The Definitive Guide to Aggregate Planning

Managers must learn to forecast a balance between demand and capacity to make sound decisions when planning projects. Good managers develop a sixth sense for achieving an intricate balance between the two, maximizing their chances of project success over time. 

Before we go on, let's define both words: 

  • Capacity is the number of units that can be produced within a timeframe
  • Demand is the number of units required to fulfill customer or stakeholder needs

You must conduct effective aggregate planning and strategy to ensure your team delivers successful products efficiently and consistently. 

If capacity frequently exceeds demand, there's wastage. If demand frequently outweighs capacity, it could lead to poor outcomes, missed opportunities, and a strain and possible breakdown of available resources.

What is aggregate planning?

Aggregate planning is the process of balancing the relationship between demand and capacity to create stability in a workflow. In project management, it is used to manage and schedule activities related to capacity and demand, such as analyzing requirements, deploying resources, and maintaining the set timeline of projects and operations.

Oxford Reference defines aggregate planning as "an approach to planning that enables overall output levels and the appropriate resource input mix to be set for related groups of products over the near to medium term. Thus, the aggregate plan for a car factory would consider the total number of units produced per month but would not be concerned with scheduling individual models or colors. It would, instead, be concerned with the labor and machine hours available in a given period."

Aggregate planning helps teams and managers operate at maximum efficiency by influencing and adjusting workload and capacity to match changing demands.

Aggregate planning examples

Here are a few aggregate planning examples to help you understand the concept of aggregate planning better. 

Aggregate planning example 1

A mobile phone manufacturer planning for the first half of 2022 would consider fluctuating trends and changes that may affect sales and marketing in the first quarter of the new year. The aggregate forecast may look like this:

Month

Demand (forecast)

Production Timeline (according to number of working days)

January

19,000

21

February

30,000

20

March

20,000

23

April

30,000

22

May

35,000

21

June

35,000

22

Total

169,000 Units

129 Days

Next, they would calculate the accompanying cost of the demand forecast.

Resource(s)

Cost

Material

$200 per unit

Labor cost per hour

$50 per hour

Subcontracting

$30 per unit

Inventory

$6 per unit, per month

The input data provided helps create a proper aggregate plan, as separate elements are assembled to create a clearer picture for accurate project planning.  

Aggregate planning example 2

A software company creates ten products. The demand for seven of these products is increasing, while demand for the last three is dwindling. The company is focused on the overall growth and resources (people, technology, storage, and materials) needed for all ten products for the following year.

If the company makes a forecast for the ten products individually, each forecast may have errors. However, if they combine all ten forecasts, the aggregate demand figure would likely have fewer errors.

This happens because aggregate forecasts are more accurate than individual or disaggregated forecasts. The demand variation for each product is smoothed when aggregated with other products, providing a more accurate prediction. This is also known as risk pooling.

Aggregating the demands of individual products into one software creation plan is a better option than developing software creation plans for each product. The former often leads to better resource and time utilization, improving the company's bottom line. 

You gain more efficiency and benefits when you create an aggregate demand forecast rather than isolated demand forecasts.

Aggregate planning example 3

Imagine your company's working-hour policy for full-time employees is eight hours a day, four days a week. The organization's work capacity would be 32 hours a week for one full-time employee or a four-person day.

If demand requires eight full-time employees per week and the organization's capacity is seven full-time employees per week, there is an obvious shortage of one full-time employee per week. 

This reveals a problem with human resource capacity planning. You can restore balance by hiring a part-time workforce, encouraging team members to work overtime, or subcontracting knowledge vendors

What is the purpose of aggregate planning in project management?

In project management, aggregate planning reduces costs in project planning by detailing how much capacity, e.g., production time, inventory, and workforce, is required to respond to fluctuating organizational demands in the short to medium term. 

Aggregate project plans help managers categorize projects based on the number of resources they consume and contribute to their product line. This helps the management team and stakeholders have visibility into ongoing projects and programs and see where gaps exist to make timely and informed decisions. 

Other purposes of aggregate planning in project management include: 

Efficient time management

Most successful projects are timeline-driven and split into defined, actionable items. Aggregate planning helps project managers predict how much time a project will take and allocate sufficient pockets of time to complete different aspects of the project, paying particular attention to critical paths.

Resource management

Aggregate planning utilizes an organization's resources to meet or surpass the expected demand. This reduces resource wastage on individual projects, which can easily lead to demand outweighing capacity. 

Cost management

Aggregate planning creates a comprehensive budgeting framework to help companies achieve financial goals, rein in excesses, and improve the bottom line by maximally utilizing available resources and capabilities.

Big-picture perspective

Aggregate planning provides critical data to inform the big-picture perspective in an organization. When it is clear what resources and capacity are needed to satisfy certain demands, it is easier to make data-driven decisions that enable the organization to make the best of every situation. 

