# Question about Level versus chase strategy: Aggregate production plan

A company produces to a seasonal demand, with the forecast for the next 12 months as given below.
Month Demand
January 600
February 700
March 800
April 700
May 600
June 500
July 600
August 700
September 800
October 900
November 700
December 600
The present labor force can produce 500 units per month. Each employee added can produce an additional 20 units per month and is paid \$1000 per month. The cost of materials is \$30 per unit. Overtime can be used at the usual premium of time and a half for labor up to a maximum of 10 percent per month. Inventory-carrying cost is \$50 per unit per year. Changes in production level cost \$100 per unit due to hiring, line changeover costs, and so forth. Assume 200 units of initial inventory. Extra capacity may be obtained by subcontracting at an additional cost of \$15 per unit over and above the company's producing them itself on regular time.
Provide a detailed cost breakdown for using a level vs. a chase strategy to meet the increased demand. Which strategy do you recommend? How much savings would result from the plan you recommend?
The following excerpt is from the email sent to all students in the class, 'After reviewing the assignment, I have decided to allow you to stock-out inventory--reach zero inventory--in the Level strategy for any month except the year end, which still has to be +/- 10% of the 200 inventory.'
Stock-out and Year-end replenishment of inventory to +/- 10% of 200 are two different issues. Stock-out may occur during the year, but beginning-of-year inventory is 200 units and end-of-year inventory must be +/- 10% of 200 units.

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Solution Summary

This problem explains how to prepare the production plan with different work force management plans. It tackles two different strategies - level and chase. The solution is presented in Excel model format to make it easy to understand and see how changes in different variables will have an impact on the total cost.

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• Level Vs Chase strategy-43033.xls

Rohtas Kumar, MBA

Rating 4.9/5

Active since 2004

BEng, Birla Institute of Technology and Science, India
MBA, Delhi University
CFA (Indian accrediation not US) , Institute of Chartered Financial Analysts of India
Ph.D, Indian Institute of Management Bangalore, India

Responses 3669