Aggregate planning is the process for determining the most cost effective way to match supply and demand over the intermediate future, often from 3 to 18 months. This is achieved by adjusting production rate, workforce levels, inventory levels, overtime work, subcontracting rates, and other controllable variables.
Before we go into the strategies of aggregate planning, we shall examine a few concepts:
- Production Rate: Output per unit of time, such as units per day or units per week.
- Workforce Level: Number of workers required to provide a specified level of production
- Inventory Level: The surplus of units that results when production exceeds demand in a given time period.
- Backlog (or Stockout): The deficit in units that results when demand exceeds production in a given time period.
When generating an aggregate plan, there are a few questions an operations manager should ponder:
- Should inventories be used to absorb changes in demand during the planning period?
- Should changes be accommodated by varying the size of workforce?
- Should part-timers be used, or should overtime and idle time absorb fluctuation?
- Should subcontractors be used on fluctuating orders so a stable workforce can be maintained?
- Should price or other factors be changed to influence demand?
There are a few strategies an operations manager can adopt:
Matching the production rate to exactly meet the order rate by hiring and laying off workers as the order rate varies.
Maintain a stable workforce working at constant output rate; absorb demand variations with inventory, backlogs, or lost sales.
Stable Workforce – Variable Work Hours
Varying output by varying the number of hours worked through flexible schedules or overtime.
We will examine a few examples in the upcoming posts.
Jay Heizer & Barry Render, “Operations Management”, 8th edition
Lecture notes of Dr. Wong Kee Luan