Definition: Aggregate planning provides organizations with a frame of reference to help with overall organization planning, which is critical for evaluating whether an investment has been made and serving its objectives. This process includes identifying the current state of affairs in any particular area and determining an action plan to deal with any risks that would need to be addressed.
Aggregate planning is required when an individual or organization is established and will continue to grow. The primary function of the aggregate is to lay out a system of goals for management to accomplish over time. These goals generally need to be structured so that they can be achieved by changing the activities of some workers without changing the overall program or eliminating some goals.
In an aggregate planning phase, management prepares a preliminary schedule for each phase of the organization’s program. The goal is to identify major programmatic requirements and develop estimates of program costs. In addition, project management identifies key performance indicators (KPI) for every activity program in the framework of the overall schedule and develops criteria for selecting and implementing activities.
An aggregate plan gives management the flexibility to adjust the timing and size of contracts as necessary without disrupting ongoing contract negotiations or disrupting the performance of contracted services. Management can also adopt aggregated contracting principles when developing an overall operating budget. An aggregated contracting approach gives project managers the potential to originate more revenue, extend projects longer, and acquire new assets more quickly than if they were contractually obligated to purchase each item separately.
An aggregate plan is the overall strategy of a business. It will cover the different activities that are needed for the business to run effectively. For example, it may include:
- The marketing activities for the current year,
- Plan for increasing sales over time,
- Insurance requirements for specific business sectors and
- Any other legal or regulatory requirements that may affect how the company does business.
- For a start-up, the aggregate planning may include how much capital needs to be raised and loan terms need to be offered to potential investors.
Types of Aggregate Planning
1. Level Strategy
The level strategy carries out management functions that combine fine-tuning current practices and planning for future demand changes. An example of such an aggregate strategy would be an assembly line in which components are produced in standard quantity and then standardized in response to customer demand.
Level strategy is good because you typically have more experienced people contributing, which means there’s less churn and more consistency. Worse, if you’re getting started and can’t pin down an end date, then the level strategy can work against you because you’ll spend too much time managing people and not enough time doing your work.
2. Chase Strategy
Chase strategy involves conducting market research, identifying how customers behave in different markets, and deciding how to act accordingly. By understanding the psychology behind buying behavior and the impact that factors such as credit limits, utilization, complaints, and credit history have on behavior, firms can then match supply and demand on time, ensuring they can match deals to as many people as possible at the right time and the right price.
The advantage of the chase strategy is that it allows the business owner to get more assets quickly by attracting and retaining more valuable customers. The disadvantage is this does not give capital to improve the business as a whole. Instead, it allows the business owner to attract a more skilled workforce with a higher interest rate and fees, which can drain profits faster.
3. Hybrid Strategy
As the name implies, it looks to balance between level strategy and chase strategy.
The importance of aggregate planning can be demonstrated by the major companies in the financial industry. Each of them has an aggregate plan which is a comprehensive look at their overall financial picture. This picture includes the divisions within each business, products and services offered, liabilities and assets, revenue and expenses, on-sold product and services, relationships with suppliers and partners, and internal processes.
In a nutshell, the purpose of aggregate planning is to develop a realistic long-term strategy that aligns company goals, financial goals, and operational objectives. The aggregate plan allows you to see the big picture and allows for flexibility in action. By making decisions on a strategically aligned basis, you can utilize your human, financial, and technical resources effectively.