Strategies Capacity
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strategies_for_adjusting_capacity.docxStrategies for Adjusting Capacity
If demand for a company’s products or services is stable over time, then the resources necessary to meet demand are acquired and maintained over the time horizon of the plan, and minor variations in demand are handled with overtime or undertime. Aggregate planning becomes more of a challenge when demand fluctuates over the planning horizon. For example, seasonal demand patterns can be met by:
Aggregate planning evaluates alternative capacity sources to find an economic strategy for satisfying demand.
1. Producing at a constant rate and using inventory to absorb fluctuations in demand (level production)
2. Hiring and firing workers to match demand (chase demand)
3. Maintaining resources for high-demand levels
4. Increasing or decreasing working hours (overtime and undertime)
5. Subcontracting work to other firms
6. Using part-time workers
7. Providing the service or product at a later time period (backordering)
When one of these alternatives is selected, a company is said to have a pure strategy for meeting demand. When two or more are selected, a company has a mixed strategy.
The level production strategy, shown in Figure 14.3a, sets production at a fixed rate (usually to meet average demand) and uses inventory to absorb variations in demand. During periods of low demand, overproduction is stored as inventory, to be depleted in periods of high demand. The cost of this strategy is the cost of holding inventory, including the cost of obsolete or perishable items that may have to be discarded.
Figure 14.3 Pure Strategies for Meeting Demand
The chase demand strategy, shown in Figure 14.3b, matches the production plan to the demand pattern and absorbs variations in demand by hiring and firing workers. During periods of low demand, production is cut back and workers are laid off. During periods of high demand, production is increased and additional workers are hired. The cost of this strategy is the cost of hiring and firing workers. This approach would not work for industries in which worker skills are scarce or competition for labor is intense, but it can be quite cost-effective during periods of high unemployment or for industries with low-skilled workers.
A variation of chase demand is chase supply. For some industries, the production planning task revolves around the supply of raw materials, not the demand pattern. Consider Motts, the applesauce manufacturer, whose raw material is available only 40 days during a year. The work-force size at its peak is 1500 workers, but it normally consists of around 350 workers. Almost 10% of the company’s payroll is made up of unemployment benefits—the price of doing business in that particular industry.
Maintaining resources for peak demand levels ensures high levels of customer service but can be very costly in terms of the investment in extra workers and machines that remain idle during low-demand periods. This strategy is used when superior customer service is important (such as Nordstrom’s department store) or when customers are willing to pay extra for the availability of critical staff or equipment. Professional services trying to generate more demand may keep staff levels high, defense contractors may be paid to keep extra capacity “available,” child-care facilities may elect to maintain staff levels for continuity when attendance is low, and full-service hospitals may invest in specialized equipment that is rarely used but is critical for the care of a small number of patients.
Overtime and undertime are common strategies when demand fluctuations are not extreme. A competent staff is maintained, hiring and firing costs are avoided, and demand is met temporarily without investing in permanent resources. Disadvantages include the premium paid for overtime work, a tired and potentially less efficient workforce, and the possibility that overtime alone may be insufficient to meet peak demand periods.
Overtime and undertime adjust working hours to meet demand.
Undertime can be achieved by working fewer hours during the day or fewer days per week. In addition, vacation time can be scheduled during months of slow demand. For example, furniture manufacturers typically shut down the entire month of July, while shipbuilding goes dormant in December. During the recent recession, 35% of U.S. employers surveyed used unpaid furloughs in lieu of more layoffs to adjust to decreased demand. Europe routinely uses shorter workweeks and mandatory vacations in economic downturns.
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