Explain the basic strategies that an aggregate planner has available to balance the various costs and meet demand

Question

What will be an ideal response?

Answer 1

Answer: There are essentially three distinct aggregate planning strategies for achieving balance between these costs. These strategies involve trade-offs between capital investments, workforce size, work hours, inventory, and backlogs/lost sales. Most strategies that a planner actually uses are a combination of these three and are referred to as mixed strategies. The three strategies are as follows:
1. Chase strategy—using capacity as the lever: With this strategy, the production rate is synchronized with the demand rate by varying machine capacity or hiring and laying off employees as the demand rate varies. In practice, achieving this synchronization can be very problematic because of the difficulty in varying capacity and workforce on short notice. This strategy can be expensive to implement if the cost of varying machine or labor capacity over time is high. It can also have a significant negative impact on the morale of the workforce. The chase strategy results in low levels of inventory in the supply chain and high levels of change in capacity and workforce. It should be used when the cost of carrying inventory is very expensive and costs to change levels of machine and labor capacity are low.
2. Time flexibility strategy—using utilization as the lever: This strategy may be used if there is excess machine capacity (i.e., if machines are not used twenty four hours a day, seven days a week). In this case, the workforce (capacity) is kept stable but the number of hours worked is varied over time in an effort to synchronize production with demand. A planner can use variable amounts of overtime or a flexible schedule to achieve this synchronization. Although this strategy does require that the workforce be flexible, it avoids some of the problems associated with the chase strategy, most notably changing the size of the workforce. This strategy results in low levels of inventory but with lower average utilization. It should be used when inventory carrying costs are relatively high and machine capacity is relatively inexpensive.
3. Level strategy—using inventory as the lever: With this strategy, a stable machine capacity and workforce are maintained with a constant output rate. Shortages and surpluses result in inventory levels fluctuating over time. Here production is not synchronized with demand. Either inventories are built up in anticipation of future demand or backlogs are carried over from high- to low-demand periods. Employees benefit from stable working conditions. A drawback associated with this strategy is that large inventories may accumulate and customer orders may be delayed. This strategy keeps capacity and costs of changing capacity relatively low. It should be used when inventory carrying and backlog costs are relatively low.