Aggregate planning (AP) is a tactical function within operations management that aligns a company’s production capabilities with predicted market demand over the medium term. This planning is necessary because balancing supply and demand requires calculated adjustments to resources that cannot be made instantly or without significant financial impact. AP helps a business translate its broader strategic goals into actionable production targets, ensuring resources like labor and inventory are utilized efficiently. This article defines aggregate planning and focuses on the time horizon that governs this activity.
Defining Aggregate Planning
Aggregate planning is a methodology used to analyze and develop a comprehensive plan for a firm’s production schedule, inventory levels, and staffing requirements. The term “aggregate” refers to the fact that the planning is conducted for product families or groups of similar services, rather than for individual stock-keeping units (SKUs) or specific items. This high-level view simplifies the complexity of the planning process, allowing managers to focus on overall flow and capacity.
The fundamental goal of AP is to match forecasted demand with available capacity resources while minimizing total operating costs over the planning period. This balance involves determining the optimal quantities for production output and the necessary levels for resources such as total workforce size, inventory buffers, and production rates. Working with aggregated units provides a framework for managing the total flow of goods and services.
The Typical Time Horizon for Aggregate Planning
The time horizon for aggregate planning defines the period over which the production and resource plan will be executed. This timeframe is categorized as medium-range planning, falling between the long-term strategic decisions and the short-term scheduling of specific tasks. The typical time horizon for aggregate planning generally spans from three to eighteen months.
The most common range cited is six to twelve months, providing sufficient foresight to enact meaningful changes to major resources. This duration is long enough to permit management to implement significant adjustments, such as hiring or training the workforce. Conversely, the horizon is short enough that demand forecasts remain reasonably accurate, unlike the highly speculative forecasts required for multi-year strategic plans. The aggregate plan is often updated periodically, usually monthly, to account for updated demand forecasts and changing business conditions.
Why the Time Horizon Matters
The six-to-eighteen-month window is significant because of the nature of the capacity adjustments feasible within it. Decisions are tactical, focusing on modifying existing resources rather than acquiring new facilities or equipment, which are long-term capital decisions. This medium-term horizon allows for the execution of adjustments that are costly and non-trivial, requiring lead time for implementation and subsequent reversal.
Management can use this window to change labor levels through hiring and layoffs, which requires time for recruitment, training, and separation procedures. Production output can also be adjusted by utilizing overtime, idle time, or adding/removing extra work shifts. The time horizon also permits the strategic use of inventory as a buffer, allowing the business to build up stock during low demand to cover anticipated peaks later in the year.
Aggregate Planning in the Production Hierarchy
Aggregate planning occupies the intermediate tier in a company’s production hierarchy, serving as the bridge between high-level strategy and daily execution. At the highest level is Strategic Planning, which is long-term, often covering five or more years, and focuses on major capital investments like facility location, product line development, and market entry. AP translates the broad objectives set by strategic planning into a usable, medium-term operational plan that establishes capacity levels.
Below AP in the hierarchy is Master Production Scheduling (MPS), a short-term plan typically covering three to six months, often broken down into weekly time buckets. While AP deals with product families and aggregate units, the MPS disaggregates the plan by specifying the exact quantity and timing for the production of specific end items or SKUs. The aggregate plan provides the capacity and resource constraints used by the MPS to create a detailed schedule for the shop floor.
Key Strategies Used Within the Time Horizon
Within the aggregate planning time horizon, managers primarily use two distinct strategies to manage the balance between production capacity and fluctuating demand. The Level Strategy aims to maintain a constant production rate and a stable workforce level throughout the planning period, regardless of variations in demand. This approach absorbs demand fluctuations by building inventory when demand is low and drawing down excess inventory when demand rises. The trade-off is the increased cost of carrying inventory and the potential for backorders if demand significantly exceeds expectations.
The alternative, the Chase Strategy, involves adjusting production output and workforce levels to closely match the forecasted demand in each period. Under this strategy, a company might hire temporary workers or use subcontracting during peak demand periods and enact layoffs or reduce hours when demand falls. The benefit of the Chase Strategy is that it minimizes inventory holding costs and backlogs, but it incurs higher costs associated with hiring, firing, and training, leading to a less stable workforce. Many organizations adopt a Mixed Strategy, combining elements of both the Level and Chase approaches, such as maintaining a core workforce while using overtime and subcontracting.
Factors Influencing Time Horizon Length
While the six-to-eighteen-month range is typical, the exact length of the aggregate planning time horizon is not fixed and can be influenced by several industry-specific factors. The nature of the product and the industry’s production lead times play a significant role. For instance, a company manufacturing large capital goods with long procurement and assembly cycles may require a longer horizon, perhaps extending closer to the eighteen-month mark.
Conversely, businesses in fast-moving consumer goods or highly volatile service industries may adopt a shorter horizon, potentially closer to six months, because their demand forecasts lose accuracy quickly. The time required to acquire major resources, such as specialized raw materials or components with long supplier lead times, also necessitates a longer planning period. Predictability and volatility of market demand are important, as highly seasonal patterns often push the planning horizon longer to accommodate capacity adjustments.