Aggregate Production Planning

Aggregate production planning, abbreviated as APP, is useful for operation management. It is associated
with the determination of production, inventory, and personnel levels to fulfil varying demand over a
planning perspective that ranges from a period of six months to one year. Aggregate production plans
are needed to exploit workforce opportunity and represent a crucial part of operations management.
Aggregate production plans facilitate matching of supply and demand while reducing costs. Process of
Aggregate production planning applies the upper-level predictions to lower-level, production-floor
scheduling and is most successful when applied to periods 2 to 18 months in the future. Plans generally
either "chase" demand, adjusting workforce accordingly, or are "level" plans, meaning that labour is
comparatively constant with fluctuations in demand being met by inventories and back orders.

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Concept of aggregate production planning denotes to the process of determine the overall quantities of
products to be manufactured or produced in a plant or other manufacturing facility during a medium
term planning period such as a month, or a quarter. The aggregate plan output comprises of the total
quantities of each product or a group of product to be manufactured in the plan period of going into
details of scheduling of different manufacturing activities required to attain the planned production
levels. The aggregate production will also not specify details such as the dates when material ordered
against individual customer order will be ready for delivery. The aggregate production plan is designed
to establish overall production targets and as input for planning availability of other inputs and
supporting activities to meet the production targets. The aggregate plans then form the basis of more
comprehensive production such as daily and weekly production schedules and customer delivery
schedules.

The prime objective of Aggregate Production Planning is to judge company policies and management
inputs linked to operations, distribution and marketing, materials, accounting and finance, engineering
and human resources to reduce the price and increase revenue, enhance customer service, lessen
inventory investment, decrease changes in production rates, reduce changes in work-force levels, boost
utilization of plant and equipment.

Costs relevant to aggregate production planning:

Basic production costs: material costs, direct labour costs, and overhead costs. It is customary to divide
these costs into variable and fixed costs.

Costs associated with changes in the production rate: Costs involved in hiring, training, and laying off
personnel, as well as overtime compensations.
Inventory related costs. Aggregate production planning models may be supportive as decision support
systems and to appraise proposals in union negotiations.

Aggregate Production Planning

Techniques of Aggregate Planning

Various techniques are used to perform the task of aggregate planning. Usually, there are two
categories: Informal trial-and-error techniques and mathematical techniques. In practice, informal
techniques are more commonly used. However, a substantial amount of research has been done to
mathematical techniques, but still, they are not as extensively used, they often serve as a basis for
comparing the effectiveness of alternative techniques for aggregate planning.

There are several steps in general procedure for aggregate planning:

Determine demand for each period.

Determine capacities (regular time, overtime, subcontracting) for each period.

Identify company or departmental policies that are pertinent (e.g., maintain a safety stock of 5 percent
of demand, maintain a reasonably stable workforce).

Determine unit costs for regular time, overtime, subcontracting, holding inventories, back orders,
layoffs, and other relevant costs.

Develop alternative plans and compute the cost for each activity.

If satisfactory plans emerge, select the one that best satisfies objectives. Otherwise, return to step 5.

Procedure for Aggregate Planning

Procedure for Aggregate Planning

It can be useful to employ a worksheet or spreadsheet to summarize demand, capacity, and cost for
each plan. Additionally, graphs can be used to guide development of alternatives. Among all methods,
the spreadsheet solver approach is the most appropriate for industries because the solver on
spreadsheet software is readily available on virtually all personal computers, the APP model is
comparatively easy to devise in a spreadsheet format, anand lastly, the results are easy to construe.
There are certain guidelines for developing optimal aggregate production plan using spreadsheet solver.
First of all, necessary data must be collected for developing Aggregate production planning mode.
Secondly, formulate APP model in the spreadsheet format. Next step is to appraise the obtained
solutions. This can be done by presenting the constructed spreadsheet aggregate production planning
model and its solutions to related departments of the company such as production, personnel, planning,
sales and marketing, and warehousing, and judge whether the solutions are satisfactory. The
comparison between the existing aggregate production plan and the optimal plan generated from the
Aggregate production planning model may be done in financial term. If the solution is not satisfactory,
values of some input parameters may need to be reconsidered or the constraints may need to be
customized. The spreadsheet APP model will be changed until the solutions are acceptable. Last step is
to implement the aggregate production plan. After the spreadsheet APP model is agreeably developed
and solved, the obtained solutions can be implemented. During the execution of the aggregate
production plan, some parameters of the model may be altered such as demands, productivity rates,
related costs, number of workers, and inventory levels. These parameters should be modernized
regularly and the APP model is solved to resolve the revised aggregate production plan.

