If a company has correctly estimated the demand for their products in the market and has built the inventory correctly, they can expect a increase in profits. This strategy also reduces the risk of carrying obsolete goods inventory throughout the year and is used in much the same way that a sales forecast is used. Using a level production strategy enables a company to have lower production costs and higher inventory levels because capital spending is kept at a minimum and fixed cost are spread over larger Gross Margin dollars. While in contrast, a company that is going after market share using a differentiation strategy is likely to use a production to stock strategy. This will insure that the customers orders are always filled at the price that the market will bear.
If the company is trying to maximize profits in the market place by using a low cost strategy of attacking all competitors on price, they may also consider using a level production strategy.
In contrast, a company that is adopting a variable pricing strategy will have a much greater demand as they will reduce the price of their products in an attempt to increase demand. For example, a company that is selling on price will only want to sell a product when a customer requests it. The pricing policy that is adopted by the company will also play a role in their decision to produce to stock or on a level production basis. This will not only result in lost sales, but will cost the company money in the long run in replacement costs and in refunds to customers. If the management is poor, they could end up producing items that get damaged during storage and may not be able to reproduce the item for the store shelves. If the company has poor management in the production warehouses, there is a good chance that they will not be able to produce in a timely fashion. The firm must make sure that it can produce the items in a quality manner in a cost effective manner. The cost of replacing finished goods inventory caused by factors such as theft or damage can be quite high and must also be considered. In some cases, the inventory in the storage areas and the cost of replacing the items if damaged could be a major cost to the company. As this is the case, the company must have the belief that the inventory carrying costs are less than the additional costs to produce items in advance. A company may be hesitant to produce to stock, or use a level production strategy because the additional capital required for the production of goods in advance could be higher than if the company only produced when there was an actual order. For example, the firm must consider the following: Many factors come into play when a manufacturing company is deciding whether it should produce to stock or a level production strategy.
Factors That Are Considered in This Strategy In contrast, if an item is not in high demand, it will only produce a small quantity. This means that if an item is in high demand, the company will manufacture a large quantity of it. If the company employs a level production strategy, it means that the Work Availability process is followed, but only for each individual item (product). If a company produces to meet demand, this process will be followed automatically. The process that is used to determine the right quantity of each type of item is known as the Work-Availability Process for each product and is a major component of the concept known as Materials Requirements Planning (MRP). When a company produces items to meet the demands of consumers, it means that the company must insure that the right quantity of each item is available for sale at any time. The production process of a product involves the following What is Level Production Strategy?
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