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 and 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. Intermediate range implies a period of 6-12 months. Resource capacity refers to resources such as labor, raw materials, production facilities, etc. The term “aggregate” is used because this method of planning is developed for a group of products vice an individual product.

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. (Source: Stevenson) Demand will be based on firms current forecasting techniques. Capacities are determined using currently available resources including regular time, overtime, and subcontracting. Company policy can affect the allowable percentage of workers that are hired and fired. Policy may also dictated the minimum allowable safety stock that must by maintained. Unit cost will include employee pay, cost of holding inventory, cost of backordering, subcontracting, and any other relevant costs.

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. When attempting to efficiently meet demand the firm should focus on minimizing costs at all levels of the production process.

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. Some other goals of AP include maximizing customer service and the utilization of plant and equipment. Minimizing inventory costs, changes in workforce levels, and changes in production levels. (Source: Aggregate Planning)

Available Strategies for Meeting Demand Chase demand Level production Subcontracting Overtime/Undertime Employing temporary workers Backordering When only one strategy is chosen the company is said to be using a pure strategy. If more than one strategy is selected the company is using a mixed strategy. The level production and chase demand strategies will be discussed later. Subcontracting can be used by the firm when demand exceeds capacity. The firm may hire another firm to produce part or all of a particular component. Overtime/Undertime is used to control production output by raising or lower workers’ hours. Backordering is used to meet demand by producing and supplying goods at a later date to the customer.

Principles of the Chase Method The chase method helps firms match production and demand by hiring and firing workers as necessary to control output When demand increases, production must be increased, therefore additional workers are hired in order to meet this new demand. When demand decreases production will be reduced, therefore, workers are laid off or fired.

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. When demand is low excess production will be stored in inventory. When demand exceeds production the firm can pull from inventory to meet customer demand. When using a level strategy production is usually set at average demand.

Graph of Level vs. Chase Strategy In a level production strategy demand will fluctuate while production will remain relatively constant at the average demand level. In a chase demand strategy, as demand increases and decreases, workers will be hired and fired as necessary to match production with demand.

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. (Source: Stevenson) The cost of hiring workers includes recruitment, training, and screening. The cost of firing workers includes severance pay, loss of morale for retained workers, and ill will towards the company.

Level Production Strategy Cost of strategy – holding items in inventory. Tends to be the preferred strategy of many organizations, including labor unions. (Source: Stevenson) Inventory costs include losses due to perishable or obsolete goods. A level production strategy is the preferred strategy since altering the workforce level can havenhegative effects on employee morale, management organization, and can also increase costs as previously mentioned.

Advantages of Chase Strategy Reduced inventory costs. High levels of worker utilization. (Source: Aggregate Planning) Since the chase method does not rely on inventory level to meet demand all cost associated with carrying inventory will be less than that of a level strategy. Since the firm wishes to produce the most goods with the fewest employees possible (to keep labor costs down) workers tend to be used as efficiently as possible.

Disadvantages of Chase Method Cost of fluctuating workforce levels. Potential damage to employee morale. (Source: Aggregate Planning) When changing workforce levels increased costs are incurred when hiring and firing workers and also when the production levels must be raised and lowered.

Advantage of Level Strategy Worker levels and production output are stable. (Source: Aggregate Planning) This approach eliminates the negative effects of the chase strategy.

Disadvantages of Level Strategy High inventory costs. Increased labor costs. (Source: Aggregate Planning) Inventory costs will increase due to carrying costs. Labor cost may increase due to possible overtime pay.

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. (Source: Russell) Demand is high due to holiday season and Valentine’s Day.

Hershey’s (cont.) When demand drops in the spring and summer months the farmers are let go and thus able to return the their fields. Demand drops due to consumers watching their weight and since chocolate tends to melt when it’s hot. This scenario works quite well for Hershey’s since they are in a unique situation. This strategy will not likely work as efficiently for most other organizations due to the aforementioned disadvantages of the chase strategy.

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 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 See Excel file “Exercise Solution” for answer.

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 and level production may work for some firms, most tend to use a mixed strategy.

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