Strategic Use of Resources
Strategic Use of Resources
A company produces to a seasonal demand, with the forecast for the next 12 months as given below.
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.
1-Provide a detailed cost breakdown for using a level vs. a chase strategy to meet the increased demand.
2-Which strategy do you recommend?
3-How much savings would result from the plan you recommend?
Strategic Use of Resources
Chase strategy on the other hand involves the idea of companies balancing production capacity and the demand from time to time. This strategy can involve the hiring and firing of employees with changes in demand. The strategy may result to unhappy employees due to the high rates of layoffs (Olhager, 2013). However, many firms are able to save on costs since inventory can be held as low as possible.
From the given data, the cost breakdown when chase strategy has been used can be represented as below.
|Month||Demand||Production||No. of Extra hired workers||Total cost arising from the added workforce (in $)|
When chase strategy will be used in this scenario, the demand of the products will coincide with the production level. This was due to the ability of the firm to hire new workforce that will ensure that there will be more production that meet the current demands of the consumers. Every extra employee can be able to produce 20 extra units every month. Since there will be 110 employees who would be required to fill the gaps, then a total of $ 110,000 would be needed to compensate them. Since there will be 110 employees, each producing 20 units in a month, there will be a total of 2,200 extra units that will be produced by the extra workforce. This would not be the case when the level strategy will be applied. It is an added advantage and profit for the firm.
Level strategy in production involves the kind of plan that seeks to maintain a stable production rate or employment level. Companies must either lower or raise inventory levels as they seek to satisfy the demands emanating from the consumers (Olhager & Johansson, 2012). When the demand is deemed to be low, the firm maintains a steady workforce and a constant rate of output. Through doing this, the firm will be able to achieve a higher inventory level than the amount that will be presently needed. Even when the rate of demand is increasing, the firm still will continue to maintain a steady rate of production and still be able to use the surplus from the inventory as a means of handling the increase in demand. One of the alternatives used by the level strategy is the use of backorder or backlog (Bevly et al., 2016). In this case, the firm may promise to deliver the units or products at later stages when they will be readily available. The level strategy is usually used by firms that aim to meet their demands while at the same time maintaining their output. When this strategy is used several issues come up. For instance, there is always the cost of excess inventory, overtime costs, as well as the loss of goodwill from consumers.
|Month||Demand||Production||No. of Extra hired workers||Total cost arising from the added workforce|
|January||600||700 (200 from inventory)||0||0|
For the level strategy, the production and workforce are fixed. Any extra units produces will be stored in the inventory awaiting the high season. The demand was 8,200 while the firm would produce only 6,200 units. There is a deficit of 2,000 units which will be needed to satisfy consumer demands. This is a massive loss in case this strategy was used. In case the company would have agreed to be flexible in their business activities, hiring workforce as well as increasing production would produce a positive change in the financial returns.
From the analysis, chase strategy seems more profitable than the level strategy. However, the concept of hiring and firing workforce seems unethical. From a firm’s perspective, though, the technique can be very valuable to produce grater profits than the level strategy. From an insightful perspective, a combination of the chase and the level strategy can be very effective in meeting organisational policies and goals. This can be termed as a hybrid or a mixed strategy approach. It can assist the firm to meet the required demand while at the same time lowering the costs as opposed to the use of pure chase or level strategies.
Bevly, D., Cao, X., Gordon, M., Ozbilgin, G., Kari, D., Nelson, B., & Redmill, K. (2016). Lane Change and Merge Maneuvers for Connected and Automated Vehicles: A Survey. IEEE Transactions on Intelligent Vehicles, 1(1), 105-120.
Olhager, J. (2013). Evolution of operations planning and control: from production to supply chains. International Journal of Production Research, 51(23-24), 6836-6843.
Olhager, J., & Johansson, P. (2012). Linking long-term capacity management for manufacturing and service operations. Journal of engineering and technology management, 29(1), 22-33.
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