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What Is Aggregate Planning? Strategies & Tips

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For any company to profit from a product, there must be a strategic plan in place to produce just enough to meet that need. Create too few products, and there’s a missed financial opportunity. Create too much, and money is wasted in production and warehousing.

Aggregate planning is a technique to create an equilibrium between demand and capacity. It’s something every company that is producing something needs to know. Let’s take a look at what aggregate production planning is and some aggregate planning strategies.

What Is Aggregate Planning?

Aggregate planning is a method for analyzing, developing and maintaining a manufacturing plan with an emphasis on uninterrupted, consistent production. Aggregate planning is most often focused on targeted sales forecasts, inventory management and production levels in the mid-term (3-to-18-month) future.

Note that production planning is not just goods, but services as well. Aggregate planning defines the necessary production inputs for a good or service (including facilities, workforce, raw materials and inventory levels) to maintain consistent delivery dates, all while keeping costs down.

This doesn’t apply solely to individual production lines or the manufacturing of one product. It will cover all the jobs being done at a facility or across several facilities. This allows manufacturers to get the most out of their resources even if there are different demands for products and changes in customer orders, the supply chain or other variables.

meaning of aggregate planning in business

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How to Create an Aggregate Plan

To create an aggregate plan, you must first determine the number of units that are produced over a specific time frame, which is the capacity , and the number of units needed, which is the customer demand .

Here are some of the factors to consider when trying to create consistency in your process:

  • Pricing Strategies: When demand is low, reduce the price to match capacity. You can also do the reverse; when demand is high, increase the price.
  • Advertising/Promotion: Marketing and promotional activities can impact the demand for your product or service.
  • Back Ordering: Delay delivery until demand catches up with capacity.
  • New Demand Creation: Create another demand to supplement an existing one.
  • Workforce: You can lay off or hire employees to meet the demand or respond to a lack of it. Overtime, subcontracting or use of a temporary workforce is also an option.

What’s the Purpose of Aggregate Planning?

As stated, the goal of aggregate planning is figuring out the level of production, inventory and workforce required to respond to fluctuating demand in the medium term. With this information, a business can assess when demand will spike or wane, and ensure it has enough product to meet the moment. Aggregate production planning also lets manufacturers know what staff, materials, output rates, timeline estimates and budget costs they need.

Making forecasts saves the company from changing its production schedule quickly, which is not only expensive but also creates insecurity and uncertainty. With aggregate planning, you can make a fairly accurate forecast of demand and capacity in the medium term.

Resource Management

In other words, you’re working on short-term resource allocation. This reduces the risk of overproduction, which wastes resources, depresses prices and can lead to oversaturation of your product in the market. By reducing production during periods of weak demand, you save money on labor and materials.

meaning of aggregate planning in business

Cost Savings

Aggregate planning helps companies achieve their financial goals and improve the bottom line. It allows for maximum utilization of the available production capabilities while meeting customer demand and reducing their wait time, as well as reducing the cost of stocking excess inventory.

Good Data is Required

Aggregate planning forecasting is not a magic bullet, though. It’s only as good as the data you collect (and the people you use) to forecast. People have biases, and they can misread economic indicators or use faulty forecast models. There are always unknowns, too, such as material price spikes, implementation of new policies, changing interest rates. Not to mention labor; alterations in labor conditions can cause unrest in your workforce.

Project management software facilitates aggregate planning. ProjectManager is award-winning software that helps manufacturers manage costs and resources to allow for uninterrupted production. Planning on our powerful Gantt charts helps to control costs and resources associated with production runs and reallocate those resources as necessary to keep production lines running smoothly.  You can even track the planned effort against the actual effort in real time. Get started with ProjectManager today for free.

ProjectManager's Gantt chart

3 Types of Aggregate Planning Strategies

Success depends on having the following inputs: an aggregate demand forecast for the period you’re planning for, evaluating capacity management (including using subcontractors, outsourcing, etc.), and the existing operational status of your workforce. All this will lead to greater accuracy, and therefore, a greater likelihood of success.

You can achieve this by applying a variety of aggregate planning strategies. There are three main ones that organizations have used:

  • Level Strategy: The goal of an aggregate planning strategy is to keep the production rate and the workforce level. This requires strong forecasting of demand to know if production levels must be increased or decreased as customer demands grow and shrink. This aggregate production planning strategy will keep your workforce steady but can increase your inventory and backlog.
  • Chase Strategy: As the name implies, you are chasing market demand. The production matches demand, and excess inventory isn’t held over. This is part of a larger lean production strategy, which saves money by waiting until an order is placed. However, productivity and quality can be reduced, and it can negatively impact the morale of your workforce.
  • Hybrid Strategy: There is a third alternative, which is a hybrid of the previous two strategies. This keeps the balance between the production rate, workforce and inventory levels, while still responding to demand as it changes. This alternative offers a bit of flexibility that can satisfy demand while working to keep production costs low.

Best Practices for Making an Aggregate Plan

Whatever strategy you choose, there are some things to keep in mind when using aggregate planning. For one, you want to figure out the demand and capacity for each period. These two should match one another, though this might require overtime or sub-contracting to achieve.

You’ll also want to identify any policies, be they union, departmental or companywide, that can impact production levels. Cost is also important, obviously, so you’ll want to determine fixed and variable costs as well as direct and indirect labor costs.

meaning of aggregate planning in business

It never hurts to have an alternative plan just in case. These plans should also follow the same best practices for making an aggregate plan. If you come up with one that meets your objectives, you might discover it in fact costs less and should be your primary aggregate production plan.

How ProjectManager Helps with Aggregate Planning

Work management software helps you reign the variables in your aggregate planning and let you manage your production to keep capacity matched with demand. ProjectManager is a cloud-based software that gives you better insights into your manufacturing process, workforce and budget because it delivers real-time data.

Managers understand that aggregate planning is all about resources. You can use the Gantt chart to plan production , filter for the critical path and set a baseline to always have project variance available to view. Set up your budget, then manage costs. Your resources’ costs are automatically calculated as your team logs their hours worked. The Gantt chart has a timeline, which provides a visual of the whole production cycle.

ProjectManager's Gantt chart with task info

Keeping track of your team, their hours and availability is key to a successful aggregate production plan. With ProjectManager, you can set your teams’ workdays, holidays and PTO. You can also view all the tasks assigned to them on a Team Page. Then, you can switch over to the color-coded workload chart. From there, you can re-allocate their work to balance their workload and help them work more productively.

Another of ProjectManager’s work views is the kanban board. This visual workflow tool lets your teams manage their backlog, while you get transparency into where they are in the production cycle. Aggregate planning is all about matching capacity to demand.

With the board view, you can see potential roadblocks and re-allocate resources to keep the team working. ProjectManager is fast, flexible and provides the visibility needed for project planning , resource management and capacity planning.

A screenshot of the Kanban board project view

ProjectManager is award-winning software that gives teams collaborative platform, and gives managers transparency without getting in the way of their workforce. See how it can help you meet demand, whether you’re working on one or dozens of projects at once. Try ProjectManager today for free.

Click here to browse ProjectManager's free templates

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Aggregate Planning – Definition, Importance, Strategies And Advantages

August 24, 2020 | By Hitesh Bhasin | Filed Under: Operations Management

Definition:

Aggregate planning is a planning method in the production process which is also considered a marketing activity used to determine the required resource capacity to meet expected demand. Aggregate planning

The aggregate planning is done in advance of 6 – 18 months and includes a combination of sub-contracting, sourcing, outsourcing, employment, labor overtime, amount of inventory and planned output to match demand and supply cost-effectively.

Aggregate planning is critical to an organization which wants to optimize its operational activity because it helps in balancing short term production plans and long term strategic plans.

Table of Contents

Importance of aggregate planning

Aggregate planning is a proven technique that brings an element of foresight and stability into manufacturing. It helps the management to achieve the long-term objectives of a company. The importance of aggregate planning include-

  • Creates a satisfied and happy workforce
  • Reduce changes in the levels of the workforce
  • Helps to determine resources for the short-term
  • Helps in maximum utilization of space
  • Meets the overall goals and objectives of a company
  • Helps to adjust capacity to meet demand
  • Minimizes costs associated with inventory stocking
  • Reduce investments related to various inventories
  • Matching demand with supply and minimizing the waiting time for the customers to maximize customer service
  • Offers better customer value
  • Proper utilization of production facilities
  • Maximum usage of various types of equipment
  • Reducing the changes in production rates
  • Removes variable cost and improves the bottom line of the financial statement for achieving the business goals of an organization

Management and Planning Strategies

Strategies for management and users

The aggregate planning strategies include-

1. Level strategy

This type of aggregate planning deals with producing goods of similar quantities over equal duration. This is done to handle a peak in market demand by filling out back orders or by sending the extra products to inventory. The level strategy is considered a traditional aggregate planning method that maintains a steady production rate as well as the level of the workforce by continuing consistent human resources and production in the organization.

It is best suited where the inventory carrying costs are not high and are adopted by mainly manufacturing companies. The advantages of using level strategy are well-trained workforce as their changes are not so frequent, experienced workers and a low rate of absenteeism and employee turnover. An essential disadvantage of level strategy is building up inventory costs during the lean period when the demand is low.

2. Chase strategy

The chase strategy of aggregate planning puts its onus on reducing inventory. It keeps pace with demand fluctuations by varying either actual level of output or the workforce number. It is considered not as rigid as a level strategy as it allows room for some deviation from the conventional approach. This methodology helps to minimize waste by receiving goods when needed. It often leads to stressed employees.

This strategy is popular in several industries like hospitals, hospitality business and educational centers like schools. The advantage of chase strategy is high flexibility to meet the fluctuations in demand and the disadvantages related to the strategy include high costs associated with hiring as well as training the workforce.

3. Hybrid strategy for an aggregate planning

As the name indicates, the Hybrid strategy is an integration of both level and chase strategies to get a better result. It maintains a sufficient balance between stock level, recruiting, termination and production rate. In the hybrid strategy of aggregate planning, the organizations build up inventory before rising demands. It uses backorders to level with high peak periods.

