Aggregate Planning Aggregate Planning Aggregate planning is essentially a big-picture approach to planning. It is intermediate-range capacity planning that typically covers a time horizon of two to twelve months, although in some companies it may extend to as much as eighteen months. Aggregate planning is also sometimes known as sales and operations planning. Sales and operations planning is the intermediate-range decisions to balance supply and demand, integrating financial and operations planning.
It is hard for organizations to predict the exact quantity and timing of demands for specific products and services in advance.
In order to assess their capacity needs and costs months in advance in order to handle the demand, aggregate planning is very useful. The goal of aggregate planning is to achieve a production plan that will effectively utilize the organization’s resources to match expected demand. To meet this goal it is important for planners to make serious decisions regarding output rates, employment levels and changes, inventory levels and changes, back orders, and subcontracting in or out.
Stevenson, 2009) A key objective in business planning is to coordinate the intermediate plans of various organization functions such as marketing, finance, and operations. All of these areas must work together to form the aggregate plan. Aggregate planning decisions are strategic decisions that define the framework within which operating decisions will be made. The aggregate plan will have impacts throughout the supply chain, and should be shared with supply chain partners. All supply chain stages should work together on an aggregate plan that will optimize supply chain performance.
This is important because it can help synchronize flow throughout the supply chain; it affects costs, equipment utilization, employment levels, and customer satisfaction. Overall, the aggregate plan will guide the more detailed planning that will eventually lead to a master schedule. Demand and Capacity According to Helms (2006), “Steps taken to produce an aggregate plan begin with the determination of demand and the determination of current capacity. ” Aggregate planning begins with a forecast of demand at the intermediate range.
After this, it is up to the planner to come up with a general plan to meet demand requirements by setting output, employment, and finished goods inventory levels. It is important for planners to focus on the quantity and timing of the expected demand in order to achieve a balance. A problem may occur when dealing with uneven demand within the planning interval. To help face these problems there are strategies aggregate planners can use. A proactive strategy involves demand options in which they attempt to alter demand so that it matches capacity.
Reactive strategies involve capacity options in which they attempt to alter capacity to that it matches demand. A mixed strategy involves an element of the proactive and reactive approaches. (Stevenson, 2009) In the case that demand needs to be increased in order to match capacity, there are four options in which aggregate planners can choose from; pricing, promotion, back orders, and new demand. Pricing differentials are often used to shift demand from peak periods to off-peak periods. Promotional strategies such as advertising or direct marketing are also sometimes used to shift demand.
It is also possible to shift demand by allowing back orders in which orders are taken but are promised a later delivery date. The last option to make demand match capacity is to introduce a new product for peak demand. Options to use which make capacity meet demand include hire and lay off workers, use overtime and slack time, use part-time workers, hold inventories, and subcontract. Hiring or laying off workers, or having some workers work overtime and some slack time can help maintain a balance between capacity and demand.
Building up finished-goods inventory in times of slack and then using it in times of demand can also help balance because this way no workers have to me hired. Helms says, “Frequently firms choose to allow another manufacturer or service provider to provide the product or service to the subcontracting firm’s customers. By subcontracting work to an alternative source, additional capacity is temporarily obtained” (2006). As an alternative to subcontracting, an organization may consider outsourcing whereas; they contract with another organization to supply some portion of the goods or services on a regular basis.
There are a number of options aggregate planners can consider for achieving a balance of demand and capacity. With these options, there are a number of strategies aggregate planners might use to give the demand forecast for each period in the planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firm’s supply chain’s profit over the planning horizon. Strategies There are two main strategies aggregate planners can choose from. The first is a level capacity strategy.
Under a level capacity strategy, variations in demand are met by using some combination of inventories, overtime, part-time workers, subcontracting, and back-orders while maintaining a steady rate of output. The firm maintains a level workforce and a steady rate of output when demand is somewhat low. In order to help maintain a constant level of output and still satisfy varying demand, an organization may sometime resort to a combination of subcontracting, backlogging, and use of inventories to absorb fluctuations.