Steps for Developing the Aggregate Production Plan

Aggregate Production Plan

To summarize, aggregate production planning, is an effectual approach to operations management and

concentrate to satisfy demand as it relates to production, labour force, inventory and other models.
Aggregate production planning can attach in facility planning with scheduling decisions. Aggregate
production planning assists to lessen production costs, the effect of variant demand, cost of inventory
and labour costs. Aggregate production planning also exploits plant and equipment utilization and
profits. The efficiency of aggregate production planning is a production plan that indicates how many
workers are needed in each period, the amount and type of production (such as regular, overtime,
subcontracting, etc.), and the units to be produced, stored, and back ordered per month or per quarter.
Aggregate production planning is also a constructive tool to create and assess alternatives such as the
adjustment of the labour force through hire/fire/layoff/overtime, the use of subcontractors, anticipatory
inventory, and even the development of corresponding products and pricing strategies.

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Aggregate Planning

What is Aggregate Planning?

Aggregate planning is a method for developing an overall manufacturing plan that ensures
uninterrupted production at a facility. Aggregate production planning typically is applied to a 3- to 18-
month period. Aggregate planning covers all production activities at a facility (or for large enterprises,
across several facilities), not just individual production runs or the manufacture of individual products.
Because of this, aggregate production planning helps manufacturers optimize resource utilization
despite significant variations in demand for individual products, which arise from changes in customer
orders, supply chain dynamics, and other elements.

For manufacturers that are using digital systems in a manufacturing operations management (MOM)
ecosystem, aggregate planning is a capability of an advanced planning and scheduling (APS) system. As a
methodology, aggregate production planning can be performed using paper-based, spreadsheet or
homegrown software solutions. However, the growing complexity of products, production operations,
and supply chains have substantially increased the variety and volume of information to be considered
in aggregate planning. Therefore, manufacturers are trending toward greater employment of APS
systems for their aggregate planning needs.

The goal of aggregate planning is to minimize operating costs by matching production demand with
production capacity. An aggregate plan specifies what materials and other resources are needed and
when they should be procured to minimize cost. The ideal outcome of aggregate planning is to maximize
a facility’s productivity at the lowest possible cost to the manufacturer.

Businesswoman performing aggregate planning functions on an interactive transparent touchscreen

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Aggregate Planning Objectives and Approaches

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

Minimize inventory investment – 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 through material resource planning.

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

Maximize production rates while minimizing fluctuation – Aggregate planning software analyzes
production capacity versus demand forecasts to maximize the overall production rate while avoiding
periods of idle capacity.

Maximize facility and production equipment utilization – Aggregate planning software accounts for
available production equipment and facilities, and targets maximum utilization over the aggregate
planning period.

To achieve these objectives, aggregate planning software may employ one of two approaches, or a
combination of both. The chase approach attempts to match production capacity with demand. With
this approach, a manufacturer adjusts resource procurement and availability to keep up with
fluctuations in customer (or make-to-stock) orders. This approach enables a manufacturer to minimize
inventory levels and maximize resource utilization, but the manufacturer must contend with costs
associated with adjustments to capacity: workforce onboarding and layoffs or underutilized floor space,
for example.

