UNIT – 3

Aggregate Planning: Meaning, Strategies

and Cost
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. This longer-term perspective on resource use can help minimize short-term
requirements changes with a resulting cost savings.

In simple terms, aggregate planning is an attempt to balance capacity and demand in such a
way that costs are minimized. The term “aggregate” is used because planning at this level
includes all resources “in the aggregate;” for example, as a product line or family. Aggregate
resources could be total number of workers, hours of machine time, or tons of raw materials.
Aggregate units of output could include gallons, feet, pounds of output, as well as aggregate
units appearing in service industries such as hours of service delivered, number of patients
seen, etc.

Aggregate planning does not distinguish among sizes, colors, features, and so forth. For
example, with automobile manufacturing, aggregate planning would consider the total
number of cars planned for not the individual models, colors, or options. When units of
aggregation are difficult to determine (for example, when the variation in output is extreme)
equivalent units are usually determined. These equivalent units could be based on value, cost,
worker hours, or some similar measure.

Aggregate planning is considered to be intermediate-term (as opposed to long- or short-term)

in nature. Hence, most aggregate plans cover a period of three to 18 months. Aggregate plans
serve as a foundation for future short-range type planning, such as production scheduling,
sequencing, and loading. The master production schedule (MPS) used in material
requirements planning (MRP) has been described as the aggregate plan “disaggregated.”

Steps taken to produce an aggregate plan begin with the determination of demand and the
determination of current capacity. Capacity is expressed as total number of units per time
period that can be produced (this requires that an average number of units be computed since
the total may include a product mix utilizing distinctly different production times). Demand is
expressed as total number of units needed. If the two are not in balance (equal), the firm must
decide whether to increase or decrease capacity to meet demand or increase or decrease
demand to meet capacity. In order to accomplish this, a number of options are available.
Options for situations in which demand needs to be increased in order to match capacity
include:

1. Varying pricing to increase demand in periods when demand is less than peak. For
example, matinee prices for movie theaters, off-season rates for hotels, weekend rates
for telephone service, and pricing for items that experience seasonal demand.
2. Advertising, direct marketing, and other forms of promotion are used to shift demand.
3. Back ordering. By postponing delivery on current orders demand is shifted to period
when capacity is not fully utilized. This is really just a form of smoothing demand.
Service industries are able to smooth demand by taking reservations or by making
appointments in an attempt to avoid walk-in customers. Some refer to this as
“partitioning” demand.
4. New demand creation. A new, but complementary demand is created for a product
or service. When restaurant customers have to wait, they are frequently diverted into a
complementary (but not complimentary) service, the bar. Other examples include the
addition of video arcades within movie theaters, and the expansion of services at
convenience stores.

Options which can be used to increase or decrease capacity to match current demand include:

1. Hire/lay off. By hiring additional workers as needed or by laying off workers not
currently required to meet demand, firms can maintain a balance between capacity
and demand.
2. By asking or requiring workers to work extra hours a day or an extra day per week,
firms can create a temporary increase in capacity without the added expense of hiring
additional workers.
3. Part-time or casual labor. By utilizing temporary workers or casual labor (workers
who are considered permanent but only work when needed, on an on-call basis, and
typically without the benefits given to full-time workers).
4. Finished-goods inventory can be built up in periods of slack demand and then used to
fill demand during periods of high demand. In this way no new workers have to be
hired, no temporary or casual labor is needed, and no overtime is incurred.
5. 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.
6. Cross-training. Cross-trained employees may be able to perform tasks in several
operations, creating some flexibility when scheduling capacity.
7. Other methods. While varying workforce size and utilization, inventory
buildup/backlogging, and subcontracting are well-known alternatives, there are other,
more novel ways that find use in industry. Among these options are sharing
employees with counter-cyclical companies and attempting to find interesting and
meaningful projects for employees to do during slack times.

Concept of Aggregate Planning

Aggregate Planning Strategies

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

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.

