Choice of appropriate strategy in aggregate capacity


The appropriate strategy to follow depends upon the time-frame over which the decision prevails and the costs/benefits that result.

In level capacity plans, the operating costs tend to be low, quality of output tends to be high and production rates are usually dependable and hence preferred by operations managers. But, financial managers do not prefer this approach because it results in higher finished goods inventory levels and attracts inventory carrying costs. The resolution of this finance versus operations management conflict depends finally on the trade-off between additional carrying costs and the savings in labor and material costs that result from the level capacity plan.

The other alternative aggregate capacity plan namely, varying capacity with demand, results in hiring costs and lay-off costs or costs of overtime and idle time of labor and equipment or costs of sub-contracting or back-ordering. The only advantage of this plan is the absence of inventory carrying costs of finished goods inventories. However, the increase in labor and material costs, because of frequently changing the workforce, material supplies and production machine capacities may more than offset the savings in inventory carrying costs.

The factors which would be important in deciding between plans namely “level capacity plan� and “varying capacity to match aggregate demand� are:

1. The total costs for each alternative plan.
2. Maintaining positive relations between management and trade unions. (attitudes of workers towards working overtime)
3. Fatigue, reduced morale and increased costs could result from working too much overtime on a continual basis.
4. Product quality might be better with overtime plan rather than sub-contracting plan because all production would be in-house and under the direct control of the firm.

5. The flexibility of increasing or decreasing production levels either by hiring or laying-off, by over time or idle time or by subcontracting.

Aggregate Plans for Services

In some of the service systems that supply standardized services to customers, aggregate planning may be even simpler than in systems that produce products. Examples of these situations in service systems are fast-food corners, trucking firms and banks.

Some service systems that supply customized services to customers have the same difficulty as job shops in specifying the nature and extent of services to be performed for each customer. Examples of these systems are hospitals, computer service centers and auto repair shops.

Another problem with planning capacity levels for service system is the absence of finished goods inventories as a buffer between system capacity and customer demand. In such cases, the service system must develop capacity plans that nearly match the expected aggregate demand.

In custom-designed services, a two-step approach is suggested. The steps involved are:

(a) Developing aggregate demand forecasts in some homogeneous units of measure such as labors-hours, machine capacity or sales in rupee value.
(b) Trying to find out common denominator units of capacity that are useful in transforming aggregate demand into production resource requirement.

If the first suggestion is infeasible, alternative innovations are developed for expanding the flexibility of production resource capacities. Examples of these innovations are –

(a) Stand–by workers who are on call for peak demand periods.
(b) Machines and buildings that can be activated during peak demand periods.
(c) Sub-contractors who respond quickly.
(d) Retired supervisors who wish to work only part time and can be recalled for short periods.

The above stand-by resources provide a new-level capacity aggregate plan with the extra capacity needed to respond to the surges in demand.