Operations and Supply Chain Management The Core

SALES AND OPERATIONS PLANNING chapter 8 245
2. Stable workforce—variable work hours. Vary the output by varying the number
of hours worked through flexible work schedules or overtime. By varying the
number of work hours, you can match production quantities to orders. This strategy
provides workforce continuity and avoids many of the emotional and tangible costs
of hiring and firing associated with the chase strategy.
3. Level strategy. Maintain a stable workforce working at a constant output rate.
Shortages and surpluses are absorbed by fluctuating inventory levels, order backlogs,
and lost sales. Employees benefit from stable work hours at the cost of potentially
decreased customer service levels and increased inventory costs. Another
concern is the possibility of inventoried products becoming obsolete.
When just one of these variables is used to absorb demand fluctuations, it is termed a pure
strategy; two or more used in combination constitute a mixed strategy. As you might
suspect, mixed strategies are more widely applied in industry.
Subcontracting In addition to these strategies, managers also may choose to subcontract
some portion of production. This strategy is similar to the chase strategy, but hiring and
laying off are translated into subcontracting and not subcontracting. Some level of subcontracting
can be desirable to accommodate demand fluctuations. However, unless the
relationship with the supplier is particularly strong, a manufacturer can lose some control
over schedule and quality.
Relevant Costs
Four costs are relevant to the aggregate production plan. These relate to the production cost
itself, as well as the cost to hold inventory and to have unfilled orders. More specifically,
these are
1. Basic production costs. These are the fixed and variable costs incurred in producing
a given product type in a given time period. Included are direct and indirect
labor costs and regular as well as overtime compensation.
2. Costs associated with changes in the production rate. Typical costs in this category
are those involved in hiring, training, and laying off personnel. Hiring temporary
help is a way of avoiding these costs.
3. Inventory holding costs. A major component is the cost of capital tied up in inventory.
Other components are storing, insurance, taxes, spoilage, and obsolescence.
4. Backordering costs. Usually, these are very hard to measure and include costs of
expediting, loss of customer goodwill, and loss of sales revenues resulting from
backordering.
Pure strategy
A simple strategy
that uses just one
option, such as hiring
and firing workers,
for meeting demand.
Mixed strategy
A more complex
strategy that
combines options for
meeting demand.
Budgets To receive funding, operations managers are generally required to submit
annual, and sometimes quarterly, budget requests. The aggregate plan is key to the success
of the budgeting process. Recall that the goal of the aggregate plan is to minimize
the total production-related costs over the planning horizon by determining the optimal
combination of workforce levels and inventory levels. Thus, the aggregate plan provides
justification for the requested budget amount. Accurate medium-range planning increases
the likelihood of (1) receiving the requested budget and (2) operating within the limits of
the budget.
In the next section, we provide an example of medium-range planning in a manufacturing
setting. This example illustrates the trade-offs associated with different production
planning strategies.