Page 599 - Introduction to Business

CHAPTER 16 Managing Business Operations 573

tunity to make adjustments in the production system such that demand is satisfied
in the most efficient and effective way.

Production Rate

One of the fundamental challenges that all businesses face is matching production
and demand rates for the product that they offer. This challenge is especially hard
when product demand exhibits a rate that varies significantly from month to
month. This type of demand rate pattern is called seasonal demand. Examples of
products with seasonal demand are toys, air conditioners, and computers. In
matching production and demand rates, companies can try to modify the demand
rate pattern by using several options: pricing, advertising and promotion, and back
ordering. These options primarily pertain to the marketing function; as such, they
will only be touched on briefly here.
Pricing is used to reduce the peaks and valleys in seasonal demand. For exam-
ple, airlines and hotels increase prices in high-demand seasons and lower prices in
low-demand seasons. Advertising and promotion are done in such a way as to
increase demand in typically slow periods, and sometimes even to shift demand
from peak periods to slack periods. For example, automobile and computer manu-
facturers offer rebates in periods of slow demand. This may entice a customer to
buy a computer when he was not thinking of buying one or may push a customer
to buy an automobile earlier than she had planned. Back ordering represents a back ordering An option where the
shift of demand from demand peak times to demand slack times. In this case, the customer is willing to wait for the
product in return for a financial
customer is willing to wait for the product in return for a financial incentive, usu-
incentive
ally in the form of a discount.
To complement these three options, operations managers can modify the pro-
duction rate by using one or more of the following alternatives: hiring or firing
workers, overtime or undertime, and subcontracting. Hiring or firing workers is uti-
lized in varying degrees in different industries. Some industries will do everything
they can before reducing their workforce, while in other industries increases and
decreases of the workforce are carried out routinely. Overtime or undertime is an
alternative where for the most part, the workforce remains stable, and changes in
the production rate are achieved by asking workers to work more time—overtime—
or less time—undertime. A third alternative for increasing the production rate is to
subcontract some of the products being produced. The subcontractor may pro- subcontract An option where products
duce the whole product or some of its components. Computer manufacturers usu- are produced by a third party
ally subcontract most of the computer components. Secretarial and catering help is
typically obtained by subcontracting.
Given a demand rate pattern and using the above three alternatives, the opera-
tions manager needs to decide on the production rate strategy that will match
demand at minimum cost. There are two extreme production rate strategies: chase
and level. In the chase strategy, adjustments to the production rate come exclu- chase strategy An extreme strategy
sively from changes in the workforce by hiring and firing workers. In the level where production rate adjustments
come exclusively from hiring and firing
strategy, the workforce remains stable, and adjustments to the production rate are
workers
achieved by using overtime, undertime, and subcontracting. In practice, these two
level strategy An extreme strategy
strategies are rarely used but serve as a comparison point. Most successful strate- where the workforce remains stable
gies incorporate elements of the chase and level strategies and are called hybrid and production rate adjustments come
strategies. Exhibit 16.9 (on p. 574) presents an example of a chase strategy, and from overtime or undertime, and
subcontracting
Exhibit 16.10 (on p. 574) presents an example of a level strategy. In these examples,
hybrid strategy A strategy that
each worker can produce 20 units per month while working in regular time and 10 combines the chase and level strategies
units per month while working in overtime. in different degrees

Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.