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

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.