What should take in to consideration when applying aggregate planning for services

Aggregate planning involves developing, analyzing and maintaining the operational schedule of an organization. It organizes areas of business that include targeted sales forecasts, production levels, inventory levels and customer backlogs. When aggregate planning is carried out effectively, the effects of short-sighted, daily scheduling are minimized. Capacity and demand are balanced in a way that minimizes costs where aggregate resources may include the total number of workers, hours of equipment and machine time, or tons of raw materials.

Techniques

1. The techniques for aggregate planning include informal trial-and-error that utilize simply graphs or tables as well as advanced mathematical techniques. Aggregate planning requires the demand for each period to be determined, followed by determining the capacity for each period, which should match demand. Company, departmental or union policies that are pertinent are then identified. Unit costs for the total number of units produced and the costs associated with making changes in capacity are also taken into account. Alternative plans and computational costs for each are developed as a result. The plan that best satisfies the business objectives is chose. This is normally the plan with the lowest cost.

Manufacturing

1. Aggregate planning in manufacturing involves allocating the correct amount of resources for every manufacturing process so that the time and costs are minimized during idle mode. Manufacturing businesses use either the Chase Strategy or the Level Strategy. The Chase Strategy involves matching demand and capacity period by period. This strategy could trigger a considerable amount of hiring or firing workers, increased inventory carrying costs, labor union problems and utilization of plant and equipment. The advantage of the Chase strategy is that inventory is held at the lowest level possible, meaning large savings for the company. With a Level Strategy, a steady production rate and a steady employment rate is maintained. The business can then raise or lower inventory levels in anticipation of forecasted demand levels.

Services

1. Since services do not involve stockpiles or inventory, service-focused businesses do not have the luxury of building up their inventories during periods of low demand. In aggregate planning, services are considered “perishable,” where any capacity that is unused is considered to be wasted. For example, an empty hotel room or an empty flight seat cannot be held and sold at a later time. Services have variable processing requirements that make it hard to establish a good measure of capacity.

Differentiation

1. Aggregate planning in manufacturing works well because of the ability to produce, hold and sell inventory at any given time. Alternatively, aggregate planning in services differs substantially because services cannot be inventoried. The demand for services is much more difficult to predict and capacity is also difficult to measure. Service capacity must be provided at the right place and the right time, while labor is generally the most constraining service resource.

SCM Chapter 8 - Discussion Questions & Answers 

• 1. What are some industries in which aggregate planning would be particularly important?

Aggregate planning is useful in many types of manufacturing and services. Manufacturers include furniture, all durable goods, consumer electronics, textiles, motor vehicles, and aircraft, Service industries might be restaurants and other hospitality providers like hotels and motels.

• 2. What are the characteristics of these industries that make them good candidates for aggregate planning?

Aggregate planning is most useful in industries characterized by relatively long lead times and finite amounts of capacity. The end products or services provided in these industries are composed of inputs that are often provided by other businesses that must perform some fabrication.

• 3. What are the main differences between aggregate planning strategies?

The three pure aggregate planning strategies are the chase strategy, time flexibility from workforce or capacity strategy, and the level strategy. The primary difference among the three strategies is the lever, that is, the parameter that is manipulated to achieve equality of supply and demand over the aggregate planning period.

The first chase strategy uses capacity, in the form of machine or personnel capacity, as the lever. By chasing demand on a period-by-period basis, the level of inventory is very low throughout the supply change and the workforce is in a constant state of flux, which can increase management costs.

The second chase strategy is time flexibility from workforce or capacity, using utilization as the level. This strategy, like the chase plan before it, results in low levels of inventory throughout the supply chain. It avoids the layoff problem of its predecessor but still requires a flexible workforce and may also result in low machine utilization.

The third strategy is to maintain a constant output rate throughout the aggregate planning period, which stands in stark contrast to the first two strategies. If demand is highly variable, this plan will result in periods marked by backorders or stockouts and other periods when the supply chain carries a high level of inventory. There is no true synchronization of demand with supply in this strategy, although over the entire aggregate planning period the planner will achieve a match.

• 4. What types of industries or situations are best suited to the chase strategy? The flexibility strategy? The level strategy?

The chase strategy should be used when the cost of carrying inventory is very high and the costs to change levels of machine and labor capacity are low. Industries with these characteristics include aircraft and other high dollar products and producers of highly perishable products.

The flexibility strategy should be used when inventory carrying costs are relatively high, machine capacity is relatively inexpensive, and the workforce cannot be adjusted on short notice. This strategy works in the automotive sector, durable goods, and consumer electronics.

The level strategy works well when inventory carrying and backlog costs are relatively low. The consumer goods industry has a cost structure that lends itself well to the level strategy.

• 5. What are the major cost categories needed as inputs for aggregate planning?

The major cost categories needed as inputs for aggregate planning are production costs and inventory costs. Production costs include labor costs of regular and overtime, costs of subcontracting production, costs of changing capacity by hiring or laying off workforce, and increasing or reducing machine capacity. Inventory costs include the cost of having too much (storage costs per period) and too little (backorder or stockout costs).

• 6. How does the availability of subcontracting affect the aggregate planning problem?

Subcontracting provides another variable that the aggregate planner may manipulate to match supply with demand. A fortunate planner may be able to plan production using a chase strategy from a macro view with production segmented such that internal operations are run using a level strategy with a subcontractor absorbing the variability in demand.

• 7. If a company currently employs the chase strategy and the cost of training increases dramatically, how might this change the company’s aggregate planning strategy?

As training costs increase, it becomes more expensive to vary the level of the workforce, perhaps to the point of making a chase strategy cost-prohibitive. If a chase strategy is taken off the table, then the aggregate planner should familiarize himself with a level strategy, time flexibility strategy, or some happy combination of the two.

• 8. How can aggregate planning be used in an environment of high demand uncertainty?

High demand uncertainty creates difficulties for the forecasting input to aggregate planning. Based on experience any aggregate planner knows that an aggregate plan developed for an 18 month planning period will not be 100% accurate and that the last few months in the plan may have gross errors in the demand forecast. As those months roll towards the present, the planner must update the plan. In an environment with high demand uncertainty, the planner must update plans regularly, communicate more frequently with suppliers and all others providing inputs to the plan, and recognize that plans several months into the future are little more than toner on paper.

How is aggregate planning applied in services?

Can aggregate planning be used for services?

What are the most common decision variables for aggregate planning in a service setting?

What is the importance of aggregate planning in the service industry?