Aggregate planning and its effect on fluctuating needs
Blog: Monday Project Management Blog
There are some aspects of business that are completely unpredictable. Natural disasters, for example, have the potential to upend your business plans, but a system built on stability and consistency can help protect you from factors outside your control. One effective strategy is aggregate planning, which allows you to save money, stabilize your workforce, and increase efficiency.
In this article, you will learn what aggregate planning is and how it can serve as a cost-saving measure for your business. By understanding the different kinds of aggregate plans and how they play out in management and operations, you can better evaluate whether this strategy would be beneficial in your own business.
What is aggregate planning?
Aggregate planning is the process of developing an approximate schedule that details how an organization will operate over a particular period, typically ranging from 3 to 18 months. It allows you to approach inventory and staffing with clear eyes, assess and minimize risks, and build more efficient systems.
How it works
Rather than evaluating only certain points, such as current inventory or expected sales, you will get a full picture of what you can expect in the future and then plan accordingly. When creating your plan, you will use data related to customer demand and capacity from several sources of information, including:
- Sales and demand forecasts
- Production history
- Inventory levels
- Customer backlogs
With this information in hand, you can determine whether there are times when your company tends to have excess or insufficient capacity, anticipate future peak sales times, and assess whether your staffing levels have been and are currently appropriate. Once you have developed and implemented a plan, you can make adjustments to capacity when demand rises or falls without excessive spending.
Benefits
While you can never be certain of the future, aggregate planning is a comprehensive approach that helps you to realistically outline the future of your business over the coming months.
Instead of making rash decisions when demand suddenly increases, you can make decisions that are informed by a carefully considered strategy.
There are several benefits to implementing aggregate planning within your business:
- It is an effective strategy for both goods and services.
- It matches production demand with production capacity, thereby minimizing operating costs.
- It maximizes a business’ productivity and efficiency.
- It specifies what materials and resources will be necessary and when to procure them.
As this list makes clear, developing an effective aggregate plan can have a positive effect on your overall business outcomes, from production to profit levels.
Challenges
Despite the advantages of aggregate planning, there are certain challenges that are worthy of consideration. First, keep in mind that aggregate planning is intended for a limited time range.
While this is a limitation, it offers an opportunity to be more proactive in your management practices. External and internal factors change over time, and creating an aggregate plan encourages you to make note of them and incorporate them into your business strategies. Regularly developing a new plan that best reflects current circumstances best positions you for long-term success.
Additionally, aggregate planning operates under the assumption that some factors are relatively certain when in reality there can be massive disruptions at any time. This emphasizes the importance of creating and implementing an aggregate plan with the knowledge that you will need to remain flexible and responsive to changes and difficulties in real-time.
“Aggregate planning” is a part of our Project Management Glossary — check out the full list of terms and definitions!
Creating a mid- to long-term strategy with aggregate planning
While all forms of aggregate planning can help businesses avoid the kinds of last-minute decisions that create a turbulent work environment, not every business follows the same format. There are three types of aggregate plans that companies commonly use for their mid- to long-term strategies.
Level strategy
A business that relies on a level strategy tries to create a plan that will keep production rates and employment relatively steady. Rather than resorting to layoffs and temporary hires, a business with a level strategy might:
- Use a constant workforce and produce a level number of units
- Establish a larger inventory than necessary when demand is low
- Use back orders or backlogs to address sudden increases in demand
A level aggregate plan can create a more predictable workload for employees. However, it can also be expensive as businesses often have excessive inventory and are constantly running at a full level of production.
Chase strategy
Chase strategy, in contrast, is focused on constantly matching demand and capacity. Rather than maintaining a constant level of production and a fully-staffed workforce, a business implementing a chase aggregate plan:
- Keeps inventory levels low until customer demand justifies an increase
- Hires, fires, and lays off employees as necessary based on production levels
- Introduces new strategies and methods of production when demand increases
Using a chase strategy can be problematic because of the constant changes. Businesses that employ this strategy may have problems with fluctuating quality levels because of frequent staffing changes, and they may have conflicts with employees and labor unions due to the frequent need for layoffs.
