Aggregate Planning

Aggregate planning is a process by which a company determines planned levels of capacity, production, subcontracting, inventory, stock outs, and even pricing over a specified time horizon. The goal of aggregate planning is to build a plan that satisfies demand while maximizing profit. Aggregate planning, as the name suggests, solves problems involving aggregate decisions rather than stock-keeping unit (SKU)-level decisions.

For example, aggregate planning determines the total production level in a plant for a given month, but it does so without determining the quantity of each individual SKU that will be produced. This level of detail makes aggregate planning a useful tool for thinking about decisions with an intermediate time frame of between roughly 3 and 18 months. In this time frame, it is too early to determine production levels by SKU, but it is also generally too late to arrange for additional capacity. Therefore, aggregate planning answers the question: How should a firm best utilize the facilities that it currently has?

To be effective, aggregate planning requires inputs from all stages of the supply chain, and its results have a tremendous impact on supply chain performance. Collaborative forecasts are created by multiple supply chain enterprises and are an important input for aggregate planning. In addition, many constraints that are key inputs to aggregate planning come from supply chain partners outside the enterprise. Without these inputs from both up and down the supply chain, aggregate planning cannot realize its full potential to create value.

The output from aggregate planning is also of value to both upstream and downstream partners. Production plans for a firm define demand for suppliers and establish supply constraints for customers. The supply chain implications of aggregate planning will become even clearer in sales and operations planning.

The aggregate planner’s main objective is to identify the following operational parameters over the specified time horizon:

• Production rate: the number of units to be completed per unit time (such as per week or per month)
• Workforce: the number of workers or units of labor capacity required
• Overtime: the amount of overtime production planned
• Machine capacity level: the number of units of machine capacity needed for production
• Subcontracting: the subcontracted capacity required over the planning horizon
• Backlog: demand not satisfied in the period in which it arises, but is carried over to future periods
• Inventory on hand: the planned inventory carried over the various periods in the planning horizon

The aggregate plan serves as a broad blueprint for operations and establishes the parameters within which short-term production and distribution decisions are made. The aggregate plan allows the supply chain to alter capacity allocations and change supply contracts. The entire supply chain should be involved with the planning process. If a manufacturer has planned an increase in production over a given time period, the supplier, transporter, and warehouse must be aware of this plan and incorporate the increase into their own plans.

Ideally, all stages of the supply chain should work together on an aggregate plan that optimizes supply chain performance. If each stage develops its own aggregate plan independently, it is extremely unlikely that all the plans will mesh in a coordinated manner. This lack of coordination results in shortages or oversupply in the supply chain. Therefore, it is important to form aggregate plans over a wide scope of the supply chain.