Commonly Used Terms
Aggregate Plan
Aggregate planning refers to the process of developing, maintaining, and analyzing the approximate scope of the operations of a company. It usually contains targeted sales forecasts, inventory levels, and production levels. Aggregate planning determines capacity and then minimizes the cost by balancing them against such capacity. It is considered a marketing activity that is done in advance in order to determine the cost of production and procurement of other necessary materials in order to minimize the cost of operation of a company.
An aggregate plan is produced when the demand and current capacity of the company is determined. The number of units that can be produced in a fixed time period is expressed as capacity. Demand, on the other hand, is expressed as the number of units required.
Methods that can be used to bring both to equilibrium are as follows:
- Pricing: When the demand for a product is less, the price will be decreased to match the capacity and vice versa when the demand is rising.
- Advertising/promotion: Marketing the product can have a significant impact on its demand
- Back ordering: By delaying the delivery on existing orders, demand is shifted to a period when capacity is not fully utilized.
- New demand creation: A complementary demand is created to supplement the existing demand—for example, the addition of a bar in a restaurant.
Aggregate planning strategies
- Level strategy
A level strategy aims at producing a plan that maintains a steady production or employment rate. The firm under this strategy maintains a steady workforce and output when the demand is low; this equips the firm with higher inventory levels than required. This is particularly helpful when the demand increases because the company can maintain the steady flow of workers and productivity and absorb the increased demand with their extra supplies. Thus the company can function efficiently at no extra cost.
- Chase strategy
This strategy aims at matching demand and capacity period by period. It requires a great deal of flexibility on the company’s part as it involves a considerable amount of hiring, firing, increasing inventory, etc. chase strategy considers the components of production, variable and thus does not hold them at a set level. It evolves according to the needs of the company and ends up saving costs because of that.