Aggregate Planning: Objectives and Advantages

To profit from a product, a company must have a strategic plan in place to produce just enough to meet that need. If you create too few products, you will miss out on a financial opportunity. When you produce too much, money is wasted in production and warehousing.

 

Aggregate planning is a technique for achieving a balance between demand and capacity. It is something that every company that manufactures something should be aware of. Let's define aggregate production planning and look at some aggregate planning strategies.

 

 

What is Aggregate Planning?

 

Aggregate planning is the process of developing, maintaining, and analyzing a company's approximate scope of operations. It typically includes sales forecasts, inventory levels, and production levels.

 

Aggregate planning determines capacity and then reduces costs by balancing them against that capacity. It is regarded as a marketing activity that is carried out in advance in order to determine the cost of production and the procurement of other necessary materials in order to reduce a company's operating expenses.

 

When the company's demand and current capacity are determined, an aggregate plan is created. Capacity is defined as the number of units that can be produced in a given time period. In contrast, demand is expressed as the number of units required.

 

The following methods can be used to bring both back into balance:

 

1. Pricing: When demand for a product is low, the price is reduced to match the capacity and vice versa when demand is high.

 

2. Advertising/promotion: Marketing the product can have a significant impact on its demand.

 

3. Back ordering: By delaying the delivery of existing orders, demand is shifted to a time when capacity is not fully utilized.

 

4. New demand creation: A complementary demand is created to supplement existing demand, such as the addition of a bar in a restaurant.

 

Objectives of Aggregate Planning

 

Aggregate planning aims to reduce operating costs by matching production demand with production capacity. The ideal outcome of aggregate planning is to maximize a facility's productivity while minimizing the manufacturer's costs. 

 

The strategic objectives of aggregate planning include the following, with the primary goals of minimizing costs and maximizing profits:

 

1. Minimize inventory investment – Through material resource planning, aggregate planning software optimally balances efforts to minimize the cost of inventory management and storage with efforts to ensure sufficient inventory to meet both independent and dependent demands.

 

2. Reduce workforce demand and fluctuation – Aggregate planning software uses data from demand forecasts and material resource planning to calculate an optimal workforce plan, balancing the cost of onboarding/layoffs due to workforce fluctuation with the cost of worker idle time and/or overtime.

 

3. Maximize production rates while minimizing fluctuation – Aggregate planning software compares production capacity to demand forecasts in order to maximize overall production rates while avoiding idle capacity periods.

 

4. Increase facility and production equipment utilization – Aggregate planning software takes into account available production equipment and facilities and aims for maximum utilization over the aggregate planning period.

 

Also Read | Production Management

 

 

Aggregate Planning Strategies

 

The following inputs are required for success: an aggregate demand forecast for the period you're planning for, and evaluation of capacity management (including the use of subcontractors, outsourcing, and so on), and the current operational status of your workforce. All of this will result in greater accuracy and, as a result, a higher likelihood of success.

 

This can be accomplished by employing a variety of aggregate planning strategies. Organizations have primarily used three types:

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Aggregate Planning Strategies

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1. Level Strategy

 

This is also known as a stable plan or a production-smoothing plan. An aggregate planning strategy's goal is to maintain the production rate and workforce level. This necessitates accurate demand forecasting in order to determine whether production levels should be increased or decreased as customer demands grow and shrink.

 

This strategy not only helps to maintain human resources, but it also stocks inventory. There is also the possibility that the expected targets will not be met, resulting in backlogs that will cost the company significantly more. The level strategy works best in situations where inventory carrying costs are low.

 

2. Chase Strategy

 

A just-in-time production strategy is another name for it. Just in time, (JIT) manufacturing is a manufacturing technique that reduces waste by receiving goods only when they are required. Japan developed the JIT process to make the best use of limited resources.

 

You're chasing market demand, as the name suggests. Excess inventory is not held over, and production meets demand. This is part of a larger lean manufacturing strategy that saves money by deferring production until an order is received. However, productivity and quality can suffer, and your workforce's morale can suffer as a result.

 

3. Hybrid Strategy

 

To arrive at the final production plan, a hybrid strategy in aggregate planning employs a number of methods. This maintains a balance between production rate, workforce, and inventory levels while responding to changing demand. 

 

This option provides some flexibility in order to meet demand while keeping production costs as low as possible. A company, for example, may use a mathematical model to calculate the optimal production plan, which is then adjusted based on feedback from the actual production process. 

 

The combination provides them with the best of both worlds: the precision of a level strategy combined with the adaptability of a chase strategy.

 

Also Read | Cost Of Production

 

Problems in Aggregate Planning

 

Aggregate planning is a short- to medium-term plan for a specific department within a company. It is not part of the overall planning strategy for achieving organizational objectives. 

 

It is more concerned with matching demand and supply by adjusting the workforce, output rate, and inventory. As a result, it has its own set of challenges, which include:

 

1. Horizon Planning

 

Aggregate planning is associated with a specific time period ranging from 3 to 12 months. As a result, it's critical to specify the exact time frame ahead of time or well in advance to keep track of what needs to be done. 

 

Organizations must determine the levels at which they must maintain their workforce and inventory. This could necessitate extensive planning on their part.

