CPIM Practice Exam

What is the biggest trade-off for a seasonal industry using a level production strategy?

1. Increased overtime costs

2. Lower production efficiency

3. Skilled workers unavailable for rehire

4. Increased inventory carrying cost

The correct answer is: Increased inventory carrying cost

In a seasonal industry employing a level production strategy, the primary trade-off concerns the increased inventory carrying cost. This strategy involves producing goods at a steady rate regardless of seasonal demand fluctuations. As a result, inventory builds up during off-peak periods when demand is lower, leading to higher carrying costs associated with storing excess products. These carrying costs encompass expenses related to warehousing, insurance, and potential obsolescence, particularly if the products have a limited shelf life or if there’s a risk of changing consumer preferences. By balancing production evenly throughout the year, companies create a buffer for peak demand periods, but they must manage the financial burden of excess inventory during times of lower sales. The other options present issues related to workforce management, production efficiency, or costs, but the accumulation of inventory due to steady production without corresponding demand during off-peak seasons distinctly highlights the trade-off inherent in this strategy.