Hard Rules of Inventory

revenues. Assume that soles and uppers are light weight and compact so transportation
costs can be reasonably ignored. Furthermore, you are a small player
in the shoe industry and face a given market price for the shoes you make. Taken
together these assumptions imply that you can focus on maximizing output and
the result will maximize profits as well. You now prepare a plan for what activity
each worker in each plant should execute.
Consider 4 plans:
Plan A: The previous manager had instructed each plant to manufacture complete
shoes only. That is, he had made each plant self-sufficient (or “standalone”
or autarkic): makers of uppers received all their soles from the same
plant. In Thailand, the equal productivities mean that the labour force can
be split in two: 150 workers on soles and the rest making uppers. Thailand
will make 15,000 shoes per day. In Korea 2 workers will be making
uppers for every one in soles. Thus there will be 100 workers doing soles,
200 making uppers, and total output will be 40,000. The company’s total
output will be 55,000 shoes.
Plan B: Let Thailand specialize in uppers and import soles from Korea who
will specialize in soles. By focusing on uppers, Thailand can make 30,000
of them. Koreans will therefore need to supply 30,000 soles. However this
will require only 75 workers, leaving 225 idle, or they will make soles that
have no upper and are therefore useless. Recall that your contractual obligations
prevent you from laying these workers off. Total company output is
30,000 shoes.
Plan B*: Let Thailand specialize in uppers, yielding 30,000 uppers as in Plan
B. The Korean plant will use 150 workers to make 60,000 soles. The other
150 workers will make 30,000 more uppers. Combining them all together
we obtain a total output of 60,000 shoes.
Plan C (reverse of B*): Let Thailand specialize in soles—it will be able to make
30,000 of them. The Korean plant would assign 250 workers to uppers,
making 50,000 of... [continues]

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