2. Chase Strategy

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.

3. Hybrid Strategy

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

Long-Term Decisions

The size of the company will determine the length of your long-term decisions made through
the aggregate planning concept. Long term aggregate planning usually involves a time frame
of two to 10 years. Long-term decision making should start with the company examining
goals and objectives for the time period.

The term of this decision relates to product and service selection and includes all aspects of
production. Long-term aggregate planning includes product and market planning, financial
planning and resource planning. The resource planning identifies facilities and personnel
needed to accomplish the long-term production objectives.

Intermediate Decisions

Intermediate decisions affect the level of employment within the organization. Specifically,
through intermediate aggregate planning the organization will examine the output capacity of
the workforce. This planning also affects the capacity of short-term decision making.

Intermediate aggregate planning also covers many additional aspects of the company,
including production planning and stipulating output requirements. Further, intermediate
aggregate planning looks at the major product groups and quantifies the labor hours needed to
manufacture the product groups. Intermediate aggregate planning will typically look at time
horizons totaling 12 to 18 months.

Short Term Decisions

Once a company has made long-term and intermediate decisions, it should create its short-
term aggregate plan. Short-term aggregate planning decisions include materials planning,
capacity requirement planning, final assembly scheduling and production activity control.
Short-term decisions help the organization to ensure the end product is manufactured without
delay to meet the projected goals of the intermediate and long-term aggregate plans.

Capital Intensive
Prof. Harvey Leibenstein, Paul Baran, Rostow, Hirschamn Maurice Dobb and Mahalanobis
are the chief advocators of capital intensive technique. They consider that this technique is
indispensable for accelerating the process of growth. Prof. Paul Baran has the strong opinion
about the necessity of using the capital intensive in less developed countries.

He observed that such countries should make use of their ability to draw upon the scientific
and technological advancement of the more developed countries if they want to industrialize
at a faster rate. Capital intensive technique refers to that technique in which larger amount of
capital is comparatively used. In such a technique the amount of capital used per unit of
output is larger than what it is in case of labour intensive technique.

To quote Prof. Myint, “the capital intensive or labour intensive methods of producing a
particular commodity are classified by the modern factory methods of producing consumer
goods and mechanized methods of constructing roads, irrigation works and other projects.
Here, because of lower labour costs and higher productivity, the net output per unit of capital
may be comparatively higher.” Capital intensive technique has been shown in diagram 2.

In this diagram isoquant Q represents the initial .level of output, using OL amount of labour
and OC amount of capital. With the introduction of new technique a higher level of output is
shown by labour (OL) but with greater dose of capital (OC1). Therefore, capital intensive
technique is using more capital with the same amount of labour.

Labor Intensive
~2 minutes
In simple words labour intensive technique is that which uses comparatively larger amount of
labour and small doses of capital. It is that technique by which more of labour and less of
capital is required for the process of production. However, it can be defined as one in which a
large amount of labour is combined with a smaller amount of capital. According to Prof.
Myint, “labour intensive methods of production are those that require a large quantity of
labour with a given unit of capital.” With this method of production, it is possible to raise
output by using the same amount of capital but greater amount of labour.

This technique fulfills two objectives of capital formation and skill. It raises agriculture
production through the use of minor irrigation, better seeds, manure, implements and the
introduction of short duration crops. Labour intensive technique has been illustrated with the
help of diagram I. In this diagramme, isoquant Q shows the initial level of output which is
being produced by using OL labour and OC amount of capital. With the adoption of new
technology a higher level of output is represented by the isoquant Q1; can be produced by the
same amount of capital i.e. OC. In this case, greater amount of labour is OL This shows that
the technique is labour intensive.