The second strategy to form an aggregate plan is a chase demand strategy in which the planned output for any period would be equal to expected demand for that period. A major advantage of this approach is that inventories can be kept relatively low, which yield savings for an organization. A disadvantage to this strategy is that when forecast and reality differ, morale can suffer, since it quickly becomes obvious to workers and managers that efforts have been wasted. This strategy should be used when inventory holding costs are high and costs of changing capacity are low.
Helm states that, “Most firms find it advantageous to utilize a combination of the level and chase strategy. A combination strategy, sometimes called a hybrid or mixed strategy, can be found to better meet organizational goals and policies and achieve lower costs than either of the pure strategies used independently” (2006) When choosing which strategy to use, it is important to consider company policy, flexibility, and costs. Company policy may discourage layoffs except under extreme conditions.
The degree of flexibility needed to use the chase approach may not be present for companies designed for high, steady output. As a rule, aggregate planners seek to match supply and demand within the constraints imposed on them by policies or agreements and at minimum cost. Techniques for Aggregate Planning There are two primary techniques used to help with the task of aggregate planning. The first technique is the trial-and-error technique. The second technique is the mathematical technique. According to Stevenson (2009), the eneral procedure for aggregate planning consists of the following steps: determine demand for each period, determine capacities for each period, identify company or departmental policies that are pertinent, determine unit costs for regular time, overtime, subcontracting, holding inventories, back orders, layoffs, and other relevant costs, develop alternative plans and compute costs for each, and finally if satisfactory plans emerge, select the one that best satisfies objectives. The trial-and-error technique consists of developing tables or spreadsheets to make it easy to compare projected demand requirements with existing capacity.
A major disadvantage to this technique is that it does not necessarily result in the optimal aggregate plan. An example of a spreadsheet is shown below: (Stevenson, 2009) [pic] The cost of a particular plan for a given period can be determined by summing the appropriate costs: Cost for = Output cost + Hire/Lay Off + Inventory + Back-order A period (Reg + OT + Subcontract) Cost Cost Cost A number of mathematical techniques have been developed to help aggregate planning.
Some of the better known techniques are the linear programming model, and a simulation model. Linear programming models are used for obtaining solutions to problems involving the allocation of scarce resources in terms of cost minimization or profit maximization. In order to use this method, planners must identify capacity of regular time, overtime, subcontracting, and inventory on a period-by-period basis, as well as related costs of each variable. An example is shown below. (Stevenson, 2009) [pic]
The second mathematical technique is a simulation model, which is a computerized model that can be tested under a variety of conditions in an attempt to identify reasonably acceptable solutions to problems. According to Helm, “These models can also be incorporated into a decision support system, which can aid in planning and evaluating alternative control policies. These models can integrate the multiple conflicting objectives inherent in manufacturing strategy by using different quantitative measures of productivity, customer service, and flexibility”(2006) Disaggregating the Aggregation Plan
In order for the plan to be put into meaningful production the next step is to disaggregate the aggregate plan. While in the aggregate plan the planners kept everything in means of a whole, at this time they must break down the aggregate plan into specific product requirements in order to determine labor requirement, materials, and inventory requirements. Doing this, you are converting and decomposing the aggregate units into actual products or services that can be produced or offered. The result of this is called the master schedule.
The master schedule shows the quantity and timing of specific end items for a scheduled horizon, which often covers about six to eight weeks ahead. This shows the planned output for individual products rather than the entire group as the aggregate plan did. The master schedule also reveals when orders are scheduled for production and when completed orders are shipped. The master production schedule indicates the quantity and timing of planned production, taking into account desired delivery quantity and timing as well as on-hand inventory.
