Back orders, subcontracting and plant capacity: Other pure strategies are back-orders, sub contracting and varying plant capacity.
In order to maintain smooth operations, organizations use the back order strategy, in which current order commitments are fulfilled in the future. Back-order strategy assumes that customers are willing to wait for delivery. It effectively smoothens out production. But this strategy may sometimes result in stock-out costs when customers do not wait till the product is delivered and switch to a competitor's product.
The subcontracting strategy allows level production and sources the additional output required from subcontractors. Finally, adjusting plant capacity by varying equipment capacity over both the short term and long term is another pure strategy to absorb demand fluctuations. Meeting the demand by varying the workforce and subcontracting may lead to hiring and lay-off costs. Further, it may also lead to periods of idle time and periods of over-utilization of workforce. To avoid these consequences, many organizations in Europe have started using Annualized hours. In this concept, workers are recruited on the basis of number of hours they have to work in a year. Refer Exhibit 9.1 for further details on annualized hours.
Exhibit
Annualized Hours
In aggregate planning, seasonal demand is managed by varying the workforce size, varying workforce usage, building inventory/backlogging and subcontracting. But hiring and layoff costs are incurred in varying the workforce, while workforce utilization-based planning leads to periods of idle time and periods of overtime.
In order to meet fluctuations in demand effectively, a new concept known as "annualized hours (AH)" is being used in Europe. Under the annualized hours system, workers are recruited on the basis of number of hours to be worked in a year, for instance, 1500 hours a year. These hours are distributed through the year on the basis of the demand requirements at a particular time. The use of this concept has helped overcome the problem of having idle or overworked employees, and has reduced the costs of hiring/layoff and training of employees. Workers are paid overtime only when they have worked more than their annual contracted hours. Using annualized hours, many organizations have achieved reduction in unit cost, inventory and low labor turnover, and improvement in quality of products and services. This system has also improved employee morale and made it easier for employers to recruit new employees.
One of the problems faced by organizations in annualized system is scheduling the work throughout the year.
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Adapted from R Hung, "Scheduling a workforce under annualized hours," International Journal of Production Research, 07/20/99, Vol. 37 Issue 11, p2419, 9p.
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