The level approach to aggregate production planning, on the other hand, avoids the cost of adjustments
by keeping production rates steady. This means that the manufacturer builds up inventory at times of
lower demand to be able to fulfill orders during periods of peak demand. Alternatively, the
manufacturer may maintain a steady level of workforce and production capacity and ramp up
productivity during periods of high demand. In either case, the level approach encounters costs
associated with inventory management, idle capacity, workforce idle time and/or overtime, and other
expenses associated with fluctuating utilization of resources.

Aggregate Planning Benefits

By fulfilling the strategic objectives of aggregate planning, a manufacturer can balance short- and long-
term production demands and optimize productivity and profits.

Additional benefits:

Stabilizes manufacturing efforts

Facilitates lean manufacturing

Optimizes space and resource utilization

Lowers operating costs

Improves on-time delivery

Improves supply chain relationships

Raises customer satisfaction

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Home Harappa Diaries What is Aggregate Planning?

What Is Aggregate Planning?

What is Aggregate Planning?

February 19, 2021 | 4 mins read

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There are times when organizations are not able to meet consumer demands because of limited supply.
Maybe while you were doing inventory you miscalculated capacity that in turn affected your supply.

Production has its own share of limitations—from workforce levels to changing demands. What an
organization must do is assess what it needs to minimize cost by scheduling production over a period of
time. This is known as aggregate planning.

WHAT IS AGGREGATE PLANNING?

AGGREGATE PLANNING STRATEGIES

PROBLEMS IN AGGREGATE PLANNING

WHAT IS AGGREGATE PLANNING?

Usually undertaken for 3 to 18 months, aggregate planning is how organizations plan their production
process depending on what resources they have and the cost of production.

It means that planning is concerned with a certain amount of time that factors into long-term goals.
Matching demand and supply by taking care of challenges and setbacks is what aggregate planning
methods are set out to do.

HERE’S WHAT ORGANIZATIONS NEED FOR AGGREGATE PLANNING:

Relevant data and information about available resources—employees, inventory and equipment

Trend analyses of demand-supply for the relevant period

Assessing alternative costs of production and maintaining inventory in case of setbacks

Internal policies and regulations with respect to alternatives

Aggregate planning methods help organizations communicate goals and ways to achieve them. The only
way to reach these objectives is by using resources efficiently. Aggregate planning is typically done 12
months into the future. Some examples of aggregate planning are hiring temporary workers, laying off
employees for a specific period or cross-training. This works as an effective benchmark to measure
resource utilization and implementation.

AGGREGATE PLANNING STRATEGIES

In any organization, there are three types of aggregate planning strategies.

PURE CHASE STRATEGY

The purpose of the pure chase strategy is to match or chase demands by minimizing final inventory. It
absorbs demand fluctuations effectively for successful aggregate planning. Organizations can either
maintain workforce level or output rate to match demand.

PURE LEVEL STRATEGY

Pure level strategies are concerned with maintaining workforce or output rates at all times. Production
will be consistent within the same period of time for which aggregate planning was done. Inventory and
backorders help manage demand fluctuations and market changes. Organizations may even employ
different ways to put inventory to good use—especially if there’s a change in demand.

HYBRID OR MIXED STRATEGY

A hybrid or mixed strategy combines both inventory and workforce/output rate. It can include
maintaining additional inventory ahead of time to match demands or even use backorders to keep up.
Organizations can hire temporary workers if needed or they may even furlough or lay off workers
temporarily in case of low demand. Job rotations may form a part of mixed strategies to make sure that
workers’ skills are being fully-applied.

Organizations react to changes in demand depending on their resources. Whether they focus on
inventory or workforce is subjective. Operations can rely on backorders and higher inventory to tackle
high demand. Alternatively, they may rely on shifting the workforce if needed.

Aggregate planning isn’t restricted to production or operations. It may be used in services or project
management to control employee hours and scheduling tasks. It’s an effective strategy that helps
organizations stay on top of their resources and take action without delays.