It can easily cover short-term peaks by hiring workers temporarily or by subcontracting production. Hiring, lay-off and reassigning workers is a normal part of the hybrid strategy.

plan Advantages for Management and Users

The advantages associated with aggregate planning include-

  • It helps the organization in dealing with production facilities in a lean manner. If a manufacturing facility has an excess of finished products, then it is not suitable for it. The chance of product damage before reaching the end target is higher and this means loss. Moreover, excess inventory costs mean additional expense for the company. The only way to minimize these costs is by implementing a proper aggregate planning process.
  • The process helps to develop effective strategic plan as well as relationships with distributors and suppliers. It also assists in making developing accurate market research
  • The planning helps in the optimization of inventory. Carrying excessive inventory will mean additional expenses for a manufacturing company. It also results in more storage space to keep it properly because the chances of damage increase if the storage space is not proper. The organization will also have to invest in more resources, labor and equipment to manage the inventory and for its movement. The process makes an adequate estimation for the anticipated inventory that will be sufficiently able to meet projected demands.
  • An essential advantage is that it serves as a useful tool for making viable forecasts about product demand. A business entity is now able to make predictions about staff requirements, for instance, the number of additional workers it will need temporarily or the number of employees it will need to lay-off. Proper forecasting helps the company to fill the positions with temporary staff from agencies. The need for additional hires is easily met without other expenses that are part of the full-time workforce. The aggregate planning method helps the organization to make considerable savings in terms of both money and time that would have to be spent on the hiring and training process.
  • It helps to adjust capacity so that it can meet demands
  • The aggregate planning process helps to calculate capacity, for instance, how many units can be produced daily or in a week or a month.
  • Production orders cannot be constant throughout the year. It will vary and this makes it difficult for the business entities to keep up with a similar production plan for all times. The aggregate planning process takes this thought into consideration and allows for contingency measures. These are put in place so that the manufacturing facilities can accommodate the changes that occur in production as well as orders from the customers. The organization keeps shifting between the level strategy, chase strategy and hybrid strategy to keep up with the changes.
  • It helps the organization to identify the best options so that it can meet the demands easily.
  • It assists in knowing about the inefficiencies that exist within the organization
  • It helps to determine resources for instance amount of raw materials on hand, availability of total machine hours and the total number of workers along with products in progress, packaging materials, and tools required for manufacturing finished goods
  • An advantage of the planning process is that it helps to project demand and figure out the units in need for the short-term by factoring in advertising campaigns, special pricing, and promotions.
  • It encourages the optimized utilization of space. The facilities that are used by organizations for manufacturing purposes are too costly and it is not feasible to own or rent it at all times. Besides paying for space, an organization also has to pay for maintenance and utilities. The planning helps the company to avoid any scenario where the space is unused for an extended period and it has to bear unnecessary expenses
  • It helps to offer optimized value to both the direct buyers from which it is getting raw materials etc. and end customers to which it will sell the products. The process reduces the production costs and this helps them to pass on savings. Ultimately the end consumer gets the best quality products at the minimum price levels

Thank you for reading our article about of aggregate planning

Liked this post? Check out the complete series on Operations Management

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About Hitesh Bhasin

Hitesh Bhasin is the CEO of Marketing91 and has over a decade of experience in the marketing field. He is an accomplished author of thousands of insightful articles, including in-depth analyses of brands and companies. Holding an MBA in Marketing, Hitesh manages several offline ventures, where he applies all the concepts of Marketing that he writes about.

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Aggregate planning and its effect on fluctuating needs

meaning of aggregate planning in business

There are some aspects of business that are completely unpredictable. Natural disasters, for example, have the potential to upend your business plans, but a system built on stability and consistency can help protect you from factors outside your control. One effective strategy is aggregate planning, which allows you to save money, stabilize your workforce, and increase efficiency.

In this article, you will learn what aggregate planning is and how it can serve as a cost-saving measure for your business. By understanding the different kinds of aggregate plans and how they play out in management and operations, you can better evaluate whether this strategy would be beneficial in your own business.

What is aggregate planning?

Aggregate planning is the process of developing an approximate schedule that details how an organization will operate over a particular period, typically ranging from 3 to 18 months. It allows you to approach inventory and staffing with clear eyes, assess and minimize risks , and build more efficient systems.

How it works

Rather than evaluating only certain points, such as current inventory or expected sales, you will get a full picture of what you can expect in the future and then plan accordingly. When creating your plan, you will use data related to customer demand and capacity from several sources of information, including:

  • Sales and demand forecasts
  • Production history
  • Inventory levels
  • Customer backlogs

With this information in hand, you can determine whether there are times when your company tends to have excess or insufficient capacity, anticipate future peak sales times, and assess whether your staffing levels have been and are currently appropriate. Once you have developed and implemented a plan, you can make adjustments to capacity when demand rises or falls without excessive spending.

While you can never be certain of the future, aggregate planning is a comprehensive approach that helps you to realistically outline the future of your business over the coming months.

Instead of making rash decisions when demand suddenly increases, you can make decisions that are informed by a carefully considered strategy.

There are several benefits to implementing aggregate planning within your business:

  • It is an effective strategy for both goods and services.
  • It matches production demand with production capacity, thereby minimizing operating costs.
  • It maximizes a business’ productivity and efficiency.
  • It specifies what materials and resources will be necessary and when to procure them.

As this list makes clear, developing an effective aggregate plan can have a positive effect on your overall business outcomes, from production to profit levels.

Despite the advantages of aggregate planning, there are certain challenges that are worthy of consideration. First, keep in mind that aggregate planning is intended for a limited time range.

While this is a limitation, it offers an opportunity to be more proactive in your management practices. External and internal factors change over time, and creating an aggregate plan encourages you to make note of them and incorporate them into your business strategies. Regularly developing a new plan that best reflects current circumstances best positions you for long-term success.

Additionally, aggregate planning operates under the assumption that some factors are relatively certain when in reality there can be massive disruptions at any time. This emphasizes the importance of creating and implementing an aggregate plan with the knowledge that you will need to remain flexible and responsive to changes and difficulties in real-time.

“Aggregate planning” is a part of our Project Management Glossary — check out the full list of terms and definitions!

Creating a mid- to long-term strategy with aggregate planning

While all forms of aggregate planning can help businesses avoid the kinds of last-minute decisions that create a turbulent work environment, not every business follows the same format. There are three types of aggregate plans that companies commonly use for their mid- to long-term strategies.

Level strategy

A business that relies on a level strategy tries to create a plan that will keep production rates and employment relatively steady. Rather than resorting to layoffs and temporary hires, a business with a level strategy might:

  • Use a constant workforce and produce a level number of units
  • Establish a larger inventory than necessary when demand is low
  • Use back orders or backlogs to address sudden increases in demand

A level aggregate plan can create a more predictable workload for employees. However, it can also be expensive as businesses often have excessive inventory and are constantly running at a full level of production.

Chase strategy

Chase strategy, in contrast, is focused on constantly matching demand and capacity. Rather than maintaining a constant level of production and a fully-staffed workforce, a business implementing a chase aggregate plan:

  • Keeps inventory levels low until customer demand justifies an increase
  • Hires, fires, and lays off employees as necessary based on production levels
  • Introduces new strategies and methods of production when demand increases

Using a chase strategy can be problematic because of the constant changes. Businesses that employ this strategy may have problems with fluctuating quality levels because of frequent staffing changes, and they may have conflicts with employees and labor unions due to the frequent need for layoffs.

Hybrid strategy

Hybrid strategies combine elements of chase and level strategies and are often the most profitable and effective method that a business can employ. In a hybrid strategy, a business attempts to find a balance of flexibility and stability. For example, a hybrid aggregate plan might include minimal layoffs and a relatively steady level of inventory. Many businesses prefer hybrid strategies because they tend to be the most cost-effective of the three available forms of planning.

Aggregate planning in manufacturing and production

In manufacturing and production environments, aggregate planning can empower businesses to make sound decisions. The plan addresses all the production activities that are necessary to maintain uninterrupted production and helps businesses allocate resources appropriately despite variables like customer demand and problems with the supply chain.

Businesses can use aggregate planning to guide their choices in a number of important areas, including:

  • Pricing modification
  • Delayed deliveries
  • Promotional activities
  • Staffing increases
  • Inventory increases
  • Complementary demand
  • Overtime requirements
  • Temporary hiring
  • Subcontracting work
  • Cross-training of employees

Each of these aspects of a business is consequential for consistent and sustainable operations management. For example, a manufacturer that does not have an aggregate plan might use a period of high demand as justification for ordering excess materials and hiring additional employees for the upcoming quarter. However, the manager might fail to recognize that the business has historically had significantly less demand in this period. The additional materials now sit unused, and the employer lays off the recently hired employees.

How aggregate planning can lead to consistent production

Consistent production allows businesses to better meet demand without wasting resources. Because an effective aggregate plan creates equilibrium between demand and capacity, it allows a business to level out production rather than having sudden surges or reductions. A facility with an aggregate plan can level out production planning to serve customers over the entire period rather than ramping up or rapidly decreasing production based on the current environment.

How aggregate planning affects your team

In addition to maximizing business profits and making production consistent, aggregate planning is important to create a stable, reliable work environment for your team. Without an appropriate aggregate plan, your business’ workforce and resource needs can fluctuate wildly. As a result, you might be constantly laying off and hiring employees. This erodes trust, makes it difficult to recruit new talent, and may inspire current workers to seek employment elsewhere. It can also reduce work quality as it is difficult for employees to operate at their highest potential if they are constantly worried about when their jobs will end.

Aggregate planning with monday.com

Although aggregate planning can be an excellent tool for business and project management, it is only as strong as the data that goes into it. To build a strong plan, you will need to have access to reliable reports  with information that is not only accurate but also up-to-date. monday.com’s Work OS  allows you to manage your workflow in a way that incorporates all of the components of both creating and implementing an aggregate plan, including:

  • Resource allocation
  • Sales forecasts
  • Inventory management

In addition, you can use monday.com to communicate with team members and stakeholders so that everyone is on the same page and fully understands the plan and its implications.

Frequently asked questions

Aggregate planning is the process of analyzing data and developing a projected schedule for your business. Project and business managers create aggregate plans using information from different aspects of a business, including inventory, sales forecasts, and production levels.

Why is aggregate planning important?

Aggregate planning is vital to a business’ ability to schedule production, allocate resources, and adjust staffing. It allows businesses to minimize costs and keep production running consistently.

What can poor aggregate planning result in?

Poor aggregate planning can result in significant issues with supply and demand. Businesses with ineffective aggregate planning might have excessive inventory taking up space in warehouses or waste resources and staffing on unnecessary production. On the opposite side, they may find themselves unable to meet customer demand.

Strengthening your business with aggregate planning

There are many ways to reduce costs and improve business strategies, but aggregate planning is unique in the way that it combines information and addresses issues with demand and capacity from a more holistic viewpoint. If you want to stabilize production, create a more reliable workplace for your team, and minimize costs, you can begin creating an aggregate plan by taking advantage of the resources available on monday.com. Whether you need to run accurate reports, manage inventory, or communicate with team members and stakeholders, monday.com’s Work OS has the tools necessary to develop an effective aggregate plan.

meaning of aggregate planning in business

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What is Aggregate Planning? - Importance and its Strategies

Introduction.

An organization can finalize its business plans on the recommendation of demand forecast. Once business plans are ready, an organization can do backward working from the final sales unit to raw materials required. Thus annual and quarterly plans are broken down into labor, raw material, working capital, etc. requirements over a medium-range period (6 months to 18 months). This process of working out production requirements for a medium range is called aggregate planning.

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;

  • A complete information is required about available production facility 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, following inputs are required;

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

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

Aggregate planning as an Operational Tool

Aggregate planning helps achieve 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 scenario where capacity is not matching demand, an organization can try to balance the 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 there by creating additional capacity.
  • Hiring a temporary workforce for a fix period or outsourcing activity to a sub-contrator.

Importance of Aggregate Planning

Aggregate planning plays an important part in achieving 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 there by creating a happy and satisfied work force

Aggregate Planning Strategies

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

As the name suggests, level strategy looks to maintain a steady production rate and workforce level. In this strategy, organization requires a robust forecast demand as to increase or decrease production in anticipation of lower or higher customer demand. Advantage of level strategy is steady workforce. Disadvantage of level strategy is high inventory and increase back logs.

As the name suggests, chase strategy looks to dynamically match demand with production. Advantage of chase strategy is lower inventory levels and back logs. Disadvantage is lower productivity, quality and depressed work force.

