level vs. a chase strategy
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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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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?
Please note that your calculations already provide the detailed cost breakdown for the increased demand.
AGGREGATE PLANNING STRATEGIES
There are two pure planning strategies available to the aggregate planner: a level strategy and a chase strategy. Firms may choose to utilize one of the pure strategies in isolation, or they may opt for a strategy that combines the two.
LEVEL STRATEGY.
A level strategy seeks to produce an aggregate plan that maintains a steady production rate and/or a steady employment level. In the context of the problem posted by you following the level strategy means incurring additional subcontracting costs at least twice. This is to offset the shortfall in production because of the level strategy. In order to satisfy changes in customer demand, the firm must raise or lower inventory levels in anticipation of increased or decreased levels of forecast demand. The firm maintains a level workforce and a steady rate of output when demand is somewhat low. This allows the firm to establish higher inventory levels than are currently needed. As demand increases, the firm is able to continue a steady production rate/steady employment level, while allowing the inventory surplus to absorb the increased demand.
A second alternative would be to use a backlog or backorder. A backorder is simply a promise to deliver the product at a later date when it is more readily available, usually when capacity begins to catch up with diminishing demand. In essence, the backorder is a device for moving demand from one period to another, preferably one in which demand is lower, thereby smoothing demand requirements over time. In our current problem there is the facility for subcontracting and so back order is not contemplated.
A level strategy allows a firm to maintain a constant level of output ...
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