Manufacturers and service providers usually find that the demand for their products or services is not constant. Thus, planning production to meet demand is often problematic. Aggregate planning was developed to tackle the problem of meeting forecasted demand by adjusting production capacity.
The importance of aggregate production planning is apparent by its use in a wide range of industries for all production-planning processes. It helps businesses develop a road map to operate efficiently. But it also has disadvantages.
Aggregate planning is concerned with determining the quantity and the schedule of production for the immediate future. Aggregate plans are intermediate-range plans that are valid for three to 18 months. The main objective of aggregate plans is to lower costs and to use capacity most efficiently. The operations department uses the forecasted demand for the planning period to plan the rate of production in such a way that the overall costs are reduced.
Aggregate plans combine resources into general categories and do not give a product-specific breakdown. The inputs used to develop the plan include demand forecast, capacity, inventory levels and workforce size. Once the aggregate plan has been developed to give an overall production rate for the planning period, it is handed to production personnel. The operations and production personnel then break down the plan into weekly, daily and hourly schedules, in a process called disaggregation.
Disaggregation results are used in the development of the master production schedule (MPS). The MPS is used for purchase decisions, employee schedules and product prioritizing. Aggregate plans form the basis to develop all the production plans.
There are two main aggregate planning methods and strategies: the chase strategy and level strategy. The chase strategy sets production equal to forecasted demand. Many service organizations such as schools, hospitality businesses and hospitals, use the chase strategy. The level strategy is mainly focused on maintaining a constant output rate. This strategy is mainly adopted by manufacturing companies.
Chase strategy is most suitable when demand is unstable and there is no inventory. Thus service industries use this strategy the most. The focus is on meeting forecasted demand, therefore the workforce is manipulated to achieve this. Chase strategy uses overtime work, subcontracting and part-time workers to meet demand.
The main advantage of using the chase strategy is tremendous flexibility to meet demand fluctuations. The disadvantage is that it may mean higher hiring and training costs.
Level scheduling is used when demand is stable. Here the focus is on maintaining a constant production rate. The workforce does not change. This strategy has several advantages, including well-trained workers because there are no frequent workforce changes, lower turnover, lower absenteeism and more experienced workers. Companies such as Toyota and Nissan use this strategy.
The disadvantage is that there are inventory costs built up during the periods of lower demand. Because the production stays constant irrespective of demand, during lean months the inventory buildup can be considerable.
One of the objectives of aggregate planning is to allow planners to compare projected demand with existing capacity. Using the data inputs, planners use graphical analysis to compare the costs of various options to meet demand. These techniques in aggregate planning allow companies to not only identify the best options to meet demand but also to know about inefficiencies within their own organizations.
Aggregate planning thus helps in developing more efficient strategic plans. This includes developing strategic relationships with suppliers and distributors and also developing more accurate market research.