As the name suggests, hybrid strategy looks to balance between level strategy and chase strategy.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team . MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider . To Know more, click on About Us . The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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Aggregate Planning: On the Way to Elevate, Pursue, or Both

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A business of any size can face struggles and competition at any time. That is why there are so many frameworks, methodologies, strategies, and tips that a company can consider implementing in order to boost its success. Everyone prioritizes what is best for the growth and chooses those methods that will meet customer expectations, generate revenue, and save money. There is no organization that wants to work at a loss, and being able to stop the overflow of different business risks is vital.

Therefore, in today’s article, we will look at the practice that is known as Aggregate Planning. When it comes to project management, aggregate planning can greatly elevate your business. So, let’s look closer at this method, explore its benefits, and find out which types of strategies your company can go for in order to prosper.

Aggregate Planning: Its Importance and Purpose for Business

What is aggregate planning? To understand this principle, it is essential to start with the definition. Aggregate planning is the process that balances between demand and capacity and creates stability in a workflow. Capacity is the number of units, which can be produced within a timeframe, while demand is the number of units that are required to fulfill the needs of a stakeholder or customer.

In general, this type of planning helps you to analyze, develop, and maintain a manufacturing plan the way that related activities, requirements, resources, and operations are properly managed and scheduled to fit in a project timeline and are operated at maximum efficiency. Usually, aggregate planning takes the mid-term period of 3 to 18 months and is focused on production levels, inventory management, targeted sales forecasts, etc.

If you want to realistically outline the future of your project for the upcoming months, this type of planning is what can bring you benefits in this case. But what are the exact advantages of aggregate planning?

  • Better staff planning process Being able to foresee production demand helps you to understand when and why your organization may need staff augmentation services . Any staff fluctuation can be easily minimized with the help of aggregate planning or controlled to the required state.
  • Optimized space and resource management By implementing this method of planning, when you fulfill the strategic objectives, it is possible to optimize productivity and profits. Besides that, you will be able to balance both short-term and long-term demands and improve processes.
Read Also  Improving Product vs Improving Processes. Agile, Lean, and Lean-Agile Compared
  • Boost of overall efficiency and productivity The strategy is effective for both services and goods, because it helps you to understand which materials and resources are necessary and when to procure them. It can even improve on-time delivery and supply chain operations, especially if you monitor the processes with any kind of supply chain software .

meaning of aggregate planning in business

Source: Workflow Application For Businesses

  • Increased customer satisfaction Any project management strategy or method that improves relationships with your clients is considered to be the best right away. This is quite understandable, and the common use of CRM solutions in different spheres only proves the point. It is easier to analyze and maintain your plans with aggregate planning, so the quality of your customer services won’t be able to fall behind.

This is only a glimpse of how the development of an aggregate plan can be effective, and the positive effect is seen soon enough after you start following this method. The key purposes and objectives of this planning method are based on increases and decreases . According to this approach, such decisions as the following can be made:

  • Increment of utilization of equipment and devices;
  • Decrement of costs and expenditures in different inventories;
  • Enhancement of customer service;
  • Minimization of variations of workforce level.

It all depends on what exactly you need to increase or decrease in your particular case. The main point is that a company needs improvement, and aggregate planning can give you a full picture of what can be expected and what to do.

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Types of Aggregate Planning Strategies

Project management includes different practices that are meant to lead your project to a successful outcome. It is vital to know how to combine the usage of  project management software , pursuit of the principles your company has chosen, and the goals of your team. In order to understand why and when you can choose aggregate planning over the other methods, you need to know which strategies it can offer you. Some specialists define many different courses of action that a company can take, however, it is impossible to cover all possible scenarios. Therefore, let’s look at the 3 key types of aggregate planning that you can rely on depending on the focus of your establishment.

Level Strategy

All the manipulations you do by following this approach are mainly focused on the increases and decreases of the production rate and workforce level that depend on the changes of demand. It means that your actions will depend on demand, which is why you need to have a strong forecasting of it. In other words, if demand is low, you keep human resources and sustain the manufacturing capacity. If demand increases, any extra inventory can be absorbed in order to maintain the capacity and employment levels. The plan you create helps you to control these factors and keep them at a relatively steady level. It is often chosen by the companies with inventory that carries low costs.

Chase Strategy

The chase strategy is a bit more difficult than the level strategy, so you need to keep it in mind. It is suitable for your business if your goal is not to hold the variables at a set level. The plan is to constantly adjust capacity so that it matches demand. To put it differently, you are always chasing demand. It means that your company produces only when there is a need. On other days, you simply wait and save your money and resources until the order comes.

Hybrid Strategy

The third option is a combination of the previous two strategies. In case you choose the hybrid version, your plan will include the goal of keeping the balance between the levels of workforce, inventory, and production rate and, at the same time, the need to respond to any change in demand. This is a more flexible variant, because demand is satisfied and costs are kept at low levels.

All situations and organizations are different, so it is up to you to decide which option is the suitable one. Sometimes, a firm turns to other companies that can give them some insights on their experience or advise what can be better. Whether you lead a startup or an enterprise, you are not alone in this sea of choices.

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Conclusions

Aggregate planning is a good way to improve the project management practices that you currently utilize. Of course, you need to be ready for sudden changes in demand or project workflow and possible unexpected events that can lead to bottlenecks. Changing capacity, production, and other levels of resource – everything has an effect. Explore the available options, gather market insights, and define your business goals in order to avoid possible mistakes and take the lead.

If you have an idea of developing software that will increase the positive impact of aggregate planning or any other project management approach you are using, you can  contact us and get help from seasoned professionals.

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The Definitive Guide to Aggregate Planning

November 23, 2021 - 10 min read

Kelechi Udoagwu

Managers must learn to forecast a balance between demand and capacity to make sound decisions when planning projects. Good managers develop a sixth sense for achieving an intricate balance between the two, maximizing their chances of project success over time. 

Before we go on, let's define both words: 

  • Capacity is the number of units that can be produced within a timeframe
  • Demand is the number of units required to fulfill customer or stakeholder needs

You must conduct effective aggregate planning and strategy to ensure your team delivers successful products efficiently and consistently. 

If capacity frequently exceeds demand, there's wastage. If demand frequently outweighs capacity, it could lead to poor outcomes, missed opportunities, and a strain and possible breakdown of available resources.

What is aggregate planning?

Aggregate planning is the process of balancing the relationship between demand and capacity to create stability in a workflow. In project management , it is used to manage and schedule activities related to capacity and demand, such as analyzing requirements , deploying resources, and maintaining the set timeline of projects and operations.

Oxford Reference defines aggregate planning as "an approach to planning that enables overall output levels and the appropriate resource input mix to be set for related groups of products over the near to medium term. Thus, the aggregate plan for a car factory would consider the total number of units produced per month but would not be concerned with scheduling individual models or colors. It would, instead, be concerned with the labor and machine hours available in a given period."

Aggregate planning helps teams and managers operate at maximum efficiency by influencing and adjusting workload and capacity to match changing demands.

Aggregate planning examples

Here are a few aggregate planning examples to help you understand the concept of aggregate planning better. 

Aggregate planning example 1

A mobile phone manufacturer planning for the first half of 2022 would consider fluctuating trends and changes that may affect sales and marketing in the first quarter of the new year. The aggregate forecast may look like this:

Next, they would calculate the accompanying cost of the demand forecast.

The input data provided helps create a proper aggregate plan, as separate elements are assembled to create a clearer picture for accurate project planning.  

Aggregate planning example 2

A software company creates ten products. The demand for seven of these products is increasing, while demand for the last three is dwindling. The company is focused on the overall growth and resources (people, technology, storage, and materials) needed for all ten products for the following year.

If the company makes a forecast for the ten products individually, each forecast may have errors. However, if they combine all ten forecasts, the aggregate demand figure would likely have fewer errors.

This happens because aggregate forecasts are more accurate than individual or disaggregated forecasts . The demand variation for each product is smoothed when aggregated with other products, providing a more accurate prediction. This is also known as risk pooling .

Aggregating the demands of individual products into one software creation plan is a better option than developing software creation plans for each product. The former often leads to better resource and time utilization, improving the company's bottom line. 

You gain more efficiency and benefits when you create an aggregate demand forecast rather than isolated demand forecasts.

Aggregate planning example 3

Imagine your company's working-hour policy for full-time employees is eight hours a day, four days a week. The organization's work capacity would be 32 hours a week for one full-time employee or a four-person day.

If demand requires eight full-time employees per week and the organization's capacity is seven full-time employees per week, there is an obvious shortage of one full-time employee per week. 

This reveals a problem with human resource capacity planning . You can restore balance by hiring a part-time workforce , encouraging team members to work overtime, or subcontracting knowledge vendors . 

What is the purpose of aggregate planning in project management?

In project management, aggregate planning reduces costs in project planning by detailing how much capacity, e.g., production time, inventory, and workforce, is required to respond to fluctuating organizational demands in the short to medium term. 

Aggregate project plans help managers categorize projects based on the number of resources they consume and contribute to their product line. This helps the management team and stakeholders have visibility into ongoing projects and programs and see where gaps exist to make timely and informed decisions. 

Other purposes of aggregate planning in project management include: 

Efficient time management

Most successful projects are timeline-driven and split into defined, actionable items. Aggregate planning helps project managers predict how much time a project will take and allocate sufficient pockets of time to complete different aspects of the project, paying particular attention to critical paths .

Resource management

Aggregate planning utilizes an organization's resources to meet or surpass the expected demand. This reduces resource wastage on individual projects, which can easily lead to demand outweighing capacity. 

Cost management

Aggregate planning creates a comprehensive budgeting framework to help companies achieve financial goals, rein in excesses, and improve the bottom line by maximally utilizing available resources and capabilities.

Big-picture perspective

Aggregate planning provides critical data to inform the big-picture perspective in an organization. When it is clear what resources and capacity are needed to satisfy certain demands, it is easier to make data-driven decisions that enable the organization to make the best of every situation. 

Types of aggregate planning strategies

Three common aggregate planning strategies are: 

Level strategy

This strategy focuses on balancing capacity and human resources in a program or company. The primary requirement for level strategy is a good demand forecast, which determines how much human resources and inventory are needed to meet current demand. 

When demand is low, management keeps a level labor force and sustains the production rate. When demand increases, the company can absorb any extra inventory, maintaining the production and employment levels. 

Chase strategy

This strategy, as the name implies, means that you are chasing demand. The company produces only when there is a demand and nothing more. 

Chase strategy is often used for lean manufacturing and production. Money and resources are saved by waiting until an order is placed. This is an excellent strategy for relatively low-cost production companies.

Hybrid strategy

Hybrid strategy in aggregate project planning is a combination of the level and chase strategy. It seeks to create an equilibrium between the capacity (or production rate), workforce, and inventory levels while responding to demand as it changes. 

The hybrid strategy realizes project goals and organizational policies at a considerably lower cost than the level or chase strategy. 

The Definitive Guide to Aggregate Planning 2

Challenges with aggregate project planning

Even with the purpose and advantages of aggregate planning, it comes with some challenges, including:

Bottlenecks

Bottlenecks arise when there are sudden changes in demand and congestion occurs in the project workflow. Bottlenecks reduce team efficiency and create long wait times, higher production costs, and high stress levels.

Changing production, capacity, and other resource levels from one period to another has its wear and tear. Smoothing refers to the cost that comes with making these changes.

