Many people do not know that aggregate planning plays a vital role in creating a production schedule.
If you want to know about the role of aggregate planning, go through this article. It gives clear information about aggregate planning.
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.
Word’ aggregate’ is derived from the Latin verb aggregate. The meaning of it is ‘add to.’ In economics or business, it is frequently used.
Hence aggregate production planning is the exercise of developing an overall production plan of all products combined for a company.
Aggregate planning does not differentiate colors, sizes, and features. For example, in a mobile handset manufacturing company, aggregate planning considers only the total number of handsets, not the separate models, colors, etc.
That specifies how the company’s resources will be allocated overall for the next three months to one year for a given demand schedule.
In this post, you will find the following things,
- What is aggregate planning why it is needed?
- What is aggregate capacity management aggregate demand?
- how to do the aggregate production planning?
- Using the strategies, formula, tools, and software for aggregate planning.
Why is aggregate production planning needed?
The demand for the various products of a company could be varying. If the demands vary, 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 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. However, 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 individual products’ demands and handling the aggregate production plan is better than discussing individual production plans. That 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 streamline 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 about the product must be collected and analyzed. The inventory and production capacity have to be thoroughly understood.
- A reliable demand prediction helps in planning better.
- Every process of the firm contributes to successful aggregate planning. Therefore,from quality control to labor morale management, all organizational factors must be considered.
- Proper financial management ensures appropriate costing.
All in all, it assures that the entire production factors are scrutinized to achieve the firm’s goal.
Two main factors while calculating aggregate planning are aggregate demand and aggregate capacity.
Objectives of Aggregate planning
- Decrease expenditures in different inventories
- Increase the usage of devices and equipments
- Decrease the variations in production rate
- Provide good customer service
- Decrease the workforce level variations
- Decrease the cost of planning outline
Aggregate demand and aggregate capacity
Aggregate planning starts with the establishment of aggregate demand and aggregate capacity.
What is Aggregate demand?
Aggregate Demand (AD) is the quantitative assessment of the requirement for all goods and services at a given price level for a specific period.
The correlation between the price level and the demand is depicted by using the demand curve. It is observed that both the factors share a negative relationship which is also termed as “total spending.”
It is understood that when the price level of a product or a service is high, the demand for the same goes down, and when the price level is low, the demand steadily increases.
What is the aggregate capacity?
Aggregate capacity is the total amount of capacity required or available to carry out a function.
The process of ascertaining the company’s overall volume and ability to perform in terms of its entire resources is called aggregate capacity management.
An organization needs to understand the capacity of its resources. That will help the business know its production capacity, which will lead to proper sales forecasting and prompt supply of products to the customers.
That will also ensure to maintain the right amount of balance between the demand and supply without stressing out the resources.
The resources can vary from company to company, but aggregate capacity considers both manual and machinery resources and does not differentiate between the two.
To quote an instance, if the company is into the production of bikes, the aggregate capacity will consider only the end product numbers.
It will not take into account the complexity of each bike, the variations, and the specialties. Instead, it looks from a macroscopic view.
Aggregate planning becomes successful when both aggregate demand and aggregate capacity are equal.
When there is an imbalance between them, the organization has to decide whether to add or reduce capacity to attain demand or add or reduce demand to attain capacity.
Here are some choices for the condition in which demand must be increased to meet the available capacity.
- Price: Lessen the price of the product or service to increase the demand. For example, cloth industries offer discount sales at the ending of the season to increase the demand. Some hotels also fix off seasonal rates to attract customers.
- Advertise: Many companies promote their products through advertising, direct marketing, etc.
- Generate new demands: Industries like hotels, bars, etc., offer some complimentary services to create some extra demands. Likewise grocery shops offer home delivery services to create demands.
- Backorders: For smoothing the demand, some companies shift the current orders to the next period when the capacity is not used properly.
Here are some choices for the condition in which capacity must be increased or reduced to meet the existing demand.
