What is aggregate production planning explain the capacity options to match the demand?

Last updated on Jan 5, 2020

• Aggregate Production Planning
  • Costs relevant to aggregate production planning:
  • Techniques of Aggregate Planning
  • Procedure for Aggregate Planning
  • Steps for Developing the Aggregate Production Plan
  • Factors Affecting Aggregate Planning
  • Aggregate planning is an Operational Tool
  • Importance of Aggregate Planning
  • Aggregate Planning Strategies

Aggregate Production Planning

Aggregate production planning, abbreviated as APP, is useful for operation management. It is associated with the determination of production, inventory, and personnel levels to fulfill varying demand over a planning perspective that ranges from a period of six months to one year. Aggregate production plans are needed to exploit workforce opportunities and represent a crucial part of operations management. Aggregate production plans facilitate the matching of supply and demand while reducing costs. The process of Aggregate production planning applies the upper-level predictions to lower-level, production-floor scheduling and is most successful when applied to periods 2 to 18 months in the future. Plans generally either “chase” demand, adjusting the workforce accordingly, or are “level” plans, meaning that labor is comparatively constant with fluctuations in demand being met by inventories and backorders.

The concept of aggregate production planning denotes the process of determining the overall quantities of products to be manufactured or produced in a plant or other manufacturing facility during a medium-term planning period such as a month, or a quarter. The aggregate plan output comprises of the total quantities of each product or a group of products to be manufactured in the plan period of going into details of the scheduling of different manufacturing activities required to attain the planned production levels. The aggregate production will also not specify details such as the dates when material ordered against individual customer orders will be ready for delivery. The aggregate production plan is designed to establish overall production targets and as input for planning availability of other inputs and supporting activities to meet the production targets. The aggregate plans then form the basis of more comprehensive products such as daily and weekly production schedules and customer delivery schedules.

The prime objective of Aggregate Production Planning is to judge company policies and management inputs linked to operations, distribution and marketing, materials, accounting and finance, engineering and human resources to reduce the price and increase revenue, enhance customer service, lessen inventory investment, decrease changes in production rates, reduce changes in work-force levels, boost utilization of plant and equipment.

Costs relevant to aggregate production planning:

• • Basic production costs: material costs, direct labor costs, and overhead costs. It is customary to divide these costs into variable and fixed costs.
  • Costs associated with changes in the production rate: Costs involved in hiring, training, and laying off personnel, as well as overtime compensations.
  • Inventory related costs. Aggregate production planning models may be supportive as decision support systems and to appraise proposals in union negotiations.

Techniques of Aggregate Planning

Various techniques are used to perform the task of aggregate planning. Usually, there are two categories: Informal trial-and-error techniques and mathematical techniques. In practice, informal techniques are more commonly used. However, a substantial amount of research has been done to mathematical techniques, but still, they are not as extensively used, they often serve as a basis for comparing the effectiveness of alternative techniques for aggregate planning.

There are several steps in the general procedure for aggregate planning:

• Determine the demand for each period.
• Determine capacities (regular time, overtime, subcontracting) for each period.
• Identify a company or departmental policies that are pertinent (e.g., maintain a safety stock of 5 percent of demand, maintain a reasonably stable workforce).
• Determine unit costs for regular time, overtime, subcontracting, holding inventories, backorders, layoffs, and other relevant costs.
• Develop alternative plans and compute the cost for each activity.
• If satisfactory plans emerge, select the one that best satisfies objectives. Otherwise, return to step 5.

Procedure for Aggregate Planning

It can be useful to employ a worksheet or spreadsheet to summarize demand, capacity, and cost for each plan. Additionally, graphs can be used to guide the development of alternatives. Among all methods, the spreadsheet solver approach is the most appropriate for industries because the solver on spreadsheet software is readily available on virtually all personal computers, the APP model is comparatively easy to devise in a spreadsheet format, and lastly, the results are easy to construe. There are certain guidelines for developing an optimal aggregate production plan using a spreadsheet solver. First of all, necessary data must be collected for developing Aggregate production planning mode. Secondly, formulate the APP model in the spreadsheet format. The next step is to appraise the obtained solutions. This can be done by presenting the constructed spreadsheet aggregate production planning model and its solutions to related departments of the company such as production, personnel, planning, sales and marketing, and warehousing, and judge whether the solutions are satisfactory. The comparison between the existing aggregate production plan and the optimal plan generated from the Aggregate production planning model may be done in the financial term. If the solution is not satisfactory, the values of some input parameters may need to be reconsidered or the constraints may need to be customized. The spreadsheet APP model will be changed until the solutions are acceptable. The last step is to implement the aggregate production plan. After the spreadsheet APP model is agreeably developed and solved, the obtained solutions can be implemented. During the execution of the aggregate production plan, some parameters of the model may be altered such as demands, productivity rates, related costs, number of workers, and inventory levels. These parameters should be modernized regularly and the APP model is solved to resolve the revised aggregate production plan.