Planning horizon

Aggregate planning challenges managers to draw insights from data and customers to forecast demand for a certain period with a degree of certainty. This comes with its risks, such as changing market forces and unpredictable events like COVID-19, which can render project plans useless. 

How to create in-depth aggregate planning strategies

The fundamental building block of aggregate planning is the forecast. You cannot correctly deploy an aggregate plan without a thorough forecast containing a vast pool of crucial information.

To get started creating an in-depth aggregate plan, follow the steps below:

  • Determine the demand forecast for the period covered in the project.
  • Assess organizational capacity for that period. Capacity can include resources, labor, and equipment. Ensure your capacity can match demand.
  • Identify necessary policies that must be considered, e.g., internal company policies, outsourcing policies, inventory, workers' overtime, market forces, and regulations.
  • Estimate the total cost for all the required inputs. Calculate the unit cost of materials, workers' wages, production, inventory, and indirect expenses.
  • Create alternative or contingency plans to account for varying degrees of change. For example, individual plans may have different backup timelines, schedules, and business process outsourcing workflows to meet demand requirements.
  • When you have your alternative plans, select the one that best satisfies corporate objectives. Compare your plans and determine how well each one meets these objectives. Usually, this is the plan with less cost or a better timeline.
  • Do a pilot test to see how well it performs in different scenarios and conditions.

More proactive aggregate planning strategies to create a balance between capacity and demand

Here are a few other proactive activities that help create an in-depth aggregate plan:

Back ordering

Lean into back-order systems. Back ordering is the process of allowing your customers to place orders even if you don’t have sufficient stock on hand. Businesses implement back-ordering when a sudden increase in demand means that products are getting sold faster than they’re being stocked. This helps smoothen the demand process. You can have a process where delivery is delayed until demand catches up with capacity. Advance booking of flights is an excellent example of this.

Pricing as a strategy

Make changes to the pricing during low-demand seasons. For example, when demand is low, give discounts or reduce the price to match capacity. When demand is high, you can increase the price. This is a good way to bring some balance into your product planning.

Use marketing to your advantage

Leveraging advertising and promotional activities can increase demand when executed properly. Regardless of the aim of the project or product, even in internal company projects, advertising strategies are useful for influencing demand.

Create new demand

Create secondary or supplementary demands that boost your existing product. A good example is to offer additional services, up-sell a service, or promote complementary products that work with the ones purchased to keep up demand.

Vary the workforce

Managing human resources and labor can be particularly challenging when demand and capacity have the tendency to shift drastically. Create a balancing system to ensure project success. You can make use of a temporary workforce or subcontract to avoid a high churn rate. This will help balance the scale of human resource capacity in relation to demand.

Using Wrike for aggregate planning

Using a project management software like Wrike helps you match capacity with demand by providing visibility on all the variables that make up your project plans and management. 

With Wrike's cloud-based software, you can gain detailed insight into your processes, timelines, workload, etc. This way, you can maximize efficiency, which is the backbone of aggregate planning.

Using views like the Gantt chart and Kanban boards , managers can visualize the different timelines and schedule projects using a phased approach to ensure development runs on time, budget, and specification. A transparent approach to aggregate planning eliminates chaos, enabling teams to share their workflow, calendars, and backlog, offering transparency on how capacity matches demand.

Are you ready to improve efficiency in your team by strengthening your aggregate planning skills? Get started with a two-week free trial of Wrike today.

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Kelechi Udoagwu

Kelechi is a freelance writer and founder of Week of Saturdays, a platform for digital freelancers and remote workers living in Africa.

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The Ultimate Guide to Creating a Strategic Annual Plan

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Regardless of what you’re trying to achieve, the following strategic planning best practices will help you get there:  1. Use SMART goals A variety of SMART goals are commonly used to help guide and motivate people. They help set realistic benchmarks and are designed to help teams achieve success. It will also help you plan for the ups and downs of your business. To reach your goals, divide them up into smaller goals and set specific deadlines. These goals will help you measure how successful you are at reaching them. 2. Include contingencies For example, having an emergency financial reservoir is a good idea to prevent a potential financial disaster. It can help your company navigate slower seasons while still sticking to your annual plan.  3. Build in flexibility  Even minor shifts in external factors can significantly impact on how effective you are at creating and implementing your strategic plan. 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Remember to add deadlines to every action to keep teammates accountable and keep to realistic deadlines. Then, delegate tasks according to strengths and weaknesses. Use project reporting and individual job performance to assess team members. You may find that those with specialized talent are being tasked with unskilled work when they could help solve major problems elsewhere.  Don’t forget to involve the whole team. Start early, plan ahead, and keep everyone involved in the process. Doing so will make it easier to overcome obstacles once the projects are underway.  Additionally, ask them for direct feedback on your ideas for the next year. You will learn from the front line what obstacles they may be facing that will affect the timeline.  Another bonus of getting your team involved is that it creates more transparency in the workplace. 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Everything You Need to Know About Rough Order of Magnitude (ROM) Estimates

Everything You Need to Know About Rough Order of Magnitude (ROM) Estimates

A rough order of magnitude estimate, also known as ROM, is an estimation of a project’s level of effort and cost to complete. ROM estimates take place early in a project life cycle and guide strategy and planning choices. In this article, you’ll learn more about ROM estimates and how they are used in project management. Plus, keep reading to discover examples and how Wrike could be used to assist in creating a template for your own rough order of magnitude.  What is the rough order of magnitude? A rough order of magnitude estimate is a general estimate of a project's level of effort and cost. It's usually performed during the selection and approval stage of a project. Generally, it’s used for estimating a project budget that doesn’t have a lot of detail.  Project estimating is a vital aspect of project management because it helps determine the total budget for the project and whether or not it’s feasible companywide. It also helps keep track of the project's milestones and budget at the very beginning (more on that later).  A rough order of magnitude is most commonly used for project screening. ROM is typically meant to be given to executives who need a high-level overview of how much work might cost. This is especially helpful when they don’t yet have the mandate to do a deep dive into the scope and requirements of the work.  Comparing the ROMs of different projects helps identify which projects should be prioritized and which ones should be shelved. It can also help uncover and prevent scope creep later on.  This tool also helps decision-makers at other levels of the organization make informed choices regarding the project's complexity and costs. That information is critical for proper scope planning before project kickoff. It’s important to know that a ROM estimate is often used for information purposes at the beginning of a project and it’s suitable for use for the lifetime of the project.  How to make a rough order of magnitude estimate Estimating a ROM is often thought of as an art. They are quick to make, but the trick is learning how to make them well.  Those who are more experienced in coming up with these estimates may have their own way of executing this process. Regardless of how well you understand the rough order of magnitude, it is important to consider the various factors involved in developing one. These include:  A guesstimate range of what resources the project will require based on the information you have on hand Opinions from experts and/or higher-ups who hold a stake in the project A variance of at least -25% to +75% Keep in mind that, when calculating ROM, the goal is to provide a rough estimate that is largely accurate even if it’s not necessarily convenient for your plans. By this, we mean you may find it tempting to choose figures on the more conservative side in order to achieve a more desirable outcome.  Unfortunately, using inaccurate stats defeats the entire point of creating the estimation in the first place. Great research can help illuminate areas of your rough order of magnitude estimate where it may be tempting to let bias enter into the equation.  All that being said, a ROM estimate's variance is not significant enough to deter you from creating one. A ROM estimate provides a starting point for moving forward in much the same way a budget estimate is also used to determine your base. For example, instead of just presenting single-point estimates, managers should present budgets as a range. Remember: the estimate is derived from the available information. If information is missing, you’ll have to make do with what you do know for sure and move forward from there.  In fact, you can expect to improve the estimate as the project moves forward. During the planning and implementation phases, the requirements and information will be refined. As you go along, you’ll learn through trial and error what the reality of the project actually is.  Rough order of magnitude techniques One technique for creating a rough order of magnitude estimate is known as a definitive estimate. A definitive estimate is a technique that involves estimating an individual project phase or task's level of effort. Planning with this information upfront makes it easier to plot out workloads on visual charts while keeping your team on the same page.  This step typically takes a number of hours to complete, but it is a successful way to get an accurate idea of the time and cost of any project.  Other popular techniques and procedures for estimating costs include PERT time estimation, COCOMO, and function point analysis. Program Evaluation Review Technique (PERT) PERT charts are used to plan out tasks that will take a certain amount of time to complete. They can also be used to coordinate team members. Constructive Cost Model (COCOMO)COCOMO is a regression model that can be used for estimating the various factors involved in tech and software project management. It is typically used for estimating the size, effort, cost, and quality of a project. Function Point Analysis (FPA)Function Point Analysis is a method of estimating a company's clear business significance. It helps in the evaluation, management, and control of software development. When estimating ROM, it is best to try and estimate in buckets of time and costs. Doing so helps minimize the number of, well, numbers that are required to provide a complete and accurate estimate.  Rough order of magnitude examples There are two ways to think about estimating ROM. You can create effort ranges or buckets with approximate figures that any task can fit into. Alternatively, you can use historical data to guide decision-making. Here are some hypothetical rough order of magnitude examples:  Creating buckets In this example, a project manager will define effort ranges such as small, medium, and large. Within each range is a total number of hours, personnel, and/or budget needed for tasks that fall in that category. For example, a small bucket may indicate that a task will take two to four hours and is relatively simple or affordable to complete. It all depends on the specific project.  Here is a very simple example. Let's say you're considering eating a sandwich for lunch. You know that tasks such as spreading peanut butter and jelly onto two slices of bread would fall into the small category — low effort, low time, and perhaps even a single knife instead of two.  However, if you noticed that you're currently out of bread and you know it would take 20 minutes to drive to the store, that task would fall into the medium category because it would take considerably more resources to complete when compared to the spreading task. Historical data Historical data means pulling information from past projects. These projects may have similar tasks, goals, or outlines. This information is good to have on hand in your project management solution.  You can use data from projects that didn't go as well as you'd hoped in order to refrain from repeating his mistakes. You can also use data from projects that went above expectations to see where you can replicate those choices here. Let’s continue with our sandwich example. You may have found that in the past when you were craving peanut butter and jelly, it was worth it to you to make the drive. In fact, it also allowed you to run several other errands (a.k.a. projects) at the grocery store.  Based on this historical data, you may find that, despite the effort involved, the payoff was worth it in the end. So choosing this path again will be profitable. First-hand experience First-hand experience refers to how experienced the person creating the rough order of magnitude is in this particular field, project type, or as a project manager in general. An expert who understands project management will likely come up with a more accurate ROM than someone on their first day of work.  First-hand experience is valuable because you have plenty of anecdotal evidence to back up your estimations from other related projects. It's also helpful because it allows planners to be intuitive about the process and consider the people involved. For example, you may find that a particular supplier often experiences delays. Although the supplier representative promises otherwise, you've seen it happen time and time again. Knowing this, you can factor that into your rough order of magnitude. Now we’ve come full circle with our peanut butter and jelly project. You may have learned from first-hand experience that, despite your intense craving for it, these sandwiches aren't actually worth it for you.  You may even have regretted eating them right after you finished and wished you’d opted for a turkey sandwich instead. Knowing this, you may draft an estimate that confirms the amount of resources and effort needed will not have the ROI expected and it would be better to not move forward with it after all.  This information isn’t something you can necessarily track with a report. It’s simply a memory of what you’ve experienced in the past. Using this knowledge will help you make better, more informed decisions in your ROM with information you can’t find elsewhere.  How to use ROM in project management Project estimation techniques help managers identify the most critical elements of a project and provide them with accurate estimates. These techniques can also be used to plan for resource allocation.  It is important that you have an estimate in place before you start a project. Without an estimate, you may not know how long it will take or what resources will be needed. Cost is often one of the most challenging constraints in project management. Having enough money to complete the project is one of the most critical factors in managing it. Creating a ROM will help you understand whether or not it’s financially viable before you even begin.  Another key component of a project is time. Having the ability to determine the duration of the work and when specific tasks will take place is very important to project planning. By estimating your project schedule, you can arrange for the people and resources that you need when they are needed. It also allows you to set expectations for the clients. You can create a rough order of magnitude for any project. But there are several project management situations in which it may be necessary to come up with a ballpark idea of what resources will be needed:  Larger than normal projects where you will need to provide more detailed information about the project  Projects that involve teams across different countries where there may be varying costs and exchange rates Projects that are customized to the client or unique to your team where the product or service is innovative and the scope of the project is being managed through Agile project management methods Even if your project doesn’t fall into one of these categories, a ROM can be used to determine whether or not it’s viable. This is helpful when you’ve got limited resources and more than one project to choose between.  Using Wrike to create a rough order of magnitude template Wrike is a project management tool that streamlines the process of organizing, creating, and coordinating a rough order of magnitude.  First, start by checking for any historical data from relevant projects you’ve successfully completed. All Wrike users have access to their own detailed project reports. If you have historical data, you can go straight to a more detailed cost figure. It will give you a more accurate and detailed estimate. If you don’t, continue creating your ROM.  Then, start breaking the big components of the project down into smaller pieces. Some planners use the top-down approach or the bottom-up approach, both of which can be accomplished with the help of Wrike.  A top-down estimating technique breaks down a project into discrete phases and tasks. This method works by estimating the overall time for the project, as well as the phases and work tasks that will be completed within that time frame. If a client tells you that the project has to be done in six months, a top-up approach allows you to estimate how much time you can dedicate to each activity within the project. A bottom-up estimate is a technique that works by estimating multiple tasks and aspects of a project. This step-by-step process combines the various estimates into one final project estimate. In project management, orders of magnitude are typically referred to as broad-brush categorizations of sizes. So use a range when adding in timelines for individual phases and expenses.  Tip: don’t forget about project costs spent preparing the ROM and the project management itself. This will take up about 20% of your estimated total time allotted to the project.  Next, go above and beyond by using Wrike to calculate risk. Project risk is a set of events that could significantly affect the quality or schedule of a project. It can be triggered by various factors such as unforeseen delays, budget cuts, and legal issues. By estimating the risks involved in a project, you can plan for how those risks will affect the project and develop a risk management strategy later on if you feel that the ROM is convincing enough to adopt the project.  Tip: If you’re stuck, talk to your finance department to see if they can help you get a better idea of what things cost. Finally, consider what project planning may look like. Project planning for Agile projects is usually done in phases, with estimates being created initially before the beginning of the sprint. These estimates are then updated during the sprint. Estimation can also happen during a sprint retrospective, where you update the backlog based on the outcomes of the previous sprints. It can also be done during the sprint planning session. The project team is responsible for estimating projects and managing the estimates. They are also involved in the development of the project's documents and databases.  Having one central hub for all project estimates makes it easier to organize and communicate your vision and ROM results.  As you progress through the project, you should start to produce smaller ranges for accuracy. Over time you will reach a cap for each category that is both realistic and attainable. As the project details become more detailed, the accuracy of the ROM estimates decreases until they are no longer accurate. In conclusion The more data you have about your project, the better it is to draft current project estimates. A project estimation tool can help you build up estimates and track against actuals. It can also help you improve your estimates by recording errors and lessons learned. Discover how Wrike can help you improve your planning and execution with our free trial.