PROBLEMS IN AGGREGATE PLANNING

Aggregate planning is a short to mid-term plan for a particular department in an organization. It’s not
part of the greater planning strategy to achieve organizational goals. Rather, it’s concerned with
matching demand and supply by manipulating workforce, output rate and inventory. Therefore, it has its
set of challenges, including:

SMOOTHING

Smoothing refers to the cost of changing inventory, relying on backorders and hiring or laying off
workers temporarily. Anything that stands outside the norm of day-to-day business has certain costs
associated with it. Aggregate planning may be an additional cost to the organization.

PLANNING HORIZON

Aggregate planning is associated with a particular period of 3-12 months. So, it’s important to specify
the exact period beforehand or well in advance to keep track of what needs to be done. In terms of
workforce and inventory, organizations have to determine the levels at which they need to be
maintained. This may require extensive planning on their part.

BOTTLENECK
When it comes to fluctuating demand, it’s not always black and white. Even if organizations ascertain
demand at a certain level, it may not be accurate. So, bottleneck planning has to do with an inability to
match demand due to capacity limitations.

Aggregate planning strategies are based on forecasting and assumptions. For this, you need to
understand the logic behind problems. There are many ways you can analyze problems to break them
down into smaller chunks. Harappa’s Creating Solutions will teach you how to navigate challenges
associated with aggregate planning. Learn about the five characteristics of good analysis to pick the right
numbers. Become an expert in forecasting and make accurate assumptions based on relevant
information.

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What is Aggregate Planning ? - Importance and its Strategies

Introduction

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.

Factors Affecting Aggregate Planning

Aggregate planning is an operational activity critical to the organization as it looks to balance long-term
strategic planning with short term production success. Following factors are critical before an aggregate
planning process can actually start;

A complete information is required about available production facility and raw materials.

A solid demand forecast covering the medium-range period

Financial planning surrounding the production cost which includes raw material, labor, inventory
planning, etc.

Organization policy around labor management, quality management, etc.

For aggregate planning to be a success, following inputs are required;

An aggregate demand forecast for the relevant period

Evaluation of all the available means to manage capacity planning like sub-contracting, outsourcing, etc.

Existing operational status of workforce (number, skill set, etc.), inventory level and production
efficiency

Aggregate planning will ensure that organization can plan for workforce level, inventory level and
production rate in line with its strategic goal and objective.

Aggregate planning as an Operational Tool

Aggregate planning helps achieve balance between operation goal, financial goal and overall strategic
objective of the organization. It serves as a platform to manage capacity and demand planning.

In a scenario where demand is not matching the capacity, an organization can try to balance both by
pricing, promotion, order management and new demand creation.

In scenario where capacity is not matching demand, an organization can try to balance the both by
various alternatives such as.

Laying off/hiring excess/inadequate excess/inadequate excess/inadequate workforce until demand

decrease/increase.

Including overtime as part of scheduling there by creating additional capacity.

Hiring a temporary workforce for a fix period or outsourcing activity to a sub-contrator.

Importance of Aggregate Planning

Aggregate planning plays an important part in achieving long-term objectives of the organization.
Aggregate planning helps in:
Achieving financial goals by reducing overall variable cost and improving the bottom line

Maximum utilization of the available production facility

Provide customer delight by matching demand and reducing wait time for customers

Reduce investment in inventory stocking

Able to meet scheduling goals there by creating a happy and satisfied work force

Aggregate Planning Strategies

There are three types of aggregate planning strategies available for organization to choose from. They
are as follows.

Level Strategy

As the name suggests, level strategy looks to maintain a steady production rate and workforce level. In
this strategy, organization requires a robust forecast demand as to increase or decrease production in
anticipation of lower or higher customer demand. Advantage of level strategy is steady workforce.
Disadvantage of level strategy is high inventory and increase back logs.

Chase Strategy

As the name suggests, chase strategy looks to dynamically match demand with production. Advantage
of chase strategy is lower inventory levels and back logs. Disadvantage is lower productivity, quality and
depressed work force.

