Chase Method of Aggregate Planning

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Chase Method of Aggregate Planning

• Kevin Craner
• OPERMGT 345
• Boise State University

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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

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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.

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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.

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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.

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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.

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Available Strategies for Meeting Demand

• Chase demand
• Level production
• Subcontracting
• Overtime/Undertime
• Employing temporary workers
• Backordering

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Principles of the Chase Method

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

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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.

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Graph of Level vs. Chase Strategy
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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?

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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.

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Level Production Strategy

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

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Advantages of Chase Strategy

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

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Disadvantages of Chase Method

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

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Advantage of Level Strategy

• Worker levels and production output are stable.

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Disadvantages of Level Strategy

• High inventory costs.
• Increased labor costs.

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Hersheys use of Chase Strategy

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

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Hersheys (cont.)

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

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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.

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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

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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.

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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.