What is Aggregate Planning? Aggregate planning is intermediate- range (2 to 12 months) capacity planning useful in particular for organizations that experience seasonal or other fluctuation in demand. The goal of aggregate planning is to effectively utilize the organization’s resources to satisfy expected demand.
The Concept of Aggregation Aggregate planning is a “big picture” approach that does not focus on individual products or services. Instead, the focus is on groups of similar products of an entire product line. Examples: Total number of bikes produced Total number of customers served
Responses to Demand Fluctuations Demand-based options are intended to alter (smooth) the pattern of the demand. Capacity-based options to alter capacity to better match the demand.
Demand-based Options Finished goods inventories: To meet anticipate high demand Back orders & lost sales: Delay delivery or allow demand to go unfilled when demand exceeds capacity Shift demand to off-peak times: Proactive marketing: pricing, promotions Create new (complementary) demand
Capacity-based Options Overtime: Short-term option Pay workers a premium to work longer hours Idle time: Short-term option Slow the production rate or send workers home early (lowers labor productivity, but doesn’t tie up capital in finished good inventories) Subcontracting: Medium-term option Hire & fire workers: Long-term option Change the size of the workforce
Aggregate Plan Strategies Level plans: Use a constant workforce & produce similar quantities each time period. Use inventories & backorders to absorb demand peaks & valleys Chase plans: Minimize finished good inventories by trying to keep pace with demand fluctuations
Hybrid Strategies Use a combination of options: Build-up inventory ahead of rising demand & use backorders to level extreme peaks Layoff or furlough workers during lulls Subcontract production or hire temporary workers to cover short-term peaks Reassign workers to preventive maintenance during lulls
Developing Aggregate Plan Choose the basic strategy: Level, chase, or hybrid Determine the production rate: Level plan with back orders: rate = average demand over the planning horizon Level plan without back orders: rate is set to meet all demand on time Chase plan: assign regular production, amount of overtime & subcontracted work to meet demand
Developing the Aggregate Plan Calculate the size of the workforce needed Calculate period-to-period inventory levels, shortages, expected hiring & firings, and overtime Calculate period-by-period costs, then sum for total costs of the plan Evaluate the plan’s impact on customer service and human resource issues
Evaluating Alternative Plans Level strategy plan Chase strategy plan
Non-Financial Criteria Operations perspective: Smooth & even flow is easy to manage Human resources perspective: Nobody hired or fired, no overtime or furloughs, so employee morale should be fine Marketing perspective: All demand met, so no customer service issues
Non-Financial Criteria Operations perspective: Can operations ramp up & back down this quickly? Much more difficult to accomplish Human resources perspective: Will employees tolerate being hired & fired so rapidly? What about training & learning curve issues? Marketing perspective: All demand is met (assuming no strikes)
Aggregate Planning Bottom Line The Aggregate plan must balance several perspectives Costs are important but so are: Customer service Operational effectiveness Workforce morale A successful AP considers each of these factors
Service Planning Issues Intangible products can’t be inventoried Possible approaches: Try to proactively shift demand away from peaks Use overtime or subcontracting to handle peaks Allow lost sales