Aggregated Planning

Aggregate planning is a process by which a company determines ideal

levels of capacity, production, subcontracting, inventory, stockouts, and
even pricing over a specified time horizon. The goal of aggregate planning
is to satisfy 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 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?"

As an example, consider how a premium paper supply chain uses

aggregate planning
to maximize profit. Many types of paper mills face seasonal demand that
ripples
up from customers to printers to distributors and finally to the
manufacturers. Many
types of premium paper have demand peaks in the spring, when annual
reports are
printed, and in the fall, when new-car brochures are released. Building a
mill with
capacity to meet demand in the spring and fall on an as-needed basis is
too costly,
because of the high cost of mill capacity. On the other side of the supply
chain, premium
papers often require special additives and coatings that may be in short
supply.
The paper manufacturer must deal with these constraints and maximize
profit around
them. To deal with these potential problems, mills use aggregate planning
to determine
production levels and inventory levels that they should build up in the
slower months
for sale in the spring and fall when demand is greater than the mill's
capacity.

Aggregate demand and Aggregate capacity- How a company

becomes more successful
Aggregate planning starts 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.
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.
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.
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.

Options to enhance demand

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 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 demand.
- Backorders: For smoothing the demand some companies shift the current
orders to the next period when the capacity is not used properly.
Options to enhance capacity
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.
AGGREGATE PLANNING REQUIREMENTS

To create an aggregate plan, a company must specify the planning horizon

for the plan.

A planning horizon is the time period over which the aggregate plan is to
produce a solution-usually between 3 and 18 months. A company must
also specify the duration of each period within the planning horizon (e.g.,
weeks, months, or quarters). In general, aggregate planning takes place
over months or quarters. Next, a company specifies key information
required to produce an aggregate plan and to make the decisions
for which the aggregate plan will develop recommendations.

An aggregate planner requires the following information:

• Demand forecast Fr for each Period in a planning horizon that extends
over T periods
• Production costs
• Labor costs, regular time ($/hour), and overtime costs ($/hour)
• Cost of subcontracting production ($/unit or $/hour)
• Cost of changing capacity; specifically, cost of hiring/laying off workforce
($/worker) and cost of adding or reducing machine capacity ($/machine)
• Labor/machine hours required per unit
• Inventory holding cost ($/unit/period)
• Stockout or backlog cost ($/unit/period)
• Constraints
• layoffs Costs
Using this information, a company makes the following determinations
through aggregate planning:

Production Rate: the number of units to be completed per unit time (such
as per week or per month)
Workforce: the number of workers/units of capacity needed for production
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 carried
over to future periods
Inventory on Hand: the planned inventory carried over the various periods
in the planning horizon

Aggregated 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 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.
AGGREGATE PLANNING STRATEGIES
Most strategies that a planner actually uses are a combination of the
following strategies and are referred to as tailored strategies. The three
strategies are as follows.

1. Chase strategy-using capacity as the lever:

As the name implies, you are chasing market demand. The production
matches demand, and excess inventory isn’t held over. This is part of a
larger lean production strategy, which saves money by waiting until an
order is placed. However, productivity and quality can be reduced, and it
can negatively impact the morale of your workforce.

With this strategy, the production rate is synchronized with the demand rate
by varying machine capacity or hiring and laying off employees as the
demand rate varies. In practice, achieving this synchronization can be very
problematic because of the difficulty of varying capacity and workforce on
short notice. This strategy can be expensive to implement if the cost of
varying machine or labor capacity over time is high. It can also have a
significant negative impact on the morale of the workforce. The chase
strategy results in low levels of inventory in the supply chain and high levels
of change in capacity and workforce. It should be used when the cost of
carrying inventory is very high and costs to change levels of machine and
labor capacity are low.

This strategy may be used if there is excess machine capacity. In this case
the workforce (capacity) is kept stable but the number of hours worked is
varied over time in an effort to synchronize production with demand. A
planner can use variable amounts of overtime or a flexible schedule to
achieve this synchronization. Although this strategy does require that the
workforce be flexible, it avoids some of the problems associated with the
chase strategy, most notably, changing the size of the workforce. This
strategy results in low levels of inventory but with lower average machine
utilization. It should be used when inventory carrying costs are relatively
high and machine capacity is relatively inexpensive.

Characteristics:
- Adjusts workforce levels or production rates in response to demand
changes.
- Often involves hiring and laying off workers, using overtime, or varying the
hours worked.
- Minimizes inventory holding costs since production closely matches
demand.
- Can lead to higher labor and operational costs due to frequent changes in
production levels.

Example:
A **toy manufacturer** that produces seasonal toys might use the chase
strategy. Demand for toys increases significantly during the holiday season
but remains lower throughout the rest of the year. The company might hire
additional temporary workers in the months leading up to the holidays and
reduce its workforce after the season ends. This ensures that the company
produces enough toys to meet high demand without holding large
inventories during the off-season.

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2. Level strategy-using inventory as the lever:

With this strategy, a stable machine capacity and workforce are maintained
with a constant output rate. Shortages and surpluses result in inventory
levels fluctuating over time. In this case, production is not synchronized
with demand. Either inventories are built up in anticipation of future demand
or backlogs are carried over from high- to low-demand periods. Employees
benefit from stable working conditions. A drawback associated with this
strategy is that large inventories may accumulate and customer orders may
be delayed. This strategy keeps capacity and costs of changing capacity
relatively low. It should be used when inventory carrying and backlog costs
are relatively low.
The company produces at a fixed rate, and the output is stored in inventory
when demand is low. During periods of higher demand, the company draws
from this inventory.
Characteristics:
- Maintains a consistent production rate and workforce level.
- Relies on inventory to absorb fluctuations in demand.
- Can lead to higher inventory holding costs.
- Offers a stable production environment, minimizing the need for overtime,
layoffs, or hiring.

Example:
A **furniture manufacturer** that produces standard furniture pieces year-
round may use the level strategy. While demand for furniture may peak
during certain seasons (e.g., summer sales or holiday promotions), the
company continues to produce furniture at a steady rate throughout the
year. When demand is low, it stores excess inventory in warehouses.
During peak periods, the company meets increased demand by selling
from this inventory without increasing production levels.

Both strategies have their strengths and weaknesses. The choice between
a chase and level strategy often depends on the nature of the business, the
variability of demand, and the costs associated with production changes or
holding inventory. Some companies may also use a **hybrid strategy**,
combining elements of both approaches to better balance demand and
supply.

3. Hybrid Strategy: There is a third alternative, which is a hybrid of the

previous strategies. This keeps the balance between the production rate,
workforce and inventory levels, while still responding to demand as it
changes. This alternative offers a bit of flexibility that can satisfy demand
while working to keep production costs low.