Why is leveling of resources preferred to large fluctuations?
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Answer:
Fluctuation in demand is a real world phenomenon and when the demand of goods vary, the demand of resources required to produce these items also vary. But fluctuation in demand of resources comes at a cost. Part - A) Fluctuation in demand of resources is undesirable because: 1) The resources are utilized in some time periods and in others its underutilized which means we have idle costs in some time periods. Thus, fluctuation in demand for any resource either result in over stocking or capital lock or stock out or loss of business resources. For example, we have in every month, a demand of 1000 MT steel but in Dec its 5000 MT. If we build our capacity according to 5000 MT, our resource utilization will be very low in 11 months. 2) Hiring/ firing costs are there if there are high fluctuations in demand for human resources Part - B) Different strategies of resource levelling are: 1) Subcontracting -> The cost of goods under subcontracting is higher than the cost using our own facility. Moreover, quality is a challenge 2) Inventory buildup -> Build inventories in periods of low demands and use it to fulfill demand in other periods, Holding inventory results in storage costs, capital cost,...
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