 

2. Smoothing

 

The cost of changing inventory, relying on backorders, and temporarily hiring or laying off employees is referred to as smooth. Anything that deviates from the normal course of a business incurs costs. Aggregate planning could cost the organization more money.

 

3. Bottleneck

 

It's not always black and white when it comes to fluctuating demand. Even if organizations estimate demand at a certain level, it may be inaccurate. As a result, bottleneck planning is concerned with an inability to meet demand due to capacity constraints.

 

 

Advantages of Aggregate Planning

 

Below are some of the advantages of aggregate planning

 

1. Reduce Staffing Fluctuations

 

By using aggregate planning to forecast production demand, businesses can predict staffing requirements. Businesses that require temporary workers tend to fill these positions with workers from temporary employment agencies. 

 

With proper forecasting, a company can reduce or eliminate the need to hire additional employees. Finally, this will save the company time and money because it will not have to pay additional fees to the staffing agency and will not have to pay workers to train the new hires.

 

2. Useful Tool

 

One significant advantage is that it can be used to make accurate forecasts of product demand. A company can now forecast its staffing needs, such as the number of additional workers it will require temporarily or the number of employees it will need to lay off. Proper forecasting enables the company to fill positions with temporary workers from agencies. 

 

The need for additional hires is easily met without incurring additional costs associated with a full-time workforce. The aggregate planning method allows the organization to save a significant amount of money and time that would otherwise be spent on the hiring and training process.

 

3. Reduce Overhead

 

Having excess inventory in a manufacturing facility can cost a lot of money. This is due to the facility's need to ensure that it has enough material on hand to produce finished goods as well as space to store those items. 

 

Furthermore, having finished products lying around increases the likelihood that they will be damaged or obsolete before being sold. Adhering to an aggregate planning model can assist manufacturing facilities in maintaining lower levels of inventory and lowering overhead costs.

 

4. Contingency Measures

 

Orders for production cannot be consistent throughout the year. It will vary, making it difficult for business entities to maintain a consistent production plan at all times. The overall planning process takes this into account and allows for contingency measures. 

 

These are put in place so that the manufacturing facilities can accommodate changes in production as well as customer’s orders. To keep up with the changes, the organization alternates between the level strategy, the chase strategy, and the hybrid strategy.

 

5. Changes

 

Because production orders change frequently, most production companies are unable to stick to a single plan at all times. Aggregate planning allows for the implementation of contingency plans in order for production facilities to be able to accommodate significant changes in customer orders and production. 

 

Updating forecasts and production plans on a regular basis allow planners to account for changes in expected demand or supply and revise plans.

 

• It assists the organization in identifying the best options for meeting the demands.

 

• It aids in determining the inefficiencies that exist within the organization.

 

• It aids in adjusting capacity to meet demand.

 

• The aggregate planning process aids in calculating capacity, such as how many units can be produced per day, week, or month.

 

• The process aids in the development of an effective strategic plan as well as relationships with distributors and suppliers. It also aids in the development of accurate market research.

 

Also Read | Market Research Analysis

 

Types of Aggregate Plans

 

Below are some of the aggregate plans that are being used :

 

1. Promotions and price differences

 

Pricing differentials and promotions are used by managers to increase demand in order to match available capacity. This ensures that the company uses all available capacity to eliminate waste. Businesses that rely on seasonal demand frequently employ this strategy to keep customers buying even after demand has fallen from its peak.

 

2. Ordering in the future

 

Backorder is a type of aggregate production planning in which orders are postponed until demand shifts to times of lower capacity. 

 

Back ordering allows a company to use its capacity more efficiently throughout the year without having to offer costly discounts or promotions. This may result in a backlog, so managers should create a product prioritization matrix based on expected popularity.

 

3. Making new demand

 

Rather than reducing capacity, some businesses will try to generate demand by developing a new product.

 

This is risky because customers may not respond to the new product, but in general, any new product is related to the old product because it must be created using the same production processes to minimize costs and risk.

 

4. Hiring for the Season

 

Let us now consider adjusting capacity rather than demand. Seasonal hiring is a strategy for matching capacity to demand rather than the other way around.

 

Companies can ramp down capacity to expected sales volume by hiring workers for temporary positions with an expiration date, avoiding overpaying for labor they don't need.

 

5. Subcontracting

 

Subcontracting is appealing to businesses looking to adjust capacity because it is essentially on-demand labor. The disadvantage is that it is more expensive than using in-house labor. However, the flexibility that subcontracting provides allows businesses to keep full-time staff to a minimum while operating with maximum efficiency in terms of capacity.

 

Also Read | Order to Cash Process (OTC)

 

Aggregate planning is the practice of balancing a company's capacity and demand over time — typically a year — in order to maximize profits. 

 

It compiles information on what a business requires to operate, from sales forecasts to production and inventory, to customer service, and then determines whether the company has the excess capacity or not enough capacity at any given time.

 

With this information, leadership makes changes through a variety of strategies, such as seasonal hiring or promotions. In your business, use aggregate operations planning to maximize profits through proper resource management. 

 

If you don't follow this practice, you'll either blow the project budget on the capacity you don't need, or you'll have too little capacity and won't be able to meet demand.