Posted: September 16th, 2017

MIXED LEVEL STRATEGY

MIXED LEVEL STRATEGY

1.    Introduction

The Cornwall Glass Company is in the business of manufacturing automobile glass. It has a very advanced forecasting system which makes accurate weekly demand forecasts for the year.

With the data available we will attempt to identify and analyse the aggregate planning strategies that are available. We will also put forward our recommendation for the best strategy in terms of cost efficiency and feasibility.

2.    DataAnalysis
The following data is available to us:
Production Limit    :    1900 pounds per week
Cost of Hiring    :    $ 5.63 per pound
Cost of Firing    :    $ 15.73 per pound
Holding Cost    :    $.12 per pound
Cost of late order    :    $ 20 per pound
Current Inventory        73 units
Subcontracting limit        2000 pounds per week
Overtime limit        250 pounds per week

Regular cost has not been provided. So we will assume that the regular cost of production is $ 4 per pound.

Regular Cost    :    $ 4 per pound
Overtime Cost     :    $ 12 per pound (8 more than regular)
Subcontracting Cost    :    $ 14 per pound (2 more than overtime

On the basis of the above information we will now evaluate the following strategies of Aggregate Planning to come up with the best fit for the situation:

1.    Chase Strategy with subcontracting
2.    Level Strategy  with overtime
3.    Mixed Strategy

3.    Chase Strategy (with subcontracting)

This strategy is characterized by the idea that only the amount that is required should be manufactured in-house. If the requirement exceeds the production limits then it should be fulfilled by outsourcing to sub-contractors.

Advantages
?    Low level of inventory, leading to reduced inventory cost and easy cash flow

Disadvantage
?    Provision for  short term demand only;
?    Continuous hire and fire workforce leads to workforce  cost fluctuating , damage to employee morale and loss of goodwill in society;

Applying the Chase Strategy with subcontracting in the Cornwall Glass case, it is noted that any quantity exceeding 1900 pounds per week will be subcontracted.

The Excel Sheet with the calculations is found below:

CHASE STRATEGY WITH SUBCONTRACTING
Units (Pounds)    Cost per pound    TOTAL
Regular Production    96,865    USD 4.00    387,460.00
Subcontracted     10,752    USD 14.00    150,528.00
Firing    1,935    USD 15.73    30,437.55
TOTAL COST    USD 568,425.55

4.    Level Strategy with Overtime

This strategy requires that the production is maintained at fixed optimum level of 1900 pounds per week and company arranges for the additional demand by overtime and arrange for inventory holding in case of excess production and late order payment for shortage.

Advantages:
?    Maintains a constant workforce
?    Sets capacity to maximum as it is close to the average demand
?    Often used for make-to-stock products like appliances

Disadvantage
?    Accumulate  inventory and/or  unable to fulfill orders in time
?    Incurs heavy holding and late order costs

The Excel Sheet with the calculations is found below:

LEVEL STRATEGY (with Overtime)
Units (Pounds)    Cost per pound    TOTAL
Regular Production    98,800    USD 4.00    395,200.00
Overtime    6,023    USD 12.00    72,276.00
Holding    11,034    USD 0.12    1,324.08
Late Order    3,335    USD 20.00    66,700.00
TOTAL COST         USD 535,500.08

5.    Mixed Level Strategy (Overtime and Subcontracting)

This strategy requires that the production is maintained at fixed optimum level of 1900 pounds per week and company arranges for inventory holding in case of excess production.

Now we try a combination of Overtime and Subcontracting to fulfill the additional demand. Considering that overtime is more cost effective than subcontracting we first fulfill the additional demand through overtime and then opt for subcontracting for the remaining demand.

Advantages:
?    Controlled inventory
?    Meet the required demand and avoid late orders
?    The holding cost is minimized
?    Late Order Cost is completely eliminated

The Excel Sheet with the calculations is found below:

MIXED LEVEL STRATEGY  (With Overtime and Subcontracting)
Units (Pounds)    Cost per pound    TOTAL
Regular Production    98,800    USD 4.00    395,200.00
Overtime    6,023    USD 12.00    72,276.00
Holding    11,034    USD 0.12    1,324.08
Subcontracting    3,335    USD 14.00    46,690.00
TOTAL COST         USD 515,490.08

6.    Evaluation and Recommendations:
STRATEGY COMPARISON
Cost for:    Chase Strategy with subcontracting     Level Strategy with Overtime    Mixed Level Strategy with overtime and subcontracting
Regular Production    387,460    395,200    395,200.00
Overtime    —-    72,276    72,276.00
Holding    —-    1,324.08    1,324.08
Firing    30,438    —-    —-
Subcontractor    150,528    —-    46,690.00
Late Order    —-    66,700    —-
TOTAL COST (USD)    568,426    535,500    515,490

Upon comparison of the three strategies it is evident that the Mixed Level Strategy is the most cost effective.

In addition to the cost benefit, the Mixed Strategy has additional advantages over the other 2 Strategies as follows:
A    Workforce remains constant thereby maintaining goodwill of the people
B    No Late Orders ensuring good image with the client.
C    More cost effective than the Level Strategy with overtime and only minimally higher than the Chase Strategy

Based on the above, we would like to recommend the Mixed Level Strategy with Overtime and Subcontracting as the best and most cist efficient option for Cornwell Glass Company.

Reference:

http://www.managementstudyguide.com/aggregate-planning.htm

http://www.csus.edu/indiv/f/freemand/Class%20Notes/Ch%2012%20objectives.htm

http://smallbusiness.chron.com/strategies-used-production-planning-scheduling-1808.html