Question

When using a "level capacity strategy" or “level production strategy” in aggregate planning, variations in demand are met by using which of the following options?

             I. varying output during regular time without changing workforce size (for example, using overtime)

            II. varying output during regular time by changing workforce size

            III. varying inventory levels

Answer 1

A level production strategy seeks to produce an aggregate plan that maintains a steady production rate and/or a steady employment level. 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 level strategy allows a firm to maintain a constant level of output and still meet demand. This is desirable from an employee relations standpoint. Negative results of the level strategy would include the cost of excess inventory, subcontracting or overtime costs, and backorder costs, which typically are the cost of expediting orders and the loss of customer goodwill.

Therefore , correct answer would be “III. Varying Inventory Level”

ANSWER : III. VARYING INVENTORY LEVEL