Aggregate Planning by definition is concerned with determining the quantity and scheduling of production for the mid-term future. The timing on an aggregate plan runs normally from 3 to 18 months. Therefore, the plan is a by-product of the longer term strategic plan. This is an important differentiation since the planning horizon may have an immediate impact on the business’ volume requirements. Before I proceed allow me to define the term “production.” Do not be misled to think production is only related to tangible goods. Services also require the transformation of inputs to outputs ergo production. So, the aggregate plan is a fundamental method to further define what will be needed to complete this transformation process. This includes capacity to include facilities and manpower, raw materials whether directly consumed in the manufacture of the product or consumed as part of the process (think tongue depressors in a doctor’s office), and finally the inventory levels required to maintain delivery dates and at the same time minimize costs. By my definition I excluded capital expenditures since these will extend beyond the planning time horizon of 3 to 18 months.
The key input to the success of aggregate planning is the forecast. As I previously shared forecasting is the main building block of transforming a strategy into deliverable objectives. The aggregate plan cannot be deployed unless vital information in the form of the forecast are compiled. But, one additional piece from the forecast is required, timing. What I have found in my experiences is an aggregate forecast formulated for the next fiscal year is not complete without the inclusion of timing. To further define timing, think seasonality. Seasonal business cycles and forecasts may have a dramatic impact on the aggregate plan. If the majority of your customer demand is in the summer how would you address the aggregate plan? The importance of the forecast in this example cannot be understated. Let us use further review this example. Quite frankly the aggregate planning solution is textbook simple but in the real world is far more complex. There are various models available. I will share three:
- Level loading - making the same level of product each day averaging forecast demand
- Chasing demand - adding/decreasing capacity depending on demand for the next period
- Sub- contracting - level loading with excess demand being manufactured by a third party
As in all models there are positives and negatives of each. Yes, hybrid models are also fair game! The key for any model is to insure delivery to the customer while minimizing costs. Service business’ are included in these examples and in fact are more complex. So which one should you pick? The traditional MBA answer holds true here, it depends. Each model has an impact to delivery and cost. Level loading using seasonally adjusted forecasts in a tangible environment will require building inventory in advance of demand. The risks of using this model are well defined. Whenever a firm “builds to anticipation” they face the risk the demand will never materialize. In services you cannot build product to anticipated sales so this will require tools such as reservations and appointments with a heightened sensitivity to seasonal spikes. In contrast using a chase model in the tangible world requires adjusting capacity to demand to include hiring/firing of human resources. Following this path has a direct impact on quality as well as an indirect cost to the business. To deploy this strategy requires a highly efficient forecast! Using a chase strategy in services is a bit easier (think retail Christmas help). Finally, subcontracting potentially requires the sharing of sensitive information. The firm must carefully weigh out the risks and rewards of such a venture. Here services may gain from sub-contacting (think emergency room by-pass to another hospital if demand exceeds capacity).
That said the aggregate plan is a necessary tool to determine what the firm will need to manage customer demand. Highly efficient forecasting is a key input to the planning cycle. Minimizing cost is a key consideration. But more importantly is meeting demand using a planned approach. This is where strong aggregate planning plays a vital role.
Related Benedictine Programs
If you’re interested in learning more about analytics, Benedictine’s MBA program provides a course on Operations Management and prepares you to successfully lead organizations through the challenges of 21st-century business management. Benedictine University also offers Bachelors and Associates degree programs. To learn how an online degree from Benedictine can help you hone your business skills talk to a Program Manager today.
About the Author
Pete Papantos is an operations director at a Fortune 500 company. He is responsible for the global execution of their strategic plan and driving operational excellence using lean methods. In addition, Pete is a graduate instructor with emphasis in operations and strategic management — both in traditional and online settings.