What aggregate production planning is
Aggregate production planning (also called aggregate planning) sets, for a horizon of 6 to 18 months, how much to produce per period, how many people are needed, how much inventory to carry and how much overtime or subcontracting to use, with products grouped into families. The goal is to meet forecast demand at the lowest total cost without yet going into individual items.
It is the link between the demand forecast and day-to-day scheduling: the aggregate plan fixes resources, and the master production schedule breaks it down by product and week. In practice it is approved in the S&OP process.
Visual map of aggregate planning
The map compares the three strategies using the same six-month example and shows the total cost of each.
The three classic strategies
With demand changing month to month, there are only four levers: workforce size, overtime, inventory and subcontracting. The strategies combine these levers in different ways.
- Chase: output follows demand month by month, hiring and laying off. Inventory stays near zero, but hiring, training and layoff costs are high, with risks to morale and quality.
- Level: output is constant and equal to average demand. Inventory builds in slow months and is used in peak months. The workforce is stable, but you pay for inventory and risk obsolescence.
- Mixed (hybrid): a stable workforce at base level, with overtime, extra shifts, flexible hours or subcontracting to cover peaks. It is the most common approach in industry.
Ending inventory(t) = Ending inventory(t−1) + Production(t) − Demand(t)
Total cost = labor + hiring/layoff + overtime + inventory + shortage
In the level strategy, monthly output is total demand divided by the number of periods. In chase, the number of workers is the month's demand divided by each worker's productivity.
Worked example: six months, three strategies
Fictional example for a furniture plant, with aggregate demand in units of one product family:
- Demand for months 1 to 6: 700, 800, 1,000, 1,300, 1,200 and 1,000 (total 6,000, average 1,000).
- Productivity: 100 units per worker per month. Current workforce: 9 workers.
- Labor: $4,000 per worker per month ($40 per unit when the worker is fully used).
- Hiring: $1,500 per person. Layoff: $2,000 per person.
- Overtime: $48 per unit, at most 20% of regular output. Inventory: $10 per unit per month. Opening and closing inventory zero, no backorders.
Level: 6,000 ÷ 6 = 1,000 units per month, which needs 10 workers (1 hire). Ending inventory builds to 300, 500, 500, 200, 0 and 0: a total of 1,500 unit-months.
Chase: workers = demand ÷ 100, that is 7, 8, 10, 13, 12 and 10. Starting from 9, that is 2 layoffs in month 1, hires of 1, 2 and 3 people in months 2, 3 and 4, and layoffs of 1 and 2 people in months 5 and 6: 6 hires and 5 layoffs.
Mixed: a fixed crew of 9 workers (900 regular units per month) and overtime in the peak months, within the limit of 180 per month (20% of 900). It needs 600 extra units in total, in months 3 to 6.
| Month | Demand | Level: output | Level: ending inventory | Chase: workers | Mixed: output | Mixed: ending inventory |
|---|---|---|---|---|---|---|
| Month 1 | 700 | 1,000 | 300 | 7 | 900 | 200 |
| Month 2 | 800 | 1,000 | 500 | 8 | 900 | 300 |
| Month 3 | 1,000 | 1,000 | 500 | 10 | 1,040 (900 + 140) | 340 |
| Month 4 | 1,300 | 1,000 | 200 | 13 | 1,080 (900 + 180) | 120 |
| Month 5 | 1,200 | 1,000 | 0 | 12 | 1,080 (900 + 180) | 0 |
| Month 6 | 1,000 | 1,000 | 0 | 10 | 1,000 (900 + 100) | 0 |
| Total | 6,000 | 6,000 | 1,500 | 60 | 6,000 | 960 |
Costs, in dollars:
| Item | Level | Chase | Mixed |
|---|---|---|---|
| Regular labor | 240,000 | 240,000 | 216,000 |
| Overtime | 0 | 0 | 28,800 |
| Hiring and layoff | 1,500 | 19,000 | 0 |
| Inventory | 15,000 | 0 | 9,600 |
| Total cost | 256,500 | 259,000 | 254,400 |
How it was calculated: regular labor = workers × months × $4,000 (level 10 × 6; chase 60 worker-months; mixed 9 × 6 = 54 worker-months, $216,000). Mixed overtime = 600 × $48 = $28,800. Chase hiring and layoff = 6 × 1,500 + 5 × 2,000 = $19,000. Inventory = unit-months × $10 (level 1,500; mixed 960).