The Ultimate Guide to Parametric Estimating in Project Management

The Ultimate Guide to Parametric Estimating in Project Management

Parametric estimating is a method of calculating the time, cost, and resources needed for a project. Learn more about parametric estimating techniques with Wrike.

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Aggregate Planning pp 1–15 Cite as

Introduction to Aggregate Planning and Strategies

  • Seyyed Amir Babak Rasmi 3 &
  • Metin Türkay 4  
  • First Online: 26 January 2021

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Part of the SpringerBriefs in Operations Research book series (BRIEFSOPERAT)

In this chapter, we discuss what aggregate planning is and how managers exploit various strategies in aggregate planning. A demand prediction for the planning time frame (usually 2–18 months) is required to establish an aggregate plan. Then, this aggregate plan provides an intermediate-term plan that determines the production rate, subcontracting/outsourcing, inventory, backlogs, and promotions in the supply chain for the next 2–18 months. Different strategies can be used in aggregate planning: constant workforce, constant production rate, or chase strategy. A planner decides between several pure strategies and mixed strategies. Moreover, an aggregate plan results in an optimal solution that may be against environmental and social concerns. Aggregate planning possesses sufficient flexibility to be improved such that some sustainability considerations can be taken into account.

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Rasmi, S.A.B., Türkay, M. (2021). Introduction to Aggregate Planning and Strategies. In: Aggregate Planning. SpringerBriefs in Operations Research. Springer, Cham. https://doi.org/10.1007/978-3-030-58118-3_1

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What is Aggregate Planning? – Strategies, Types & Examples

What is Aggregate Planning?

Aggregate planning stands as the cornerstone in the world of strategic business management. As businesses navigate the ever-evolving landscape of demands, resources, and market fluctuations, mastering the art of aggregate planning becomes an imperative. 

It is a business strategy that helps companies plan how to use their resources and produce what people want in the future.

This blog post will define aggregate planning and discuss its benefits, strategies, and examples. We’ll also provide some tips on creating an effective aggregate plan. Stay tuned!

Areas of Aggregate Planning

Aggregate planning is a way to plan the production of all products for a company over a period of time. It starts by listing all the important requirements for uninterrupted production. The usual planning horizon ranges from three to twelve months .

The word ‘aggregate’ comes from the Latin word ‘aggregāre.’ It means ‘to add to.’ It is frequently used in economics or business. This is why aggregate production planning is the exercise of developing an overall production schedule for all products combined for a company. 

Aggregate planning does not differentiate colors, sizes, and features. For example, in a mobile handset manufacturing company, aggregate planning considers only the total number of handsets, not the separate models’ colors.

Key insights

  • Aggregate planning acts as the strategic conductor, shaping a company’s production schedule for months ahead.
  • Derived from ‘Aggregāre’: Rooted in the Latin term ‘aggregāre,’ meaning ‘to add to,’ this method consolidates all product requirements for seamless production flow.
  • For example, in mobile handset manufacturing, it disregards specific model features or colors, focusing on the total handset count for streamlined operations.

Why is aggregate production planning needed?

The demand for the various products of a company could vary. If the need changes, how do you commit your resources to meet this variation in the market?

Let us take an example.

Aggregate planning examples

Some companies make different products. The demand for two products might increase, but the demand for the other three might decrease. The company only wants to know about the overall growth and what resources (people, machines, storage, and raw materials) it will need next year.

If the company forecasts how much each product will sell separately, it is likely that each prediction will have some errors. However, combining these forecasts will give a more accurate idea of the total demand. This is because high and low tend to cancel each other out when you look at them together.

Having an aggregate production plan is better than discussing individual production plans because it considers all potential changes in demand instead of selective changes.

The planning covers various elements, such as

  • Human resources
  • Raw material
  • Financial planning
  • Engineering
  • Marketing and distribution

It is an essential tool for companies to help streamline the immediate production processes. That is by aligning them with the organization’s long-range plans and goals.

Aggregate planning is crucial to achieving the long-term goal of the company.

  • It helps to reach financial goals by decreasing overall variable costs.
  • It reduces the cost of inventory stocking.
  • It helps to utilize the maximum available production capacity.
  • It helps achieve the demand on time and reduces the customer’s waiting time.
  • It enables the organization to meet scheduled goals and satisfies workforce planning .

What is the criterion that influences aggregate planning?

  • Is the hiring and firing of employees allowed?
  • Is overtime allowed based on the fluctuation in demand?
  • Are backorders allowed?
  • It is crucial that before planning, complete details about the product must be collected and analyzed. The inventory and production capacity have to be thoroughly understood.
  • A reliable demand prediction helps in planning better.
  • Every process of the firm contributes to successful aggregate planning. Therefore, all organizational factors must be considered, from quality control to labor morale management.
  • Proper financial management ensures appropriate costing.

It assures that all production factors are scrutinized to achieve the firm’s goal.

Two main factors while calculating aggregate planning are aggregate demand and aggregate capacity .

Aggregate demand and aggregate capacity

Aggregate planning starts with the establishment of aggregate demand and aggregate capacity.

What is Aggregate demand?

Aggregate Demand (AD) is the quantitative assessment of the requirement for all goods and services at a given price level for a specific period.

The demand curve depicts the correlation between the price level and the demand. In addition, it is observed that both factors share a hostile relationship called “total spending.”

It is understood that when the price level of a product or a service is high, the demand for the same goes down, and when the price level is low, the market steadily increases.

What is the aggregate capacity?

Aggregate capacity  is the required or available capacity to carry out a function.

The process of ascertaining the company’s overall volume and ability to perform its entire resources is called aggregate capacity management .

An organization needs to understand the capacity of its resources. That will help the business know its production capacity, leading to proper sales forecasting and prompt supply of products to the customers.

That will also ensure the right balance between the demand and supply without stressing the resources.

The resources can vary from company to company, but aggregate capacity considers manual and machinery resources and does not differentiate between the two.

For instance, if the company is into the production of bikes, the aggregate capacity will consider only the end product numbers.

It will not consider the complexity of each bike, the variations, and the specialties. Instead, it looks from a macroscopic view.

Aggregate planning becomes successful when both aggregate demand and aggregate capacity are equal.

When there is an imbalance between them, the organization must decide whether to add or reduce capacity to attain demand or add or reduce the need to achieve capacity.

Here are some tips to increase demand to meet the available capacity .

  • Price : Lessen the cost of the product or service to increase the demand. For example, cloth industries offer discount sales at the end of the season to increase demand. Some hotels also fix seasonal rates to attract customers.
  • Advertise: Many companies promote their products through advertising and direct marketing.
  • Generate new demands: Industries like hotels and bars offer some complimentary services to create some extra demands. Likewise, grocery shops offer home delivery services to create demand.
  • Backorders : To smooth the demand, some companies shift the current orders to the next period when the capacity is not used correctly.

Here are some tips to increase or decrease the capacity to meet the existing demand .

  • Overtime : The organization can create additional capacity by making the employees work extra time in a day or work another day per week. It is an excellent choice to increase capacity without much investment in hiring workers.
  • Hiring or firing workers: It is one of the ways to make capacity and demand balanced. The company can hire employees to increase the capacity required for the increased demand or fire some current employees to decrease the capacity for reduced demand.
  • Part-time workers : The company can hire workers on a contract or on-call basis to meet the demand.
  • Final product inventory : It is one of the common methods companies use. The company can stock the finished products when demand is less and capacity is high to use those products to fulfill the current demand without increasing the capacity.
  • Sub-contracting : The organization can obtain temporary capacity by subcontracting to another manufacturer or service provider.
  • Cross-training : Train the employees so that they will be able to do not only their work but also they can do some flexible work if it is needed.

