Choose a local service-based organization and suggest how it might employ a leve
ID: 324841 • Letter: C
Question
Choose a local service-based organization and suggest how it might employ a level, chase, or mixed strategy to best meet its demand. You should explain how your suggestion would enable the firm to best meet their typical demand in a way that minimizes cost or maximizes profit. You should also discuss the drawbacks to this strategy and if any of their competitors would employ a different strategy and why. Finally, create a sample aggregate plan for the organization for the next 12 months, making forecasts for their future demand, estimating the relevant costs and determining the estimated total cost of your plan.
Explanation / Answer
Here no data is given.
Hence, we will assume all the costs and forecasts.
Consider a local Engineering Services Company NAC Technology. The company employs draughtsman and makes engineering drawings for its customers. This is the service provided. The following is the demand for number of units of drawing for 12 months.
The Costs involved are as follows.
Cost
Costs
Per Unit
Regular Time Labor Cost
$10.00
Overtime/Subcontracting
$15.00
Inventory Holding Cost
$0.00
Backorders
$7.50
Hiring
$500.00
Layoff
$750.00
To begin with there are 18 draughtsman and each draughts man can make 250 drawings per month.
Beginning Workforce
18
Labor Standard (units/worker)
250
Level Plan: In the level plan the aggregate demand is divided by number of units of drawing each workman can produce. Then the required number of workmen are hired or fired in the very first month itself and then remains constant throughout the time period.
Here the aggregate demand is sum of demand of each month = 73100 units.
Average demand per month = 73100/12 = 6091
Each worker can make 250 units per month. Hence number of works needed for level plan = 6091/250 = 24
We already have 18 workers. Thus 6 workers are hired in the first month. We capture the same information in the table below. Thus 18 workers producing 250 drawings per month make the production capacity as 6000 units per month.
Period
1
2
3
4
5
6
7
8
9
10
11
12
Demand
3000
6000
2000
1500
4000
5500
8500
9000
7000
8500
9000
9100
Cumulative Demand
3000
9000
11000
12500
16500
22000
30500
39500
46500
55000
64000
73100
Production/Inventory Planning
Production
6000
6000
6000
6000
6000
6000
6000
6000
6000
6000
6000
6000
Cumulative Production
6000
12000
18000
24000
30000
36000
42000
48000
54000
60000
66000
72000
Inventory (Excess Units)
3000
3000
7000
11500
13500
14000
11500
8500
7500
5000
2000
0
Backorders (Units Short)
0
0
0
0
0
0
0
0
0
0
0
1100
Capacity Planning
Workers Hired
6
0
0
0
0
0
0
0
0
0
0
0
Workers Layed Off
0
0
0
0
0
0
0
0
0
0
0
0
Workforce Available
24
24
24
24
24
24
24
24
24
24
24
24
Regular Time Capacity (units)
6000
6000
6000
6000
6000
6000
6000
6000
6000
6000
6000
6000
Overtime/Subcontracting (units)
0
0
0
0
0
0
0
0
0
0
0
0
Total Production Capacity (units)
6000
6000
6000
6000
6000
6000
6000
6000
6000
6000
6000
6000
Thus if we calculate the total cost we get,
Cost
Total
Total
Costs
Per Unit
Units
Cost
Regular Time Labor Cost
$10.00
72000
$720,000
Sum of production
Inventory Holding Cost
$0.00
86500
$0
Sum of inventory
Backorders
$7.50
1100
$8,250
Sum of backorders
Hiring
$500.00
6
$3,000
Layoff
$750.00
0
$0
Total Costs
$731,250
Chase Plan: In this plan workers are hired and fired every month to exactly meet the demand of that month. This means that there is no inventory or back-order in any month. All other costs and forecasts remain the same as in the previous plan.
Thus by using the chase plan we get the following table.