Fashion Industries Aggregate Planning

The selection of merchandise is a critical part of retail management. Assortment planning

aims to ensure that an appropriate mix and quantity of retail inventory is stocked to meet
customer demand. It involves gathering and evaluating historical data related to customer
demand for various categories of goods to reduce inventory out-of-stock and overstock
problems. The collaborative efforts of retailers and vendors assists in synchronizing the
market orientation process in assortment planning for the garment or apparel industry.

Strategic Business Objectives

Strategic business objectives (SBO) play a key role in assortment planning. SBOs are the
specific, measurable goals and objectives set by a business. This is developed at various
levels within an organization and is generally tied to a clearly discernible target market.
Market research related to an apparel retailer’s target market will impact the inventory
selection process. Keep in mind that SBOs and product assortment planning also will be
shaped by budgets.

Product Category

Merchandising categories for the garment industry include basics, fashion basics and fashion.
The procedures generally used for assortment planning differ between each category. For
example, the “basics” category in ladies apparel might represent products with extended life
cycle, such as a traditional black skirt. “Fashion basics” represents standard seasonal
variations in color and fabric. The “fashion” category includes the newest designs and trends.
The fashion basics and fashion categories typically have shorter demand windows.

Style Placeholders

The early process for assortment planning generally involves creating style placeholders,
which are established within each product category to allow forecasting prior to the
completion of final product specification. This defines the further assortment attributes that
might be included, such as style, price points, sizes, colors, units and SKU counts.

Forecasting

Financial and sales reports provide a garment retailer with historical performance data
segmented by product category that can be analyzed to identify historical, current and future
trends. Analyze data variances, for example, based on historical sell-through data by
category, to uncover order patterns and the fill rates for product categories. Retailers may also
track gross margin, inventory turns and end-of-season excess inventory to assist in planning
for effective inventory assortment.

Aggregate planning involves projecting market demand and evaluating production capacity to
ensure that a firm is sufficiently equipped to meet demands for a given period. Production
rates for a range of products or services are generally examined in the aggregate planning
process, which also seeks to influence demand for overall outputs. Workforce size and
financial resources are both key variables in this inventory management process.

Informal Tools

The aggregate planning process, which compares market demand projections against existing
and potential inventory capacity, uses basic tables, charts and other graphics aligned to data
processing systems. These tools are used in aggregate planning to compare an assortment of
alternative ways of achieving a company’s supply management goals. When using these
types of informal methodologies alone, one disadvantage identified is that they might not
provide the most optimum aggregate plan, according to Lin Pan and Brian H. Kleiner in their
essay “Aggregate Planning Today.”

Mathematical Techniques

Mathematical techniques are used in the aggregate planning process. For example, production
rates and human resource requirements might be evaluated as linear program problems. This
involves choosing and expressing values for known and unknown variables, quantities to be
minimized or maximized and constraints. One of the disadvantages with using mathematical
techniques, such as the linear programming method, in aggregate planning is the assumption
of determinism generally factored into its application.

Heuristic Methods

Heuristic methods can accelerate the aggregate planning process based on the experience and
knowledge of the planning team. Examples of heuristic techniques include making judgments
based on past experience or using known industry best practices. It is used in aggregate
planning because the process is driven by the organization’s decision-makers who draw upon
their knowledge and experience. For example, the framework used for planning production
might involve heuristic techniques to, in part, establish production ratios based on production
management’s experience with specific inventory areas at varying production levels.

Budget Considerations

A firm’s budget significantly shapes estimates for production capacity. Generally, budgets
are developed using factors that are also used in the aggregate planning process — for
example, existing inventory levels and valuations, historical purchasing patterns and human
resource production capabilities. Additionally, aggregate plans must operate within the
constraints imposed by the revenue allocations earmarked for production of various products
or services. In this sense, aggregate planning and preparing budgets are closely related
business functions.

Materials requirements Planning (MRP I)

In manufacturing, developing a plan for your resources is vital to your operation. Without
resource planning, your operation will have a much more challenging time managing various
areas within your supply chain such as inventory, production, and output. This is why
utilizing a materials requirement planning (MRP) system can efficiently manage materials
within production, making it much easier for project managers to order and organize
materials waiting to be assembled.

