Aggregate Planning and its Process

Managing companies for success across a range of time frames – a requisite for achieving both performance and health – is one of the toughest challenges in business. The fact that 10 146 of the largest 15 bankruptcies in history have occurred since 2001 is playing up its inherent risks. Managements need to build confidence in their ability to realize longer-term strategies and good short-term results. Planning, for any period including aggregate planning, is possible only when management has information available on tap. This is especially true for batch-based manufacturing planning. Aggregate planning consists of the resource management planning activities that are done after the long-term capacity and capability planning decisions have been made. These planning activities are designed to help the firm achieve its long-term strategic initiatives. The nature of these activities is influenced by the structure of the product delivery systems.

What is Aggregate Planning?

Firms make the strategic long-term resource commitments that will enable its operations function to achieve its corporate objective. Most of the decisions needed to create these capabilities involve strategic commitments, i.e., where to site and how to site facilities; how to acquire plant and equipment; what type of information systems to be implemented and executed; and how to create an organization with a culture that serves the corporate strategy well.

Aggregate planning is the “big picture” approach to planning for the intermediate term. While strategic planning deals with long range operations of facilities and resources, aggregate planning deals with developing ways to utilize those facilities and resources. In other words, the aggregate plan links strategic goals and objectives of the organization with the plans for individual products, services and their various components.

Aggregate planning deals with the utilization of the existing capacity; planners ascertain what facilities are currently available and whether they’re being used to optimum effect. Aggregate planning leads to a decision involving utilization of the existing capacity to match production and demand at medium term level – though it does not get to the scheduling level yet. Aggregate planning is also used to determine how the facilities need to be optimized or contracted, depending on customer demand.

Aggregate planning also addresses personnel needs such as hiring, reskilling, training, and downsizing. Decisions regarding subcontracting needs are also covered by those who carry out the aggregate planning. This is when decisions are made about subcontracting work to outside organizations to meet excess, unexpected, or seasonal demand.

The Aggregate Planning Process

The process consists of four basic considerations as

• Concept of Aggregation: starts with a meaningful measure of output. In a single product output organization there is no problem with the output measure. Many organizations have multiple products and it is difficult to find a common factor of measure of output.

For e.g. steel producer can plan in terms of tons of steel, gallons of paint in case of paint industry. Service organizations such as transport system may use passenger miles as a common measure, health care facilities may use patient visits, and educational institutes may use student to faculty contact ratio in terms of hours as a reasonable measure. A group of products or services that have similar demand requirements and common processing, labor and materials requirements is called a Product Family. Therefore a firm can aggregate its products or services into a set of relatively broad families, avoiding too much detail at the planning stage. For example consider the Bicycle manufacture that has aggregated all products into two families: mountain bikes and road bikes. This approach aids production planning for the assembly lines in the plants.

• Goals for aggregate planning: there are number of goals to be satisfied. It has to provide the overall levels of output, inventory and backlogs dictated by the business plan. Proper utilization of the plant capacity It should not be underutilized because it 147 is waste of resources. It is better to operate at a near full capacity. The aggregate plan should be consistent with the company’s goals and policies regarding its employees. A firm may like to have employee stability or hire and layoff strategy. Other firms change employees freely as the output level is varied throughout the aggregate planning horizon.
• Aggregate Demand Forecasts: The benefits of aggregate planning depend on the accurate forecasting. Any suitable forecasting model can be used to forecast demand for product groups as well as individual products.
• Interrelationships among decisions: Here the managers must consider the future consequence of current decisions. This is important mainly due to the fact that output plans are developed for a long period of time.

Strategies for Aggregate Planning

There are three pure strategies that the planner could use for the Aggregate Planning.

• Strategy1: Vary the number of Productive employees in Response to Varying output Requirements (also known as Chase 1 plan). Here, the average productivity per employee is first calculated which determines the number of employees needed to meet the monthly required output demand. The employees are laid off when the output demand falls. As a result there is always Hiring and lying off employees.
• Strategy 2: Maintain a Constant Work Force Size but Vary the Utilization of the Work Force (also known as Level # 1). Suppose, for example, we chose the strategy of employing 70 workers per month throughout the year. On an average, this work force would be capable of producing 700 wagons each day. During the lean months (January, February, March, July, October, November, December), the work force would be scheduled to produce only the amount forecasted, resulting in scheduled to produce only the amount forecasted, resulting in same idle working hours. During high demand months (April, May, June, August, September), overtime operations would be needed to meet demand. The work force would therefore be intensely utilized during some months and underutilized in other months.
• Strategy 3: Vary the Size of Inventory in Response to Varying Demand (also known as Chase # 2 plan). Finished goods inventories in make-to-stock companies can be used as a cushion against fluctuating demand. A fixed number of employees, selected to that little or no overtime or idle time is incurred, can be maintained throughout the planning horizon. Producing at a constant rate, output will exceed demand during slack demand periods, and finished goods inventories will accumulate. During peak periods, when demand is greater than capacity, the demand can be supplied from inventory. This planning strategy results in fluctuating inventory levels throughout the planning horizon.