Chase Method of Aggregate Planning Kevin Craner OPERMGT

Chase Method of Aggregate Planning Kevin Craner OPERMGT 345 Boise State University

Overview • What is aggregate planning? • What are the inputs to aggregate planning? • Strategies for meeting demand • Principles of chase demand level production • Advantages/Disadvantages • Practical exercise

Aggregate Planning • Aggregate planning is an intermediate planning method used to determine the necessary resource capacity a firm will need in order to meet its expected demand.

Inputs to Aggregate Planning • • Determine demand for each period. Determine capacities for each period. Determine pertinent company policies. Determine unit cost based on all relevant sources. • Develop alternative plans and calculate the cost for each. • Chose the best overall plan based on company objectives and cost.

Capacity and Demand • If capacity and demand are nearly equal emphasis should be placed on meeting demand as efficiently as possible. • If capacity is grater than demand the firm might chose promotion and advertising in order to increase demand. • If capacity is less than demand the firm might consider subcontracting a portion of the work load.

Goal of Aggregate Planning • To develop a realistic production plan on an aggregate level that will satisfy organizational goals and customer demand needs at the lowest total cost.

Available Strategies for Meeting Demand • Chase demand • Level production • Subcontracting • Overtime/Undertime • Employing temporary workers • Backordering

Principles of the Chase Method • The chase method helps firms match production and demand by hiring and firing workers as necessary to control output

Principles of a Level Production Method • The level method allows for a constant rate of production and uses inventory levels to absorb fluctuations in demand.

Graph of Level vs. Chase Strategy

Brainstorming Exercise • Does your firm currently use aggregate production planning? – If so, which strategy for meeting demand is being used and why? – If not, should the firm be using aggregate production planning and which strategy should be used? • What benefits could aggregate production planning provide your firm?

Chase Demand Strategy • Cost of strategy – hiring and firing workers • This strategy would not be feasible for industries which require highly skilled labor or where competition for labor is fierce. • This strategy would be cost effective during periods of high unemployment or when low-skilled labor is acceptable.

Level Production Strategy • Cost of strategy – holding items in inventory. • Tends to be the preferred strategy of many organizations, including labor unions.

Advantages of Chase Strategy • Reduced inventory costs. • High levels of worker utilization.

Disadvantages of Chase Method • Cost of fluctuating workforce levels. • Potential damage to employee morale.

Advantage of Level Strategy • Worker levels and production output are stable.

Disadvantages of Level Strategy • High inventory costs. • Increased labor costs.

Hershey’s use of Chase Strategy • Demand for chocolate is high during the winter months. Facilitated by the location of Hershey’s manufacturing facility, the company hires farmers from the surrounding areas to aid in meeting demand.

Hershey’s (cont. ) • When demand drops in the spring and summer months the farmers are let go and thus able to return their fields.

Chase vs. Level • A rapidly growing television manufacturer is looking at way to reduce costs. They are currently using a level production strategy and wish to know if switching to a chase strategy would be more cost effective. Given the following data compare the two methods to determine which one has the lowest cost.

Chase vs. Level (cont. ) Quarter Demand Forecast 1 100, 000 2 90, 000 3 130, 000 4 160, 000 Hiring cost = $300 Firing cost = $500 Inventory carrying cost = $1. 50 per unit per quarter Production per employee = 400 units per quarter Beginning workforce = 300 workers

Summary • Aggregate production planning is a vital tool to aid firms in balancing supply and demand. • All possible strategies should be considered initially and then eliminated based on cost and organizational policy. • While pure strategies such as chase demand level production may work for some firms, most tend to use a mixed strategy.

Sources Aggregate Planning: http: //www. uoguelph. ca/~dsparlin/aggregat. htm. Russell, Roberta S. and Bernard W. Taylor III. Operations Management. New Jersey: Prentice Hall, 2000. Stevenson, William J. Production / Operations Management. Massachusetts: Irwin, 1993.