Case Study: Jumbo Bicycles
Jumbo manufactures bicycles for all ages. The demand forecast for the coming year is as
shown in Table 9-5.
Capacity at Jumbo is limited by the number of employees it hires. Employees are paid $10
per hour for regular time and $15 per hour for overtime. Each bicycle requires 2 hours of
work from one employee. The plant works 20 days a month and 8 hours a day of regular
time. Overtime is restricted to a maximum of 20 hours per employee per month. Jumbo
currently has 250 employees and prefers not to change that number.
Table 9.5: Anticipated monthly demand at Jumbo
MONTH DEMAND
JANUARY 12,000
FEBRUARY 11,000
MARC 14,000
APRIL 20,000
MAY 25,000
JUNE 27,000
JULY 24,000
AUGUST 20,000
SEPTEMBER 15,000
OCTOBER 10,000
NOVEMBER 11,000
DECEMBER 10,000
Each bicycle uses $35 of material. Carrying a bicycle in inventory from one month to the
next costs $4. Jumbo starts with 4,000 bicycles in inventory and wants to end the year
with 4,000 bicycles in inventory. Bicycles are currently sold to retailers for $80 each. The
market is shared between Jumbo and its competitor, Shrimpy.
Jumbo is in the process of making its production planning and promotion decisions.
Jumbo wants to consider only plans without any stockouts. One option is to drop the sale
price by $3 (from $80 to $77) for one month in the year. The outcome of this action by
Jumbo is influenced by the action taken by Shrimpy. If neither firm promotes, the forecast
demand for Jumbo is as shown in Table 9-5. If Jumbo promotes in a given month but
Shrimpy does not, Jumbo sees consumption (this does not include forward buying) in that
month increase by 40 percent and forward buying of 10 percent from each of the two
following months. If Shrimpy promotes in a given month but Jumbo does not, Jumbo sees
consumption in the month drop by 40 percent, with no change in other months. If both
promote in a given month, neither sees an increase in consumption but both see forward
buying of 15 percent from each of the two following months. The debate within Jumbo is
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whether to promote, and if so, whether to do it in April or June. For the following questions,
assume that Shrimpy and Jumbo have similar demand.
a. What is the optimal production plan for Jumbo, assuming no promotion by either
Jumbo or Shrimpy? What are the annual profits for Jumbo?
b. What are the profits for Jumbo if Shrimpy promotes in April but Jumbo does not
promote throughout the year (because it follows everyday low pricing)? What are
the profits for Jumbo if it promotes in April but Shrimpy does not promote
throughout the year? Comment on the benefit from promoting versus the loss from
not promoting if the competitor does.
c. What are the optimal production plans and profits if both promote in April? Both
promote in June? Jumbo promotes in April but Shrimpy in June? Jumbo promotes
in June but Shrimpy in April?
d. What is the best decision for Jumbo if it can coordinate its decision with Shrimpy?
e. What is the best decision for Jumbo if it wants to maximize its minimum profits no
matter what Shrimpy does?
Supply Chain Management: Strategy, Planning, and Operation, Global Edition
Chopra, Sunil
