A company produces to a seasonal demand, with the forecast for the next 12 months as given below.
Month Demand
January 600
February700
March 800
April 700
May 600
June 500
July 600
August 700
September 800
October 900
November 700
December 600
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.
STRATEGIC USE OF RESOURCES 2
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
Strategic Use of Resources
Chase Strategy
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 $)
January 600 600 5 5,000
February 700 700 10 10,000
March 800 800 15 15,000
April 700 700 10 10,000
STRATEGIC USE OF RESOURCES 3
May 600 600 5 5,000
June 500 500 0 0
July 600 600 5 5,000
August 700 700 10 10,000
September 800 800 15 15,000
October 900 900 20 20,000
November 700 700 10 10,000
December 600 600 5 5,000
Totals 8,200 8,200 110 $ 110,000
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
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).
STRATEGIC USE OF RESOURCES 4
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
February 700 500 0 0
March 800 500 0 0
April 700 500 0 0
May 600 500 0 0
June 500 500 0 0
July 600 500 0 0
STRATEGIC USE OF RESOURCES 5
August 700 500 0 0
September 800 500 0 0
October 900 500 0 0
November 700 500 0 0
December 600 500 0 0
Totals 8,200 6,200 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.
Conclusion
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.
STRATEGIC USE OF RESOURCES 6
References
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.
