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Aggregate Planning

Aggregate planning involves making trade-offs between capacity, inventory, and backlog costs. There are three main strategies for aggregate planning: chase strategy which uses capacity as the lever, flexibility strategy which uses utilization as the lever, and level strategy which uses inventory as the lever. Information technology plays a key role in aggregate planning by enabling optimization of large, complex problems and integration with other systems like inventory management. Accurate data and accountability are important for effective aggregate planning using advanced planning software systems.

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Farhad Munna
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39 views5 pages

Aggregate Planning

Aggregate planning involves making trade-offs between capacity, inventory, and backlog costs. There are three main strategies for aggregate planning: chase strategy which uses capacity as the lever, flexibility strategy which uses utilization as the lever, and level strategy which uses inventory as the lever. Information technology plays a key role in aggregate planning by enabling optimization of large, complex problems and integration with other systems like inventory management. Accurate data and accountability are important for effective aggregate planning using advanced planning software systems.

Uploaded by

Farhad Munna
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Aggregate planning

√√ Aggregate planning strategy / the aggregate planner must trade off between capacity inventory and
backlog. in this Concept explain the aggregate plan strategy.

The aggregate planner must make trade-offs among capacity inventory, and backlog costs. An aggregate
plan that increases one of these costs typically results in reduction of the other two. Arriving at the most
profitable combination of trade-offs is the goal of aggregate planning. Given that demand varies over
time, the relative level of the three costs leads to one of them being the key lever the planner uses to
maximize profits. If the cost of varying capacity is low, a company may not need to build inventory or
carry backlogs. If the cost of varying capacity is high, a company may compensate by building some
inventory and carrying some backlogs from peak demand periods to off-peak demand periods.( রিডিং
পরে গেলে চলবে)

In general, a company attempts to use a combination of the three costs to best meet demand.
Therefore, the fundamental trade-offs available to a planner are among the following:

Capacity (regular time, overtime, subcontracted)

Inventory

Backlog/lost sales because of delay

There are essentially three distinct aggregate planning strategies for achieving balance among these
costs. These strategies involve trade-offs among capital investment, workforce size, work hours,
inventory, and backlogs/lost sales. Most strategies that a planner actually uses are a combination of
these three and are referred to as tailored or hybrid strategies. The three strate gies are as follows:

Chase strategy :- using Capacity as the lever. Capacity is


changed as per the demand. Capacity includes both machine
capacity and man power capacity. This strategy can be
expensive to implement if the cost of varying machine or labor
capacity over time is high. It can also have a significant negative
impact on the morale of the workforce. The chase strategy
results in low levels of inventory in the supply chain and high
levels of change in capacity and work force. It should be used
when the cost of carrying inventory is high and costs to change
levels of machine and labor capacity are low.

2. Flexibility strategy-using utilization as the lever: This strategy


may be used if there is excess machine capacity. In this case,
the workforce (capacity) is kept stable, but the number of hours
worked is varied over time in an effort to synchronize
production with demand. A planner can use variable amounts
of overtime or a flexible schedule to achieve this
synchronization. This strategy results in low levels of inventory
but with lower average machine utilization. It should be used
when inventory carrying costs are relatively high and machine
capacity is relatively inexpensive.
3. Level strategy-using inventory as the lever: With this
strategy, a stable machine capacity and workforce are
maintained with a constant output rate. Shortages and
surpluses result in inventory levels fluctuating over time. In this
case, production is not synchronized with demand. Either
inventories are built up in anticipation of future demand or
backlogs are carried over from high- to low-demand periods.
Employees benefit from stable working conditions and
customer orders may be delayed. This strategy keeps capacity
and costs of changing capacity relatively low. It should be used
when inventory carrying and backlog costs are relatively low.
In practice, a planner is most likely to come up with a tailored
or hybrid strategy that com bines aspects of all three
approaches.

The Role of IT in Aggregate Planning


1. Aggregate planning is arguably the supply chain area in which
information technology has been used the most. The earliest IT
supply chain products were aggregate planning modules, often
called factory, production, or manufacturing planning Some of
the early modules focused only on obtaining a feasible
production plan subject to constraints arising from demand and
available capacity. Later modules provided tools that chose an
optimal solution from among the feasible production plans,
based on objectives such as increased output or lowered cost.
2. The ability to handle large problems
3. The ability to handle complex problems (through either
nonlinear optimization or linear approximations:- the large
amount of data considered in producing aggregate plans-which
can render nonlinear problems computationally prohibitive-and
the ability to treate linear approximations of nonlinear
functions, linear programming is often the best way to solve
these problems.
4.The ability to interact with other core IT systems such as
inventory management and sourcing
5. Many software vendors (including SAP and Oracle) offer
advanced planning systems (APSS) to help firms create
aggregate plans.

Data accuracy is critical if APSS are to deliver their full potential.


If the APS is using lead times or capacities that are different
from reality, the resulting aggregate plan is likely to lead to
unhappy customers and high costs. It is thus important to track
the accuracy of these parameters and ensure that people are
held accountable for these inputs.

Demand Forecasting in supply chain

√√The role of forecasting in a Supply chain.

1.The basis for all planning decisions in a supply chain

2. All push processes in the supply chain are performed in anticipation of customer demand, whereas all
pull processes are performed in response to cus tomer demand. For push processes, a manager must
plan the level of activity, be it production. transportation, or any other planned activity. For pull
processes, a manager must plan the level of available capacity and inventory .In both instances, the first
step a manager must take is to forecast what customer demand will be.

3. Increasing customer satisfaction


In order to keep your customers satisfied you need to provide them with the product
they want when they want it. This advantage of forecasting in business will help predict
product demand so that enough product is available to fulfil customer orders with short
lead times, on-time
4. Reducing inventory stockouts
Businesses need realise the importance of demand forecasting. If you are buying from
long lead time suppliers then you need to send a demand forecast so that suppliers can
arrange raw materials in anticipation of actual customer orders.
demand forecasting helps you to time your purchases to correspond to when sales
need to be fulfilled. The less time inventory spends in the warehouse, the less money
you’re paying to let it just sit there waiting to be sold.

5. . Lowering safety stock requirement

A good demand forecasting process will have a direct impact in the planning of
inventory levels, Link:

 Planning for new product launches


 Planning for promotional activity
 Planning for seasonal variations in demand

If a business is using forecasting to plan any of the above scenarios then you don’t
need to carry high safety stocks to manage those events.
6. Reducing product obsolescence costs By identifying, repurposing or removing
obsolete inventory the volume of inventory on hand will decrease. With this, both direct
and indirect costs of keeping the obsolete inventory will be reduced.

Beside above role Demand forecast help in supply chain in

Improving pricing and promotion management

Scheduling production more effectively

Managing shipping better

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