The chase strategy refers to the notion that you are chasing the demand set by the market. Production is set to match demand and doesn’t carry any leftover products. Inventory costs are low, and the cost of goods for products sold is kept to a minimum and for a shorter length of time.
What is Chase Production Strategy?
Chase Production Strategy is just what the name implies, chasing production to meet demand:1. It begins with the finished goods inventory.2. When the demand for a raw material exceeds the predetermined reorder point, it is ordered into inventory.3. When the finished goods inventory reaches a predetermined level, it is released into the channel of distribution.4. When the finished goods inventory reaches a predetermined level, production begins.5. When the finished goods inventory reaches a predetermined level, shipments begin.
This cycle is repeated continuously. The heart of the chase production strategy is the reorder point.
The reorder point level is the point at which the inventory needs to be replenished. It is the level at which the inventory is low and either the customer is about to receive ‘out of stock’ items or the inventory is beginning to accumulate. To determine the reorder level, we need to consider the standard deviation and setup cost of the product.
Now, what does this mean? A standard deviation is a measure of variation from an average value. This average value is found by taking the average of numerous sample values and trying to reduce the effects of random variability. In statistics, the standard deviation is a measure of how much the individual values in a distribution differ from the average value. The average of the values that are farthest from the average value is called the “standard deviation.” This is a statistical measure calculated by squaring the deviation from the mean and dividing the result by the number of items minus 1.
Moving on, the setup cost is the minimum amount of time and money it takes to run the process. Basically, what it depends on is the equipment you are using.
Advantages/Disadvantages of Chase Production Strategy:
This strategy helps to maintain low inventory levels. It keeps the production/inventory relationship very close. Another advantage is that it helps to reduce the amount of money tied up in the slow moving inventory. It also allows you to avoid the obsolete inventory.
This strategy however has many disadvantages. Since it is based on the demand created by the market, the economy or the market plan cannot determine what the right production level is. Thus, the numbers can be very inaccurate and problematic. The actual quantity of goods sold may be higher than the forecasted sales and will lead to a shortage of goods in the channel of distribution. This shortage of goods may lead to a situation wherein a finished goods inventory actually increases instead of decreasing. This may lead to an uneconomic shipment and raise incorrect delivery dates for the raw material and finished product.
Another disadvantage of the chase strategy is that it is based on the whims of the market. As a result, there are no barriers to entry and exit. This means that the organization is constantly worrying about making their sales target rather than concentrating on developing a strong position in their market place.
The chase production strategy is a flexible one. It is used by firms in situations where their products are different and has a relatively small amount of products in the product line. This strategy is also good choice for firms with large market share.
It is however, not a good choice for firms in the following situations:
- The demand patterns of the industry are short term, seasonality etc. (Short-term fluctuations)
- The market share is not very large. (So we can give up some market share in order to maximize profits)
- The product does not vary much. (So the manufacturers can maintain a high quality, low cost)
- The product has clearly defined substitutes. ( So if suppliers have a high profitability)
- The sensitivity of the product to promotion is low.
- A long lead time is required to introduce new products.
- Shelf space is limited.
Another factor that can complicate the chase strategy is the fact that the organization may be less flexible. Since the production levels are mainly based on the market situation, the firm may not be able to make adjustments in the organization to create flexibility. Chase in practice simply involves a decision to start up production and can therefore become a major bottleneck for production.
Chase Production Strategy vs Alternatives
The chase production strategy is basically a piece-rate strategy since it involves chasing demand. So it is not surprising that top management pays attention to the chase strategy of production because it interacts closely with the market. This strategy is slightly different from the other piece rate strategies.
In a piece-rate strategy, top management is more concerned with the rates of production, which would lead to the highest profit. Therefore, each department is given a piece rate which is determined by the production rate of the department. In the chase strategy, top management is more concerned about the quantity, or ‘stock on hand’, or ‘level of inventory’. Since inventory is a liability (we need to store, monitor etc.) it is natural to want to avoid this liability. So top management is more concerned about the level of inventory and the relationships between the levels of production and stock on hand.
Also, in a piece-rate strategy, top management is more concerned about the costs of production, while in the chase strategy top management focuses on the inventory. Since inventory is a liability, top management is more concerned about the costs of holding inventory. Other factors like the cost of raw material and manufacturing are also important to top management.
Another difference between the chase and piece-rate strategies is that in a piece-rate strategy, inventory indirectly becomes a factor of production and is therefore part of the price charged for the product. Since the chase strategy is based on a low inventory level, there is no need to include ‘cost of goods’ in the price.
So, the chase production strategy Z is different from the piece-rate strategy X and Y.
The chase strategy is also different from the other strategies. For instance, the target rate strategy does not pay attention to the level of inventory. The target rate strategy is basically based on setting a target rate of production instead of chasing demand. Another example would be the target cost strategy. The target cost strategy is based on the idea of having the lowest possible cost of production, rather than setting a target range of finished goods inventory.
Finally, the chase strategy is different from the cycle counting strategy. Cycle counting essentially tracks inventory and production to ensure that there occurs no discrepancy. Cycle counting is an inventory control system wherein there is a clear understanding of the current inventory as well as its changes over a period of time.
It is the comparison of the current cycle count with the previous cycle count.