In any type of organization, whether it is operating in a manufacturing or a service industry, a broad aggregate plan is required to be prepared for a specific time frame that indicates how targets are met. This plan determines the planned outcome is achieved and alternatives or options that are used.
In simple words, aggregate planning is considered a way to make a balance between capacity and demand by minimizing the costs. The term “aggregate” in aggregate planning indicates that all resources included in planning are “in the aggregate”. A product line or a product family can be an example of this.
In other words, aggregate planning referred to a procedure through which a production schedule can be created for a specific period. It begins once all requirements are listed out considered crucial for smooth production. In the production process, aggregate planning is used as a planning method to determine the resource capacity that is required to fulfill the expected demand. Generally, the aggregate planning is done for 3-18 months and includes a combination of different elements such as outsourcing, sub-contracting, employment, sourcing, overtime of workers, inventory, and planned output.
Aggregate planning is considered a critical aspect of the organization seeking to optimize operational activity as it facilitates making a balance between short-term plans of production and long-term strategic plans.
Below are the inputs that are used in developing an aggregate plan:
- A logical overall unit to measure sales and outcome.
- A demand forecast for a sufficient intermediate period of planning in aggregate terms.
- A model to be made to combine costs and forecasts to ensure the scheduling decisions for the planning period.
- A method that will determine the costs related to the options that are followed.
The need for Aggregate Plan
The aggregate plan supports production management in making an overall plan. With the help of this overall plan, managers are able to obtain the required output at specific time periods as define in the plan.
It is considered an important aspect to achieve an organization’s long-term goals. Apart from the above, the aggregate plan helps in the below aspects:
- Obtaining financial goals by minimizing the overall variable costs.
- Ensuring the utilization of the available production capacity up to its maximum extent.
- Delighting customers by fulfilling their demands and minimizing the customer’s wait time.
- Reducing investment in stock of inventory.
Steps to Develop an Aggregate Plan
Below are the different steps required to develop an aggregate plan:
- The aggregate plan begins with a product forecast that shows how much quantity will be produced during each specified time period.
- All individual demands to be combined in single aggregate demand. Combining different individual demands is only possible if all individual units are homogeneous.
- Translating each time period’s aggregate demand into the production resources required in this such as facilities, people, materials, and machines.
- To check the available production capacity as per the required capacity and to take appropriate decisions to minimize total cost or total time or to maximize utilization of capacity.
Strategies for Aggregate Planning
Different strategies are there that can be used in aggregate planning. These strategies are categorized into two groups i.e. pure strategies and mixed strategies.
The pure strategies take a single type of approach and production is done only in case of one decision variable is allowed to vary; whereas, other variables should be constant.
In mixed strategies, to achieve production targets, combined approaches are used that require the utilization of resources that are both internal and external to the organization.
A) Pure Strategies
Below strategies are included in this category:
Chase Demand Strategy
This strategy works by matching demand and production capacity on a periodic basis. This may result in hiring or firing off the workforce as and when required. Basically, in the chase demand strategy, production and demand are balanced by making changes in the employment. Workers increase if there is a need to increase output; whereas, if the need is to reduce the output, then, workers are reduced.
Level Production Strategy
This strategy aimed at producing an aggregate plan in order to maintain a constant production rate and a constant workforce level. The purpose of the level strategy is to retain a stable employment level in order to produce a constant rate of output. For every changing demand satisfaction of customers, it is required to increase or decrease inventory levels of a firm to meet the increased or decreased levels of demand forecast. In the case of low demand, the organization keeps maintaining a level workforce and a steady output rate. This helps in achieving a higher level of inventory as compared to the inventory level required currently.
Once there is an increase in demand level, it is possible for the organization to continue maintaining a steady employment or production level, and at the same time, it allows the inventory surplus to meet the increased level of demand.
So, the level production strategy facilitates an organization to maintain its output at a constant level and still able to meet demand. It allows organizations to accumulate inventory to meet the demands of peak season.
