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    Level versus chase strategy: Aggregate production plan

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    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?

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    Solution Preview

    See the attached file for complete solution. The text here may not be copied exactly as some of the symbols / tables may not print. Thanks

    Capacity of present labor force 500 units per month
    Additional labor 20 units per month
    Cost of additional labor 1000 $ per month
    Cost of material 30 $ per unit
    Overtime rate 150% labor rate
    Maximum allowed overtime 10% per month
    Inventory carrying cost 50 $ per unit per year
    Change in production level cost 100 $ per uniu
    Initial Inventory 200 Units
    Subcontracting 15 $ per unit

    The cost of labor for additional labor 50 $ per unit
    The cost of labor for unit produced in overtime 75 $ per unit
    The cost of production with subcontracting 65 $ per unit
    Since cost of subcontracting is less than cost of overtime worker. The subcontracting will be preferred over overtime. So there is no need to evaluate that case
    NOTE: Subcontracting is done outside the company, so subcontracting will not require any cost of chage in production level.
    ASSUMPTION: The ending inventory is assumed as 200
    The current production level is 500
    ASSUMPTION: Inventory carrying cost for a month is applicable on the beginning inventory for that month

    Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
    Demand 600 700 800 700 600 500 600 700 800 900 700 600 8200
    Production 683.33 683.33 683.33 683.33 683.33 683.33 683.33 683.33 683.33 683.33 683.33 683.33 8200

    Case-1-Using additional labor
    Beginning inventory 200.00 283.33 266.67 150.00 133.33 216.67 400.00 483.33 466.67 350.00 133.33 116.67 3200.00
    Ending inventory 283.33 266.67 150.00 133.33 216.67 400.00 483.33 466.67 350.00 133.33 116.67 200.00 3200.00
    Inventory carrying cost 1180.56 1111.11 625.00 555.56 902.78 1666.67 2013.89 1944.44 1458.33 555.56 486.11 833.33 13333.33
    Change in production ...

    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.