Hybrid Strategy

As the name suggests, hybrid strategy looks to balance between level strategy and chase strategy

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What is Aggregate Planning? – 3 strategies and examples

This post provides clear information on everything you need to know about aggregate planning and its
role in production scheduling.

Contents

1) Introduction

2) Why is aggregate production planning needed?

3) Importance of aggregate planning

4) What is the criterion that influences aggregate planning?

5) Aggregate planning objectives

6) Aggregate demand and aggregate capacity

7) Aggregate planning flowchart

8) How to manage demand fluctuations through aggregate capacity management?

9) Types of aggregate planning strategies

10) Advantages of aggregate planning

11) Mathematical approach to aggregate planning

12) FAQs

13) Conclusion

Introduction

Aggregate Planning

Aggregate planning is creating a production schedule for a given period.

It starts after listing out all the crucial requirements for uninterrupted production.

The usual planning horizon ranges from three to twelve months.

Word ‘aggregate’ is derived from the Latin verb ‘aggregāre.’ Its meaning is ‘add to.’ It is frequently used
in economics or business.

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.

That specifies how the company’s resources will be allocated 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 demand varies, how do we
commit our resources to meet this variation in the demand?

Let us take an example.

Aggregate planning examples

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 following year.

If the above company makes a forecast of five products individually, each forecast can have some errors.
However, if they 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.

Operations.

Engineering.

Marketing and distribution.

It is an essential tool for companies to help streamline the immediate production processes. That is by
aligning them with the organization’s long-term strategic plans and goals.

Importance of aggregate planning

Aggregate planning is crucial to achieving the long-term goal of the company.

It helps to reach financial goals by decreasing overall variable costs.

It reduces the cost of inventory stocking.

It helps to utilize maximum available production capacity.

It helps to achieve the demand on time and hence reduces the customer’s waiting time.

It enables the organization to meet scheduled goals and satisfies the workforce.

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.

Aggregate planning objectives

Aggregate Planning Objectives

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 capacity required or available to carry out a function.

The process of ascertaining the company’s overall volume and ability to perform 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 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 consider 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.

Generate new demands: Industries like hotels and bars, 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

Aggregate planning flow chart

How to manage demand fluctuations through aggregate capacity management?

Managing of Demand Fluctuations

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.

Types of aggregate planning strategies

Two types of strategies are used. They are level strategy and chase strategy. The third approach is
utilizing the best of both strategies.

Aggregate Planning Strategies

Level strategy

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.

Chase strategy

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.

Hybrid strategy

A hybrid strategy in aggregate planning uses a combination of methods to arrive at the final production
plan.

For example, a company may use a mathematical model to calculate the optimal production plan and
then adjust it based on their actual production process feedback. The combination gives them the best
of both worlds – the accuracy of a level strategy, combined with the flexibility of a chase strategy.

The hybrid strategy focuses on blending both level and chase strategies for better and more fruitful
results.

The hybrid strategy in aggregate production-planning balances production rate, hiring/firing, and stock
level.

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 mathematical techniques used in more composite aggregate planning applications.

Linear Programming
It is one of the refinement techniques that help the customer 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-inter 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 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 – the production rate set for period t

W t – 1 – is the workforce in the past period

I t-1 – the ending inventory for the past period

F t+1 – 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 computer
programming to evaluate any production plan’s cost. Then it searches for alternative methods with
minimum cost among them.

Advanced planning and scheduling (APS) software can quickly assist aggregate planning.

FAQs

What do you mean by aggregate planning?

Aggregate planning is creating a production schedule for a given period. For example, the period can be
one month, three months, or one year depending on the demand schedule.

What is an aggregate planning example?

Aggregate planning for automobile manufacturing can be one example. Because aggregate planning
considers only the total number of vehicles, it does not bother about models of the handset.

Without considering the products’ color, size, and features, aggregate planning develops an overall
production plan for all the organization’s products.

What are the three types of aggregate plans?

