Aggregate Planning

Why do organizations need to do

aggregate planning?
• It takes time to implement plans. For instance, if
plans call for hiring (and training) new workers,
that will take time.
• Aggregation is important because it is not
possible to predict with any degree of
accuracy the timing and volume of demand for
individual items.

Aggregate planning is important because it can

help synchronize flow throughout the supply
chain; it affects costs, equipment utilization,
employment levels, and customer satisfaction.
 Aggregate Planning
is an intermediate-range capacity planning that
typically covers a time horizon of 2 to 12 months,
although in some companies it may extend to as
much as 18 months.

useful for organizations that experience seasonal

or other fluctuations in demand or capacity

The goal of aggregate planning is to achieve a

production plan that will effectively utilize the
organization’s resources to match expected
demand.
 Sales and Operations Planning
is defined as making intermediate-range decisions
to balance supply and demand, integrating
financial and operations planning.

Some organizations use the term “sales and

operations planning” instead of aggregate
planning for intermediate-range planning.
Planning Tasks and Responsibilities
 Three Levels of Decisions
Long-term decisions relate to product and service
selection (i.e., determining which products or
services to offer), facility size and location,
equipment decisions, and layout of facilities.
Intermediate decisions relate to general levels of
employment, output, and inventories, which in
turn establish boundaries within which short-range
capacity decisions must be made.

Short-term decisions involve scheduling jobs,

workers and equipment, and the like.
Planning Sequence
 The Nature of Aggregate
Planning
Aggregate planning is part of a larger production
planning system. Therefore understanding the
interfaces between the plan and several internal
and external factors is useful.

Given demand forecast, facility capacity,

inventory levels, workforce size and related
inputs, the planner has to select the rate of output
for a facility over the next 3 to 18 months.
Relationship of an Aggregate Plan
 Aggregate Planning Strategies

Aggregate planning strategies can be described as:

Proactive – it involves demand options. It attempts to

alter demand so that it matches capacity.
Reactive – it involves capacity options. It attempts to alter
capacity so that it matches demand.
Mixed – involves an element of each of the above
approaches
 Aggregate Planning Strategies
When generating an aggregate plan, Operations Manager must answer or
consider the following questions:

1. Should inventories be used to absorb changes in demand

during the planning period?
2. Should changes be accommodated by varying size of the
workforce?
3. Should part-timers be used, or should overtime and idle time
absorb fluctuations?

4. Should subcontractors be used on fluctuating orders so a stable

workforce can be maintained?

5. Should prices or other factors be changed to influence

demand?
 Options which can be used to increase or
Capacity Options decrease capacity to match current
demand include:

1. Carrying inventory/Changing inventory level – In

manufacturing companies, inventory can be used as a buffer
between supply and demand. Inventories for later use can be
built up during periods of slack demand.

2. Varying workforce size by hiring and layoff of employees –

The use of this variable not only affect costs but also labor
relations, productivity, and worker morale.

3. Varying production rates through overtime and undertime –

Overtime is sometimes used for short or medium-range labor
adjustments in lieu of hiring and layoffs, especially if the change
in demand is considered temporary. Undertime refers to planned
utilization of the workforce rather than layoffs or shortened
workweek.
Capacity Options
4. Subcontracting – This option, which involves the use of other
firms, is sometimes an effective way to increase or decrease supply.
The subcontractor may supply the entire product or only some of
the components.
5. Making Cooperative Arrangements – These arrangements are
very similar to subcontracting in that other sources of supply are
used.
6. Using part-time or temporary labor – In some cases, it is
possible to hire part-time or temporary employees to meet peak
or seasonal demand.
Demand Options
Option for situations in which demand needs to be
increased in order to match capacity include:
1. Influencing Demand – When demand is low,
therefore the supply is high. To increase demand
there are initiatives that the company can try, those
are:
 Advertising and Promotion – Advertising, direct marketing,
and other forms of promotion are used to shift demand.
 Personal Selling
 Price cuts
Demand Options