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.

1. 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.

2. 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.

3. Hybrid Strategy

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

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.