Steps for Developing the Aggregate Production Plan

To summarize, aggregate production planning is an effectual approach to operations management and concentrate to satisfy demand as it relates to production, labor force, inventory, and other models. Aggregate production planning can attach to facility planning with scheduling decisions. Aggregate production planning assists to lessen production costs, the effect of variant demand, cost of inventory and labor costs. Aggregate production planning also exploits plant and equipment utilization and profits. The efficiency of aggregate production planning is a production plan that indicates how many workers are needed in each period, the amount and type of production (such as regular, overtime, subcontracting, etc.), and the units to be produced, stored, and back-ordered per month or per quarter. Aggregate production planning is also a constructive tool to create and assess alternatives such as the adjustment of the labor force through hire/fire/layoff/overtime, the use of subcontractors, anticipatory inventory, and even the development of corresponding products and pricing strategies.

Factors Affecting Aggregate Planning

Aggregate planning is an operational activity critical to the organization as it looks to balance long-term strategic planning with short term production success. Following factors are critical before an aggregate planning process can actually start;

• Complete information is required for available production facilities and raw materials.
• A solid demand forecast covering the medium-range period
• Financial planning surrounding the production cost which includes raw material, labor, inventory planning, etc.
• Organization policy around labor management, quality management, etc.

For aggregate planning to be a success, the following inputs are required;

• An aggregate demand forecast for the relevant period
• Evaluation of all the available means to manage capacity planning like subcontracting, outsourcing, etc.
• Existing operational status of the workforce (number, skill set, etc.), inventory level and production efficiency

Aggregate planning will ensure that the organization can plan for workforce level, inventory level and production rate in line with its strategic goal and objective.

Aggregate planning is an Operational Tool

Aggregate planning helps achieve the balance between operation goal, financial goal and overall strategic objective of the organization. It serves as a platform to manage capacity and demand planning.

In a scenario where demand is not matching the capacity, an organization can try to balance both by pricing, promotion, order management, and new demand creation.

In the scenario where capacity is not matching demand, an organization can try to balance both by various alternatives such as.

• Laying off/hiring excess/inadequate excess/inadequate excess/inadequate workforce until demand decrease/increase.
• Including overtime as part of scheduling thereby creating additional capacity.
• Hiring a temporary workforce for a fixed period or outsourcing activity to a sub-contractor.

Importance of Aggregate Planning

Aggregate planning plays an important part in achieving the long-term objectives of the organization. Aggregate planning helps in:

• Achieving financial goals by reducing overall variable cost and improving the bottom line
• Maximum utilization of the available production facility
• Provide customer delight by matching demand and reducing wait time for customers
• Reduce investment in inventory stocking
• Able to meet scheduling goals thereby creating a happy and satisfied workforce

Aggregate Planning Strategies

There are three types of aggregate planning strategies available for an organization to choose from. They are as follows.

1. Level StrategyAs the name suggests, the level strategy looks to maintain a steady production rate and workforce level. In this strategy, an organization requires a robust forecast demand to increase or decrease production in anticipation of lower or higher customer demand. The advantage of the level strategy is a steady workforce. A disadvantage of level strategy is high inventory and increase backlogs.
2. Chase StrategyAs the name suggests, the chase strategy looks to dynamically match demand with production. Advantage of chase strategy is lower inventory levels and backlogs. A disadvantage is lower productivity, quality, and a depressed workforce.
3. Hybrid StrategyAs the name suggests, the hybrid strategy looks to balance between level strategy and chase strategy.

Syllabus – Production And Operations Management

What are the demand and capacity options in aggregate planning?

What are the capacity options that can be used in aggregate planning?

What is aggregate production planning?

What is aggregate planning and capacity planning?