Types of aggregate planning strategies

Three common aggregate planning strategies are: 

Level strategy

This strategy focuses on balancing capacity and human resources in a program or company. The primary requirement for level strategy is a good demand forecast, which determines how much human resources and inventory are needed to meet current demand. 

When demand is low, management keeps a level labor force and sustains the production rate. When demand increases, the company can absorb any extra inventory, maintaining the production and employment levels. 

Chase strategy

This strategy, as the name implies, means that you are chasing demand. The company produces only when there is a demand and nothing more. 

Chase strategy is often used for lean manufacturing and production. Money and resources are saved by waiting until an order is placed. This is an excellent strategy for relatively low-cost production companies.

Hybrid strategy

Hybrid strategy in aggregate project planning is a combination of the level and chase strategy. It seeks to create an equilibrium between the capacity (or production rate), workforce, and inventory levels while responding to demand as it changes. 

The hybrid strategy realizes project goals and organizational policies at a considerably lower cost than the level or chase strategy. 

The Definitive Guide to Aggregate Planning 2
Photo by Firmbee.com on Unsplash

Challenges with aggregate project planning

Even with the purpose and advantages of aggregate planning, it comes with some challenges, including:

Bottlenecks

Bottlenecks arise when there are sudden changes in demand and congestion occurs in the project workflow. Bottlenecks reduce team efficiency and create long wait times, higher production costs, and high stress levels.

Smoothing

Changing production, capacity, and other resource levels from one period to another has its wear and tear. Smoothing refers to the cost that comes with making these changes.

Planning horizon

Aggregate planning challenges managers to draw insights from data and customers to forecast demand for a certain period with a degree of certainty. This comes with its risks, such as changing market forces and unpredictable events like COVID-19, which can render project plans useless. 

How to create in-depth aggregate planning strategies

The fundamental building block of aggregate planning is the forecast. You cannot correctly deploy an aggregate plan without a thorough forecast containing a vast pool of crucial information.

To get started creating an in-depth aggregate plan, follow the steps below:

  1. Determine the demand forecast for the period covered in the project.
  2. Assess organizational capacity for that period. Capacity can include resources, labor, and equipment. Ensure your capacity can match demand.
  3. Identify necessary policies that must be considered, e.g., internal company policies, outsourcing policies, inventory, workers' overtime, market forces, and regulations.
  4. Estimate the total cost for all the required inputs. Calculate the unit cost of materials, workers' wages, production, inventory, and indirect expenses.
  5. Create alternative or contingency plans to account for varying degrees of change. For example, individual plans may have different backup timelines, schedules, and business process outsourcing workflows to meet demand requirements.
  6. When you have your alternative plans, select the one that best satisfies corporate objectives. Compare your plans and determine how well each one meets these objectives. Usually, this is the plan with less cost or a better timeline.
  7. Do a pilot test to see how well it performs in different scenarios and conditions.

More proactive aggregate planning strategies to create a balance between capacity and demand

Here are a few other proactive activities that help create an in-depth aggregate plan:

Back ordering

Lean into back-order systems. Back ordering is the process of allowing your customers to place orders even if you don’t have sufficient stock on hand. Businesses implement back-ordering when a sudden increase in demand means that products are getting sold faster than they’re being stocked. This helps smoothen the demand process. You can have a process where delivery is delayed until demand catches up with capacity. Advance booking of flights is an excellent example of this.

Pricing as a strategy

Make changes to the pricing during low-demand seasons. For example, when demand is low, give discounts or reduce the price to match capacity. When demand is high, you can increase the price. This is a good way to bring some balance into your product planning.

Use marketing to your advantage

Leveraging advertising and promotional activities can increase demand when executed properly. Regardless of the aim of the project or product, even in internal company projects, advertising strategies are useful for influencing demand.

Create new demand

Create secondary or supplementary demands that boost your existing product. A good example is to offer additional services, up-sell a service, or promote complementary products that work with the ones purchased to keep up demand.

Vary the workforce

Managing human resources and labor can be particularly challenging when demand and capacity have the tendency to shift drastically. Create a balancing system to ensure project success. You can make use of a temporary workforce or subcontract to avoid a high churn rate. This will help balance the scale of human resource capacity in relation to demand.

Using Wrike for aggregate planning

Using a project management software like Wrike helps you match capacity with demand by providing visibility on all the variables that make up your project plans and management. 

With Wrike's cloud-based software, you can gain detailed insight into your processes, timelines, workload, etc. This way, you can maximize efficiency, which is the backbone of aggregate planning.

Using views like the Gantt chart and Kanban boards, managers can visualize the different timelines and schedule projects using a phased approach to ensure development runs on time, budget, and specification. A transparent approach to aggregate planning eliminates chaos, enabling teams to share their workflow, calendars, and backlog, offering transparency on how capacity matches demand.

Are you ready to improve efficiency in your team by strengthening your aggregate planning skills? Get started with a two-week free trial of Wrike today.

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