What is aggregate planning?

Aggregate planning is a way for companies to figure out the best way to make the right amount of stuff at the right time while spending the least amount of money. It looks at how much of each thing needs to be made in total and comes up with a plan based on the machines and workers available to do the work.

Why is aggregate planning important?

Aggregate planning is essential for companies that make things. If they make too much stuff, it will just sit around, and they’ll waste money on extra materials and storage. But if they don’t make enough, they might run out and be unable to sell to their customers.

Aggregate planning helps avoid both of these problems by devising a plan to make the right amount. It also helps the company spend less money overall by finding the cheapest way to make everything with the machines and people it has.

How does aggregate planning work?

There are a few steps to aggregate planning:

Step 1: Figure out demand

First, the company needs to figure out how many of each thing its customers will want to buy. It can look at past sales or do market research to make a good guess. This tells it the total demand it needs to meet with its plan.

Step 2: Look at capacity

Next, they need to look at their production capacity. This means finding out how much their factories and workers can make. They need to know things like:

• How many machines do they have, and how many things can each machine make
• How many workers do they have
• How many shifts or hours people can work
• How long it takes to make each thing

This tells them the total capacity that the plan has to work with. They can’t plan to make more than this, or they won’t be able to.

Step 3: Consider constraints and costs

There are also some constraints and costs to think about:

• Hiring and firing workers costs money
• Having inventory sitting around costs money
• Running out of inventory loses money
• Workers and machines can only work so much

The plan must meet customer demand and production capacity while working within these constraints and keeping costs as low as possible.

Step 4: Make the plan

With all this information, it’s time to make the aggregate plan. There are different strategies companies can use:

Level strategy

One option is to keep production at the same steady level all the time. This avoids extra costs from changing production levels up and down. However, the company will sometimes make too much and build up inventory, and other times, it will not make enough.

Chase strategy

Another option is to keep changing production levels to match the demand. This way, they only make as much as they need. However, changing production levels costs hiring, firing, and training workers.

Mixed strategy

The best plan is usually somewhere in between. It uses a mix of level and chase strategies to find the right balance of production levels and inventory to meet demand while keeping costs low. Special tools and software can crunch the numbers and find the best-mixed plan.

Finalizing and implementing the plan

Once management decides on the best aggregate plan, they must implement it. This usually involves:

• Setting production schedules to hit the planned levels
• Making staffing plans to have the correct number of workers
• Ordering the right amount of raw materials
• Planning inventory storage
• Coordinating logistics like shipping plans

The different departments, such as production, procurement, human resources, and sales, all have to work together closely to implement the aggregate plan and adjust to any issues that arise.

Following up and adjusting

Aggregate plans are usually made for a medium-term timeframe, like 3-18 months. Demand and other factors can change over time, so it’s important to keep track of whether the plan is working or needs to be adjusted.

Usually, there are weekly or monthly checkpoints to look at:

• Actual demand compared to planned
• Actual production compared to planned
• Inventory levels
• Spending compared to budget

If there are differences, the company must determine why and if the plan needs to change. Maybe demand is higher than expected, and production needs to increase. Or maybe costs are over budget, and they need to find ways to be more efficient.