Three aggregate plans are Level strategy, Chase strategy, and Hybrid strategy.

i) A level strategy or policy of perpetual inventory purchase is the simplest type of aggregate plan.
ii) The next type is the chase strategy. Chase purchasing policies are based on off-lead time demand
forecasts, while level strategies are based on average demand projections.

iii) Finally, a hybrid strategy in production planning includes an inventory that balances both levels and
chases strategies. Excessive levels cause high costs for stock-outs, whereas excessive chases can cost
due to storage fees if the shipped good is not sold during the return period required by the purchasing
company’s policy.

Conclusion

Aggregate planning is a method of planning for the future. Organizations should use it to help them
understand how their current activities will affect other areas soon and what could happen if they
change their strategies or policies.

There are many benefits associated with this type of holistic thinking process: increased efficiency, lower
costs, improved innovation and creativity, reduced risks from unanticipated events, among others.
However, some drawbacks include high upfront cost and complexity.

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ERP Production Planning module dettails

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What is Aggregate Planning?

A business plan is an essential aspect for every organization, and it’s critical in establishing business
strategies. After finalizing the business strategies, they should scrutinize them reversely—from final
sales to raw materials needed.

What is Aggregate Planning?

Typically, an aggregate plan runs from three to 18 months. The plan splits down into labor, raw
materials, capital, and so on—required over a medium-range time—quarterly or annually.

Contents [show]

What is Aggregate Planning?

Aggregate planning refers to developing, maintaining, and analyzing the approximate scope of operation
of an organization. In other words, an aggregate plan incorporates the targeted sales, production level,
inventory level, and backlogs.

You should design a good aggregate plan in a way that it can reduce the impact of shortsighted daily
routines. For instance, only small amounts of raw material should be ordered when employees are laid-
off and more raw material when they are reinstated. Such a longer-term approach to resource
consumption can help in reducing unexpected short-term expenses.

Understanding Aggregate Planning Better

Aggregate planning tries to balance the organization’s capacity and the demand while minimizing cost.
The term aggregate is used because at this level; planning consumes all resources in the aggregate—as a
product portfolio.

Aggregate resources may include the total number of employees, hours of machine time, or tons of raw
materials. In product-oriented industries, the total units of output may consist of gallons, feet, or
pounds. In contrast, the service industries use aspects such as hours of service delivery, numbers of
patients attended, etc., as the aggregate units.

Elements such as size, colors, features, and the likes are not distinguished during aggregate planning. For
instance, during aggregate planning, an automobile company would focus on the total number of
vehicles and not the model or color options.

At times units of aggregation can be difficult to determine—when the difference in output is extreme. In
such a case, the equivalents units are determined. These units can be based on cost, value, work period,
or similar quantifiers.

Most aggregate plans are rolled out to cover a period of three to 18 months. Therefore, the aggregate
plan is widely perceived as an intermediate-term in nature (neither long-term nor short-term).

Future short-term planning such as production scheduling, sequencing, and loading relies on aggregate
plans. The aggregate plan has been described as “disaggregated” in the master production schedule
(MPS) that’s used in material requirements planning (MRP).

The determination of demand and the existing production capacity are given priority when making an
aggregate plan.

Capacity can be expressed as the total output per production period—only an average number of units
are calculated as the total may include a product mix using different production periods. On the other
hand, demand can be expressed as the total number of units required.

If demand and capacity are not balanced, the organization should try to strick the balance by adjusting
the levels of either capacity or demand.

The Advantages of Aggregate Planning

Aggregate planning offers tons of advantages to the organizations that adopt it. The following are some
of the expected benefits:
1. Minimize Staffing Fluctuations

The aggregate planning approach is popular because of its ability to foresee production demand which
helps businesses in the staff planning process. If a company needs temporary employees due to
unexpected changes, it can consult a temporary employment agency.

The reduction or elimination of excess employees will help the firm save money to invest elsewhere.
Moreover, it’ll help the firm save time needed to train and supervise the extra workers. Instead, they
can use that time to improve their production and service delivery.

2. Reduce Overhead

Aggregate planning helps businesses to estimate demand. The primary purpose of evaluating demand is
to enable a company to know the right amount of inventory they need for a specific period.

