Introduction to Aggregate Planning (Meaning, Concept, Objectives, Steps, Benefits, Inputs & Outputs)

Summary

Aggregate planning is an intermediate capacity planning method that helps firms balance resource capacity and demand over a 2 to 18-month period. It minimizes operational costs while managing resources such as materials, labor, and machine time. The process includes forecasting demand, determining current capacity, and adjusting strategies like pricing, promotion, or subcontracting to align them. Aggregate planning focuses on optimizing inventory, workforce levels, and production rates, ensuring efficient resource use while minimizing costs. It aids in long-term operational efficiency and decision-making for future scheduling and production planning.

Takeaways

• 📅 Aggregate planning is an intermediate planning method for determining necessary resource capacity to meet expected demand, typically over a 2 to 18-month horizon.
• ⚙️ The goal of aggregate planning is to match capacity and demand in a way that minimizes costs.
• 📊 Aggregate planning involves forecasting sales, production, inventory levels, and backlogs to create a preliminary schedule of operations.
• 📉 Properly executed, aggregate planning minimizes short-term scheduling disruptions, avoiding costly fluctuations in material orders or workforce levels.
• 📈 Key objectives of aggregate planning include maximizing customer service, minimizing inventory, reducing changes in workforce levels, and ensuring efficient plant utilization.
• 🔄 The term 'aggregate' refers to planning resources in a generalized manner, such as total workers, machine hours, or raw materials, rather than focusing on specific product details.
• 🔧 Aggregate planning helps prepare for future short-term planning, such as production scheduling and material requirements planning (MRP).
• 🔀 Firms can adjust capacity or demand through strategies like pricing, promotions, backordering, or creating new demand.
• 👷 Strategies to balance capacity with demand include hiring/laying off workers, overtime, part-time labor, subcontracting, and cross-training employees.
• 📦 Finished goods inventory can be built up during periods of slack demand to meet demand during peak periods, avoiding additional labor or capacity adjustments.

Q & A

What is aggregate planning?

Aggregate planning is an intermediate-range planning method used to determine the necessary resource capacity a firm will need to meet expected demand, typically covering a period of 2 to 18 months.

What is the primary objective of aggregate planning?

The primary objective of aggregate planning is to match capacity and demand in a way that minimizes costs while ensuring resource availability.

Why is aggregate planning considered an operational activity?

It is considered operational because it involves developing an aggregate plan for the production process in advance, determining how much material and other resources are needed and when they are required to minimize operational costs.

What key components are typically included in an aggregate plan?

An aggregate plan generally includes targeted sales forecasts, production levels, inventory levels, customer backlogs, and workforce scheduling, all aimed at meeting demand forecasts at the lowest possible cost.

How does aggregate planning minimize short-term scheduling issues?

By taking a longer-term view, aggregate planning minimizes the effects of short-sighted, day-to-day scheduling that can lead to frequent workforce layoffs, rehiring, and irregular material ordering.

What are the main objectives of aggregate planning in terms of resource management?

The main objectives include maximizing customer service, minimizing inventory investment, reducing fluctuations in workforce levels, stabilizing production rates, and optimizing plant and equipment utilization.

How does aggregate planning differ between product and service industries?

In product industries, aggregate units of output might include gallons, feet, or pounds, while in service industries, aggregate units might refer to hours of service delivered, the number of patients seen, or other similar metrics.

What are some methods companies use to increase demand to match capacity?

Methods include varying pricing, promotions, back-ordering, creating new demand, and partitioning demand through scheduling systems like reservations and appointments.

What strategies can companies use to adjust capacity to meet demand?

Companies can hire or lay off workers, use overtime, employ part-time or casual labor, build up inventory, subcontract production, or use cross-trained employees to handle varying workloads.

What are the key inputs and outputs of aggregate planning?

Key inputs include availability of resources, equipment costs, and inventory costs, while outputs include total plan cost, estimated levels of inventory, and employment projections, all of which are crucial for decision-making.

Outlines

00:00

🔄 Understanding Aggregate Planning

Aggregate planning is an intermediate-range planning method designed to determine the necessary resource capacity for a firm to meet its expected demand, typically over a 2 to 18-month period. The primary goal is to balance capacity and demand in a way that minimizes costs. It involves creating an operational plan that includes sales forecasts, production levels, inventory, and customer backlogs. By focusing on resource usage from a long-term perspective, aggregate planning helps minimize short-term fluctuations in resource needs, reducing operational costs. Key objectives include maximizing customer service, minimizing inventory investment, and reducing changes in workforce levels, production rates, and equipment utilization. It operates on an aggregated level, encompassing all resources, and simplifies variations in output, such as in manufacturing or service industries, making it a crucial intermediate-term planning tool.

