Management Chapter 13 3 Techniques for controlling the cost of labor in services include accurate scheduling

23) Houma Containers, Inc., makes industrial fiberglass tanks that are used on offshore oil platforms.

Demand for the next four months and capacities of the plant are shown in the table below. Unit cost on

regular time is $400. Overtime cost is 150% of regular time cost. Subcontracting is available in substantial

quantity but at a very high cost, $1100 per unit. Holding costs are $200 per tank per month; back orders

cost the firm $1000 per unit per month. Houma’s management believes that the transportation algorithm

can be used to optimize this scheduling problem. The firm has no beginning inventory and anticipates no

ending inventory.

March

April

May

June

Demand

300

500

300

350

Regular capacity

200

250

Overtime capacity

50

Subcontract cap.

150

100

150

Answer the following questions based on the data table and solution table shown below.

a. How many units will be produced on regular time in June?

b. How many units will be produced by subcontracting over the four-month period?

c. What will be the inventory at the end of April?

d. What will be total production from all sources in April?

e. What will be the total cost of the optimum solution?

f. Does the firm utilize the expensive options of subcontracting and back ordering? When; why?

24) Fred’s Fabrication has the following aggregate demand requirements and other data for the upcoming

four quarters.

Quarter

Demand

Previous quarter’s output

800 units

1

700

Beginning inventory

0 units

2

900

Stockout cost

$100 per unit

3

1200

Inventory holding cost

$10 per unit at end of quarter

4

600

Hiring workers

$20 per unit

Laying off workers

$40 per unit

Subcontracting cost

$200 per unit

Unit cost

$100 per unit

Which of the following production plans is better: Plan A–chase demand by hiring and layoffs; Plan B–

pure level strategy, or Plan C–700 level with the remainder by subcontracting?

25) Byron’s Manufacturing makes tables. Demand for the next four months and capacities of the plant are

shown in the table below. Unit cost on regular time is $40. Overtime cost is 150% of regular time cost.

Subcontracting is available in substantial quantity at $75 per unit. Holding costs are $5 per table per

month; back orders cost the firm $10 per unit per month. Byron’s management believes that the

transportation algorithm can be used to optimize this scheduling problem. The firm has 50 units of

beginning inventory and anticipates no ending inventory.

March

April

May

June

Demand

400

600

700

Regular capacity

400

Overtime capacity

100

Subcontract cap.

150

50

Answer the following questions based on the data table and solution table shown below.

a. How many units will be produced on regular time in June?

b. How many units will be produced by subcontracting over the four-month period?

c. What will be the inventory at the end of April?

d. What will be total production from all sources in April?

e. What will be the total cost of the optimum solution?

f. Does the firm utilize the expensive options of subcontracting and back ordering? When; why?

1) Techniques for controlling the cost of labor in services include accurate scheduling of labor hours to

assure quick response to customer demand, on-call labor for unexpected demand, flexibility of labor

skills for reallocation of available labor, and flexibility in rate of output or hours of work to meet

changing demand.

2) Aggregate planning for fast food restaurants is very similar to aggregate planning in manufacturing,

but with much smaller units of time.

3) Which of the following is NOT one of the successful techniques for controlling the cost of labor in

services?

A) accurate scheduling of labor-hours to assure quick response to customer demand

B) an on-call labor resource that can be added or deleted to meet unexpected demand

C) little flexibility in worker hours to decrease the burden on management

D) flexibility of individual worker skills that permits reallocation of available labor

E) flexibility in rate of output or hours of work to meet changing demand

4) Which of the following statements regarding aggregate planning in services is FALSE?

A) Approaches to aggregate planning differ by the type of service provided.

B) Some service organizations conduct aggregate planning in exactly the same way as manufacturing

firms, but with demand management taking a more active role.

C) Aggregate planning in some service industries may be easier than in manufacturing.

D) Labor is the primary aggregate planning vehicle.

E) Level scheduling is far more common than using a chase strategy.

