A. Subcontracting:

While subcontracting is a valid strategy in aggregate planning, it primarily falls under capacity options rather than demand options. It allows a company to temporarily increase its production capacity by outsourcing some of the production tasks to external suppliers or manufacturers.

This can be a practical solution when demand spikes suddenly, and the company’s internal resources are insufficient to meet it. However, it doesn’t directly address how to manage demand itself.

C. Changing inventory levels:

Adjusting inventory levels is a key aspect of inventory management, which is a critical part of operations management. It involves maintaining an optimal level of stock to meet customer demand.

However, in the context of aggregate planning, this option primarily relates to managing the supply side of the equation (ensuring enough inventory is available to meet demand) rather than directly managing demand fluctuations.

D. Varying workforce size:

Varying workforce size is indeed a demand option in aggregate planning. It involves adjusting the number of workers based on changes in customer demand. During high-demand periods, a company may hire more workers to increase production capacity.

Conversely, during low-demand periods, it may reduce the workforce to control costs. This is an effective way to align labor resources with customer demand.

E. Varying production rates through overtime or idle time:

This option allows a company to adjust production rates without necessarily changing the size of the workforce. During high-demand periods, the company can implement overtime to increase production.

Conversely, during low-demand periods, it can reduce production by utilizing idle time. This option provides flexibility in meeting customer needs by optimizing the utilization of existing resources.

In aggregate planning, the distinction between capacity options and demand options is crucial. Capacity options focus on the company’s internal resources and capabilities, such as labor, machinery, and subcontracting.

Demand options, on the other hand, are strategies that directly address how to manage customer demand, which can often exceed the company’s current production capacity.

In the case of the correct answer, back-ordering during high-demand periods, it is a demand option because it specifically deals with managing customer demand that exceeds the company’s capacity to produce.

It also, ensures that customers receive their orders eventually, even if there is a temporary shortage of inventory. This customer-centric approach aims to maintain customer satisfaction during periods of high demand.