Meridian Print: capacity, overtime and outsourcing
Meridian Print operates three presses, each available for 160 hours a month. Total monthly demand is 485 press-hours, so the factory runs 55 hours of overtime at £27 an hour; normal running cost is £19 an hour. Late deliveries have reached 11%, and a key contract pays a £1,800 monthly penalty if lateness exceeds 8%. The sales director expects demand to grow by 8% next year. Three options are proposed. Option A leases a fourth press for £4,300 a month plus £900 maintenance, adding 160 hours. Option B outsources overflow work at £28 an hour, but the subcontractor has a 4% rework rate. Option C spends £9,000 on changeover training and standard work, freeing 40 hours a month by cutting setup time; it would also reduce overtime, but depends on staff agreeing to new shift patterns. The operations manager wants a decision that is robust if demand does not grow.
1. Calculate current capacity utilisation, the monthly cost of overtime and the late-delivery penalty, and the monthly saving or net cost of each option at current demand.
Read the worked answer
Capacity = 3 × 160 = 480 hours. Demand is 485 hours, so utilisation = 485 ÷ 480 = 101%. Overtime is structural, not just poor scheduling.
Overtime cost = 55 × £27 = £1,485 a month. Late-delivery penalty = £1,800 a month. Visible cost = £3,285 a month.
Option A: cost = £4,300 + £900 = £5,200. It removes overtime and the penalty, saving £3,285, so net cost = £5,200 − £3,285 = £1,915 a month at current demand.
Option B: 55 × £28 = £1,540. If it removes overtime and the penalty, benefit = £3,285 − £1,540 = +£1,745 a month, but the 4% rework risk is not included.
Option C: frees 40 hours, so overtime falls to 15 hours. Overtime saving = 40 × £27 = £1,080. Adding the £1,800 penalty saving gives £2,880 a month. Payback = £9,000 ÷ £2,880 = 3.1 months.
2. Recommend which option or combination Meridian should adopt, justifying your answer with reference to demand growth and risk.
Read the worked answer
Recommend C first, B as flexible overflow, and defer A. C has the fastest payback, at 3.1 months, requires no long lease, and leaves the firm more robust if demand does not grow. It also handles 8% growth: demand becomes 485 × 1.08 = 523.8 hours; effective capacity after C is 520 hours, leaving only about 4 hours of overtime. Risk: staff may resist new shift patterns, and training may not deliver the full 40 hours. Even half the saving gives £1,440 a month and a 6.25-month payback, so the downside is tolerable.
B is cheaper than A at current demand and can be switched off, but its 4% rework rate could damage the key contract. Use it only for standard, non-rush work and audit quality monthly.
A costs £5,200 a month and is not justified at current demand; it becomes attractive only if demand consistently exceeds 520 hours or if C fails. It also creates a 36-month commitment.
Judgement: approve C now, negotiate a temporary B arrangement for peaks, and revisit A after six months of demand data. This combination is lowest-cost, fastest to implement and most robust to the sales director being wrong.