What is Aggregate Planning?

– 3 strategies
for aggregate production planning

Many people do not know that aggregate planning plays an important role in
creating a production schedule. If you want to know about the role of aggregate
planning, go through this article. It gives clear information about aggregate
planning.

Aggregate planning is the procedure of creating a production schedule for a given

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

The usual planning horizon ranges from 3 to 12 months.

Word ‘aggregate’ is derived from the Latin verb aggregate, the meaning of it is ‘add
to’. In economics or business, it is frequently used.

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, etc.

That specifies how resources of the company are going to be allocated overall 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.

Contents
1) Why is aggregate production planning needed?
2) What is the criterion that influences aggregate planning?
3) Objectives of Aggregate planning
4) Aggregate demand and aggregate capacity
5) Aggregate planning flowchart
6) How to manage demand fluctuations through aggregate capacity
management?
7) Aggregate planning strategies
8) Advantages of aggregate planning
9) Mathematical approach to aggregate planning

Why is aggregate production planning needed?

The demand for the various products of a company could be varying. If the demands
are varying, how do we commit our resources to meet this variation in the demand?

Let us take an example. 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 overall resources
(people, machines, storage, and raw materials) needed for the next year.

If the above company makes a forecast of five products individually, each forecast
can have some errors. If they try to 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 demands of the individual products and handling the
aggregate production plan is better than talking about individual production plans.
This 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 in streamlining the immediate

production processes. That is by aligning them with the long-term strategic plans
and goals of the organization.

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. 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.

Objectives of Aggregate planning

 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 stars 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 for a specific period of time at a given price level.

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 then
naturally the demand for the same goes down and when the price level is low then
the demand steadily increases.

What is the aggregate capacity?

Aggregate capacity is the total amount of capacity required or available to carry

out a function.

The process of ascertaining the company’s overall volume and ability to perform in
terms of its entire resources is called aggregate capacity management.

An organization needs to understand the capacity of its resources. This will help the
business to know its production capacity which will further lead to proper sales
forecasting and prompt supply of products to the customers.
 This will also ensure to maintain the right amount of balance between the demand
and supply without stressing out the resources.

The resources can vary from company to company but aggregate capacity takes into
account both manual and machinery resources and does not really 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 take into account the
complexity of each bike, the variations, and the specialties. 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, then 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 is required to be increased
to meet the capacity available.

 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, etc.
 Generate new demands: Industries like hotels, bars, etc offer some
complimentary services to create some extra demands. 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 is required to 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 basis or an
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

1. Understanding the aggregate demand and supply for a specific period of

time.
2. Preparation of suitable plans and contingency plans for situations where the
demand levels might fluctuate.
3. Finalizing an appropriate plan.

Aggregate planning flowchart

How to manage demand fluctuations through
aggregate capacity management?

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.

Aggregate planning strategies

Two types of strategies are used in aggregate planning. Level strategy, and chase
strategy. The third approach is utilizing the best of both 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, which might
result 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. 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
 The hybrid strategy focuses on blending both level and chase strategies for better
and more fruitful results. The hybrid strategy in aggregate production planning
keeps the balance between production rate, hiring/firing, and stock level.

The summary of this post is, we have to utilize the production alternatives available
to us optimally. That satisfies the demand, with the overall objective of minimizing
the total production cost. An appropriate aggregate planning strategy helps us in
achieving the same.

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 am going to list some of the mathematical techniques to be used in more

composite aggregate planning applications.

Linear Programming: It is one of the refinement techniques that helps the customer
to 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-integer Programming: This technique will be useful 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 to attain single
quadratic equation by a set of cost-approximating functions ( three of them are
quadratic) that used to reduce production cost.

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   is the production rate set for period t

W  t  – 1   is the workforce in the past period
I  t-1 is the ending inventory for the past period
F  t+1 is the forecast of demand for the next period
Search decision rule: This technique helps to overcome some of the limitations of
linear programming techniques about cost assumptions.

It enables the customer to express cost data inputs in normal terms. It needs a
computer programming that will evaluate any production plan’s cost. Then it
searches for alternative plans with minimum cost among them.

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

very easily.
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.
 UNIT V

Lean Management
Definition: Lean management refers to a technique developed with the aim of
minimising the process waste and maximising the value of the product or service to
the customer, without compromising the quality. It is coined by Toyota Production
System, which is a part of lean thinking.

Lean is possible through distinct techniques such as flow charts, just in time, total
quality management, workplace redesigning, and total productive maintenance. It
focuses on delivering value to customers. A number of tools are deployed by the
lean management system to link customer value to the process and people.

Principles of Lean

1. Identify value: The value must be ascertained from the point of view of the
ultimate customer by product family.
2. Map the value stream: Ascertain all the steps involved in the value stream
for each product family and then eliminating those steps that are not productive.
3. Create the flow: Ensure that the steps which create value take place in a
perfect sequence, so the product reaches the customer smoothly.
4. Establish Pull: Once the flow is initiated, customers pull value from the next
level activity.
5. Seek Perfection: When the value is specified, value streams are ascertained,
non-productive steps are eliminated and flow and pull are instigated. The process is
started again and continue, till the perfection state is arrived, in which the perfect
value is created with no waste.
Single Piece Flow is an ideal state of operation that replaces the batch sizes and
lost production with working on one product at a time. Lean Manufacturing System
aims at implementing one-piece flow in every operation possible. It can be achieved
by eliminating the wastes such as overproduction, space, defects, unnecessary
human motion, inventory, labour and so on.

Stakeholders of Lean Management

 Customers: For a firm, nothing can give more satisfaction than seeing your
customers delighted, which can be due to the satisfaction they derive from the
product or the customer service. To achieve this the issues and concerns of the
customers are addressed first.
 Employees: Employees are the rank and file of the organisation, who are the
most valuable asset of the organisation. When the employee is happy, he/she will
also work for the organisation with great enthusiasm and efficiency that will help in
making the organisation the best of its kind.
 Organisation: Organisation includes board members, the Chief Executive
Officer, and the business owners. Add to that; it covers the policies, programmes
and procedures and other implementation. A well managed and balanced
organisation is capable of fulfilling customers requirements.
Lean management is philosophy, which intends to continuously eliminate the waste,
in all the processes, through small and incremental improvement. It improves quality
and reduces defects, as well as enhances the overall manufacturing flexibility.
However, at times, it encounters certain limitations such as low productivity,
prolonged cycle time, costly organisation, etc.