Overstocking remains to be one of the leading economic severe issues. Holding costs for excess
inventory such as inventory financing, storage space, and inventory servicing attract extra expenses that
businesses can evade through adopting the aggregate plan strategies. Additionally, merchandise tied up
capital and having an excess of it will expose you to opportunity costs.

Aggregate planning promotes the lean production approach. Organizations implementing the aggregate
planning model can better foresee the amount of material they will require and when. Besides the costs
mentioned above, overstocking also exposes businesses to risks associated with spoilage. Therefore,
adapting aggregate planning is economical.

3. Increase Production Rates

Aggregate planning fosters maximum utilization of production resources which results in a significant
increase in production rates.

Maximum resource utilization creates a smooth-running process that allows the businesses to precisely
determine the time it will take to deliver orders and plan their production process duly.
The objective is to meet the deadlines, but still, the organization should be keen to complete production
almost on the projected time for delivery—to avoid the costs associated with holding inventory.

4. Accommodate Changes

In business, there are tons of uncertainties—price fluctuations, production order variance, etc. Since
production order often changes, companies cannot stick to one strategy at all times.

Aggregate planning incorporates contingency measures that allow the business to accommodate
changes in customer orders and production.

If need be, businesses can revolve between active, passive, or mixed strategies. Additionally, they can
shift between chase strategy (production levels match the predicted demand) and the level strategy—
production level is constant despite the changes.

Aggregate Planning Strategies

Aggregate planning has two pure planning strategies—the level strategy and the chase strategy, and the
combined strategy. Let’s take a look at the strategies;

1. Level Strategy

The level strategy favors an aggregate plan that maintains a more steady production and steady
employment levels. To accommodate the changes in customer demand, organizations must either
increase or decrease inventory levels regarding the foreseen demand trends.

When demand is relatively low, the organization keeps a level labor force and a constant production
rate, which will enable them to create surplus inventory at the time. As demand rises, the organization
can absorb the previously extra inventory, thereby maintaining the production and employment levels.

Alternatively, the organization can use a backlog or backorder. A backorder refers to a promise by the
supplier to deliver a product at a later date. In other words, backorder shifts demand from a period
where a firm’s capacity cannot match demand to a period when the capacity starts to catch up with
diminishing demand.
The main benefit of the level strategy is that it enables a firm to maintain a constant production level
and still meet demand. This approach is more convenient to the employee since working conditions
remain constant—there isn’t time that the organization pushes them to work excessively to meet
demand.

However, from the employer’s angle, it may be expensive to adopt this approach. The strategy dictates
that production levels should be constant regardless of the market changes, which can attract
unnecessary costs—excess inventory, subcontracting/overtime cost, and backorder cost.

2. Chase Strategy

The chase strategy champions a production plan that matches the existing demand and capacity. This
approach makes a firm flexible as it involves considerable internal changes to accommodate external
changes, such as hiring, firing, laying off employees, increasing or decreasing inventory levels, etc.

Most firms that implement the just-in-time (JIN) production concept utilize a chase strategy. The
primary benefit of a chase strategy is that it allows inventory to be held at the lowest level possible,
saving the business lots of money. Additionally, the approach fosters maximum utilization of resources
which utterly increases the production levels.

Despite these advantages, the chase strategy also has some significant drawbacks. First, companies that
embrace chase strategy are often at loggerheads with the labor unions because of their untimely firing
and lay-offs.

Secondly, they are prone to high levels of inconsistency—in operations and skill levels. The consistent
changes expose firms to the aftermath of inconsistency.

For example, when a company tries to adjust to accommodate the rising demand, it may introduce new
production methods or machinery, or new employees. Consequently, the employees will need time to
adjust to the changes. Or laying off skilled and loyal employees when the demand drops.

