Implementing Aggregate Planning in a Supply Chain in Practice

1. Think beyond the enterprise to the entire supply chain. Most aggregate planning today takes only the enterprise as its breadth of scope. However, many factors outside the enter­prise and throughout the supply chain can affect the optimal aggregate plan dramatically. There­fore, avoid the trap of thinking only about your own enterprise when planning. Work with downstream partners to produce forecasts, with upstream partners to determine constraints, and with any other supply chain entities that can improve the quality of the inputs into the aggregate plan. The plan is only as good as the quality of the inputs, so using the supply chain to increase the quality of the inputs will greatly improve the quality of the aggregate plan. Also make sure to communicate the aggregate plan to all supply chain partners who will be affected by it.
2. Make plans flexible, because forecasts are always inaccurate. Aggregate plans are based on forecasts of future demand. Given that these forecasts are always inaccurate to some degree, the aggregate plan needs to have some flexibility built into it if it is to be useful. By building flexibility into the plan, when future demand changes or other changes occur, such as increases in costs, the plan can adjust appropriately to handle the new situation.

How do we create this flexibility? In addition to the suggestions earlier in the chapter, we recommend that a manager perform sensitivity analysis on the inputs into an aggregate plan. For example, if the plan recommends expanding expensive capacity while facing uncertain demand, examine the outcome of a new aggregate plan when demand is higher and lower than expected. If this examination reveals a small savings from expanding capacity when demand is high but a large increase in cost when demand is lower than expected, deciding to postpone the capacity investment decision is a potentially attractive option. Using sensitivity analysis on the inputs into the aggregate plan enables a planner to choose the best solution for the range of possibilities that could occur.

3. Rerun the aggregate plan as new data emerge. As we have mentioned, aggregate plans provide a map for the next 3 to 18 months. This does not mean that a firm should run aggre­gate plans only once every 3 to 18 months. As inputs such as demand forecasts change, managers should use the latest values of these inputs and rerun the aggregate plan. Be careful, however, to modify plans in a way that limits volatility.
4. Use aggregate planning as capacity utilization increases. Surprisingly, many com­panies do not create aggregate plans and instead rely solely on orders from their distributors or warehouses to determine their production schedules. These orders are driven either by actual demand or through inventory management algorithms. If a company has no trouble meeting demand efficiently this way, then the lack of aggregate planning may not harm the company sig­nificantly. However, when utilization becomes high and capacity is an issue, relying on orders to set the production schedule can lead to shortages and delays. When utilization is high, aggregate planning helps the firm effectively meet the forecasted demand.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.