14.3 Aggregate Planning Strategies
Effective aggregate planning relies on selecting appropriate strategies to manage capacity in response to forecasted demand. As discussed in Chapter 4, capacity strategies serve as both operational and strategic levers that influence an organization’s competitive position and long-term success. Common capacity strategies include:
- Leading Capacity Strategy: Adding capacity in anticipation of demand.
- Following Capacity Strategy: Increasing capacity only after demand has been realized.
- Tracking Capacity Strategy: Incrementally adjusting capacity to match demand trends.
While these strategies are typically strategic in nature, aggregate planning applies similar principles at an operational level. The three primary strategies used in aggregate planning are:
- Chase Strategy: Adjusts production rates and workforce levels to match demand fluctuations precisely.
- Level Strategy: Maintains a constant production rate and workforce, using inventory to buffer demand variability.
- Mixed Strategy: Combines elements of both chase and level strategies, often incorporating overtime, subcontracting, or inventory adjustments.
In addition to these qualitative approaches, several quantitative methods are employed in aggregate planning, including:
- Linear Programming
- Transportation Models
- Management Coefficient Models
- Decision Rules based on Decision Theory
Example
To better understand these methods, let us consider a firm with the following six-month demand forecast:
| Month | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Demand (units) | 1000 | 1200 | 1500 | 900 | 1100 | 1300 |
Operational Parameters:
- Regular production capacity: 1000 units/month
- Regular workforce: 50 workers
- Regular production cost: $10/unit
- Overtime cost: $15/unit
- Hiring cost: $200/worker
- Layoff cost: $250/worker
- Inventory holding cost: $2/unit/month
- Subcontracting cost: $12/unit
The firm evaluates three strategies to meet demand:
a) Chase Strategy
This strategy aligns production directly with monthly demand by adjusting workforce levels. It minimizes inventory but incurs costs related to hiring and layoffs.
| Month | Demand | Regular Production | Workforce level | Hire/Layoff | Production Cost | Labor Cost | Total Cost |
|---|---|---|---|---|---|---|---|
| 1 | 1000 | 1000 | 50 | 0 | $10,000 | $ – | $10,000 |
| 2 | 1200 | 1200 | 60 | Hire 10 | $12,000 | $2,400 | $14,000 |
| 3 | 1500 | 1500 | 75 | Hire 15 | $15,000 | $4,800 | $18,000 |
| 4 | 900 | 900 | 45 | Layoff 30 | $9,000 | $ – | $16,500 |
| 5 | 1100 | 1100 | 55 | Hire 10 | $11,000 | $1,200 | $13,000 |
| 6 | 1300 | 1300 | 65 | Hire 10 | $13,000 | $2,400 | $15,000 |
| $86,500 |
Total Cost: $86,500
b) Level Strategy
Adopting a Level strategy, the firm maintains a constant (level) production rate and workforce, using inventory to absorb demand fluctuations. In some months, the production level might be more or less than the forecasted demand in that month. If the firm produces more than the demand, the excess production will be stored in a warehouse as inventory. This inventory might be carried from month to month at a cost known as holding cost or inventory carryover cost. If the production happens to be less than the projected demand, the gap is filled by taking some of the inventory and adding it to the month’s production, so the demand is met. The total cost associated with this strategy is comprised of production cost and inventory holding cost, as shown in the following table.
Here, the firm maintains a constant production rate of 1167 units/month (based on the total demand of 7000 units over six months). Inventory is used to absorb demand fluctuations.