- Overtime: The organization can create additional capacity by making the employees work extra time in a day or work an additional day per week. It is a good choice to increase capacity without much investment in hiring workers.
- Hiring or firing workers: It is one of the ways to make capacity and demand balance. The company can hire the employees to increase the capacity required for the increased demand, or it can fire some of the current employees to decrease the capacity for decreased demand.
- Part-time workers: The company can hire workers on a contract or on-call basis to meet the demand.
- Final product inventory: It is one of the common methods used by companies. The company can stock the finished products when demand is less and capacity is high so that it can use those products to fulfill the current demand without increasing the capacity.
- Sub-contracting: The organization can obtain temporary capacity by giving subcontracting to another manufacturer or service provider.
- Cross-training: Train the employees so that they will be able to do not only their own work but also they can do some flexible work if it is needed.
Steps involved in aggregate capacity management
- Understanding the aggregate demand and supply for a specific period of time.
- Preparation of suitable plans and contingency plans for situations where the demand levels might fluctuate.
- Finalizing an appropriate plan.
Aggregate planning flowchart
How to manage demand fluctuations through aggregate capacity management?
Generally, the business will have pure strategies ready to meet such unexpected situations. However, a combination is also used based on the needs.
- Altering the size of the workforce: this involves getting more people to work or laying off people when there is an excess of the resource.
- Altering the usage of human resources: utilizing the existing workforce by providing overtime, incentives, and such schemes.
- Changing the size of inventory: depending on how much the production can be leveraged the inventory is ordered.
- Outsourcing, sub-contracting, varying the plant capacity: passing on the work, and meeting the production requirements.
Aggregate planning strategies
Two types of strategies are used in aggregate planning. They are 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, resulting 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.
Just in time (JIT) is a manufacturing methodology designed to decrease wastage by receiving goods only as they are needed. JIT process was developed in Japan to make the best use of limited resources.
It focuses on matching the anticipated demand with rigorous production. Unfortunately, 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 to 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.
Advantages of aggregate planning
- If you forecast production planning with the help of aggregate planning, it avoids the requirement of extra employees. It helps the organization to save money and time.
- We know that holding excess inventory demands more money. Maintaining the condition of finished goods in the warehouse will be a big challenge for the organization. With the help of aggregate planning, you can easily avoid that situation.
- Production orders change more frequently. An organization can’t stick to one plan all the time. Sometimes businesses rotate between mixed strategies. They will be fluctuating between level strategy and chase strategy.
Mathematical approach to aggregate planning
I will list some of the mathematical techniques to be used in more composite aggregate planning applications.
Linear Programming: It is one of the refinement techniques that helps the customer to generate more revenue with minimum resources or available capacities.
The transportation model (special linear programming) allows the customer to balance capacity and demand with minimum cost.
Mixed-integer Programming: This technique will be helpful when the aggregate planning is intrinsically the sum of plans for individual production lines.
In this case, mixed-integer programming allows to find out the number of units to be produced in each production line.
Linear decision rule: It is one more optimization technique. It helps to attain a single quadratic equation by a set of cost-approximating functions ( three of them are quadratic) used to reduce production costs.
Then you can derive two linear equations from that quadratic equation and use one equation for planning the output for each period, another for planning the workforce for each period.
Management co-efficient model: This method is formed on the production rate for any period that will be set by this equation
ie P t = aW t-1 − bI t -1 + cF t+1 + K, where a,b,c,K are constants and using regression analysis you can find their values.
P t is the production rate set for period t
W t – 1 is the workforce in the past period
I t-1 is the ending inventory for the past period
F t+1 is the forecast of demand for the next period
Search decision rule: This technique helps overcome some of the limitations of linear programming techniques about cost assumptions.
It enables the customer to express cost data inputs in standard terms. First, it needs a computer programming that will evaluate any production plan’s cost. Then it searches for alternative methods with minimum cost among them.
Advanced planning and scheduling (APS) software can assist aggregate planning very quickly.