Through materials requirement planning (MRP), the need for manual materials planning is
eliminated and the system is able to successfully carry out an efficient strategy. MRP has
become a vital component in allowing manufacturers to keep up with a consistently growing
demand.

Material Requirement Planning (MRP) Functions

Utilizing a systemic approach, the system is able to efficiently keep production up to

schedule through data analysis and simple integration. Although the system cannot run a
production facility all on its own, it still is able to maintain a steady flow of materials
throughout the supply chain through decision-making capabilities. Various functions of an
MRP system include the following:
 • Inventory Management: Arguably the main objective of an MRP system, the feature
is to ensure that materials are available at a moment’s notice. This eliminates the need
for manual-entered data and is able to carry out material orders with ease. It also is
able to alert the facility when products are ready to be delivered.
• Cost Reduction: In correlation with inventory management, cost is reduced
significantly. Through ensuring a steady flow of inventory, holding and untimely-
delivery cost are reduced, ultimately bringing more revenue into the operation.
• Production Optimization: Although the main goal of MRP is to oversee and manage
materials, it benefits the rest of the system as well. As materials are flowing
throughout the supply chain, equipment and employees are able to work at a much
faster and efficient rate as well.

Implementing an MRP system can be extremely beneficial to your production facility, but as
mentioned previously, the system is not enough by itself. As manufacturers are looking for
ways to enhance production, many are coming to the same solution – advanced planning and
scheduling software (APS).

Advanced Planning and Scheduling (APS) with Materials Requirements Planning

(MRP)

Advanced planning and scheduling software (APS) can be integrated with an MRP system
with ease. Through diverse features, APS software offers as an extension of your MRP
system and can efficiently optimize production within your facility. Various features of APS
include the following:

• Resource Scheduling
• Schedule Optimization
• Capacity Planning
• Order Management

Manufacturing resource planning (MRP

II)
• Manufacturing resource planning (MRP II) is a comprehensive type of planning
for manufacturing companies. It is a sort of extension to the original material
requirements planning (MRP) concept. It emerged in the 1980s to help companies
deal with dynamic processes. Both of these, MRP and MRP II, are related to the
enterprise resource planning (ERP) system, which is a top-level business information
system that helps companies to plan better and work more efficiently.
• Manufacturing resource planning may include various software tools as well as
support processes. It is an overarching concept for business management. The tools
may include master production schedules, advanced invoicing, production resources,
inventory tools and more. The support processes may include contract management,
shop floor data collection, sales analysis and more.
• Through the use of diverse new technologies, companies can adjust how they work to
improve productivity and efficiency. Inventory control systems are a good example —
by aggregating big data and analyzing them for business intelligence, companies can
reduce warehouse inventory levels, to save on maintenance cost. This is just one way
 that MRP works for businesses; another way involves improving supply chains as
well as other parts of the production cycle.

Master Production Schedule

~4 minutes

A Master Production Schedule is a Schedule of the completions of the end items and these
completions are very much planned in nature. Master production schedule acts as a very
distinct and important linkage between the planning processes. With the help of this schedule,
one can know the requirements for the individual end items by date and quantity. In
companies, MPS are generally produced in order to know the number of each product that is
to be made over some planning horizon. This schedule forms a very unique part of the
company’s sales program which deals with the planned response to the demands of the
market.

A master production schedule is also in management language referred to as the master of all
the schedules as this schedule provides the production, planning, purchasing & top
management, the most needed information required for planning and control of the whole
manufacturing process or the operation.

Master production scheduling plays an important role in the balancing of demand with the
supply i.e. satisfying customers according to the limits of the factory and the supplier’s base.
MPS is used to know the number of the items that are to be produced, the planned inventories
of raw materials, finished products and parts etc.