Steps involved in aggregate capacity management

  • Understanding the aggregate demand and supply for a specific period
  • Preparation of suitable plans and contingency plans for situations where the demand levels might fluctuate
  • Finalizing an appropriate plan

Aggregate planning objectives

Aggregate Planning Objectives

  • Decrease expenditures in different inventories
  • Increase the usage of devices and equipment
  • Decrease the variations in the production rate
  • Provide good customer service
  • Decrease the workforce level variations
  • Decrease the cost of planning outline

Aggregate planning flowchart

Aggregate Planning Flowchart

How to manage demand fluctuations through aggregate capacity management?

Generally, the business will have pure strategies ready to meet such unexpected situations. However, a combination is also used based on the needs.

  • Altering the size of the workforce: This involves getting more people to work or laying off people when there is an excess of resources.
  • Altering the usage of human resources : Utilizing the existing workforce by providing overtime, incentives, and such schemes.
  • Changing the size of inventory : Depending on how much the production can be leveraged, the inventory is ordered.
  • Outsourcing, sub-contracting, varying the plant capacity : Passing on the work and meeting the production requirements

Manage Demand Fluctuations through Aggregate Capacity Management

Types of aggregate planning strategies

Two types of aggregate planning strategies are level strategy and chase strategy. The third approach is utilizing the best of both methods.

Aggregate Planning Strategies

Level strategy

This is also known as a production-smoothing plan or a stable plan.

It focuses on maintaining consistent production and human resources in a company. The expected demand rate is achieved by varying the associated factors such as finance and human resources.

Though this strategy helps maintain human resources, it also stocks inventory. There are also chances of not meeting the expected targets, resulting in backlogs costing a lot more to the firm.

The level strategy is best suited to situations where inventory carrying costs are not high.

Read more on Level Production Strategy

Chase strategy

It is also known as a just-in-time production plan.

Just in time (JIT) is a manufacturing methodology designed to decrease waste by receiving goods only as needed. JIT was developed in Japan to make the best use of limited resources.

It focuses on matching the anticipated demand with rigorous production. Unfortunately, though this strategy aims to meet the market, it usually results in stressed employees, which increases attrition.

This strategy is best suited to situations where the cost of changing the production rate is relatively not high.

Read more on Chase Production Strategy

Hybrid strategy

A hybrid strategy in aggregate planning uses a combination of methods to arrive at the final production plan.

For example, a company may use a mathematical model to calculate the optimal production plan and then adjust it based on their actual production process feedback. The combination gives them the best of both worlds – the accuracy of a level strategy combined with the flexibility of a chase strategy.

The hybrid strategy blends both level and chase strategies for better and more fruitful results.

The hybrid strategy in aggregate production-planning balances production rate, hiring/firing, and stock level.

Advantages of aggregate planning

  • If you forecast production planning with the help of aggregate planning, it avoids the requirement of extra employees. It helps the organization save money and time.
  • We know that holding excess inventory demands more money. Maintaining the condition of finished goods in the warehouse will be a big challenge for the organization. With the help of aggregate planning, you can easily avoid that situation.
  • Production orders change more frequently. An organization can’t stick to one plan all the time. Sometimes businesses rotate between mixed strategies. They will fluctuate between level strategy and chase strategy.

The mathematical approach to aggregate planning

We will list some mathematical techniques used in more composite aggregate planning applications.

Linear Programming

It is one of the refinement techniques that help the customer generate more revenue with minimum resources or available capacities.

The transportation model (special linear programming) allows customers to balance capacity and demand with minimum cost.

Mixed-inter Programming

This technique will be helpful when the aggregate planning is intrinsically the sum of plans for individual production lines.

In this case, mixed-integer programming allows finding out the number of units produced in each production line.

Linear decision rule

It is one more optimization technique. It helps attain a single quadratic equation by using cost-approximating functions ( three of them are quadratic) to reduce production costs.

Then you can derive two linear equations from that quadratic equation and use one equation for planning the output for each period and another for planning the workforce for each period.

Management co-efficient model

This method is formed on the production rate for any period that this equation will set

ie P  t  =  aW  t-1  −  bI  t  -1  +  cF  t+1  +  K , where a,b,c,K are constants and using regression analysis you can find their values.

P  t  – the production rate set for period  t W  t  –  1  – is the workforce in the past period I  t-1 – the ending inventory for the past period F  t+1 – the forecast of demand for the next period

Search decision rule

This technique helps overcome some of the limitations of linear programming techniques about cost assumptions.

It enables the customer to express cost data inputs in standard terms. First, it needs computer programming to evaluate any production plan’s cost. Then it searches for alternative methods with minimum prices among them.

Advanced planning and scheduling (APS) software can quickly assist in aggregate planning. APS is a process that enables organizations to plan and schedule activities more precisely.

This process helps to keep the total cost of an organization’s projects low by minimizing disruptions caused by unplanned events. 

APS uses two main techniques: activity duration management (DPM) and work progress tracking (WPT). DPM involves using past data on past project tasks to predict future task durations; WPT involves monitoring assigned tasks and taking corrective action when necessary so as not to interrupt current work assignments .

Aggregate planning is a method of planning for the future. Organizations should use it to help them understand how their current activities will affect other areas soon and what could happen if they change their strategies or policies.

There are many benefits to using a holistic process. These include increased efficiency, lower costs, improved innovation and creativity, and reduced risks from unanticipated events. However, there are also some drawbacks, such as the high upfront cost and complexity.

References:

  • https://www.researchgate.net/publication/280529822_how_to_control_my_product_portfolio
  • https://online.ben.edu/programs/mba/resources/aggregate-planning-and-forecasting

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meaning of aggregate planning in business

What is Aggregate Planning?

There are times when organizations are not able to meet consumer demands because of limited supply. Maybe while you were…

What Is Aggregate Planning?

There are times when organizations are not able to meet consumer demands because of limited supply. Maybe while you were doing inventory you miscalculated capacity that in turn affected your supply.

Production has its own share of limitations—from workforce levels to changing demands. What an organization must do is assess what it needs to minimize cost by scheduling production over a period of time. This is known as aggregate planning.

What Is Aggregate Planning?

Aggregate planning strategies, problems in aggregate planning.

Usually undertaken for 3 to 18 months, aggregate planning is how organizations plan their production process depending on what resources they have and the cost of production.

It means that planning is concerned with a certain amount of time that factors into long-term goals. Matching demand and supply by taking care of challenges and setbacks is what aggregate planning methods are set out to do.

Here’s what organizations need for aggregate planning:

Relevant data and information about available resources—employees, inventory and equipment

Trend analyses of demand-supply for the relevant period

Assessing alternative costs of production and maintaining inventory in case of setbacks

Internal policies and regulations with respect to alternatives

Aggregate planning methods help organizations communicate goals and ways to achieve them. The only way to reach these objectives is by using resources efficiently. Aggregate planning is typically done 12 months into the future. Some examples of aggregate planning are hiring temporary workers, laying off employees for a specific period or cross-training. This works as an effective benchmark to measure resource utilization and implementation.

In any organization, there are three types of aggregate planning strategies.

Pure Chase Strategy

The purpose of the pure chase strategy is to match or chase demands by minimizing final inventory. It absorbs demand fluctuations effectively for successful aggregate planning. Organizations can either maintain workforce level or output rate to match demand.

Pure Level Strategy

Pure level strategies are concerned with maintaining workforce or output rates at all times. Production will be consistent within the same period of time for which aggregate planning was done. Inventory and backorders help manage demand fluctuations and market changes. Organizations may even employ different ways to put inventory to good use—especially if there’s a change in demand.

Hybrid or Mixed Strategy

A hybrid or mixed strategy combines both inventory and workforce/output rate. It can include maintaining additional inventory ahead of time to match demands or even use backorders to keep up. Organizations can hire temporary workers if needed or they may even furlough or lay off workers temporarily in case of low demand. Job rotations may form a part of mixed strategies to make sure that workers’ skills are being fully-applied.

Organizations react to changes in demand depending on their resources. Whether they focus on inventory or workforce is subjective. Operations can rely on backorders and higher inventory to tackle high demand. Alternatively, they may rely on shifting the workforce if needed.

Aggregate planning isn’t restricted to production or operations. It may be used in services or project management to control employee hours and scheduling tasks. It’s an effective strategy that helps organizations stay on top of their resources and take action without delays.

Aggregate planning is a short to mid-term plan for a particular department in an organization. It’s not part of the greater planning strategy to achieve organizational goals. Rather, it’s concerned with matching demand and supply by manipulating workforce, output rate and inventory. Therefore, it has its set of challenges, including:

Smoothing refers to the cost of changing inventory, relying on backorders and hiring or laying off workers temporarily. Anything that stands outside the norm of day-to-day business has certain costs associated with it. Aggregate planning may be an additional cost to the organization.

Planning Horizon

Aggregate planning is associated with a particular period of 3-12 months. So, it’s important to specify the exact period beforehand or well in advance to keep track of what needs to be done. In terms of workforce and inventory, organizations have to determine the levels at which they need to be maintained. This may require extensive planning on their part.

When it comes to fluctuating demand, it’s not always black and white. Even if organizations ascertain demand at a certain level, it may not be accurate. So, bottleneck planning has to do with an inability to match demand due to capacity limitations. ( thebiem.com )

Aggregate planning strategies are based on forecasting and assumptions. For this, you need to understand the logic behind problems. There are many ways you can analyze problems to break them down into smaller chunks. Harappa’s Creating Solutions will teach you how to navigate challenges associated with aggregate planning. Learn about the five characteristics of good analysis to pick the right numbers. Become an expert in forecasting and make accurate assumptions based on relevant information.

Explore topics such as the  Fishbone Diagram  and Analysis,  Locus of Control  &  5 Whys Analysis  from Harappa Diaries and learn to become an effective problem-solver.

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What is Aggregate Planning?

A business plan is an essential aspect for every organization, and it’s critical in establishing business strategies. After finalizing the business strategies, they should scrutinize them reversely—from final sales to raw materials needed.  

What is Aggregate Planning?

Typically, an aggregate plan runs from three to 18 months. The plan splits down into labor, raw materials, capital, and so on—required over a medium-range time—quarterly or annually. 

What is Aggregate Planning? 

Aggregate planning refers to developing, maintaining, and analyzing the approximate scope of operation of an organization . In other words, an aggregate plan incorporates the targeted sales , production level, inventory level, and backlogs. 

You should design a good aggregate plan in a way that it can reduce the impact of shortsighted daily routines. For instance, only small amounts of raw material should be ordered when employees are laid-off and more raw material when they are reinstated. Such a longer-term approach to resource consumption can help in reducing unexpected short-term expenses.

Understanding Aggregate Planning Better 

Aggregate planning tries to balance the organization’s capacity and the demand while minimizing cost. The term aggregate is used because at this level; planning consumes all resources in the aggregate —as a product portfolio. 

Aggregate resources may include the total number of employees, hours of machine time, or tons of raw materials. In product-oriented industries, the total units of output may consist of gallons, feet, or pounds. In contrast, the service industries use aspects such as hours of service delivery, numbers of patients attended, etc., as the aggregate units. 

