Snoblo, a manufacturer of snowblowers, sells four models. The base model, Regupl

Question

Snoblo, a manufacturer of snowblowers, sells four models. The base model, Reguplo, has a demand that is normally distributed with a mean of 10,000 and a standard deviation of 1,000. The three other models have additional features, and each has demand that is normally distributed with a mean of 1,000 and a standard deviation of 700. Currently, all four models are manufactured on the same line at a cost of $100 for Regulpo and $110 for each of the other three models. Regulpo sells for $200, whereas the other three models sell for $220. Any unsold snowblowers at the end of the season are sold for $80. Snoblo is considering the use of tailored sourcing by setting up two separate lines: one for Regulpo and one for the other three. Given that no changeovers will be required on the Regulpo line, the production cost of that product is expected to drop to $90. The production cost of the other three products however, will now increase to $120. Do you recommend tailored sourcing for Snoblo? How will tailored sourcing affect production and profits?

Explanation / Answer

Current Sourcing (one line)

Tailored Sourcing (two lines)

Thus, I will recommend tailored sourcing for Snoblo as it gives more profit ($1,281,670) than current sourcing ($1,214,280).

Inputs Reguplo Each of the other models Anticipate demand 10,000 1,000 Standard deviation 1,000 700 Unit costs $100 $110 Sales price $200 $220 Disposal value $80 $80 Salvage value $80 $80 Cost of understocking $100 $110 Cost of overstocking $20 $30 Outputs Optimal cycle service level 0.8333 0.7857 Optimal production size 10,967 1,554 Expected profits $970,018 $81,421 Total Profits $1,214,280

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