Aggregate Planning Essay 2

Topics: Inventory, Supply and demand, Plan Pages: 7 (2454 words) Published: December 7, 2009
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...

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