MPS tells the company what is to be made or produced and also refers to the time in which
this production of the products is to be completed. It must be kept in mind that MPS does not
act as a sales forecast or as a manufacturing schedule or a wish list or a final assembly
schedule. MPS can be linked only with the final products and not with the planning involving
the production of parts or the components, as these listings require very detailed planning –
so these are left to the other plans that will follow this schedule.

In MPS, inputs are used to draw a master production schedule and the inputs used are –
orders from customers, production plan from aggregate planning, forecast, resources that are
available, inventory levels and the capacity constraints. While drawing a MPS, quantities of
individual items must be equal to the aggregate quantities from the production plan and also
the total requirements for a product must be allocated overtime in a very good manner.

MPS outputs include – the amounts that are to be produced, due dates, quantity that is
available to promise with the projected available balance. MPS is a schedule that expresses
the operations plan of production for a specific period of time only and is stated in terms of
the end items, which may be either shippable products or the highest level assemblies used to
make them.
The main steps in master production schedule can be summarized as –
1. Forming a preliminary MPS.
2. Performing rough – cut capacity planning.
3. Resolving differences.

Objectives of Master Production Schedule (MPS)

1. Keeping the inventories at the desired level by making perfect use of the resources
that are available with the company.
2. Setting up due dates for the availability of the end items and also providing the
required information regarding resources and also the materials – which act as the
supporting pillars of the aggregate planning.
3. Maintaining properly, the desired level of customer service.
4. Setting particular schedules for the production of the parts and the components that
are used as the inputs to materials requirements planning, in the end items.

Enterprise Resource Planning (ERP)

Enterprise resource planning (ERP) is a process used by companies to manage and
integrate the important parts of their businesses. Many ERP software applications exist to
help companies implement resource planning by integrating all of the processes it needs to
run a company with a single system. An ERP software system can integrate planning,
purchasing inventory, sales, marketing, finance, human resources, and more.

You can think of an enterprise resource planning system as the glue that binds together the
different computer systems for a large organization. Without an ERP application, each
department would have its own system optimized for that division’s particular tasks. With
ERP software, each department still has its own system, but all of the systems can be
accessed through one application with one interface.

ERP applications also allows the different departments to communicate and share
information more easily with the rest of the company. It collects information about the
activity and state of different divisions, making this information available to other parts,
where it can be used productively.

ERP applications can help a corporation become more self-aware by linking information
about production, finance, distribution, and human resources together. Because it connects
different technologies used by each individual part of a business, an ERP application can
eliminate costly duplicate and incompatible technology. The process often integrates
accounts payable, stock-control systems, order-monitoring systems, and customer databases
into one system.

ERP offerings have evolved over the years from traditional software models that make use of
physical client servers to cloud-based software that offers remote, web-based access.

Special Considerations
An ERP system doesn’t always eliminate inefficiencies within the business. The company
needs to rethink the way it’s organized, or else it will end up with incompatible technology.

ERP systems usually fail to achieve the objectives that influenced their installation because of
a company’s reluctance to abandon old working processes that are incompatible with the
software. Some companies are also reluctant to let go of old software that worked well in the
past. The key is to prevent ERP projects from being split into many smaller projects, which
can result in cost overruns.

ERP Solutions Providers

Some familiar names are leaders in ERP software. Oracle Corp. (ORCL) originally supplied a
relational database that integrated with ERP software developed by SAP (SAP) before
entering the broader enterprise market in a big way in the early 2000’s. Microsoft (MSFT)
has long been an industry leader, with many customers using multiple software applications
from the company.

As cloud-based solutions have grown in popularity in recent years, the traditional ERP
industry leaders have seen challenges from upstarts such as Bizowie and WorkWise.

• ERP software can integrate all of the processes needed to run a company.
• ERP solutions have evolved over the years, and many are now typically web-based
applications that users can access remotely.
• An ERP system can be ineffective if a company doesn’t implement it carefully.