14.2 Concept and Horizon of Aggregate Planning
Aggregate Planning and Sales and Operations Planning (S&OP) are interrelated and complementary processes within operations management. While aggregate planning focuses on developing production strategies that optimize resource utilization to meet forecasted demand, it does so at an aggregate level, typically considering product families rather than individual items. S&OP, on the other hand, is a broader, cross-functional process that integrates inputs from sales, operations, and finance to produce a unified, organization-wide plan (UKEssays, 2018).
Both processes are heavily dependent on accurate forecasting and capacity planning. Demand forecasts serve as a foundational input, enabling planners to anticipate future demand patterns and adjust production and resource levels accordingly.
As discussed in Chapter 3, forecasting supports decision-making across three planning horizons:
- Long-term (Strategic): Typically spanning 1 to 5 years, these forecasts guide top management in making strategic decisions such as capacity expansion, new product development, and capital investments.
- Medium-term (Tactical): Covering 3 to 18 months, this horizon supports aggregate planning and S&OP activities. Operations managers use these forecasts to align production plans with fluctuating market demand.
- Short-term (Operational): Ranging from daily to six months, short-term forecasts help supervisors and operations managers schedule production activities, manage inventory, and coordinate job sequencing and order dispatching.
Planning Horizons and Decision Scope
| Plan Time Horizon | Planners Involved | Plan Scope | Sample Decisions |
|---|---|---|---|
| Long-term (Strategic): 1–5 years | Top management | Strategic capacity planning | New product development, capital investment |
| Medium-term (Tactical): 3–18 months | Operations managers, S&OP team | Aggregate and S&OP planning | Production planning, budgeting |
| Short-term (Operational): Daily–6 months | Operations managers, supervisors | Short-term scheduling and control | Job sequencing, order scheduling, and dispatching |
Aggregate planning and S&OP also involve evaluating current capacity and identifying strategies to adjust it in response to demand fluctuations. This includes both external and internal considerations:
- External Factors: These are largely market-driven and include changes in customer demand, which are often beyond the direct control of the firm. While businesses may attempt to influence demand through promotions, backordering, or product mix adjustments, such strategies are typically short-term and may carry risks such as lost sales or customer dissatisfaction.
- Internal Factors: These are within the firm’s control and include adjustments to inventory levels, workforce size and skills, production rates, and subcontracting. Effective aggregate planning enables firms to manage these internal levers efficiently.
To be successful, aggregate planning requires access to accurate and timely information, including:
- Demand forecasts
- Inventory levels
- Workforce availability and costs
- Production capacity
- Subcontracting and overtime options
- Cost data related to inventory, hiring/firing, stockouts, and more
Using this information, the goals of aggregate planning are to:
- Balance production rates, workforce levels, and inventory
- Minimize total operational costs while meeting demand
- Enhance customer service levels
- Stabilize production and workforce utilization
- Provide top management with a clear, data-driven view of the business