3. Combined Strategy
A combined strategy (a.k.a hybrid or mixed strategy) utilizes the level and chase strategy jointly. Most
companies adopt this approach because it’s more advantageous than using a pure strategy in isolation.
A mixed strategy can better realize organizational goals and policies at a considerably lower cost than
the pure strategy used separately.

Aggregate Planning Techniques

Aggregate planning consists of techniques that range from informal trials, which use simple tables or
graphs, to more formal and advanced mathematical methods. William Stevenson’s
Production/operation management focuses on informal yet helpful outline procedures for aggregate
planning. The outline consist of the following steps:

Determine demand levels for every period

Determine the firm’s capacity for every period. The capacity should be equal to demand. Therefore
overtime and subcontracting must be included

Identify the relevant departmental, company, and union policies. For example, inventory levels,
workforce level, and overtime policies, respectively

Determine the unit costs for units produced. The cost usually includes production costs (fixed and
variable and direct and overhead costs), the inventory holding costs (storage, insurance, spoilage, and
obsolescence costs), and the backorder costs

Determine alternative plans and calculate the cost for each

Select the one that best suits your objectives ( plan with the least cost)

Aggregate Planning Mathematical Techniques

The following are some famous mathematical techniques that businesses can utilize in more complex
aggregate planning

1. Linear Programming
Linear programming is an optimization approach that enables the user to determine the maximum profit
or a minimum operating cost based on the availability of the limited resources and other constraints.

A unique linear programming model known as Transportation Model can get the aggregate plans that
balance capacity and demand while minimizing cost.

However, only a few real-world aggregation planning decisions can adopt linear programming. A book
by Sunil Chopra and Peter Meindl, The Supply Chain Management (SCM): strategies, planning, and
operations, demonstrates excellent examples of linear programming in aggregate planning.

2. Mixed-Integer Programming

Mixed-integer programming is more beneficial to an aggregate plan prepared for a product family where
the plan is the sum of the plan for independent product lines. Mixed-integer programming approaches
can offer a method for determining the number of units to be produced in each product family.

3. Linear Decision Rule

The linear decision rule is an optimization technique that minimizes the total cost of production using a
set of cost-approximation functions (three are quadratic) to get a single quadratic equation.

The calculus concept is then applied to the quadratic equations to derive two linear equations. One
linear equation is used to plan the output for each period, while the other is applied to plan the
workforce for each period.

Bottom Line

Aggregate planning is an essential tool for the success of any business organization. It comes with
tremendous benefits—minimizes staffing fluctuation, reduces overhead cost, increases production rate,
and accommodates changes.

However, businesses should understand all the concepts of the aggregate plan strategy before they
implement it. They must understand the pros and cons to expect and how to apply the concepts
properly.

Aggregate Planning Objectives and Approaches

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

Minimize inventory investment – 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 through material resource planning.

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

Maximize production rates while minimizing fluctuation – Aggregate planning software analyzes
production capacity versus demand forecasts to maximize the overall production rate while avoiding
periods of idle capacity.

Maximize facility and production equipment utilization – Aggregate planning software accounts for
available production equipment and facilities, and targets maximum utilization over the aggregate
planning period.

To achieve these objectives, aggregate planning software may employ one of two approaches, or a
combination of both. The chase approach attempts to match production capacity with demand. With
this approach, a manufacturer adjusts resource procurement and availability to keep up with
fluctuations in customer (or make-to-stock) orders. This approach enables a manufacturer to minimize
inventory levels and maximize resource utilization, but the manufacturer must contend with costs
associated with adjustments to capacity: workforce onboarding and layoffs or underutilized floor space,
for example.

The level approach to aggregate production planning, on the other hand, avoids the cost of adjustments
by keeping production rates steady. This means that the manufacturer builds up inventory at times of
lower demand to be able to fulfill orders during periods of peak demand. Alternatively, the
manufacturer may maintain a steady level of workforce and production capacity and ramp up
productivity during periods of high demand. In either case, the level approach encounters costs
associated with inventory management, idle capacity, workforce idle time and/or overtime, and other
expenses associated with fluctuating utilization of resources.