AGGREGATE PLANNING STRATEGIES
Planning is a primary management responsibility. Aggregate planning is concerned with organizing the quantity and timing of production over a medium period of time up to eight to ten months with undetermined demand. Specifically aggregate planning means combining all of an organization`s resources into one aggregate production schedule for a predetermined intermediate time period. The objective of aggregate planning is to maximize resources while minimizing cost over the planning period.
The aggregate production plan is midway between short-range planning and long-range planning. Aggregate planning includes the following factors:
1. Work force size and composition
2. Demand forecasts and orders
3. Raw material planning
4. Plant capacity management
5. Utilizing outside subcontractors
6. Inventory management
Aggregate planning is the link between short-term scheduling and long-term capacity planning.
What are aggregate planning strategies?
There are three types of aggregate planning strategies:
Pure Strategy. In this strategy, only one production or supply factor is changed.
Mixed Strategy. This strategy simultaneously alters two or more production or supply factors or some combination.
Level Scheduling. This strategy has been adopted by the Japanese and it embodies maintaining constant monthly production schedules.
What aggregate planning strategies influence demand?
Aggregate planning can influence demand in the following ways:
1. Pricing strategies. Pricing can be used to increase or reduce demand. All things being equal, increasing prices reduces demand while lowering prices will increase demand.
2. Advertising and promotion strategies. Advertising and promotion are pure demand management strategies in that they can increase demand by making a product or service better known as well as positioning it for a particular market segment.
3. Delayed deliveries or reserving orders. Managing future delivery schedules is a strategy for managing orders when demand exceeds capacity. The net effect of delayed deliveries, or back ordering, and reservations is to shift demand to a later period of time, often to a more slack period, which provides a smoothing effect for overall demand. However, the negative is that a percentage of orders will be lost as consumers are unwilling or unable to wait the additional amount of time.
4. Diversifying the product mix. Product mix diversification is a method used to offset demand seasonality. For example, a lawn mower manufacturing company may diversify into snow removal equipment to offset the seasonality of the lawn mower industry.
What aggregate planning strategies influence supply?
Aggregate planning is also used to manage supply considerations by using the following strategies:
1. Subcontracting (outsourcing). Subcontracting is a method of increasing capacity without incurring large capital investment charges. It can turn the competitive advantage of other corporations to the contracting organization`s advantage. However, subcontracting can be costly, and also reveals part of the business to potential competitors.
2. Overtime and idle time. A direct short-term strategy for managing production capacity is to either increase or decrease the number of the work force. This strategy has the advantage of utilizing the currently existing work force. However, overtime is expensive and can produce job burnout if relied upon too extensively. On the other hand, enforcing idle time on the work force can result in resistance as well as a drop in morale.
3. Hiring and laying off employees. Hiring and laying off employees is a medium- to long-term strategy for increasing or decreasing capacity. Hiring employees usually involves the cost of training while laying off employees can incur severance charges. Laying off employees can also cause labor difficulties with unions and reduce morale
4. Stockpiling inventory. Accumulating inventory is a strategy for smoothing variances which may occur between demand and supply.
5. Part-time employees. Certain industries have seasonal requirements for lower skilled employees. Aggregate planning can be used to manage these seasonal requirements.
What is the charting method of aggregate planning?
Charting is a highly utilized trial-and-error aggregate planning method. It is relatively simple to use and is easily understood. Essentially, the charting approach uses a few variables in forecasting demand, applying current production capacity. While the charting method does not assure an accurate prediction, it is simple to implement requiring only minimal calculations. But trial and error method does not provide an optimal solution.
The charting method requires five steps to implement:
1. Calculate each period`s demand.
2. Calculate each period`s production capacity for regular time, overtime, and subcontracting.
3. Determine all labor costs including costs for hiring and layoffs as well as the cost of holding inventory.
4. Evaluate organizational employee and stock policies.
5. Create optional policies and evaluate their costs.
A Florida men`s suit manufacturer has created expected demand forecasts for the period June-January, as shown in Table 1.2.
The daily demand is calculated by dividing the total expected demand by the number of monthly working days:
AVERAGE DEMAND = TOTAL EXPECTED DEMAND / NUMBER OF PRODUCTION DAYS
FIGURE 1.6 MONTHLY AND AVERAGE MEN`S SUIT DEMAND
The graph in Figure 1.6 illustrates that there is a substantial variance between the monthly and average men`s suit demand.
What are the costs of aggregate planning?
Aggregate planning is a systems methodology having major organizational impacts. Every strategy has associated costs and benefits. Increasing hiring means increasing training costs and incurring associated employment benefit costs. Increasing inventory increases carrying costs consisting of capital and storage costs, deterioration, and obsolescence. Using part-time employees involves the costs and risks of using improperly trained and inexperienced personnel as well as creating possible union conflicts. Using subcontractors has the cost of exposing an organization to potential competitors.
Using the data in example 1.30, it is possible to develop cost estimates for the men`s suit manufacturer. Basically, the manufacturer has three choices:
1. The manufacturer can meet expected monthly production fluctuations by varying the work force size, hiring and laying off employees as needed. In this scenario, an assumption is made that the men`s suit manufacturer has a constant staff of 55 employees.
2. Another alternative is to maintain a constant work force of 51 employees and subcontract for additional expected demand.
3. A third alternative is to maintain a work force of 69 employees and store suits during the slack demand months.
THREE PLAN SUMMARY COSTS
In this example, the best production plan is plan 3 which maintains a work force of 69 employees and stores men`s suit inventory during low demand months.