AGGREGATE PLANING STRATEGY

Chase Strategy: A chase strategy typically attempts to achieve output rates for each period
that match the demand forecast for that period. This strategy can be accomplished in a variety of
ways. For example, the operations manager can vary workforce levels by hiring or laying off or
can vary output by means of overtime, idle time, part-time employees, or subcontracting. Many
service organizations favor the chase strategy because the changing inventory levels option is
difficult or impossible to adopt.
For most firms, neither a chase strategy nor a level strategy is likely to prove ideal,
so a combination called a mixed strategy must be investigated to achieve
minimum cost. However, because there are a huge number of possible mixed
strategies, managers find that aggregate planning can be a challenging task. Finding
the one “optimal” plan is not always possible.

Steps in involved in aggregate planning:

Level Strategy: A level strategy (or level scheduling ) is an aggregate plan in which
1. Determine the demand in each period.
production is uniform from period to period. Firms which use level strategy may (1) let the
2. Determine capacity for regular time, overtime, and subcontracting
finished-goods inventory vary to buffer the difference between demand and production or (2)
each period.
find alternative work for employees. Their philosophy is that a stable workforce leads to a
3. Find labor costs, hiring and layoff costs, and inventory holding costs.
better-quality product, less turnover and absenteeism, and more employee commitment to
4. Consider company policy that may apply to the workers or to stock
corporate goals. Other hidden savings include more experienced employees, easier scheduling
levels.
and supervision, and fewer dramatic startups and shutdowns. Level scheduling works well
5. Develop alternative plans and examine their total costs.

Q. Following data related to the monthly demand is given. Implement effective planning process by using chase stretgy, level strategy, and Mixed strategy.
The data for a magazine forecasted demand is given for 6 month (january to June)

demand
per
day(compu
month expected demand production days ted) Inventory carrying cost ₹ 5 per unit per month
1 Jan 900 22 41 Subcontracting cost per unit ₹ 10 per unit
2 Feb 700 18 39 average pay rate ₹ 5 per hour(40 per day)
3 Mar 800 21 38 Overtime pay rate ₹ 7 per hour
4 Apr 1200 21 57 Labour hours to produce a unit 1.6 hours per unit
5 May 1500 22 68 cost of increasing daily production rate(hiring and training)₹ 300 per unit
6 June 1100 20 55 cost of decreasing daily production rate(layoffs) ₹ 600 per unit
TOTAL 6200 124

Plan 1: Keep the constant workforce to meet the average demand

( Here we are goig to keep workforce constant to meet average demand and store the inventories)

monthly
expected production average production at 50 units inventory
month demand days demand per day change Ending inventory
1 Jan 900 22 50 1100 200 200
2 feb 700 18 50 900 200 400
3 mar 800 21 50 1050 250 650
4 apr 1200 21 50 1050 -150 500
5 may 1500 22 50 1100 -400 100
 6 june 1100 20 50 1000 -100 0
TOTAL 6200 124 6200 0 6200

Average demand=Total
expected demand/total
production days 50 units
Note 1 Constant workforce= 10 labours note 1: it takes 1.6 hours/unit, hence to make 50 units, we need 10 labours
Cost for storing inventories= ₹ 31,000
regular time labour= ₹ 49,600 (1 Labour works 8 hours and make 5 units
Total cost= ₹ 80,600 (10 labours to make 50 units)

PLAN 2: To maintain a constant workforce to at a level necessary to meet the lowest demand and to meet demand above this level by subcontracting
(here we meet the lowest of the forecasted demand and then meet the rest of the demand by subcontracting)

demand per production with

expected production day(compute constant output of 38
month demand days d) units per day
1 Jan 900 22 41 836
2 feb 700 18 39 684
3 mar 800 21 38 798
4 apr 1200 21 57 798
5 may 1500 22 68 836
6 june 1100 20 55 760
TOTAL 6200 124 4712

lowest demand per day is 38

Note 2 constant workforce to meet lowest demand 7.6 Note 2: ( to meet lowest demand of 38 we need 7.6 labours, 38/5=7.6)
in house production 4712
regular time labour cost ₹ 37,696
units to be subcontracted 1488
cost of subcontracting ₹ 14,880
Total cost of PLAN 2 ₹ 52,576

PLAN 3: TO vary the workforce by hiring and laying off. The production rate would be equal to the forecasted demand for each month( Chase strategy)

demand per cost of

expected production day(compute increasing cost of decreasing
month demand days d) basic production cost o/p o/p
1 Jan 900 22 41 ₹ 7,200 ₹ 7,200
2 feb 700 18 39 ₹ 5,600 ₹ 1,200 ₹ 6,800
3 mar 800 21 38 ₹ 6,400 ₹ 600 ₹ 7,000
4 apr 1200 21 57 ₹ 9,600 ₹ 5,700 ₹ 15,300
5 may 1500 22 68 ₹ 12,000 ₹ 3,300 ₹ 15,300
6 june 1100 20 55 ₹ 8,800 ₹ 7,800 ₹ 16,600
TOTAL 6200 124 ₹ 49,600 ₹ 9,000 ₹ 9,600 ₹ 68,200

Basic production cost= ₹ 49,600

Cost of hiring (to meet demand)
₹ 9,000
 cost of laying off ₹ 9,600
Total of PLAN 3 ₹ 68,200

Comparison of three plans

PLAN 2 (KEEPING
PLAN 1 CONSTANT WORKFORCE PLAN 3 (VARY
(KEEPING TO MEET LOWEST WORKFORCE
CONSTANT DEMAND AND BY LAYING OFF
COST WORKFORCE) SUBCONTRACT REST OF AND HIRING)
Inventory carrying ₹ 31,000 ₹ - 0
regular labour ₹ 49,600 ₹ 37,696 ₹ 49,600
Overtime labour 0 0 0 total cost of plan 1= ₹ 80,600
Hiring 0 0 ₹ 9,000 total cost of plan 2= ₹ 52,576
Layoffs 0 0 ₹ 9,600 Total cost of plan 3= ₹ 68,200
Subcontracting 0 ₹ 14,880 0
Total cost ₹ 80,600 ₹ 52,576 ₹ 68,200

After applying this mixed strategy it is seen that PLAN 2 in which we kept constant workforce to meet lowest demand
and the rest of the fluctuations in demand is met by suncontracting, is the most cost effective method.