Aggregate Planning: Strategies & Manufacturing vs. Service

(i) Strategic Objectives of Aggregate Planning

The primary strategic objectives of aggregate planning are:

• Meeting Demand: Ensuring sufficient capacity to meet anticipated customer demand throughout the planning horizon.
• Minimizing Costs: Reducing total costs associated with production, inventory, workforce changes (hiring, firing, overtime), and subcontracting.
• Optimizing Resource Utilization: Making the best use of available resources – workforce, facilities, and materials – to maximize efficiency.
• Stabilizing Workforce: Maintaining a stable workforce level to reduce employee turnover, improve morale, and enhance productivity.
• Controlling Inventory Levels: Balancing the costs of holding inventory against the risks of stockouts and lost sales.
• Improving Customer Service: Ensuring timely delivery and responsiveness to customer needs.

(ii) Chase and Level Strategies for Aggregate Planning

Aggregate planning strategies aim to balance capacity and demand. Two common approaches are the chase and level strategies:

Chase Strategy

The chase strategy involves adjusting production levels to match demand fluctuations. This means varying the workforce size, utilizing overtime or part-time workers, and potentially subcontracting to meet peak demand. During periods of low demand, production is reduced, and employees may be laid off or assigned to other tasks.

• Advantages: Low inventory holding costs, reduced risk of obsolescence, good for short-term demand fluctuations.
• Disadvantages: High variable costs (hiring/firing, overtime), potential for decreased employee morale, difficulty in accurately forecasting demand.

Level Strategy

The level strategy maintains a constant production rate over the planning horizon, regardless of demand fluctuations. Demand variations are absorbed through changes in inventory levels. Production is set at an average level, and inventory is built up during periods of low demand and depleted during periods of high demand.

• Advantages: Stable workforce, lower variable costs, simplified planning and scheduling.
• Disadvantages: High inventory holding costs, risk of obsolescence, potential for stockouts if demand exceeds forecasts.

Which strategy to prefer? The preferred strategy depends on the specific circumstances. Generally, the level strategy is preferred when demand is relatively stable and inventory holding costs are low. However, the chase strategy is more suitable when demand is highly variable and inventory costs are high. A hybrid approach, combining elements of both strategies, is often the most effective solution.

(iii) Aggregate Planning in Service vs. Manufacturing

Aggregate planning differs significantly between service and manufacturing operations:

• Demand Volatility: Service demand is often more volatile and less predictable than manufacturing demand. This is due to factors like seasonality, weather, and unpredictable events.
• Inventory: Services generally cannot be inventoried. This means that capacity must be available to meet demand at all times. Manufacturing can utilize inventory to buffer against demand fluctuations.
• Capacity Adjustments: Adjusting capacity in service operations can be more challenging and costly than in manufacturing. Hiring and training employees, for example, can take time and resources. Manufacturing can often adjust capacity through overtime, subcontracting, or adding shifts.
• Customer Interaction: Service operations involve direct customer interaction, which can impact capacity and demand. Managing customer expectations and providing excellent service are crucial.
• Perishability: Service capacity is perishable. An empty hotel room or an unsold airline seat represents lost revenue that cannot be recovered.

For example, a hotel uses strategies like dynamic pricing and overbooking to manage demand fluctuations, while a manufacturing plant might adjust production schedules and inventory levels.