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.

Answer 1

We are going to work with an exercise applying the 3 different methods (chase, level and mixed strategy).

The exercise is:

Assume you are the operations manager of a firm that carries a single family of products. To obtain a unit of the family we need 1.5 hours (standard hours) of workforce and each worker’s shift is 8 h. a day. At this moment, December, the workforce of the firm is 150 workers (50 permanent and 100 temporary) and, although the security stock desired is 500 units, the available stock is zero.

Cost information:

• Materials per unit of product: 5,000 m.u.
• Standard hour of regular time labor: 1,000 m.u.
• Standard hour of overtime labor: 1,500 m.u.
• Standard hour of idle time: 1,100 m.u.
• Hiring: 100,000 m.u./worker
• Layoff of a temporary worker: 150,000 m.u.
• Subcontracting cost per unit: 1,000 m.u., over the regular production cost of one unit.
• Inventory or carrying cost: 200 m.u./unit and month. Cim = Ciu (Iem + Ibm)/2
• Back order cost: 1,500 m.u./ unit and month.

Other factors that need to be considered to develop an aggregate planning, are the company policies:

• There are three shifts and the maximum number of workers that can work simultaneously is 50. Therefore, there is a maximum of 1,200 h/day (150 workers x 8 h/day and worker).
• The maximum number of overtime hours allowed is 10% of the hours available in regular time.
• Permanent workers cannot be laid off.
• All the costs are linear functions.
• The daily demand, within each month, is uniform and continuous.

CHASE STRATEGY

The objective of this method is to set production equal to forecasted demand.

In this method, the monthly production is equal to the necessary production, and the company is going to adjust capacity by varying workforce levels through hiring or laying off and backorders.

In this case, the regular production is the necessary production with the limit of the maximum daily production.

We can summarize this method with the following formula:

The formulas which are going to be used are:

Despite we have a formula for final inventories, we don’t have it because in this kind of strategy the production fits the forcasted demand.

Talking about workers, we should take into account that the permantent workers (50) must be maintained, so the company cannot fire them, that is the reason why when the company needs less than 50 workers, it deals with all of these 50 workers, and this situation brings idle costs.

All this formulas are used in the excell file. In order to understand how to use it, you just have to open the file and see the table with the solutions.

LEVEL STRATEGY

We have already seen that the level strategy is one of the two pure strategies that we can apply to obtain an aggregate plan. Its aim is to maintain a constant output rate, production rate and therefore constant workforce level over the planning horizon.

The level strategy can be conducted through two different perspectives: level of regular production and level of total production.

As in the previous strategy, we are going to show a list of formulas to be used.

However, we will only focus on regular production.

• The workforce and, therefore, the daily regular production will remain constant.
• The production is adjusted by inventory variations.

Regular production

REGULAR PRODUCTION = daily regular production x production days

• Regular production (example)

JAN = 480 un./day x 20 days = 9,600 un. < 15,000 (necessary production per month)

HOURS OF REGULAR PRODUCTION = Regular production x h./un.

Workforce is constant because daily regular production is always 480 un./day.

COST OF REGULAR PRODUCTION (WORKFORCE) = h. x m.u./h.

VARIATION OF WORKFORCE = work. (i) – work. (i-1)

Difference between the number of workers in one month and the previous one.

• If positive, it will imply hiring.
• If negative, it will imply layoff.

COST OF HIRING AND LAYOFF = m.u./worker x worker

FINAL INVENTORY i = final inventory (i-1) + regular production i – necessary production i

If the final inventory is less than zero, then there is production not satisfied and therefore backordered.

COST OF BACKORDER = un. and month (demand not satisfied) x m.u./un. and month

Total cost TC = Cost of regular production + Cost of hiring and layoff + Cost of inventory and backorder

TC = 180,000 + 9,000 + 60,480 = 249,480 t.m.u.

• Units produced on time for the customers = units needed – inventory

Additional information

Factors to take into account to satisfy the necessary production when using just regular production is not possible:

Cost of regular production:

1,000 m.u./h. x 1.5 h./un. = 1,500 m.u./un.

Backordering costs 1,500 m.u./(un. month)

and a decrease in the customer service level

Subcontracting leads to an incremental cost of 1,000 m.u./u.n.

Therefore, if there is lack of capacity, we have to use the alternative with lower incremental cost with respect to the regular production unit cost:

• First, we will produce on overtime.
• Secondly, subcontracting.
• The last option, backordering.

