What is Aggregate Planning?
A business plan is an essential aspect for every organization, and it’s critical in establishing business strategies. After finalizing the business strategies, they should scrutinize them reversely—from final sales to raw materials needed.
Typically, an aggregate plan runs from three to 18 months. The plan splits down into labor, raw materials, capital, and so on—required over a medium-range time—quarterly or annually.
- What is Aggregate Planning?
- Understanding Aggregate Planning Better
- The Advantages of Aggregate Planning
- Aggregate Planning Strategies
- Aggregate Planning Techniques
- Aggregate Planning Mathematical Techniques
- Bottom Line
What is Aggregate Planning?
Aggregate planning refers to developing, maintaining, and analyzing the approximate scope of operation of an organization. In other words, an aggregate plan incorporates the targeted sales, production level, inventory level, and backlogs.
You should design a good aggregate plan in a way that it can reduce the impact of shortsighted daily routines. For instance, only small amounts of raw material should be ordered when employees are laid-off and more raw material when they are reinstated. Such a longer-term approach to resource consumption can help in reducing unexpected short-term expenses.
Understanding Aggregate Planning Better
Aggregate planning tries to balance the organization’s capacity and the demand while minimizing cost. The term aggregate is used because at this level; planning consumes all resources in the aggregate—as a product portfolio.
Aggregate resources may include the total number of employees, hours of machine time, or tons of raw materials. In product-oriented industries, the total units of output may consist of gallons, feet, or pounds. In contrast, the service industries use aspects such as hours of service delivery, numbers of patients attended, etc., as the aggregate units.
Elements such as size, colors, features, and the likes are not distinguished during aggregate planning. For instance, during aggregate planning, an automobile company would focus on the total number of vehicles and not the model or color options.
At times units of aggregation can be difficult to determine—when the difference in output is extreme. In such a case, the equivalents units are determined. These units can be based on cost, value, work period, or similar quantifiers.
Most aggregate plans are rolled out to cover a period of three to 18 months. Therefore, the aggregate plan is widely perceived as an intermediate-term in nature (neither long-term nor short-term).
Future short-term planning such as production scheduling, sequencing, and loading relies on aggregate plans. The aggregate plan has been described as “disaggregated” in the master production schedule (MPS) that’s used in material requirements planning (MRP).
The determination of demand and the existing production capacity are given priority when making an aggregate plan.
Capacity can be expressed as the total output per production period—only an average number of units are calculated as the total may include a product mix using different production periods. On the other hand, demand can be expressed as the total number of units required.
If demand and capacity are not balanced, the organization should try to strick the balance by adjusting the levels of either capacity or demand.
The Advantages of Aggregate Planning
Aggregate planning offers tons of advantages to the organizations that adopt it. The following are some of the expected benefits:
1. Minimize Staffing Fluctuations
The aggregate planning approach is popular because of its ability to foresee production demand which helps businesses in the staff planning process. If a company needs temporary employees due to unexpected changes, it can consult a temporary employment agency.
The reduction or elimination of excess employees will help the firm save money to invest elsewhere. Moreover, it’ll help the firm save time needed to train and supervise the extra workers. Instead, they can use that time to improve their production and service delivery.
2. Reduce Overhead
Aggregate planning helps businesses to estimate demand. The primary purpose of evaluating demand is to enable a company to know the right amount of inventory they need for a specific period.
Overstocking remains to be one of the leading economic severe issues. Holding costs for excess inventory such as inventory financing, storage space, and inventory servicing attract extra expenses that businesses can evade through adopting the aggregate plan strategies. Additionally, merchandise tied up capital and having an excess of it will expose you to opportunity costs.
Aggregate planning promotes the lean production approach. Organizations implementing the aggregate planning model can better foresee the amount of material they will require and when. Besides the costs mentioned above, overstocking also exposes businesses to risks associated with spoilage. Therefore, adapting aggregate planning is economical.
3. Increase Production Rates
Aggregate planning fosters maximum utilization of production resources which results in a significant increase in production rates.
Maximum resource utilization creates a smooth-running process that allows the businesses to precisely determine the time it will take to deliver orders and plan their production process duly.
The objective is to meet the deadlines, but still, the organization should be keen to complete production almost on the projected time for delivery—to avoid the costs associated with holding inventory.
4. Accommodate Changes
In business, there are tons of uncertainties—price fluctuations, production order variance, etc. Since production order often changes, companies cannot stick to one strategy at all times.
Aggregate planning incorporates contingency measures that allow the business to accommodate changes in customer orders and production.
If need be, businesses can revolve between active, passive, or mixed strategies. Additionally, they can shift between chase strategy (production levels match the predicted demand) and the level strategy—production level is constant despite the changes.
