Aggregate planning is the procedure of creating a production schedule for a given period. It starts after listing out all the requirements that are crucial for uninterrupted production.
The usual planning horizon ranges from 3 to 12 months.
Hence aggregate production planning is the exercise of developing an overall production plan of all products combined for a company. That specifies how resources of the company are going to be allocated overall for the next three months to one year for a given demand schedule.
Why aggregate production planning needed?
The demand for the various products of a company could be varying. If the demands are varying, how do we commit our resources to meet this variation in the demand?
Let us take an example. A plant might be manufacturing five different kinds of products. The demand for the two products may be going up. The demand for the other three might be coming down. The company is interested only in the overall growth and the overall resources (people, machines, storage, and raw materials) needed for the next year.
If the above company makes a forecast of five products individually, each forecast can have some errors. If they try to combine these forecasts, the aggregate demand figure would be subject to fewer errors. High and low are tend to cross each other out randomly. That leads to greater accuracy in obtaining the total demand forecast than the isolated demand forecast.
Hence aggregating the demands of the individual products and handling the aggregate production plan is better than talking about individual production plans. This leads to better utilization of resources.
The planning covers various elements such as,
- Human resources.
- Raw material.
- Financial planning.
- Marketing and distribution.
It is an essential tool for companies to help in streamlining the immediate production processes. That is by aligning them with the long-term strategic plans and goals of the organization.
What is the criterion that influences aggregate planning?
- Is the hiring and firing of the employees allowed?
- Is overtime allowed based on the fluctuation in demand?
- Are backorders allowed?
- It is important that before planning, complete details pertaining to the product must be collected and analyzed. The inventory and production capacity has to be thoroughly understood.
- A reliable demand prediction helps in planning better.
- Every process of the firm contributes to successful aggregate planning. From quality control to labor morale management, all organizational factors must be considered.
- Proper financial management ensures appropriate costing.
All in all, aggregate planning assures that the entire production factors are scrutinized to achieve the firm’s goal.
Aggregate planning strategies
Two types of strategies are used, level strategy, and chase strategy. The third approach is utilizing the best of both strategies.
This is also known as a production-smoothing plan or a stable plan.
It focuses on maintaining consistent production and human resources in a company. The expected demand rate is achieved by varying the associated factors such as finance and human resources.
Though this strategy helps in maintaining human resources, it also leads to stocking inventory. There are also chances of not meeting the expected targets, which might result in backlogs costing a lot more to the firm.
The level strategy is best suited to situations where inventory carrying costs are not high.
It is also known as a just-in-time production plan.
It focuses on matching the anticipated demand with rigorous production. Though this strategy aims to meet the demand, it usually results in stressed employees, which increases attrition.
This strategy is best suited to situations where the cost of changing the production rate is relatively not high.
The hybrid strategy focuses on blending both level and chase strategies for better and more fruitful results. The hybrid strategy in aggregate production planning keeps the balance between production rate, hiring/firing, and stock level.
The summary of this post is, we have to utilize the production alternatives available with us optimally. That satisfies the demand, with the overall objective of minimizing the total production cost. An appropriate aggregate planning strategy helps us in achieving the same.