Chase Method of Chase Method of Aggregate PlanningAggregate Planning

Kevin CranerKevin Craner

OPERMGT 345OPERMGT 345

Boise State UniversityBoise State University

OverviewOverview

• What is aggregate planning?What is aggregate planning?• What are the inputs to aggregate What are the inputs to aggregate

planning?planning?• Strategies for meeting demandStrategies for meeting demand• Principles of chase demand and level Principles of chase demand and level

productionproduction• Advantages/DisadvantagesAdvantages/Disadvantages• Practical exercisePractical exercise

Aggregate PlanningAggregate Planning

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

Inputs to Aggregate Inputs to Aggregate PlanningPlanning

• Determine demand for each period.Determine demand for each period.• Determine capacities for each period.Determine capacities for each period.• Determine pertinent company policies.Determine pertinent company policies.• Determine unit cost based on all relevant Determine unit cost based on all relevant

sources.sources.• Develop alternative plans and calculate the Develop alternative plans and calculate the

cost for each.cost for each.• Chose the best overall plan based on company Chose the best overall plan based on company

objectives and cost.objectives and cost.

Capacity and DemandCapacity and Demand

• If capacity and demand are nearly equal If capacity and demand are nearly equal emphasis should be placed on meeting emphasis should be placed on meeting demand as efficiently as possible.demand as efficiently as possible.

• If capacity is grater than demand the If capacity is grater than demand the firm might chose promotion and firm might chose promotion and advertising in order to increase demand.advertising in order to increase demand.

• If capacity is less than demand the firm If capacity is less than demand the firm might consider subcontracting a portion might consider subcontracting a portion of the work load.of the work load.

Goal of Aggregate Goal of Aggregate PlanningPlanning

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

Available Strategies for Available Strategies for Meeting DemandMeeting Demand

• Chase demandChase demand• Level productionLevel production• SubcontractingSubcontracting• Overtime/UndertimeOvertime/Undertime• Employing temporary workersEmploying temporary workers• BackorderingBackordering

Principles of the Chase Principles of the Chase MethodMethod

• The chase method helps firms The chase method helps firms match production and demand by match production and demand by hiring and firing workers as hiring and firing workers as necessary to control outputnecessary to control output

Principles of a Level Principles of a Level Production MethodProduction Method

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

Graph of Level vs. Chase Graph of Level vs. Chase StrategyStrategy

Brainstorming ExerciseBrainstorming Exercise

• Does your firm currently use aggregate Does your firm currently use aggregate production planning?production planning?– If so, which strategy for meeting demand If so, which strategy for meeting demand

is being used and why?is being used and why?– If not, should the firm be using aggregate If not, should the firm be using aggregate

production planning and which strategy production planning and which strategy should be used?should be used?

• What benefits could aggregate production What benefits could aggregate production planning provide your firm?planning provide your firm?

Chase Demand StrategyChase Demand Strategy

• Cost of strategy – hiring and firing Cost of strategy – hiring and firing workersworkers

• This strategy would not be feasible for This strategy would not be feasible for industries which require highly skilled industries which require highly skilled labor or where competition for labor is labor or where competition for labor is fierce.fierce.

• This strategy would be cost effective This strategy would be cost effective during periods of high unemployment or during periods of high unemployment or when low-skilled labor is acceptable.when low-skilled labor is acceptable.

Level Production StrategyLevel Production Strategy

• Cost of strategy – holding items in Cost of strategy – holding items in inventory.inventory.

• Tends to be the preferred strategy Tends to be the preferred strategy of many organizations, including of many organizations, including labor unions.labor unions.

Advantages of Chase Advantages of Chase StrategyStrategy

• Reduced inventory costs.Reduced inventory costs.• High levels of worker utilization.High levels of worker utilization.

Disadvantages of Chase Disadvantages of Chase MethodMethod

• Cost of fluctuating workforce Cost of fluctuating workforce levels.levels.

• Potential damage to employee Potential damage to employee morale.morale.

Advantage of Level Advantage of Level StrategyStrategy

• Worker levels and production Worker levels and production output are stable.output are stable.

Disadvantages of Level Disadvantages of Level StrategyStrategy

• High inventory costs.High inventory costs.• Increased labor costs.Increased labor costs.

Hershey’s use of Chase Hershey’s use of Chase Strategy Strategy

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

Hershey’s (cont.)Hershey’s (cont.)

• When demand drops in the spring When demand drops in the spring and summer months the farmers and summer months the farmers are let go and thus able to return are let go and thus able to return the their fields.the their fields.

Chase vs. LevelChase vs. Level

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

Chase vs. Level (cont.)Chase vs. Level (cont.)

QuarterQuarter Demand ForecastDemand Forecast 11 100,000100,000 22 90,00090,000 33 130,000130,000 44 160,000160,000

Hiring cost = $300Hiring cost = $300Firing cost = $500Firing cost = $500Inventory carrying cost = $1.50 per unit per Inventory carrying cost = $1.50 per unit per

quarterquarterProduction per employee = 400 units per quarterProduction per employee = 400 units per quarterBeginning workforce = 300 workersBeginning workforce = 300 workers

SummarySummary

• Aggregate production planning is a vital Aggregate production planning is a vital tool to aid firms in balancing supply and tool to aid firms in balancing supply and demand.demand.

• All possible strategies should be considered All possible strategies should be considered initially and then eliminated based on cost initially and then eliminated based on cost and organizational policy.and organizational policy.

• While pure strategies such as chase While pure strategies such as chase demand and level production may work for demand and level production may work for some firms, most tend to use a mixed some firms, most tend to use a mixed strategy.strategy.

SourcesSources

Aggregate Planning:Aggregate Planning:

http://www.uoguelph.ca/~dsparlin/http://www.uoguelph.ca/~dsparlin/aggregat.htm.aggregat.htm.

Russell, Roberta S. and Bernard W. Taylor III.Russell, Roberta S. and Bernard W. Taylor III.Operations Management. Operations Management. New Jersey: Prentice New Jersey: Prentice Hall, 2000.Hall, 2000.

Stevenson, William J. Stevenson, William J. Production / Operations Production / Operations Management.Management.Massachusetts: Irwin, 1993. Massachusetts: Irwin, 1993.