Chase vs level production strategy

13-3 Strategies for Aggregate Planning

•Select a goods-producing organization and a service-providing organization of your choice. Suggest ways each organization can make aggregate planning decisions using the variables described in Exhibit 13.3 (Chapter 13) (see attached).

•Compare and contrast the operational and managerial impacts of the aggregate planning decisions in terms of customer satisfaction.

to illustrate some of the major issues involved with aggregate planning, consider the situation faced by Golden Beverages, a producer of two major products—Old Fashioned and Foamy Delite root beers. The spreadsheet in Exhibit 13.4 shows a monthly aggregate demand forecast for the next year. Notice that demand is in barrels per month—an aggregate unit of measure for both products. Golden Beverages operates as a continuous flow factory and must plan future production for a demand forecast that fluctuates quite a bit over the year, with seasonal peaks in the summer and winter holiday season.

How should Golden Beverages plan its overall production for the next 12 months in the face of such fluctuating demand? Suppose that the company has a normal production capacity of 2,200 barrels per month and a current inventory of 1,000 barrels. If it produces at normal capacity each month, we have the aggregate plan shown in Exhibit 13.4. To calculate the ending inventory for each month, we use Equation 13.1.

[13.1]

Ending inventory = Beginning inventory+ Production - DemandEnding inventory = Beginning inventory + Production - Demand

For example, January is 1,000 + 2,200 − 1,500 = 1,700 and February is 1,700 + 2,200 − 1,000 = 2,900.

A level production strategy plans for the same production rate in each time period. The aggregate plan for Golden Beverages shown in Exhibit 13.4 is an example of a level production strategy with a constant production rate of 2,200 barrels per month. A level strategy avoids changes in the production rate, working within normal capacity restrictions. Labor and equipment schedules are stable and repetitive, making it easier to execute the plan. However, ending inventory builds up to a peak of 3,200 barrels in March and lost sales are 500 barrels in August due to inventory shortages.

An alternative to a level production strategy is to match production to demand every month. A chase demand strategy sets the production rate equal to the demand in each time period. While inventories will be reduced and lost sales will be eliminated, many production-rate changes will dramatically change resource levels (that is, the number of employees, machines, and so on). A chase demand strategy for Golden Beverages is shown in Exhibit 13.5 with a total cost of $1,835,050. As compared with the level production strategy documented in Exhibit 13.4, the cost of the chase demand strategy is $1,920,440 − 1,835,050 = $85,390 less. Notice that no inventory carrying or lost sales costs are incurred, but substantial overtime, undertime, and rate-change costs are required.

A level production strategy plans for the same production rate in each time period.

A chase demand strategy sets the production rate equal to the demand in each time period.