Aggregate planning is an operational activity that does an aggregate plan for the production process, in advance of 2 to 18 months, 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 to the minimum over that period (Wikipedia).
Costs are minimized by adjusting production rates, labor, inventory, overtime, subcontracting and other input variables. Influencing demand through advertising or promotion may also help.
The planning horizon is the amount of time an organization will look into the future when preparing a strategic plan (Wikipedia).
- Long range plans (>1 year)
- Intermediate range plans (3 to 18 months)
- Short-range plans (up to 3 months)
Approaches to Aggregate Planning
A chase aggregate plan means that the amount of input (resources) are matched in each time period with the required output.
For a chase plan the pros are: no wasted resources with over-production or lost revenue with under-production. The cons are: labor and other resources are constantly being increased and decreased, leading to additional costs of hiring, firing, training and potential poor quality.
A level production plan means that production is scheduled and resources are acquired to produce product at a constant level over the planning period. For a 12 month level production plan, the annual demand is forecast, and then 1/12th of the demand is scheduled for production each month.
For a level plan the pros are that production is constant, leading to higher productivity, better quality and a better work environment due to stability. The pros are that when production is higher than demand due to demand fluxuations, inventory is built up (costing $). When production is lower than demand, if there is not adequate inventory, customers can experience shortages and sales may be lost.
Mixed (Hybird) Plans
A mixed plan utilizes a variety of methods to match production and demand. Common methods include:
- Subcontracting - hiring permanent employees to support the production level of the lowest demand month of the year. Any production over this level is subcontracted, usually at a price premium.
- Overtime - plan similar to a level production plan, but schedule overtime (at a price premium) to accomodate demand over the production level.