05:01

📈 Strategies for Balancing Demand and Capacity

Firms can use various strategies to balance capacity and demand during periods of fluctuation. One such strategy is adjusting pricing, where lower prices during low-demand periods (e.g., matinee movie prices) help stimulate demand. Promotions, such as direct marketing and advertising, can also be used to shift demand. Backordering allows firms to shift deliveries to periods of lower demand, and service industries can manage demand through appointments or reservations. Additionally, firms can create new demand by offering complementary services or products, like diverting customers to bars in restaurants during waiting times or adding video arcades in movie theaters. These methods help optimize the use of capacity and avoid unnecessary fluctuations in demand.

Keywords

💡Aggregate Planning

Aggregate planning is an intermediate planning method that determines the necessary resource capacity needed by a firm to meet expected demand over a period of 2 to 18 months. It aims to match capacity and demand in a cost-effective way. In the context of the script, aggregate planning helps management plan production and procurement to minimize total operational costs.

💡Capacity

Capacity refers to the total number of units that can be produced in a given time period. It is crucial in aggregate planning as it needs to be matched with demand to minimize costs. In the video, capacity is used to determine whether production levels need to be increased or decreased to meet the expected demand.

💡Demand Forecast

Demand forecast is an estimate of the number of units needed over a specific period. It is a key input in aggregate planning, as it guides decisions on resource procurement and production levels. The script mentions that demand forecasting helps establish sales targets and plan inventory levels, ensuring cost efficiency.

💡Inventory

Inventory refers to the stock of finished goods or raw materials maintained by a company to meet demand. In aggregate planning, inventory can be built up during periods of low demand and used during high-demand periods, which helps maintain a balance between production and customer needs. This strategy helps avoid the costs associated with hiring and laying off workers.

💡Workforce Level

Workforce level refers to the number of workers employed by a company. One of the objectives of aggregate planning is to minimize changes in workforce levels, which helps reduce costs related to hiring, training, or laying off employees. In the script, it discusses balancing workforce size to match capacity and demand without significant fluctuations.

💡Production Rate

Production rate is the speed at which goods are produced over a certain period. Aggregate planning aims to minimize changes in production rates to avoid inefficiencies and unnecessary costs. The script emphasizes the importance of maintaining a steady production rate to prevent short-sighted scheduling decisions and fluctuating costs.

💡Subcontracting

Subcontracting involves outsourcing production or services to an external provider to temporarily increase capacity. This is one of the options mentioned in the script for meeting increased demand without hiring new workers or incurring overtime costs. It provides flexibility in resource management while keeping costs low.

💡Cross-training

Cross-training refers to training employees to perform multiple tasks across different operations. It creates flexibility in scheduling and capacity management, allowing the company to adjust to changes in demand more efficiently. In the script, cross-training is highlighted as a way to make better use of existing employees rather than hiring new ones.

💡Promotion

Promotion involves advertising and marketing efforts to influence demand. It is used in aggregate planning to shift demand from periods of high capacity to periods of lower capacity. The script provides examples such as direct marketing and advertising to manage customer demand effectively and ensure a better balance with production capacity.

💡Backordering

Backordering is the practice of postponing delivery on current orders to shift demand to periods when capacity is not fully utilized. This is a way to smooth out demand and avoid overburdening production facilities. The script discusses backordering as a demand management tool that helps to balance capacity with customer needs, thus reducing the need for drastic workforce or production changes.

Highlights

Aggregate planning is an intermediate-range capacity planning method.

It covers a period of 2 to 18 months.

The goal is to match capacity and demand to minimize costs.

It provides a preliminary schedule for overall operations.

The plan includes sales forecasts, production levels, inventory, and backlogs.

It aims to satisfy demand forecasts at the minimum cost.

Aggregate planning minimizes the effects of short-term scheduling.

It balances capacity and demand to reduce costs.

It includes all resources in the aggregate, such as total workers or machine hours.

Aggregate planning does not distinguish among product features like size or color.

Equivalent units may be used when output variation is extreme.

It serves as a foundation for future short-range planning like scheduling and loading.

Demand and capacity must be balanced, possibly by increasing or decreasing either.

Options include pricing strategies, promotion, backordering, and new demand creation.

Capacity can be adjusted by hiring, layoffs, overtime, part-time labor, or subcontracting.

Cross-training provides flexibility in scheduling and capacity management.

Other methods include employee sharing and meaningful projects during slack times.

Aggregate planning inputs include resource availability and costs.

Outputs are significant for decision-making, including total cost and resource levels.

It helps determine demand, capacities, company policies, and unit costs.

Aggregate planning develops alternative plans and selects the best based on objectives and costs.