Elements such as size, colors, features , and the likes are not distinguished during aggregate planning. For instance, during aggregate planning, an automobile company would focus on the total number of vehicles and not the model or color options.

At times units of aggregation can be difficult to determine—when the difference in output is extreme. In such a case, the equivalents units are determined. These units can be based on cost, value, work period, or similar quantifiers. 

Most aggregate plans are rolled out to cover a period of three to 18 months. Therefore, the aggregate plan is widely perceived as an intermediate-term in nature (neither long-term nor short-term). 

Future short-term planning such as production scheduling, sequencing, and loading relies on aggregate plans. The aggregate plan has been described as “disaggregated” in the master production schedule (MPS) that’s used in material requirements planning (MRP).

The determination of demand and the existing production capacity are given priority when making an aggregate plan. 

Capacity can be expressed as the total output per production period—only an average number of units are calculated as the total may include a product mix using different production periods. On the other hand, demand can be expressed as the total number of units required. 

If demand and capacity are not balanced, the organization should try to strick the balance by adjusting the levels of either capacity or demand.

The Advantages of Aggregate Planning

Aggregate planning offers tons of advantages to the organizations that adopt it. The following are some of the expected benefits: 

1. Minimize Staffing Fluctuations

The aggregate planning approach is popular because of its ability to foresee production demand which helps businesses in the staff planning process . If a company needs temporary employees due to unexpected changes, it can consult a temporary employment agency. 

The reduction or elimination of excess employees will help the firm save money to invest elsewhere. Moreover, it’ll help the firm save time needed to train and supervise the extra workers. Instead, they can use that time to improve their production and service delivery. 

2. Reduce Overhead

Aggregate planning helps businesses to estimate demand. The primary purpose of evaluating demand is to enable a company to know the right amount of inventory they need for a specific period. 

Overstocking remains to be one of the leading economic severe issues. Holding costs for excess inventory such as inventory financing, storage space, and inventory servicing attract extra expenses that businesses can evade through adopting the aggregate plan strategies. Additionally, merchandise tied up capital and having an excess of it will expose you to opportunity costs.  

Aggregate planning promotes the lean production approach. Organizations implementing the aggregate planning model can better foresee the amount of material they will require and when. Besides the costs mentioned above, overstocking also exposes businesses to risks associated with spoilage. Therefore, adapting aggregate planning is economical.

3. Increase Production Rates

Aggregate planning fosters maximum utilization of production resources which results in a significant increase in production rates. 

Maximum resource utilization creates a smooth-running process that allows the businesses to precisely determine the time it will take to deliver orders and plan their production process duly. 

The objective is to meet the deadlines, but still, the organization should be keen to complete production almost on the projected time for delivery—to avoid the costs associated with holding inventory. 

What is Aggregate Planning?

4. Accommodate Changes

In business, there are tons of uncertainties—price fluctuations, production order variance, etc. Since production order often changes, companies cannot stick to one strategy at all times. 

Aggregate planning incorporates contingency measures that allow the business to accommodate changes in customer orders and production. 

If need be, businesses can revolve between active, passive, or mixed strategies. Additionally, they can shift between chase strategy (production levels match the predicted demand) and the level strategy—production level is constant despite the changes. 

Aggregate Planning Strategies

Aggregate planning has two pure planning strategies—the level strategy and the chase strategy, and the combined strategy. Let’s take a look at the strategies;

What is Aggregate Planning?

1. Level Strategy

The level strategy favors an aggregate plan that maintains a more steady production and steady employment levels. To accommodate the changes in customer demand, organizations must either increase or decrease inventory levels regarding the foreseen demand trends. 

When demand is relatively low, the organization keeps a level labor force and a constant production rate, which will enable them to create surplus inventory at the time. As demand rises, the organization can absorb the previously extra inventory, thereby maintaining the production and employment levels. 

Alternatively, the organization can use a backlog or backorder. A backorder refers to a promise by the supplier to deliver a product at a later date. In other words, backorder shifts demand from a period where a firm’s capacity cannot match demand to a period when the capacity starts to catch up with diminishing demand. 

The main benefit of the level strategy is that it enables a firm to maintain a constant production level and still meet demand. This approach is more convenient to the employee since working conditions remain constant—there isn’t time that the organization pushes them to work excessively to meet demand.   

However, from the employer’s angle, it may be expensive to adopt this approach. The strategy dictates that production levels should be constant regardless of the market changes, which can attract unnecessary costs—excess inventory, subcontracting/overtime cost, and backorder cost. 

2. Chase Strategy

The chase strategy champions a production plan that matches the existing demand and capacity. This approach makes a firm flexible as it involves considerable internal changes to accommodate external changes, such as hiring, firing, laying off employees, increasing or decreasing inventory levels, etc. 

Most firms that implement the just-in-time (JIN) production concept utilize a chase strategy. The primary benefit of a chase strategy is that it allows inventory to be held at the lowest level possible, saving the business lots of money. Additionally, the approach fosters maximum utilization of resources which utterly increases the production levels .

Despite these advantages, the chase strategy also has some significant drawbacks. First, companies that embrace chase strategy are often at loggerheads with the labor unions because of their untimely firing and lay-offs. 

Secondly, they are prone to high levels of inconsistency—in operations and skill levels. The consistent changes expose firms to the aftermath of inconsistency. 

For example, when a company tries to adjust to accommodate the rising demand, it may introduce new production methods or machinery, or new employees. Consequently, the employees will need time to adjust to the changes. Or laying off skilled and loyal employees when the demand drops. 

3. Combined Strategy

A combined strategy (a.k.a hybrid or mixed strategy) utilizes the level and chase strategy jointly. Most companies adopt this approach because it’s more advantageous than using a pure strategy in isolation. A mixed strategy can better realize organizational goals and policies at a considerably lower cost than the pure strategy used separately.  

Aggregate Planning Techniques 

Aggregate planning consists of techniques that range from informal trials, which use simple tables or graphs, to more formal and advanced mathematical methods. William Stevenson’s Production/operation management focuses on informal yet helpful outline procedures for aggregate planning. The outline consist of the following steps:

  • Determine demand levels for every period
  • Determine the firm’s capacity for every period. The capacity should be equal to demand. Therefore overtime and subcontracting must be included
  • Identify the relevant departmental, company, and union policies. For example, inventory levels, workforce level, and overtime policies, respectively
  • Determine the unit costs for units produced. The cost usually includes production costs (fixed and variable and direct and overhead costs), the inventory holding costs (storage, insurance, spoilage, and obsolescence costs), and the backorder costs
  • Determine alternative plans and calculate the cost for each
  • Select the one that best suits your objectives ( plan with the least cost)

Aggregate Planning Mathematical Techniques 

The following are some famous mathematical techniques that businesses can utilize in more complex aggregate planning applications.

What is Aggregate Planning?

1. Linear Programming

Linear programming is an optimization approach that enables the user to determine the maximum profit or a minimum operating cost based on the availability of the limited resources and other constraints. 

A unique linear programming model known as Transportation Model can get the aggregate plans that balance capacity and demand while minimizing cost. 

However, only a few real-world aggregation planning decisions can adopt linear programming. A book by Sunil Chopra and Peter Meindl, The Supply Chain Management (SCM): strategies, planning, and operations , demonstrates excellent examples of linear programming in aggregate planning. 

2. Mixed-Integer Programming

Mixed-integer programming is more beneficial to an aggregate plan prepared for a product family where the plan is the sum of the plan for independent product lines. Mixed-integer programming approaches can offer a method for determining the number of units to be produced in each product family. 

3. Linear Decision Rule

The linear decision rule is an optimization technique that minimizes the total cost of production using a set of cost-approximation functions (three are quadratic) to get a single quadratic equation.

The calculus concept is then applied to the quadratic equations to derive two linear equations. One linear equation is used to plan the output for each period, while the other is applied to plan the workforce for each period. 

Bottom Line 

Aggregate planning is an essential tool for the success of any business organization. It comes with tremendous benefits—minimizes staffing fluctuation, reduces overhead cost, increases production rate, and accommodates changes. 

However, businesses should understand all the concepts of the aggregate plan strategy before they implement it. They must understand the pros and cons to expect and how to apply the concepts properly. 

meaning of aggregate planning in business

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I am a mother of a lovely kid, and an avid fan technology, computing and management related topics. I hold a degree in MBA from well known management college in India. After completing my post graduation I thought to start a website where I can share management related concepts with rest of the people.

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Aggregate Planning - Definition & Meaning

What is aggregate planning.

Aggregate Planning is an immediate (annual) planning method used to determine the necessary resource capacity a firm will need in order to meet its expected demand. Aggregate planning generally includes combination of planned output, employment, sourcing, sub-contracting etc that can be planned for a period of 9-12 month. The goal of aggregate planning is to match 'demand' and 'supply' in the aggregate using mentioned combination in a cost effective manner.

Supply chains are easier to manage when demand is stationary. But when demand is seasonal, we face tradeoffs. Aggregate planning uses following 2 basic strategies or combination of both to deal with seasonal demand:

1. Level output: It's a fixed output scheme where demand variability is met by inventory, subcontracting, overtime, cross-training etc.

2. Chase demand: It's a make to order scheme where production rate is changed to meet demand.

Suppose you are a car manufacturer. In aggregate planning, you don't differentiate a car based on model, color etc. but you decide aggregate units of cars that can be produced. Everything like capacity, time periods, work-force etc is taken in aggregate. It gives flexibility to change plan in case of variation from expected demand.

This article has been researched & authored by the Business Concepts Team . It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

Browse the definition and meaning of more similar terms. The Management Dictionary covers over 1800 business concepts from 5 categories.

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Manufacturing can be complicated and expensive; that’s why there needs to be a method to simplify the process. When looking to minimize production costs, many manufacturers turn to aggregate planning for their manufacturing plan needs. And in order to create an aggregate plan, one must balance demand with production capacity.

What Is Aggregate Planning?

Aggregate planning is a method used to ensure production runs uninterrupted throughout the manufacturing process. According to Siemens , the method covers all production activities over a three- to 18-month period and can apply to multiple facilities for larger companies. Because of aggregate planning’s comprehensive approach, companies can optimize their resources despite changes in demand, such as customer order changes.

Ultimately, aggregate planning looks to minimize operating costs while maximizing productivity by matching production demand with capacity. Manufacturers can minimize expenses by specifying when and which materials and resources are needed and when it’s necessary to obtain them. Manufacturers can maintain and track an aggregate plan on paper; however, because of the many variables that must be tracked, (from sales forecasts to inventory levels), many opt for a digital solution with an advanced planning and scheduling system – this is also known as an APS system. Depending on the manufacturer’s needs, aggregate planning can be complex.

Some advantages to aggregate planning include stabilizing manufacturing, optimizing space and resources, lowering operating costs and improving supply chain relationships. Essentially, aggregate planning can create a more concise and simplified manufacturing process.

Aggregate Planning Methods

In an aggregate plan, demand must be balanced against the company’s current capacity. According to Cogoport , capacity represents the number of units produced within a fixed period of time, while demand represents the number of units that must be produced.

There are a few methods manufacturers can use to achieve a balance between demand and capacity: pricing, advertising, promotion, back-ordering and creating a new demand. When the demand for a product decreases, the pricing method is used to lower the price to match the manufacturer’s capacity. Conversely, when the demand rises, prices are increased to match capacity. Advertising and promotion are also used to build demand for a product when needed, while back-ordering can shift demand. Lastly, creating a new demand can supplement an existing demand.