Period
1
2
3
4
5
6
7
8
9
10
11
12
Demand
3000
6000
2000
1500
4000
5500
8500
9000
7000
8500
9000
9100
Cumulative Demand
3000
9000
11000
12500
16500
22000
30500
39500
46500
55000
64000
73100
Production/Inventory Planning
Production
3000
6000
2000
1500
4000
5500
8500
9000
7000
8500
9000
9000
Cumulative Production
3000
9000
11000
12500
16500
22000
30500
39500
46500
55000
64000
73000
Inventory (Excess Units)
0
0
0
0
0
0
0
0
0
0
0
0
Backorders (Units Short)
0
0
0
0
0
0
0
0
0
0
0
100
Capacity Planning
Workers Hired
0
12
0
0
10
6
12
2
0
6
2
0
Workers Layed Off
6
0
16
2
0
0
0
0
8
0
0
Workforce Available
12
24
8
6
16
22
34
36
28
34
36
36
Regular Time Capacity (units)
3000
6000
2000
1500
4000
5500
8500
9000
7000
8500
9000
9000
Overtime/Subcontracting (units)
0
0
0
0
0
0
0
0
0
0
0
0
Total Production Capacity (units)
3000
6000
2000
1500
4000
5500
8500
9000
7000
8500
9000
9000
The costs are as follows.
Cost
Total
Total
Costs
Per Unit
Units
Cost
Regular Time Labor Cost
$9.60
73000
$700,800
Sum of production
Overtime/Subcontracting
$14.40
0
$0
Sum of inventory
Backorders
$7.50
100
$750
Sum of backorder
Hiring
$500.00
50
$25,000
Sum of hiring
Layoff
$750.00
32
$24,000
Sum of firing
Total Costs
$750,550
Thus between level and chase, level is more economical.
Mixed strategy: In a mixed strategy workers are hired and fired to minimize the total cost, i.e. hiring and firing cost and backorder cost.Thus judgement is to be used in mixed strategy. See calculations as below.
Period
1
2
3
4
5
6
7
8
9
10
11
12
Demand
3000
6000
2000
1500
4000
5500
8500
9000
7000
8500
9000
9100
Cumulative Demand
3000
9000
11000
12500
16500
22000
30500
39500
46500
55000
64000
73100
Net Cumulative Demand
3000
9000
11000
12500
16500
22000
30500
39500
46500
55000
64000
73100
24
8
6
16
22
34
36
28
34
36
36.4
Production/Inventory Planning
Production
4500
4500
2000
2000
4000
5250
8250
8250
8250
8250
8250
8250
Cumulative Production
4500
9000
11000
13000
17000
22250
30500
38750
47000
55250
63500
71750
Inventory (Excess Units)
1500
0
0
500
500
250
0
0
500
250
0
0
Backorders (Units Short)
0
0
0
0
0
0
0
750
0
0
500
1350
Capacity Planning
Workers Hired
0
0
0
8
5
12
0
0
Workers Layed Off
0
0
10
0
0
0
0
Workforce Available
18
18
8
8
16
21
33
33
33
33
33
33
Regular Time Capacity (units)
4500
4500
2000
2000
4000
5250
8250
8250
8250
8250
8250
8250
Overtime/Subcontracting (units)
0
0
0
0
0
0
0
1
2
3
4
5
Total Production Capacity (units)
4500
4500
2000
2000
4000
5250
8250
8251
8252
8253
8254
8255
Thus the total cost is
Cost
Total
Total
Costs
Per Unit
Units
Cost
Regular Time Labor Cost
$9.60
71750
$688,800
Backorders
$7.50
2600
$19,500
Hiring
$500.00
25
$12,500
Layoff
$750.00
10
$7,500
Total Costs
$728,516
Thus mixed strategy looks like the best strategy as it gives the lowest cost.
Drawbacks to this strategy depending on competition strategy: If competition uses chase strategy then this strategy will have a big drawback. Whenever there is a back-order, competition will take up that market. This is because the competition using chase strategy will hire workers to meet the excess demand that this company is no able to fulfill. This will lead to loss of customers and thus loss of revenue.
Cost
Costs
Per Unit
Regular Time Labor Cost
$10.00
Overtime/Subcontracting
$15.00
Inventory Holding Cost
$0.00
Backorders
$7.50
Hiring
$500.00
Layoff
$750.00