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.

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.

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.

Hersheys (cont.)
When demand drops in the spring and summer months the farmers are let go and thus able to return the 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 and 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.