5) Aggregate planning for service firms that provide intangible output deals mainly with:

A) smoothing the production rate and finding the optimal size of the workforce.

B) capital investment decisions.

C) centralized purchasing.

D) centralized production.

E) planning for human resource requirements and managing demand.

6) What are successful techniques of controlling the cost of labor involved in service firms?

7) A large consulting firm is deciding on if its workforce should be expanded, maintained, or decreased.

Suppose that demand is given in week-long projects, and that a consultant can work on 3 projects each

month (1 week off for personal leave and/or other duties such as conferences, etc). Currently there are 25

consultants. Ten consultants are trained for LEAN and 15 for Six Sigma, with 5 of those consultants being

overlaps (the consultant is trained for BOTH LEAN and Six Sigma). Assume that all consultants can do

the general work. Complete the table (the forecast period is an upcoming month) and prepare a

recommendation.

Category

Best

Forecast (#

Likely

Forecast (#

Worst

Forecast (#

Max

Demand in

Number of

Qualified

LEAN

42

24

12

Six Sigma

45

36

30

General

75

60

57

Section 7 Revenue Management

1) A hotel room that goes unrented and an airline seat that goes unsold are both examples of perishable

inventory in services.

2) Which of the following characteristics makes revenue management UNATTRACTIVE to organizations

that have perishable inventory?

A) demand can be segmented

B) service can be sold in advance of consumption

C) capacity is easily changed

D) variable costs are low and fixed costs are high

E) demand fluctuates

3) Revenue management is MOST likely to be used in which one of the following situations?

A) a fast food restaurant with wide demand fluctuations during the day

B) a dental clinic that wants to fill its appointment book

C) a firm with a good counterseasonal product mix

D) a shipping company that can change its fleet size easily

E) an airline attempting to fill “perishable” seats at maximum revenue

4) Revenue (or yield) management is best described as:

A) a situation where management yields to labor demands.

B) a situation where the labor union yields to management demands.

C) a process designed to increase the rate of output.

D) allocation of scarce resources to customers at prices that will maximize revenue.

E) management’s selection of a product mix yielding maximum profits.

5) Industries in which revenue management techniques are easiest to apply are those where:

A) use tends to be predictable, and pricing tends to be fixed.

B) use tends to be predictable, and pricing tends to be variable.

C) use tends to be uncertain, and pricing tends to be fixed.

D) use tends to be uncertain, and pricing tends to be variable.

E) All of the above, i.e., there is no difference.

6) To use revenue management strategies, a business should have which combination of costs?

A) high variable and high fixed

B) low variable and high fixed

C) high variable and low fixed

D) low variable and low fixed

E) either A or B

7) A hotel room that goes unrented, a dental appointment that no patient booked, and an airline seat that

went unsold, are all examples of ________ in services.

8) ________ involves capacity decisions that determine the allocation of resources to maximize revenue or

yield.

9) What is the primary management challenge when implementing revenue management?

10) Identify the five conditions that make revenue management of interest.

11) To make revenue management work, the company needs to manage what three issues?

12) A small private university normally charges the same price –$200–per credit-hour for all courses and

for all students. While the university is pretty near capacity in the fall and spring, it finds that its

classrooms are only about 60 percent occupied during the summer session. A student of operations

management wonders if revenue management might be useful to both the university and its students

alike. This student, with help from some economics majors, estimates a demand curve for summer course

enrollment. Points on this demand curve include 9000 credit-hours at the current rate of $200, 12,000

credit hours at $180, 15,000 credit-hours at $160, and 18,000 credit-hours at $140. Based on this demand

curve, what price point would best serve the university, if its objective is the greatest revenue for the

summer session?

13) A professional services firm is investigating revenue management as a means of taking advantage of

unused capacity. Analysts for this firm estimate a demand curve for the firm’s service, which is sold by

the hour. Points on this demand curve include 9000 hours at the current rate of $60 per hour, 9500 hours

at $55, 10,000 hours at $50, and 10,500 hours at $45. Based on this demand curve, what price point would

be best for the firm, if its objective is maximum revenue?