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Aggregate planning is a must for every company that wants to maximize profits. This guide will help you understand why it’s important and how to implement it in your business.Many small businesses hit a wall early on in their growth. They’re cranking out products and meeting customer demand as best they can, but they can’t quite get over the hump financially. Some months’ profits are great, and other months, they struggle to survive.
When it comes to project management for small business, aggregate planning is how you get to the next level. It's how you break free from razor-thin margins, living month to month, and start increasing the bottom line to a point that you can start thinking about growth rather than survival.
But what is aggregate planning, and how do you make it work for you? It sounds complicated at first, but the strategies are simple and easy to implement in your business plan.
Overview: What is aggregate planning?
Aggregate planning is the practice of balancing a business’s capacity and demand over a period of time -- usually a year -- to maximize profits.
Basically, it’s how management figures out how to operate at peak efficiency by adjusting capacity when demand rises and falls, or influencing demand so the company doesn’t have to change capacity.
Aggregate planning compiles the information on what a business needs to operate, from sales forecasts to production and inventory, to customer service, and then determines whether there are periods of time when the company has excess capacity or not enough capacity.
With this information, leadership makes adjustments using various strategies, like seasonal hiring or promotions.
Use aggregate operations planning in your business to maximize profits through proper resource management. If you fail to implement this practice, you will bust the project budget on capacity you don't need, or you will have too little capacity and fail to meet demand.
6 types of aggregate planning strategies
But how do you implement aggregate planning? You can choose from many strategies, or even combine a few. At a basic level, you have two options: you can modify demand to meet your production capacity, or you can modify capacity to meet demand.
Here are six common strategies -- three for the former option, then three for the latter -- along with aggregate planning examples for each.
Type 1: Pricing differentials and promotions
Managers use pricing differentials and promotions to boost demand to match available capacity. This ensures the company uses all capacity available to eliminate waste. Businesses based on seasonal demand frequently use this strategy to keep customers buying even after demand declines from its peak.
Example: A hotel in a popular summer hotspot experiences a drop in demand during the onset of winter, leading to many vacancies. The hotel addresses this by dropping prices by 50% and marketing it as a low-cost getaway alternative, filling up excess capacity that would have otherwise generated no revenue. The hotel takes a loss on rooms they would have filled anyway, but management uses aggregate planning to determine the revenue from rooms that would have gone unbooked will make up for the loss.
Type 2: Back ordering
Back ordering is aggregate production planning that postpones delivery of orders until the demand shifts to times of lower capacity. By spreading out demand through back ordering, a company efficiently uses its capacity throughout the year without offering costly discounts or promotions.
This may create a backlog, so managers should create a prioritization matrix for products based on expected popularity.
Example: An electronics store has sold out of a popular brand of LCD televisions. Instead of turning customers away, the store allows customers to back order the TV. Customers are disappointed at having to wait, but the brand is so popular, they place an order anyway. The store wouldn't sell quite as many as if they simply had a glut of stock, but after doing aggregate planning, management has determined the cost of this excess capacity would be greater than the cost of lost customers due to back ordering.
Type 3: Generating new demand
Rather than ramp down capacity, some companies will try to use the capacity to generate demand by creating a new product.
This is risky, as customers may not respond to the new product, but generally any new product is related to the old product as the same production processes must create it to minimize costs and reduce risk.
Example: An ice cream shop on the boardwalk uses the off-season to package and sell ice cream to grocery stores, using most of their available capacity. The profits are not as high as if they sold ice cream to individual customers on the boardwalk due to a lower markup, but they make up some losses they would incur if they shut down altogether.
Type 4: Seasonal hiring
Now, let’s look at adjusting capacity instead of demand. Seasonal hiring is a strategy to adjust capacity to match demand instead of the other way around.
By hiring workers for temporary positions with an expiration date, companies can ramp down capacity to expected sales volume in order to avoid overpaying for labor they don't need.
Example: A ski resort gets most of its revenue over a six-month period that features the coldest weather, and they would operate at a loss if they were open for the other six months. Instead of operating like most year-round businesses, they have only a few management employees working year round. They hire the rest of the workers on a seasonal basis, clearly spelling out in job ads that work begins in mid-October and ends in mid-April.
Type 5: Subcontracting
Subcontracting is attractive to companies looking to adjust capacity because it is essentially on-demand labor. The downside is that it is expensive compared to in-house labor.
However, the flexibility subcontracting provides allows companies to keep full-time staff at a minimum and operate with maximum efficiency in terms of capacity.
Example: A construction firm that specializes in residential housing has a full-time crew of workers to build the bulk of the house, but brings in electricians and plumbers as subcontractors when necessary. The firm could hire full-time electricians and plumbers, but because that work takes up only a small percentage of the time spent building the house, not enough work would be available and the firm would have excess worker capacity.
Type 6: Building up inventory
For companies that don't deal with issues like perishable products (meat producers, for example) or static supply (like a hotel), building up excess inventory during slow times allows the firm to manage excess capacity.
These companies can manufacture large amounts of goods knowing they will be snapped up at a higher rate later.
Example: A fireworks manufacturer confidently produces mass quantities of sparklers, Roman candles, and other firecrackers in the spring despite low demand. Management knows that when the 4th of July rolls around and then New Year's Eve after that, they'll be able to unload excess inventory based on sales figures from previous years. Because fireworks are non-perishable, the company can stock them in a warehouse and distribute them throughout the year.
Need help with aggregate planning? Try software
Creating an aggregate project plan gets complicated fast, especially if you rely on spreadsheets or basic software to organize your operations.
Project management software will help you with planning and forecasting, allowing you to implement advanced logistical techniques like the ones described above. The software also will help you with project planning and resource allocation, so it’s wise to shop around for that reason alone.
Check out software reviews from The Ascent on some of the top options available in your industry to see if any make sense for your business. Then download a trial and try it out for a week or two before deciding.
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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.
Factors Affecting Aggregate Planning
Aggregate planning is an operational activity critical to the organization as it looks to balance long-term strategic planning with short term production success. Following factors are critical before an aggregate planning process can actually start;
For aggregate planning to be a success, following inputs are required;
Aggregate planning will ensure that organization can plan for workforce level, inventory level and production rate in line with its strategic goal and objective.
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.
Importance of Aggregate Planning
Aggregate planning plays an important part in achieving long-term objectives of the organization. Aggregate planning helps in:
Aggregate Planning Strategies
There are three types of aggregate planning strategies available for organization to choose from. They are as follows.
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