Stable Workforce Strategy
In this strategy, the workforce is stable and idle time, overtime, and part-time are permitted. In other words, a stable workforce strategy maintains the workforce at the same level at regular intervals. The production output keeps changing by inventory or overtime. If the production output declines, then the demand also decreases and few workers may face an idle situation.
B) Mixed Strategies or Hybrid Strategies
The main focus of this strategy is on mixing both chase and level strategies for the purpose of better outcomes. This strategy maintains the balance between stock level, production rate, and workforce level (hiring or firing).
Using mixed strategies, there is the possibility to influence demand or capacity. Capacity variations are mostly related to internal facilities and resources. Influencing demand is mostly related to external orientation. Both are described below in detail:
A) Capacity Options
In these options, a decision on varying the production output is taken by changing workforce, time, and through outsourcing. Below are the capacity options for an organization:
Varying Inventory Levels
Under this option, a decision to increase the inventory is taken when the demand is low so that future high demand can be met. In the case of choosing this strategy, different costs related to insurance, capital, storage, handling, etc. rise. Generally, the range of these costs varies between 15%-40% of an item’s value on an annual basis.
Varying the Size of Workforce (Hiring/Layoffs)
Demand can be fulfilled by hiring or laying off the production workforce to meet production rates. Often, new employees need training and there is a temporary decline in the average productivity of these employees due to their absorption in the organization.
Varying Production Rates using Idle time or Overtime
Sometimes, there is a possibility of maintaining a steady or constant workforce while changing working hours, keeping a number of hours worked less when there is low demand, and increasing them once demand rises. In the case of high demand, the possible overtime limit is there. Overtime needs to be compensated by means of incentives, an extra salary that should be at least 1.5 times of normal salary. Also, equal consideration is given to the willingness of employees and union agreement on overtime.
If the demand decreases, then, the organization is required to absorb the idle time of workers. Though options such as maintenance work, social events, plant shutdown, etc. are carried out during lean periods, these cannot be continued for a longer duration.
The capacity on a temporary basis can be acquired by an organization through subcontracting work when demand periods are at a peak. However, subcontracting has various shortcomings such as bit expensive, risky as it may provide an opportunity for clients to access a competitor’s services. Also, finding the right subcontract supplier who is able to provide quality products all the time is quite challenging.
Allowing Part-time Workers
The requirement of unskilled labor can be fulfilled by part-time workers. Especially, in the service sector such as restaurants, supermarkets, retail stores, etc. hiring part-time workers is a common practice. The major issue is hiring the right type of such workers and different agencies are there carrying specialization in supplying such part-time or temporary workers.
B) Demand Options
Below are the main demand options:
In the case of low demand, an organization makes an effort to increase demand through different resources such as promotion campaigns, advertising, cost reduction, personal selling. For example, different hotels, airlines provide off-season prices or weekend discounts. Similarly, vendors of electronic consumer goods also offer discounts on off-season sales to boost demand and sales.
Back-ordering when the Demand is High
Orders of products or services that organizations take from customers but not able to fulfill at a particular moment are termed as backorders. Back-ordering is considered a promising strategy in case of customers can wait for their orders without any loss of their order or goodwill.
Developing items that are counter-seasonal is considered an active smoothing technique used by manufacturers on a large scale. For example, organizations that manufacture air conditions, heaters, air coolers, etc. The main idea behind producing such a counter-seasonal product is to develop products that suit every season according to the changes in demand and seasonal change.
Selection of the Method in Aggregate Planning
As discussed above, organizations have different available choices while selecting a suitable aggregate plan option. It is required to make a mix of suitable strategies. Mostly, organizations opt for mixed strategy i.e. combination of all the above options for the purpose of achieving minimum cost. However, aggregate planning is a challenging task as a large number of possible options of mixed strategies are there. So, it is not possible always to find a single optimum plan. Few organizations rely upon the same plan every year in absence of no formal process of aggregate planning and make adjustments upward or downward to meet the new annual demand.
Aggregate Planning in Services
Just like top manufacturing concerns, service organizations also make an aggregate plan. In service organizations, more focus is on managing manpower as compared to any physical resource. So, there is a common practice followed by service organizations to hire additional manpower at the time of peak periods and use fewer workforces during lean periods.