Aggregate Planning Strategies

A manufacturer’s strategic objectives can influence its approach to aggregate planning. Aggregate planning objectives include minimizing inventory investment, minimizing workforce demand and fluctuation, maximizing production rates as you minimize variation and maximizing facility and equipment usage.

Aggregate planning can adopt two strategies to reach these goals: a chase approach or a level approach. Through a chase approach, production capacity is adjusted to meet demand. This is done by adjusting resource procurement and availability to minimize inventory levels and maximize resource usage. However, the downside to this approach is that spending adjustments must be made to accommodate the changes to capacity, such as in the workforce or underutilized floor space.

Conversely, the level approach keeps production rates steady and avoids costly adjustments by increasing inventory when the demand is low. This way, the manufacturer will be able to meet orders when demand increases. Manufacturers can also keep their workforce and productivity steady and apply the same approach to periods of high demand by ramping up productivity. The costs associated with this approach include inventory management, idle capacity, idle time and overtime.

  • Siemens: Aggregate Planning
  • Cogoport: Aggregate Plan

Danielle Smyth is a writer and content marketer from upstate New York. She has been writing on business-related topics for nearly 10 years. She owns her own content marketing agency, Wordsmyth Creative Content Marketing, and she works with a number of small businesses to develop B2B content for their websites, social media accounts, and marketing materials. In addition to this content, she has written business-related articles for sites like Sweet Frivolity, Alliance Worldwide Investigative Group, Bloom Co and Spent.

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meaning of aggregate planning in business

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.

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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.

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How to use aggregate production planning to succeed?

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Learn what is aggregate production planning and how to apply it in your business..

Published on October 26, 2021

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Aggregate Planning In Supply Chain Management

7/26/19 10:30 AM

By PlanetTogether

If your production facility is lacking in terms of production efficiency and effective planning, then utilizing aggregate planning for your overall supply chain may be a viable option. Aggregate Planning in supply chain management within a manufacturing facility is extremely important when attempting to boost operational efficiency within the operation. When you attempt to look months ahead to determine your supply chain needs, you can use the techniques of aggregate planning.

Aggregate Planning in Supply Chain Management

This approach enables you to have a comprehensive view of the supplies you will need in order to meet demand for your products. Through ordering for the entire planning period, you can quality for bulk discounts and ultimately avoid shortages. Before implementing aggregate planning into your supply chain, it is important to understand some of the components within aggregate planning and supply chain.  

Aggregate Planning in Supply Chain Management 

Aggregate planning in supply chain management include the following: 

  • Solid Demand Forecast - It is important to anticipate demand for your product before you can plan your supply ordering. Using historical data as well as industry trends and forecast, you are able to accurately predict demand for your products for upcoming months. Your forecast will tell you how much you need to product in order to meet demand in order for you to know that quantity of supplies you will need to maintain productivity. 
  • Production Capacity - The ability to produce depends on machinery, work staff and efficiency. You are able to evaluate your production department to accurately determine how many products you can reasonably produce during the period that you are planning for. This could end up being less than demand. Utilizing your production ability to set goals for producing products that are realistic. Allow for personnel shortages and machinery maintenance. 
  • Limitations on Capital - No matter what quantity of supplies you would like to order, you need to take your cash into account. You may be limited by what you can afford. If you plan to borrow to buy supplies, include the interest costs in your estimates of the profits you will make from the products you manufacture. In short, make sure you have the capital to purchase the supplies you need. 

Aggregate planning is crucial within a manufacturing operation that is seeking to improve production planning within the production process. Aggregate planning can be implemented with an Advanced Planning and Scheduling (APS) system and improve operational efficiency within your manufacturing operation. Advanced Planning and Scheduling (APS) software allows you to have a visual representation of your production plan and manipulate areas that are in need of efficiency enhancement. Ultimately this leads to profit increase, waste reduction, and overall enhancement of the entire operation as a whole. Aggregate planning and Advanced Planning and Scheduling (APS) Software is being implemented into manufacturing operations around the globe and operations are experiencing the benefits. 

Advanced Planning and Scheduling Software 

Advanced Planning and Scheduling (APS) software has become a must for modern-day manufacturing operations due to customer demand for increased product mix and fast delivery combined with downward cost pressures. APS can be quickly integrated with a ERP/MRP software to fill gaps where these system lack planning and scheduling flexibility and accuracy. Advanced Planning and Scheduling (APS) helps planners save time while providing greater agility in updating ever-changing priorities, production schedules, and inventory plans.

  • Create optimized schedules balancing production efficiency and delivery performance
  • Maximize output on bottleneck resources to increase revenue
  • Synchronize supply with demand to reduce inventories
  • Provide company-wide visibility to capacity
  • Enable scenario data-driven decision making

Implementation of Advanced Planning and Scheduling (APS) software will take your manufacturing operations to the next level of production efficiency, taking advantage of the operational data you already have in your ERP.

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  1. What is Aggregate Planning?

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  2. What is aggregate planning? A comprehensive look

    meaning of aggregate planning in business

  3. What is Aggregate Planning?

    meaning of aggregate planning in business

  4. What is Aggregate Planning?

    meaning of aggregate planning in business

  5. What is Aggregate Planning?

    meaning of aggregate planning in business

  6. Introduction to Aggregate Planning (Meaning, Concept, Objectives, Steps

    meaning of aggregate planning in business

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  1. Aggregate Expenditure Models: Part-1 |Urdu

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  5. Aggregate Planning Strategies

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COMMENTS

  1. What Is Aggregate Planning? Strategies & Tips

    Aggregate planning is a method for analyzing, developing and maintaining a manufacturing plan with an emphasis on uninterrupted, consistent production. Aggregate planning is most often focused on targeted sales forecasts, inventory management and production levels in the mid-term (3-to-18-month) future.

  2. What Is Aggregate Planning? (Plus Strategies and Tips)

    Aggregate planning is the process of determining the scope of a company's operations. It involves forecasting the potential demand for an organization's goods or services and preparing the company to fulfill this demand.

  3. Aggregate Planning

    Aggregate planning is a planning method in the production process which is also considered a marketing activity used to determine the required resource capacity to meet expected demand. Aggregate planning

  4. Aggregate Planning And Its Effect On Fluctuating Needs

    Aggregate planning is the process of developing an approximate schedule that details how an organization will operate over a particular period, typically ranging from 3 to 18 months. It allows you to approach inventory and staffing with clear eyes, assess and minimize risks, and build more efficient systems. How it works

  5. What is Aggregate Planning?

    Introduction An organization can finalize its business plans on the recommendation of demand forecast. Once business plans are ready, an organization can do backward working from the final sales unit to raw materials required.

  6. What Is Aggregate Planning? Types & Purposes for Business

    Aggregate planning is the process that balances between demand and capacity and creates stability in a workflow. Capacity is the number of units, which can be produced within a timeframe, while demand is the number of units that are required to fulfill the needs of a stakeholder or customer.

  7. The Definitive Guide to Aggregate Planning

    Aggregate planning is the process of balancing the relationship between demand and capacity to create stability in a workflow. In project management, it is used to manage and schedule activities related to capacity and demand, such as analyzing requirements, deploying resources, and maintaining the set timeline of projects and operations.

  8. Why You Should Use Aggregate Planning in Your Business

    Aggregate planning is the practice of balancing a business's capacity and demand over a period of time -- usually a year -- to maximize profits. Basically, it's how management figures out how...

  9. Aggregate Planning (A Definitive Guide With Methods)

    Updated March 10, 2023. Aggregate planning (AP) is a technique for companies to align their short-term performance with long-term strategic planning. It can be an effective method to help improve a company's sales. Learning more about aggregate planning can help you become more effective in a company's planning process and have a direct effect ...

  10. Introduction to Aggregate Planning and Strategies

    The aggregate planning is an effective tool in supply chain management that considers many intermediate-level operations and decisions. Hence, we can customize traditional aggregate plans to consider sustainability by defining new decision variables, parameters, objective functions, and constraints.

  11. What is Aggregate Planning?

    Aggregate planning is a way to plan the production of all products for a company over a period of time. It starts by listing all the important requirements for uninterrupted production. The usual planning horizon ranges from three to twelve months. The word 'aggregate' comes from the Latin word 'aggregāre.' It means 'to add to.'

  12. Aggregate Planning

    It means that planning is concerned with a certain amount of time that factors into long-term goals. Matching demand and supply by taking care of challenges and setbacks is what aggregate planning methods are set out to do. Here's what organizations need for aggregate planning:

  13. What is Aggregate Planning?

    Aggregate planning refers to developing, maintaining, and analyzing the approximate scope of operation of an organization. In other words, an aggregate plan incorporates the targeted sales, production level, inventory level, and backlogs. You should design a good aggregate plan in a way that it can reduce the impact of shortsighted daily routines.

  14. Aggregate Planning

    According to Wikipedia, the term aggregate indicates that planning is done for a single overall measure of output or, at the most, a few aggregated product categories. In other words, aggregate planning is the matching of the plant capacity with demand in such a way that production costs are minimized. View chapter Explore book

  15. Aggregate Planning

    Aggregate Planning is an immediate (annual) planning method used to determine the necessary resource capacity a firm will need in order to meet its expected demand. Aggregate planning generally includes combination of planned output, employment, sourcing, sub-contracting etc that can be planned for a period of 9-12 month. The goal of aggregate planning is to match 'demand' and 'supply' in the ...

  16. What is Aggregate Planning, How the Importance of Aggregate Planning

    Aggregate planning is a systematic, data-driven approach to forecasting and planning that helps organizations manage their inventory risks. The aggregate planning process is a demand...

  17. Aggregate planning

    "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.

  18. What is Aggregate Planning

    Aggregate planning is a method for developing an overall manufacturing plan that ensures uninterrupted production at a facility. Aggregate production planning typically is applied to a 3- to 18-month period.

  19. The Advantages of Aggregate Planning

    Aggregate planning is a method used to ensure production runs uninterrupted throughout the manufacturing process. According to Siemens, the method covers all production activities over a three- to ...

  20. Aggregate Planning and Forecasting

    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.

  21. How to use aggregate production planning to succeed?

    Aggregate production planning (APP) is a method applied to manufactures to reduce costs and improve all kinds of productions related to manufacturing. This method helps to keep a balance between supply and demand in the market for a short or medium period of time. It takes around 3-18 months to conclude the aggregate plan.

  22. Aggregate Planning In Supply Chain Management

    Aggregate Planning in supply chain management within a manufacturing facility is extremely important when attempting to boost operational efficiency within the operation. When you attempt to look months ahead to determine your supply chain needs, you can use the techniques of aggregate planning. This approach enables you to have a comprehensive ...

  23. Aggregate Planning in Operations Management

    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.

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    Network giant Cisco is planning to restructure its business which will include laying off thousands of employees, as it seeks to focus on high-growth areas, according to three sources familiar ...

  25. Majority of Americans Live Paycheck To Paycheck

    Discovering why many Americans are living paycheck to paycheck amidst rising living expenses and uncovering the implications and underlying factors fueling this prevalent financial struggle in ...

  26. Good news for the Fed: Revised inflation data confirms last year's

    That matters a lot for central bankers as they aim to bring inflation back down to their 2% annual target while limiting job losses. So if, for instance, at first it looks like job gains slowed a ...