The master production schedule is one of the primary outputs of the master scheduling process. The master schedule has three inputs and three outputs. The inputs include beginning inventory, forecast, and customer orders. The outputs include projected inventory, master production schedule, and uncommitted inventory. Conclusion Aggregate planning is the process of developing, analyzing, and maintaining a preliminary, approximate schedule of the overall operations of an organization. The aggregate plan generally contains targeted sales forecasts, production levels, inventory levels, and customer backlogs.
This schedule is intended to satisfy the demand forecast at a minimum cost. Properly done, aggregate planning should minimize the effects of shortsighted, day-to-day scheduling, in which small amounts of material may be ordered one week, with an accompanying layoff of workers, followed by ordering larger amounts and rehiring workers the next week. The prospective long-term benefit of the use of this resource is its help to minimize short-term requirement changes, which may potentially result in overall cost savings. Example
A recent example of a company using aggregate planning comes from an article in the Wall Street Journal. Entrepreneur Brent Hoberman recently started a website called www. mydeco. com. His goal was to change the way people designed and shopped for their home. On his website you can create your own room using the design planner and then shop for the furniture you want without going to the store or another website. Hobberman said, “The average order values are lower than expected. People are buying accessories, rather than furniture.
While we’re growing in terms of sales, one of the challenges is that we are dependent on the conversion rates achieved by our retail partners. Sometimes we get a cost per click, which could be as much as 75p, or we take a commission from the retailer for the furniture sold to customers coming from www. mydeco. com” This is where aggregate planning comes in for Hobberman and his team. ” It is important for them to plan on how much inventory of furniture they are going to need. They also need to take in to consideration how much money they re going to be making from how many people visit their site based on cost per click.
Based on how many people visit their website and are playing with the design planner and how many sales are actually being made, their capacity is either going to be higher or lower than their demand based on what time of year it is. Whenever their busy season may be, they need to find a way to evenly balance their capacity and demand. Another recent example of a company using aggregate planning is a European travel company. Amadeus launched a new internet booking system that aims to boost airline ticket sales.
According to Michaels, “According to a recent study of Europeans who book travel online by Forrester Research Inc. , a survey firm in Cambridge, Mass. , many shoppers think travel organizations push technology that suits the seller and isn’t designed with the traveler in mind. The report said this explains why growth in online leisure-travel booking in Europe has slowed. Currently, 62% of Europeans book holidays online, compared with 57% in 2007. In the U. S. , 66% of leisure travel is sold online, according to Forrester. Based on these statistics it is important for Amadeus to use aggregate planning during these busy times so they can make a profit. Aggregate planning will also help them determine the number of employees needed for business to run smoothly. Based on how many people are using their service to book flights on line it might also be useful for the airlines to use aggregate planning to determine staffing during the busy seasons. Planning will also help Amadeus build their business so they can later expand into also booking hotels. References “Aggregate Planning. Encyclopedia of Management. Ed. Marilyn M. Helms. Gale Cengage, 2006. eNotes. com. 2006. 2 Dec, 2009 http:// www. enotes. com/ management-encyclopedia/aggregate-planning A Matter of Perception. ” Rock Products 112. 11 (2009). Academic OneFile. Web. 3 Dec. 2009.. Hanson, Roland S. , & Ogle, Michael K. (). Exploration, Not Optimization: Using a Spreadsheet to Examine the Effect of Changing Variable Values in an Aggregate Scheduling Problem. Department of Engineering Technology Georgia SouthernUniversity, Georgia. Retrieved from http:// technologyinterface. msu. edu/winter97/ computers/spreadsheet. html Michaels, Daniel (2009, November 18). Amadeus’s New Booking System Targets Leisure Travelers. The Wall Street Journal, , 19-20. Retrieved from http://online. wsj. com/article/SB10001424052748704431804574541640551685838. html Mills, Lauren (2009, November 9). Brent Hoberman. Big Plans For Mydeco, But Long Road To Profitability. The Wall Street Journal, , 20-22. Retrieved from http://blogs. wsj. com/source/2009/11/09/mo nday-interview-brent-hoberman-big-plans-for-mydeco-but-long-road-to-profitability/
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