When to integrate strategic and tactical decisions? Introduction of an asset/inventory ratio guiding fit for purpose production planning

Significant transitions in firms (e.g. outsourcing) may impact the relative importance of production and inventory assets, affecting the hierarchical separation of planning decisions. The purpose of this paper is to contribute to planning literature by investigating how the production system and the planning environment influence the performance difference between hierarchical and monolithic planning. Further, it seeks to reduce the prevailing theory-practice gap in tactical planning.

Through an action research study, a monolithic model integrating tactical production planning decisions, subject to upstream supply chain constraints, with strategic investments decisions was developed, tested and implemented in a global OEM. Using the developed model and a measure of the capital cost of production assets relative to the cost of holding inventory, it is numerically examined how the production system and planning environment influence the performance of hierarchical and monolithic planning.

The research demonstrates the potential of integrating decisions and reveals significant performance differences between hierarchical and monolithic planning for firms with low capital cost relative to inventory holding cost.

The findings suggest a fit between planning processes, the production system and planning environment. Future research should empirically validate the findings and propositions.

The paper combine capital investments and production planning decisions, which usually transpire at different hierarchical levels and on different time-horizons, and investigates the consequences of hierarchical separation through a real-life validated case and numerical analysis.