Chapter 04: Aggregate planning

Contents of this chapter: 1. Definition of aggregate planning. 2. Role of aggregate planning in supply chain. 3. Problems of aggregate planning.

Definition of aggregate planning.

An organization can finalize its business plans on the recommendation of demand forecast. Once business plans are ready, an organization can do backward working from the final sales unit to raw materials required. Thus annual and quarterly plans are broken down into labor, raw material, working capital, etc. requirements over a medium-range period (6 months to 18 months). This process of working out production requirements for a medium range is called aggregate planning. Definitions: Aggregate planning is a process by which a company determines ideal level of capacity, production, sub-contracting, inventory, stock-out and ever pricing over a specified time horizon mostly 3 to 18 months.

According to Wikipedia, Aggregate planning is an operational activity that does an aggregate plan for the production process, in advance of 2 to 18 months, to give an idea to management as to what quantity of materials and other resources are to be procured and when, so that the total cost of operations of the organization is kept to the minimum over that period.

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The quantity of outsourcing, subcontracting of items, overtime of labor, numbers to be hired and fired in each period and the amount of inventory to be held in stock and to be backlogged for each period are decided. All of these activities are done within the framework of the company ethics, policies, and long term commitment to the society, community and the country of operation.

In simple terms, aggregate planning is medium-term scheduling (6-18 months in advance) is an attempt to balance capacity and demand in such a way that costs are minimized. Figure below explains the inputs required creating an aggregate plan; in addition, it depicts the outputs which result from this plan.

Capacity Constraints

Strategic Objectives

Company Policies

Demand Forecast

Aggregate Planning

Financial Constraints

Size of work force

Production per month

Inventory levels

Units or dollars subcontracted, backordered or lost

Figure: inputs to outputs from an aggregate planning.

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 Role of Aggregate Planning in a Supply Chain:

Aggregate planning is a forecasting technique that businesses use in an attempt to predict the supply and demand of their products and services. Mainly, this is done in an effort to save money, streamline operations and increase productivity. To accomplish this, businesses use an aggregate planning model to develop a game plan that will assist them with determining their staffing requirements, materials needed estimated timelines and budget costs so they can better plan ahead.

I.

Determining production level

Aggregate planning maximizes the utilization of production equipment. Since production equipment is being used at its full capacity, production rates significantly increase. This creates a much more streamlined process where businesses can accurately determine the time it will take to fulfill orders and can then plan their production operations accordingly. The idea is to create a good balance so orders are fulfilled before the deadlines, but they're not completed so far in advance that they are placed in storage for long periods before delivery.

II.

Maximizing profit by minimizing cost

Aggregate planning is concerned with determining the quantity and the schedule of production for the immediate future. Aggregate plans are intermediate-range plans that are valid for three to 18 months. The main objective of aggregate plans is to lower costs and to use capacity most efficiently. The operations department uses the forecasted demand for the planning period to plan the rate of production in such a way that the overall costs are reduced thus maximizing the profit.

III.

Minimize Staffing Fluctuations

By using aggregate planning to forecast production demand, businesses are better able to predict their staffing requirements. Businesses that need additional employees on a temporary basis tend to fill these positions with workers from temporary employment agencies. Through proper forecasting, a business will be able to reduce or eliminate the need to hire these extra workers. This will save the business both time and money as it won't need to pay the additional fees to the staffing agency and it won't have to pay its own workers to train the new additions.

IV.

Reduce Overhead

Excess inventory costs businesses a lot of money. Additional materials will need to be stored, and having finished products lying around increases the likelihood of damage to the products before they reach the customer. Adhering to an aggregate planning model can help businesses operate in a leaner manner. Managers will be able to better anticipate how much product they
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will need and when they will need it so they won't have to stockpile it in advance due to a fear that they'll run out before they can get more.

V.

Accommodate Changes

Since production orders often vary, most businesses cannot stick to one plan at all times. Aggregate planning allows for contingency measures to be put in place so businesses can better accommodate significant changes in customer orders and production. At different times, businesses can rotate between active, passive and mixed strategies. They can also fluctuate between using the chase strategy where production levels equal forecast demands and the level production strategy where stable output rates remain constant

VI.

Analysis and Strategy

Aggregate planning allows planners to compare projected demand with existing capacity. Using the data inputs, planners use graphical analysis to compare the costs of various options to meet demand. These techniques in aggregate planning allow companies to not only identify the best options to meet demand but also to know about inefficiencies within their own organizations. Aggregate planning thus helps in developing more efficient strategic plans. This includes developing strategic relationships with suppliers and distributors and also developing more accurate market research.

VII.

Sustainable marketing

Sustainable marketing is the process of promoting products that are environmentally safe at the retail level and touting a company's commitment to sustainable practices at the public relations level. This category of marketing seeks to capitalize on the increased value consumers place on eco-friendly products and companies that have a perceived commitment to sustainability in its production and supply chains. Aggregate planning creates opportunity to create sustainable marketing by taking right decision at right time.

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Problems of Aggregate Planning:

Although it is a well practiced and accepted procedure, still it has some problems in execution. The problems are:

I.

Scheduling

The fact that this system is a plan that seeks to organize production around anticipated demand is itself a problem. There is little flexibility if demand spikes or falls drastically. If the firm has planned for a certain amount of output over the next six months and demand declines, then workers sit idle and inventory rots in warehouses. It is very rare that scheduling demand ever really fits perfectly with reality.

II.

Waste

The real-world concept of aggregate planning is that the plan gets fulfilled no matter what happens on the outside. The firm in capitalism is meant to be a transmission belt between supply and demand. Instead, under aggregate planning, the firm looks more like a Soviet-style enterprise fulfilling a quota rather than focusing on customers and what they want. At least at certain times in the production cycle, the creation of goods might have no or little connection to customers at all.

III.

Prices

In general terms, if a company's product suddenly becomes demanded in greater quantities, the firm doing the supplying has few options in the short term. Either the plan is totally thrown away and the company retooled, or the prices for the firm's product skyrockets without any short term response. Under extreme conditions, a sudden increase in demand might entice competitors to try and siphon off this demand if the firm is too tied to its aggregate plan to respond quickly. Aggregate planning is based on the desire for a smooth, bureaucratic routine. A firm, however, is meant to be a rapid response machine.

IV.

Labor

Under aggregate planning, stability is the main desire. If all goes according to plan, then the aggregate system works well. No one is surprised and the routine becomes normal. On the other hand, a sudden spike in demand means that workers are paid much in overtime, machinery is used beyond its capacity and, possibly, new workers must be rapidly hired and trained. All of this takes time and obviates the firm's short run flexibility. If demand shifts too far apart from the plan in any direction, labor is mismatched to the work at hand.
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V.

Constraints from supplier to enterprise:

For aggregate planning its very important to have integration with the suppliers so that they can provide the raw materials or other supplies when needed. If there is a miscommunication or misunderstanding among suppliers and the enterprise a successful aggregation will not be possible.

VI.

Problems to accurate information and coordination:

Aggregate planning depends greatly on forecasting about future sales, demand, supply, production etc. for accurate forecasting the managers need reliable information. But sometimes information is not accurate or may be biased.

VII.

Besides above problems, there prevail some limits:

Limits of overtime Limits of layoffs Limits of capital/machine/manpower Limits of stock out and backlogs.

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