What is aggregate production plan?

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Content: Aggregate Planning in Operations Management
What is Aggregate Production Planning?
Objectives of Aggregate Planning
Need for Aggregate Operations Planning
Nature of Aggregate Planning
Aggregate Planning Strategies
Methods of Aggregate Planning in Operations Management
Steps in Aggregate Planning
Costs under Aggregate Planning
Aggregate Planning for Services
Master Production Scheduling (MPS)
Problems in Aggregate Planning

Aggregate planning is a marketing activity that does an aggregate plan for the production process, in advance of 6 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.

The quantity of outsourcing, subcontracting of items, overtime of labour, numbers to be hired and fired in each period and the amount of inventory to be held in stock and to be backlogged for each period are decided. All of these activities are done within the framework of the company ethics, policies, and long term commitment to the society, community and the country of operation.

Aggregate planning has certain pre-required inputs which are inevitable. They include:

Information about the resources and the facilities available.
Demand forecast for the period for which the planning has to be done.
Cost of various alternatives and resources. This includes cost of holding inventory, ordering cost, cost of production through various production alternatives like subcontracting, backordering and overtime.
Organizational policies regarding the usage of above alternatives.

"Aggregate Planning is concerned with matching supply and demand of output over the medium time range, up to approximately 12 months into the future. The term aggregate implies that the planning is done for a single overall measure of output or, at the most, a few aggregated product categories. The aim of aggregate planning is to set overall output levels in the near to medium future in the face of fluctuating or uncertain demands. Aggregate planning might seek to influence demand as well as supply.

Use a constant workforce & produce similar quantities each time period
Use inventories and back-orders to absorb demand peaks & valleys
Use inventories in better way to absorb the peak of demand and valleys

Minimize finished good inventories by trying to keep pace with demand fluctuations
Matches demand varying either work force level or output rate

Build-up inventory ahead of rising demand and use back-orders 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

Smoothing

Smoothing refers to costs that result from changing production and workforce levels from one period to the next.

Bottleneck Problems

It is the inability of the system to respond to sudden changes in demand as a result of capacity restrictions.

Planning Horizon

The number of periods for which the demand is to be forecasted, and hence the number of periods for which workforce and inventory levels are to be determined, must be specified in advance.

Treatment of Demand Aggregate planning methodology requires the assumption that demand is known with certainty. This is simultaneously a weakness and a strength of the approach.

Nahmias, Steven (2009). "Production and Operation Analysis". New York, New York: McGraw-Hill Inrwin
Schroeder, R.G (2007). Operations management. New York, New York: McGraw-Hill Inrwin
Stevenson, William J. (2007). Operations management. New York, New York: McGraw-Hill Inrwin

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Definition: Aggregate Planning in Operations Management determines production and resource allocation strategies to meet the uncertain and fluctuating future demand at minimum production cost for the Intermediate Time Horizon.

Here, the word ‘Aggregate‘ signifies the product lines and families. And ‘Planning‘ covers the series of activities to be taken in order to meet the expected demand.

Organizations make these plans for the duration of the Intermediate Ranged Forecast. That is, it involves demand forecasting for capacities for the medium-range time horizon that lasts 3 to 18 months.

Managers consider these plans as a foundation for small specific schedules like Master Production Scheduling. Also, it gives an idea about the quantity and time required to meet the forecasted demand.

In simple words, Aggregate Planning enables supply creation as per corresponding demand. It aligns the organizational resources in the direction of the Intermediate-Term Goals.

The process involves planning resources and achieving the organization’s long-term objectives. Therefore, organizations strive to match their supply with expected demand and remain profitable in the long run.

Following are the major decisions taken under Aggregate Planning:

Workforce Decisions
Inventory Decisions
Production Rate

Note: While Planning, we assume that the demand forecasting data is already available. But it is not always possible to have this data readily available. Therefore it is both a merit and demerit of this concept.

Content: Aggregate Planning in Operations Management

What is Aggregate Production Planning?

The mass production units prepare Strategic and Operational plans on an aggregate level to achieve their goals. We refer to these operational plans as Aggregate Production Plans.

Pre-requirements for the planning on an aggregate level:

Demand forecast for the period
Knowledge about the availability and scarcity of resources
Costs of various alternatives
Organizations’ practices and policies

Key decisions that are taken under Aggregate Planning:

Technology Selection
Capital Investments
Location
Personnel Policies
Raw Material Policies

Objectives of Aggregate Planning

The goal behind making the strategic plans is to find an economical and excellent combination of resources. Some objectives of preparing an aggregate plan are:

Cost Reduction
Profits Maximize
Minimize Inventory Investment
Improving Customer Service and Post Purchase Experience
Reducing Production Rates
Fewer changes in Workforce Levels
Maximize use of Plant and Equipment

Need for Aggregate Operations Planning

The organizations need to plan their production/services due to following reasons:

Demand Fluctuations
The demand for the products and services keeps on changing for different reasons. Consequently, organizations plan their productions by Forecasting Future Demand and creating sufficient supply thereof.
Capacity Fluctuations
Besides fluctuating demand, the capacity and other resources also change every now and then. It can be an outcome of the changes in Working Days, Workforce, etc.