Transcripts

aggregate planning is an intermediate

planning method used to determine the

necessary resource capacity a firm will

need in order to meet its expected

demand

it is an intermediate range capacity

planning usually covering from 2 to 3

to about 12 to 18 months in other words

it is the matching of capacity and the

demand in such a way that cost are

minimized

the term aggregate planning is defined

as an operational activity which does an

aggregate plan for the production

process

in advance of 2 to 18 month to give an

idea to management as to what quantity

of materials and other resources are to

be procured and when

so that the total cost of operations of

the organization is kept at minimum over

that period

aggregate planning is the process of

developing analyzing

and maintaining a preliminary

approximate schedule of the overall

operations of an organization the

aggregate plan generally contains

targeted sales forecasts

production levels inventory levels and

customer backlogs

this schedule is intended to satisfy the

demand forecast at a minimum cost

properly done aggregate planning should

minimize the effects of short-sighted

day-to-day scheduling in which small

amounts of material may be ordered one

week

with an accompanying layoff of workers

followed by ordering larger amounts and

rehiring workers the next week

this longer-term perspective on resource

use can help minimize short-term

requirements changes with the resulting

cost savings

the main objectives of aggregate

planning are

to maximize customer service minimize

inventory investment

minimize changes in workforce levels

minimize changes in production rates

and maximize utilization of plant and

equipment

in simple terms aggregate planning is an

attempt to balance capacity

and demand in such a way that costs are

minimized

the term aggregate is used because

planning at this level includes all

resources in the aggregate for example

as a product line or family

aggregate resources could be total

number of workers

hours of machine time or tons of raw

materials

aggregate units of output could include

gallons

feet pounds of output as well as

aggregate units appearing in service

industries such as hours of service

delivered

number of patients seen etc aggregate

planning does not distinguish among

sizes

colors features and so forth for example

with automobile manufacturing aggregate

planning would consider the total number

of cars planned for not the individual

models

colors or options when units of

aggregation

are difficult to determine for example

when the variation in

output is extreme equivalent units are

usually determined

these equivalent units could be based on

value cost

worker hours or some similar measure

aggregate planning is considered to be

intermediate term in nature

as opposed to long or short term hence

most aggregate plans cover a period of 3

to 18 months

aggregate plans serve as a foundation

for future short range type planning

such as production scheduling sequencing

and loading

the master production schedule in short

mps

used in material requirements planning

or mrp

has been described as the aggregate plan

disaggregated

steps taken to produce an aggregate plan

begin with the determination of demand

and the determination of current

capacity

capacity is expressed as total number of

units per time period that can be

produced

this requires that an average number of

units be computed since the total may

include a product mix utilizing

distinctly different production

times demand is expressed as total

number of units needed

if the two are not in balance equal the

firm must decide whether to increase or

decrease capacity to meet demand or

increase or decrease demand to meat

capacity

in order to accomplish this a number of

options are available

options for situations in which demand

needs to be increased in order to match

capacity

include number one pricing

which includes varying pricing to

increase demand in periods when demand

is less than peak

for example matinee prices for movie

theaters

off-season rates for hotels weekend

rates for telephone service

and pricing for items that experience

seasonal demand

number two promotion which includes

advertising

direct marketing and other forms of

promotion are used to shift demand

number three back ordering by postponing

delivery on current orders demand is

shifted to period when capacity is not

fully utilized

this is really just a form of smoothing

demand

service industries are able to smooth

demand by taking reservations or by

making appointments in an attempt to

avoid walk-in customers

some refer to this as partitioning

demand

number four new demand creation a new

but complementary demand is created for

a product or service

when restaurant customers have to wait

they are frequently diverted into a

complimentary

but not complementary service the bar

other examples include the addition of

video arcades within movie theaters

and the expansion of services at

convenience stores

number five options which can be used to

increase or decrease capacity to match

current demand

which include hiring or laying off

by hiring additional workers as needed

or by laying off

workers not currently required to meet

demand firms can maintain a balance

between capacity and demand

over time by asking or requiring workers

to work extra hours a day or an extra

day per week

firms can create a temporary increase in

capacity without the added expense of

hiring additional workers

part-time or casual labor by utilizing

temporary workers or casual labor

workers who are considered permanent but

only work when needed

on an on-call basis and typically

without the benefits given to full-time

workers

inventory finished goods inventory can

be built up in periods of slack demand

and then used to fill demand during

periods of high demand

in this way no new workers have to be

hired no temporary or

casual labor is needed and no overtime

is incurred

subcontracting frequently firms choose

to allow another manufacturer or service

provider to provide the product or

service to the subcontracting firm's

customers

by subcontracting work to an alternative

source additional capacity is

temporarily obtained

cross-training cross-trained employees

may be able to perform

tasks in several operations creating

some flexibility when scheduling

capacity

other methods while varying workforce

size and utilization

inventory build up or backlogging and

subcontracting

are well-known alternatives there are

other more novel ways that find use in

industry

among these options are sharing

employees with counter cyclical

companies

and attempting to find interesting and

meaningful projects for employees to do

during slack times

now let's look into the aggregate

planning inputs and outputs

in this table we can see all the

necessary inputs required and aggregate

planning

the important ones are including

availability of resources

cost of equipments cost of inventories

etc

the output generated mainly includes the

total cost of plan and

estimated levels of inventory employment

etc these outputs are very significant

in the decision making

so what are the main benefits of

aggregate planning

it helps to determine demand for each

period determine capacities

for each period determine pertinent

company policies

determine unit cost based on all

relevant sources

develop alternative plans and calculate

the cost for each

and finally aggregate planning helps to

choose the best overall plan based on

company objectives and cost