As in the previous case, all this formulas are used in the excell file. You just have to open the file and see the table with the solutions, in order to understand it.

MIXED STRATEGY

The last exercise deals with the mixed strategy, which deals with multiples objectives, i.e., setting production equal to the forecasted demand.

The objective will be to reduce the Total Cost (TC) of the first option, which was the lowest, using the hiring and layoff options rationally.

This strategy has the same fomulas as the other strategies explained,so we are going to explain the main points of mixed strategies directly applying the formulas to data given.

We will maintain a constant workforce of 52 workers to avoid the cost of hiring and layoff  (in April, May, June, July, August and September) and the remaining months we will use variation in the workforce if possible, avoiding the overtime production and subcontracting.

• We start by laying off 9 workers and staying with 141 workers needed to produce 15,000 un. required in JAN and FEB
• In MAR we layoff 55 workers (variation of the workforce,141-86) and we keep 86 workers to produce 10,000 units needed in that month.
• In APR, MAY, JUN, JUL, AUG and SEP we layoff 34 workers and level the workforce with 52 workers (86-34) to face the total demand (or necessary production) in such interval (35,000 un.)(*)
• In OCT we hire 42 workers, having then a workforce of 94 (52+42) workers needed to satisfy the 10,000 un. of production of that month.
• In NOV we hire 35 workers, having a total of 129 (94+35) workers, although a priori we need 134 workers to produce the 15.000 un. required that month which would require to hire 40 workers. The remaining units of production needed 15,000 un. -14,448 un. (21,672 h./1.5 h./un.), will be covered with available inventory, 2,228 (Iim)-1,676 (Ifm) =552, and therefore in DEC inventory will be 0.

The lack of production will be covered using overtime, and if it is not possible, subcontracting.

From April to September:

NECESSARY PROD.

        5,000 + 5,000 + 5,000 +10,000 + 5,000 + 5,000 = 35,000 un.

NECESSARY WORK HOURS

35,000 un. * 1.5 h./un. = 52,500 h.

NUMBER OF PRODUCTION DAYS

20 + 22 + 21 + 20 + 22 + 22 = 127 days

DAYLY HOURS NEEDED

WORKERS NEEDED A DAY

HOURS OF REGULAR PRODUCTION

Hours of regular production (per month) = nr. of workers * h. (day and work) * production days per month.

REGULAR PRODUCTION

Regular production = Hr. of regular production / Standard hr. needed to obtain a unit of the family

OVERTIME PRODUCTION

Overtime production is required when there is demand, which is not satisfied (July, November and December in our example).

To do it step by step…

1. Calculate the demand not satisfied

July: demand not satisfied = Necessary production – production – Inventory available

1. Multiple it times the sstandard hours needed to obtain a unit of the family in order to know the number of hours of production required.

1,813 un. * 1.5 h./un. = 2,719.5 h. additional

1. Calculate available overtime hours.

0.1(10% union contract)*8320h (hours of regular production)=832 overtime hours

1. Calculate overtime production

832 O.H./1.5 h./un.) = 554 un.

There are still some necessary production not satisfied that we have to subcontract

1,813 un.- 554 un.=1,259 un.

COST OF REGULAR PRODUCTION (WORKFORCE)

Cost of regular production (workforce) = h.*m.u./h.

VARIATIONS OF THE WORKFORCE (HIRING AND LAYOFF)

Variation of the workforce = trab. (i) – trab. (i-1)

Difference between the number of workers in this month and the previous one.

COST OF HIRING AND LAYING OFF

Cost of Hiring = 100,000 m.u. / work.

Cost of Layoff  = 150,000 m.u./ work

COST OF OVERTIME

Cost of overtime = m.u./O.H.*O.H

COST OF SUBCONTRACTING

Cost of subcontracting = Subcon. un.* (1.000 m.u. + cost of regular production).

FINAL INVENTORY

Final inventory = final inventory (i-1) + regular production i – necessary production i

If the final inventory is lower than zero, then there is still some demand not satisfied and therefore backordered.

COST OF INVENTORY AND BACKORDER

Cost of backorder = un. and month (production not satisfied)* m.u./un. and month.

Cost of inventory per month (Cim) = Ciu*(Iem+Ibm)/2

TOTAL COST

TC = Cost of regular production + Cost of hiring and layoff + Cost of overtime + Cost of subscontracting + Cost of inventory and backorder