Nature of Aggregate Planning

The production managers use aggregate production plans to determine the series of actions to be taken in the near future. In addition, they consider the following parameters in mind while planning:

Capability Planning and Performance Matrix
Demand Forecasts and Actual Orders
Resource Availability

Aggregate Planning Strategies

Following are the strategies that organizations can use for aggregate production planning. As per the need, the organizations can use a single or a combination of strategies.

Pure Strategies

In this, the organizations opt for a single strategy to meet the forecasted demand. These strategies may include:

Managing inventory by the constant workforce
Changing the size of the workforce
Overtime Utilization
Subcontracting

The above strategies are broadly classified into:

Level Strategy:
Here, the capacity and employment remain constant. At the same time, managers make changes in the level of inventory in the organization. The organization may also have a Backlog or Backorder.
Chase Strategy:
It contrasts level strategy as the Inventory level remains constant here. However, the demand is met by hiring and firing the Workforce.

Mixed/Hybrid Strategies

To meet the forecasted demand at the least cost, the organizations use a combination of pure strategies. As these strategies are in combination, we refer to them as Hybrid or Mixed Strategies.

These strategies can help them in matching the supply effectively and efficiently. For Example – An organization may use Overtime Utilization strategies along with Subcontracting.

Methods of Aggregate Planning in Operations Management

The methods discussed below can be used to plan and evaluate the operations in the facilities:

Graphical Method
In this, we plot the demand and production capacities on the graph. After that, we identify the gap existing between estimated Demand and Production.
This method does not impact the costs, and cost data is not considered.

Heuristic Method
Here, the plan is based on the list of pure and mixed strategies yielding the least cost. And thus selecting the most cost-efficient suitable alternative.

Transportation model
The organizations can express the planning objective in the linear equation. So, one can solve complex aggregate problems with the help of Artificial Intelligence, Apps and Software.

Linear Programming
In this model of aggregate Planning, one can put all the variables in a linear programming model. It results in finding an economical alternative for the facilities.

Steps in Aggregate Planning

Following are the steps that one can follow during aggregate Planning:

Estimate future demand for the Intermediate Period.
Determine capacities of the facility like – Regular Time, Overtime, Sub-contracting, etc.
Identify and Review departmental policies.
Determine the relevant unit costs related to production.
Develop and evaluate alternative plans.
Select a plan with minimum cost.

Costs under Aggregate Planning

Cost is an important variable to be considered during aggregate Planning. The minor changes in demand lay a massive impact on the associated costs.

Managers can make certain assumptions about costs in the planning stage. But, in some cases, firms cannot draw any inferences.

Some of the costs that are relevant to the Aggregate Planning in Operations Management are as follows:

Procurement Costs
Production Costs
Inventory Management Costs
Workforce Management Costs
Overtime or Undertime Costs
Cost of Changing Rate of Production Costs
Backlog Costs
Fixed and Variable Costs

Aggregate Planning for Services

Aggregate Planning for services differs from that of production. Because the services follow Make-to-Order rather than Make-to-Stock.

It aims to manage the high and low demand periods by utilizing the existing workforce to the fullest. It only makes aggregate plans about:

The number of Manpower to meet the future requirement
Smoothing the load of service rate

Challenges in Service Aggregate Planning

We cannot keep services as Inventory
Difficulty in forecasting demand for services
Largely dependent on its human resources

Master Production Scheduling (MPS)

Master Production Scheduling is the focused product-wise schedule developed along with the aggregate plans. We refer to MPS as Disaggregation Planning as we split the major plan into small strategic plans.

These schedules provide an idea about the production volumes during various time horizons. Organizations can use the following techniques for Disaggregation:

Cut-and-Fit Methods
Mathematical Methods
Heuristic Methods

Problems in Aggregate Planning

The overall concept of aggregate planning assumes that the forecasted demand is known. This is the strength and weakness of the approach at the same time. Some areas in which the organizations may face problems are as follows:

Changes in production and workforce in different planning periods.
The capability of the organizations to manage abrupt changes in demand.
Difficulty in compiling capacities in an aggregate form.

Example

Suppose XYZ ltd. deals in Umbrella manufacturing. Its marketing team initiated market research for the 3rd Quarter. Thereafter, they concluded that there would be heavy rainfall in the coming months.

Normally they could manufacture 2000 Umbrellas per month and had 1000 pieces in stock. Therefore, they decided to increase the production and produce 1000 pieces more.

Consequently, he decided to hire more workers to meet the upcoming demand. The production manager instructed the workers to do overtime for this purpose. Finally, they could complete the production by the end of the month.

XYZ ltd. were able to supply Umbrellas to all its dealers and therefore earned handsome profits at the year’s end.

Conclusion

Aggregate Planning in Operations Management is developing, analyzing and managing the production. It focuses on matching capacity and resources at minimal costs.