Question

There is a question that has been raised during the class and I still did not get it what are the criteria that influence the aggregate capacity planning (can someone explain it to me in 500 words so I can fully understand it )

Answer 1

Introduction to aggregate planning

Aggregate planning is the procedure of creating a production schedule for a given period. It starts after listing out all the requirements that are crucial for uninterrupted production.

The usual planning horizon ranges from 3 to 12 months.

Word ‘aggregate’ is derived from the Latin verb aggregare, the meaning of it is ‘add to’. In economics or business, it is frequently used.

Hence aggregate production planning is the exercise of developing an overall production plan of all products combined for a company. That specifies how resources of the company are going to be allocated overall for the next three months to one year for a given demand schedule.

Aggregate capacity planning

Aggregate capacity is the total amount of capacity required or available to carry out a function.

The process of ascertaining the company’s overall volume and ability to perform in terms of its entire resources is called aggregate capacity management.

It is very important for an organization to understand the capacity of its resources. This will help the business to know its production capacity which will further lead to proper sales forecasting and prompt supply of products to the customers. This will also ensure to maintain the right amount of balance between the demand and supply without stressing out the resources.

The resources can vary from company to company but aggregate capacity takes into account both manual and machinery resources and does not really differentiate between the two.

To quote an instance, if the company is into the production of bikes, the aggregate capacity will consider only the end product numbers. It will not take into account the complexity of each bike, the variations, and the specialties. It looks from a macroscopic view.

Steps involved in aggregate capacity planning

1. Understanding the aggregate demand and supply for a specific period of time
2. Preparation of suitable plans and contingency plans for situations where the demand levels might fluctuate.
3. Finalizing on an appropriate plan.

How Aggregate Capacity Management Works

As an example of this concept, in a plant that manufactures various types of computers, aggregate capacity management would take into account the total number of computers to be manufactured over a three-month period, without considering the composition of the product mix—desktop, laptop, or tablet computers. An aggregate capacity plan assumes the mix of different products and services will remain relatively constant during the planning period.

Aggregate capacity management is generally a three-step process—measuring aggregate demand and capacity levels for the planning period, identifying alternative capacity plans in case of demand fluctuations, and choosing an appropriate capacity plan.

Operations managers are usually faced with a forecast of demand, which is unlikely to be either certain or constant. They will have some idea of their own ability to meet this demand, but before final decisions are made, they must have quantitative data on both capacity and demand. So step one will be to measure the aggregate demand and capacity levels for the planning period.

The second step will be to identify the alternative capacity plans that could be adopted in response to the demand fluctuations. The third step will be to choose the most appropriate capacity plan for their circumstances. Demand forecasting is a major input into the capacity management decision. As far as capacity management is concerned, there are three requirements from a demand forecast.

The criteria that influence the aggregate capacity planning

Generally, the business will have pure strategies ready to meet such unexpected situations. However, a combination is also used based on the needs.

• Altering the size of the workforce: this involves getting more people to work or laying off people when there is an excess of the resource.
• Altering the usage of the human resources: utilizing the existing workforce by providing overtime, incentives and such schemes.
• Changing the size of inventory: depending on how much the production can be leveraged the inventory is ordered.
• Outsourcing, sub-contracting, varying the plant capacity: passing on the work and meeting the production requirements.

Strategies used in aggregate capacity planning

Two types of strategies are used, level strategy, and chase strategy. The third approach is utilizing the best of both strategies.

Level strategy

This is also known as a production-smoothing plan or a stable plan.

It focuses on maintaining consistent production and human resources in a company. The expected demand rate is achieved by varying the associated factors such as finance and human resources.

Though this strategy helps in maintaining human resources, it also leads to stocking inventory. There are also chances of not meeting the expected targets, which might result in backlogs costing a lot more to the firm.

The level strategy is best suited to situations where inventory carrying costs are not high.

Chase strategy

It is also known as a just-in-time production plan.

Just in time (JIT) is a manufacturing methodology designed to decrease wastage by receiving goods only as they are needed. JIT process was developed in Japan to make the best use of limited resources.

It focuses on matching the anticipated demand with rigorous production. Though this strategy aims to meet the demand, it usually results in stressed employees, which increases attrition.

This strategy is best suited to situations where the cost of changing the production rate is relatively not high.

Hybrid strategy

The hybrid strategy focuses on blending both level and chase strategies for better and more fruitful results. The hybrid strategy in aggregate production planning keeps the balance between production rate, hiring/firing, and stock level.

Importantance of Aggregate Capacity Management

It's quite important for an organization to understand the capacity of its resources. This knowledge will help the business know and understand its production capacity and limitations and what will lead to further sales forecasting and prompt supply of products to go to the customers.

Aggregate capacity management also helps a company maintain the right amount of balance between the demand and supply without stressing out the resources. Resources can vary from company to company, but aggregate capacity takes into account both manual and machinery resources and does not really differentiate between the two.

The summary of this article is, we have to utilize the production alternatives available with us optimally. That satisfies the demand, with the overall objective of minimizing the total production cost. An appropriate aggregate planning strategy helps us in achieving the same.