Hybrid strategy
Hybrid strategies combine elements of chase and level strategies and are often the most profitable and effective method that a business can employ. In a hybrid strategy, a business attempts to find a balance of flexibility and stability. For example, a hybrid aggregate plan might include minimal layoffs and a relatively steady level of inventory. Many businesses prefer hybrid strategies because they tend to be the most cost-effective of the three available forms of planning.
Aggregate planning in manufacturing and production
In manufacturing and production environments, aggregate planning can empower businesses to make sound decisions. The plan addresses all the production activities that are necessary to maintain uninterrupted production and helps businesses allocate resources appropriately despite variables like customer demand and problems with the supply chain.
Businesses can use aggregate planning to guide their choices in a number of important areas, including:
- Pricing modification
- Delayed deliveries
- Promotional activities
- Staffing increases
- Inventory increases
- Complementary demand
- Overtime requirements
- Temporary hiring
- Subcontracting work
- Cross-training of employees
Each of these aspects of a business is consequential for consistent and sustainable operations management. For example, a manufacturer that does not have an aggregate plan might use a period of high demand as justification for ordering excess materials and hiring additional employees for the upcoming quarter. However, the manager might fail to recognize that the business has historically had significantly less demand in this period. The additional materials now sit unused, and the employer lays off the recently hired employees.
How aggregate planning can lead to consistent production
Consistent production allows businesses to better meet demand without wasting resources. Because an effective aggregate plan creates equilibrium between demand and capacity, it allows a business to level out production rather than having sudden surges or reductions. A facility with an aggregate plan can level out production planning to serve customers over the entire period rather than ramping up or rapidly decreasing production based on the current environment.
How aggregate planning affects your team
In addition to maximizing business profits and making production consistent, aggregate planning is important to create a stable, reliable work environment for your team. Without an appropriate aggregate plan, your business’ workforce and resource needs can fluctuate wildly. As a result, you might be constantly laying off and hiring employees. This erodes trust, makes it difficult to recruit new talent, and may inspire current workers to seek employment elsewhere. It can also reduce work quality as it is difficult for employees to operate at their highest potential if they are constantly worried about when their jobs will end.
Aggregate planning with monday.com
Although aggregate planning can be an excellent tool for business and project management, it is only as strong as the data that goes into it. To build a strong plan, you will need to have access to reliable reports with information that is not only accurate but also up-to-date. monday.com’s Work OS allows you to manage your workflow in a way that incorporates all of the components of both creating and implementing an aggregate plan, including:
- Resource allocation
- Budgeting
- Sales forecasts
- Inventory management
In addition, you can use monday.com to communicate with team members and stakeholders so that everyone is on the same page and fully understands the plan and its implications.
Frequently asked questions
What is aggregate planning?
Aggregate planning is the process of analyzing data and developing a projected schedule for your business. Project and business managers create aggregate plans using information from different aspects of a business, including inventory, sales forecasts, and production levels.
Why is aggregate planning important?
Aggregate planning is vital to a business’ ability to schedule production, allocate resources, and adjust staffing. It allows businesses to minimize costs and keep production running consistently.
What can poor aggregate planning result in?
Poor aggregate planning can result in significant issues with supply and demand. Businesses with ineffective aggregate planning might have excessive inventory taking up space in warehouses or waste resources and staffing on unnecessary production. On the opposite side, they may find themselves unable to meet customer demand.
Strengthening your business with aggregate planning
There are many ways to reduce costs and improve business strategies, but aggregate planning is unique in the way that it combines information and addresses issues with demand and capacity from a more holistic viewpoint. If you want to stabilize production, create a more reliable workplace for your team, and minimize costs, you can begin creating an aggregate plan by taking advantage of the resources available on monday.com. Whether you need to run accurate reports, manage inventory, or communicate with team members and stakeholders, monday.com’s Work OS has the tools necessary to develop an effective aggregate plan.
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