Aggregate Planning Strategies
Aggregate planning has two pure planning strategies—the level strategy and the chase strategy, and the combined strategy. Let’s take a look at the strategies;
1. Level Strategy
The level strategy favors an aggregate plan that maintains a more steady production and steady employment levels. To accommodate the changes in customer demand, organizations must either increase or decrease inventory levels regarding the foreseen demand trends.
When demand is relatively low, the organization keeps a level labor force and a constant production rate, which will enable them to create surplus inventory at the time. As demand rises, the organization can absorb the previously extra inventory, thereby maintaining the production and employment levels.
Alternatively, the organization can use a backlog or backorder. A backorder refers to a promise by the supplier to deliver a product at a later date. In other words, backorder shifts demand from a period where a firm’s capacity cannot match demand to a period when the capacity starts to catch up with diminishing demand.
The main benefit of the level strategy is that it enables a firm to maintain a constant production level and still meet demand. This approach is more convenient to the employee since working conditions remain constant—there isn’t time that the organization pushes them to work excessively to meet demand.
However, from the employer’s angle, it may be expensive to adopt this approach. The strategy dictates that production levels should be constant regardless of the market changes, which can attract unnecessary costs—excess inventory, subcontracting/overtime cost, and backorder cost.
2. Chase Strategy
The chase strategy champions a production plan that matches the existing demand and capacity. This approach makes a firm flexible as it involves considerable internal changes to accommodate external changes, such as hiring, firing, laying off employees, increasing or decreasing inventory levels, etc.
Most firms that implement the just-in-time (JIN) production concept utilize a chase strategy. The primary benefit of a chase strategy is that it allows inventory to be held at the lowest level possible, saving the business lots of money. Additionally, the approach fosters maximum utilization of resources which utterly increases the production levels.
Despite these advantages, the chase strategy also has some significant drawbacks. First, companies that embrace chase strategy are often at loggerheads with the labor unions because of their untimely firing and lay-offs.
Secondly, they are prone to high levels of inconsistency—in operations and skill levels. The consistent changes expose firms to the aftermath of inconsistency.
For example, when a company tries to adjust to accommodate the rising demand, it may introduce new production methods or machinery, or new employees. Consequently, the employees will need time to adjust to the changes. Or laying off skilled and loyal employees when the demand drops.
3. Combined Strategy
A combined strategy (a.k.a hybrid or mixed strategy) utilizes the level and chase strategy jointly. Most companies adopt this approach because it’s more advantageous than using a pure strategy in isolation. A mixed strategy can better realize organizational goals and policies at a considerably lower cost than the pure strategy used separately.
Aggregate Planning Techniques
Aggregate planning consists of techniques that range from informal trials, which use simple tables or graphs, to more formal and advanced mathematical methods. William Stevenson’s Production/operation management focuses on informal yet helpful outline procedures for aggregate planning. The outline consist of the following steps:
- Determine demand levels for every period
- Determine the firm’s capacity for every period. The capacity should be equal to demand. Therefore overtime and subcontracting must be included
- Identify the relevant departmental, company, and union policies. For example, inventory levels, workforce level, and overtime policies, respectively
- Determine the unit costs for units produced. The cost usually includes production costs (fixed and variable and direct and overhead costs), the inventory holding costs (storage, insurance, spoilage, and obsolescence costs), and the backorder costs
- Determine alternative plans and calculate the cost for each
- Select the one that best suits your objectives ( plan with the least cost)
Aggregate Planning Mathematical Techniques
The following are some famous mathematical techniques that businesses can utilize in more complex aggregate planning applications.
1. Linear Programming
Linear programming is an optimization approach that enables the user to determine the maximum profit or a minimum operating cost based on the availability of the limited resources and other constraints.
A unique linear programming model known as Transportation Model can get the aggregate plans that balance capacity and demand while minimizing cost.
However, only a few real-world aggregation planning decisions can adopt linear programming. A book by Sunil Chopra and Peter Meindl, The Supply Chain Management (SCM): strategies, planning, and operations, demonstrates excellent examples of linear programming in aggregate planning.
2. Mixed-Integer Programming
Mixed-integer programming is more beneficial to an aggregate plan prepared for a product family where the plan is the sum of the plan for independent product lines. Mixed-integer programming approaches can offer a method for determining the number of units to be produced in each product family.
3. Linear Decision Rule
The linear decision rule is an optimization technique that minimizes the total cost of production using a set of cost-approximation functions (three are quadratic) to get a single quadratic equation.
The calculus concept is then applied to the quadratic equations to derive two linear equations. One linear equation is used to plan the output for each period, while the other is applied to plan the workforce for each period.
Aggregate planning is an essential tool for the success of any business organization. It comes with tremendous benefits—minimizes staffing fluctuation, reduces overhead cost, increases production rate, and accommodates changes.
However, businesses should understand all the concepts of the aggregate plan strategy before they implement it. They must understand the pros and cons to expect and how to apply the concepts properly.