Question

Aggregate Planning                                                                                                                                (9)

Briefly explain and graphically illustrate aggregate planning’s position within the sequence of an organisation’s planning activities.

Answer 1

Sol:

9). AGGREGATE PLANNING
Introduction
An organization can finalize its business plans on the recommendation of demand forecast. Once business plans are ready, an organization can do backward working from the final sales unit to raw materials required. Thus annual and quarterly plans are broken down into labor, raw material, working capital, etc. requirements over a medium-range period (6 months to 18 months). This process of working out production requirements for a medium range is called aggregate planning.

Aggregate planning as an Operational Tool
Aggregate planning helps achieve balance between operation goal, financial goal and overall strategic objective of the organization. It serves as a platform to manage capacity and demand planning.

In a scenario where demand is not matching the capacity, an organization can try to balance both by pricing, promotion, order management and new demand creation.

In scenario where capacity is not matching demand, an organization can try to balance the both by various alternatives such as.

Laying off/hiring excess/inadequate excess/inadequate excess/inadequate workforce until demand decrease/increase.

Including overtime as part of scheduling there by creating additional capacity.

Hiring a temporary workforce for a fix period or outsourcing activity to a sub-contrato

Importance of Aggregate Planning
Aggregate planning plays an important part in achieving long-term objectives of the organization. Aggregate planning helps in:

Achieving financial goals by reducing overall variable cost and improving the bottom line

Maximum utilization of the available production facility

Provide customer delight by matching demand and reducing wait time for customers

Reduce investment in inventory stocking

Able to meet scheduling goals there by creating a happy and satisfied work force

Aggregate Planning Strategies
There are three types of aggregate planning strategies available for organization to choose from. They are as follows.

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.

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.

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

An example of a completed informal aggregate plan can be seen in Figure 1. This plan is an example of a plan determined utilizing a level strategy. Notice that employment levels and output levels remain constant while inventory is allowed to build up in earlier periods only to be drawn back down in later periods as demand increases. Also, note that backorders are utilized in order to avoid overtime or subcontracting. The computed costs for the individual variables of the plan are as follows:

Output costs:

Regular time = $5 per unit

Overtime = $8 per unit

Subcontracted = $12 per unit

Other costs:

Inventory carrying cost = $3 per unit per period applied to average inventory

Backorders = $10 per unit per period

Cost of aggregate plan utilizing a level strategy:

Output costs:

Regular time = $5 × 1,500 = $7,500

Overtime = $8 × 0 = 0

Subcontracted = $10 × 0 = 0

Other costs:

Inventory carrying cost = $3 × 850 = $2,400

Backorders = $10 × 100 = $1,000

Total cost = $10,900

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