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. 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.
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 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 about 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.
Two main factors while calculating aggregate planning are aggregate demand and aggregate capacity.
What is Aggregate demand?
Aggregate Demand (AD) is the quantitative assessment of the requirement for all goods and services for a specific period of time at a given price level.
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 then naturally the demand for the same goes down and when the price level is low then 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. This will help the business to know its production capacity which will further lead to proper sales forecasting and prompt supply of products to the customers. This 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 takes into account both manual and machinery resources and does not really 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. It looks from a macroscopic view.
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 on an appropriate plan.
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, 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.
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. 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.