The Role of Aggregate Planning in a Supply Chain

Imagine a world in which manufacturing, transportation, warehousing, and even information capacity are all limitless and free. Imagine lead times of zero, allowing goods to be produced and delivered instantaneously. In this world, there would be no need to plan in anticipation of demand, because whenever a customer demands a product, the demand would be instantly satisfied. In this world, aggregate planning plays no role.

In the real world, however, capacity has a cost, and lead times are often long. Therefore, companies must make decisions regarding capacity levels, production levels, outsourcing, and promotions well before demand is known. A company must anticipate demand and determine, in advance of that demand, how to meet it. Should a company invest in a plant with large capacity that is able to produce enough to satisfy demand even in the busiest months? Or should a com­pany build a smaller plant but incur the costs of holding inventory built during slow periods in
anticipation of demand in later months? These are the types of questions that aggregate planning helps companies answer.

Aggregate planning is a process by which a company determines planned levels of capacity, production, subcontracting, inventory, stockouts, and even pricing over a specified time horizon. The goal of aggregate planning is to build a plan that satisfies demand while maximizing profit. Aggregate planning, as the name suggests, solves problems involving aggregate decisions rather than stock-keeping unit (SKU)-level decisions. For example, aggre­gate planning determines the total production level in a plant for a given month, but it does so without determining the quantity of each individual SKU that will be produced. This level of detail makes aggregate planning a useful tool for thinking about decisions with an intermedi­ate time frame of between roughly 3 and 18 months. In this time frame, it is too early to deter­mine production levels by SKU, but it is also generally too late to arrange for additional capacity. Therefore, aggregate planning answers the question: How should a firm best utilize the facilities that it currently has?

To be effective, aggregate planning requires inputs from all stages of the supply chain, and its results have a tremendous impact on supply chain performance. As we saw in Chapter 7, collaborative forecasts are created by multiple supply chain enterprises and are an important input for aggregate planning. In addition, many constraints that are key inputs to aggregate planning come from supply chain partners outside the enterprise. Without these inputs from both up and down the supply chain, aggregate planning cannot realize its full potential to create value. The output from aggregate planning is also of value to both upstream and downstream partners. Production plans for a firm define demand for suppliers and establish supply con­straints for customers. This chapter is meant to create a foundation for using aggregate planning both solely within an enterprise as well as across the entire supply chain. The supply chain implications of aggregate planning will become even clearer in Chapter 9, in which we discuss sales and operations planning.

As an example, consider how a premium paper supply chain uses aggregate planning to maximize profit. Many types of paper mills face seasonal demand that ripples up from customers to printers to distributors and, finally, to the manufacturers. Many types of premium paper have demand peaks in the spring, when annual reports are printed, and in the fall, when new-car bro­chures are released. Building a mill with capacity to meet demand in the spring and fall on an as-needed basis is too costly, because of the high cost of mill capacity. On the other side of the supply chain, premium papers often require special additives and coatings that may be in short supply. The paper manufacturer must deal with these constraints and maximize profit around them. The mills use aggregate planning to determine production levels and inventory levels that they should build up in the slower months for sale in the spring and fall, when demand is greater than the mill’s capacity. By taking into account the inputs from throughout the supply chain, aggregate planning allows the mill and the supply chain to maximize profit.

The aggregate planner’s main objective is to identify the following operational parameters over the specified time horizon:

• Production rate:     the number of units to be completed per unit time (such as per week or per month)
• Workforce:    the number of workers or units of labor capacity required
• Overtime:      the amount of overtime production planned
• Machine capacity level:       the number of units of machine capacity needed for production
• Subcontracting:      the subcontracted capacity required over the planning horizon
• Backlog:       demand not satisfied in the period in which it arises, but is carried over to future periods
• Inventory on hand:       the planned inventory carried over the various periods in the plan­ning horizon

The aggregate plan serves as a broad blueprint for operations and establishes the parameters within which short-term production and distribution decisions are made. The aggregate plan allows the supply chain to alter capacity allocations and change supply contracts. As mentioned in earlier chapters, the entire supply chain should be involved with the planning process. If a manufacturer has planned an increase in production over a given time period, the supplier, trans­porter, and warehouse must be aware of this plan and incorporate the increase into their own plans. Ideally, all stages of the supply chain should work together on an aggregate plan that opti­mizes supply chain performance. If each stage develops its own aggregate plan independently, it is extremely unlikely that all the plans will mesh in a coordinated manner. This lack of coordina­tion results in shortages or oversupply in the supply chain. Therefore, it is important to form aggregate plans over a wide scope of the supply chain.

In the next section, we formally define the aggregate planning problem. We specify the information required for aggregate planning and discuss the decision outcomes that aggregate planning can provide.

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