What is the difference between aggregate planning and capacity planning?

For any company to profit from a product, there must be a strategic plan in place to produce just enough to meet that need. Create too few products, and there’s a missed financial opportunity. Create too much, and money is wasted in production and warehousing.

Aggregate planning is a technique to create an equilibrium between demand and capacity. It’s something every company that is producing something needs to know. Let’s take a look at what aggregate production planning is and some aggregate planning strategies.

What Is Aggregate Planning?

Aggregate planning is a method for analyzing, developing and maintaining a manufacturing plan with an emphasis on uninterrupted, consistent production. Aggregate planning is most often focused on targeted sales forecasts, inventory management and production levels in the mid-term (3-to-18-month) future.

Note that production planning is not just goods, but services as well. Aggregate planning defines the necessary production inputs for a good or service (including facilities, workforce, raw materials and inventory levels) to maintain consistent delivery dates, all while keeping costs down.

How to Create an Aggregate Plan

To create an aggregate plan, you must first determine the number of units that are produced over a specific time frame, which is the capacity, and the number of units needed, which is the customer demand.

Here are some of the factors to consider when trying to create consistency in your process:

• Pricing Strategies: When demand is low, reduce the price to match capacity. You can also do the reverse; when demand is high, increase the price.
• Advertising/Promotion: Marketing and promotional activities can impact the demand for your product or service.
• Back Ordering: Delay delivery until demand catches up with capacity.
• New Demand Creation: Create another demand to supplement an existing one.
• Workforce: You can lay off or hire employees to meet the demand or respond to a lack of it. Overtime, subcontracting or use of a temporary workforce is also an option.

What’s the Purpose of Aggregate Planning?

As stated, the goal of aggregate planning is figuring out the level of production, inventory and workforce required to respond to fluctuating demand in the medium term. With this information, a business can assess when demand will spike or wane, and ensure it has enough product to meet the moment. Aggregate production planning also lets manufacturers know what staff, materials, output rates, timeline estimates and budget costs they need.

Making forecasts saves the company from changing its production schedule quickly, which is not only expensive but also creates insecurity and uncertainty. With aggregate planning, you can make a fairly accurate forecast of demand and capacity in the medium term.

Resource Management

In other words, you’re working on short-term resource allocation. This reduces the risk of overproduction, which wastes resources, depresses prices and can lead to oversaturation of your product in the market. By reducing production during periods of weak demand, you save money on labor and materials.

Cost Savings

Aggregate planning helps companies achieve their financial goals and improve the bottom line. It allows for maximum utilization of the available production capabilities while meeting customer demand and reducing their wait time, as well as reducing the cost of stocking excess inventory.

Good Data is Required

Aggregate planning forecasting is not a magic bullet, though. It’s only as good as the data you collect (and the people you use) to forecast. People have biases, and they can misread economic indicators or use faulty forecast models. There are always unknowns, too, such as material price spikes, implementation of new policies, changing interest rates. Not to mention labor; alterations in labor conditions can cause unrest in your workforce.

3 Types of Aggregate Planning Strategies

Success depends on having the following inputs: an aggregate demand forecast for the period you’re planning for, evaluating capacity management (including using subcontractors, outsourcing, etc.), and the existing operational status of your workforce. All this will lead to greater accuracy, and therefore, a greater likelihood of success.

You can achieve this by applying a variety of aggregate planning strategies. There are three main ones that organizations have used:

1. Level Strategy: The goal of an aggregate planning strategy is to keep the production rate and the workforce level. This requires strong forecasting of demand to know if production levels must be increased or decreased as customer demands grow and shrink. This aggregate production planning strategy will keep your workforce steady but can increase your inventory and backlog.
2. Chase Strategy: As the name implies, you are chasing market demand. The production matches demand, and excess inventory isn’t held over. This is part of a larger lean production strategy, which saves money by waiting until an order is placed. However, productivity and quality can be reduced, and it can negatively impact the morale of your workforce.
3. Hybrid Strategy: There is a third alternative, which is a hybrid of the previous two strategies. This keeps the balance between the production rate, workforce and inventory levels, while still responding to demand as it changes. This alternative offers a bit of flexibility that can satisfy demand while working to keep production costs low.

Best Practices for Making an Aggregate Plan

Whatever strategy you choose, there are some things to keep in mind when using aggregate planning. For one, you want to figure out the demand and capacity for each period. These two should match one another, though this might require overtime or sub-contracting to achieve.

You’ll also want to identify any policies, be they union, departmental or companywide, that can impact production levels. Cost is also important, obviously, so you’ll want to determine fixed and variable costs as well as direct and indirect labor costs.

It never hurts to have an alternative plan just in case. These plans should also follow the same best practices for making an aggregate plan. If you come up with one that meets your objectives, you might discover it in fact costs less and should be your primary aggregate production plan.

How ProjectManager Helps with Aggregate Planning

Work management software helps you reign the variables in your aggregate planning and let you manage your production to keep capacity matched with demand. ProjectManager is a cloud-based software that gives you better insights into your manufacturing process, workforce and budget because it delivers real-time data.

Managers understand that aggregate planning is all about resources. You can use the Gantt chart to plan production, filter for the critical path and set a baseline to always have project variance available to view. Set up your budget, then manage costs. Your resources’ costs are automatically calculated as your team logs their hours worked. The Gantt chart has a timeline, which provides a visual of the whole production cycle.

Keeping track of your team, their hours and availability is key to a successful aggregate production plan. With ProjectManager, you can set your teams’ workdays, holidays and PTO. You can also view all the tasks assigned to them on a Team Page. Then, you can switch over to the color-coded workload chart. From there, you can re-allocate their work to balance their workload and help them work more productively.

Another of ProjectManager’s work views is the kanban board. This visual workflow tool lets your teams manage their backlog, while you get transparency into where they are in the production cycle. Aggregate planning is all about matching capacity to demand.

With the board view, you can see potential roadblocks and re-allocate resources to keep the team working. ProjectManager is fast, flexible and provides the visibility needed for project planning, resource management and capacity planning.

ProjectManager is award-winning software that gives teams collaborative platform, and gives managers transparency without getting in the way of their workforce. See how it can help you meet demand, whether you’re working on one or dozens of projects at once. Try ProjectManager today for free.

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