The mixed strategy is the cheapest at $254,400: 0.8% below level and 1.8% below chase. The gap is small, which is typical: the result depends on the cost inputs.
How to build the aggregate plan, step by step
- Aggregate demand into a common unit: family units, standard hours or tons. Use the consolidated demand forecast.
- Compute capacity per period (workers × productivity × days) and the overtime limit, as in production capacity.
- Gather costs: regular and overtime labor, hiring, layoff, inventory per unit-month, shortage or backorder, subcontracting.
- Build the plans in a spreadsheet, one per strategy, computing output, inventory and crew each month.
- Add up the costs and compare. For many periods and constraints, use linear programming, which finds the lowest-cost combination.
- Check feasibility: inventory never negative, overtime within limit, storage space and staffing policy.
- Approve it in S&OP and break it down in the master schedule and in MRP.
How to choose a strategy
- Hiring and layoff are cheap (temporary labor is easy to find): chase gets stronger. With hiring at $500 and layoff at $700, the same example would cost $246,500 for chase, the cheapest.
- Inventory is cheap and the product does not expire: level works well.
- Seasonal demand and skilled people hard to replace: mixed, with flexible hours and overtime.
- Perishable or make-to-order products: inventory is not an option, so chase or subcontracting.
Test sensitivity: vary inventory, overtime and hiring costs by ±30% and see whether the ranking changes. If it does, the decision is fragile and deserves closer analysis. Non-financial factors such as turnover, quality and morale also count, and the plan must fit the plant's production planning and control structure.
Common mistakes and limitations
- Aggregating badly: mixing products with very different machine-hour use hides bottlenecks. Use hours, not just units.
- Forgetting shortage or backorder cost and treating service as guaranteed.
- Ignoring the learning curve of new people in chase: someone hired yesterday does not make 100 units.
- Comparing on cost alone, without checking space, inventory cash flow and labor law.
- Treating the forecast as certain. The aggregate plan should be revised every month on a rolling horizon.
- Stopping at the aggregate level. Without a breakdown into the master schedule, the gain never reaches the shop floor.
Frequently asked questions
What is aggregate planning?
Medium-term planning that sets output, workforce, inventory and overtime per period for product families at the lowest cost.
What are the aggregate planning strategies?
Chase (output follows demand), level (constant output with inventory) and mixed (stable workforce with overtime or subcontracting).
What is the difference between aggregate planning and the master schedule?
Aggregate planning works with families and months; the master schedule works with products and weeks and is the breakdown of the aggregate plan.
Which strategy is best?
It depends on the costs. In the example, mixed cost $254,400 versus $256,500 for level and $259,000 for chase.
How does S&OP relate to the aggregate plan?
S&OP is the monthly process in which sales, operations and finance approve the aggregate plan and resolve gaps between demand and capacity.
What horizon should I use?
Usually 6 to 18 months, reviewed every month, in monthly periods.
Sources
- HOLT, C. C.; MODIGLIANI, F.; MUTH, J. F.; SIMON, H. A. Planning Production, Inventories, and Work Force. Englewood Cliffs: Prentice-Hall, 1960.
- CHASE, R. B.; JACOBS, F. R.; AQUILANO, N. J. Operations Management for Competitive Advantage. McGraw-Hill.
- NAHMIAS, S. Production and Operations Analysis. McGraw-Hill.
- HOPP, W. J.; SPEARMAN, M. L. Factory Physics. McGraw-Hill.
Keep studying: trusted sources and links
- ASCM: Association for Supply Chain Management
- ABEPRO: Associação Brasileira de Engenharia de Produção (in Portuguese)
- Wikipedia: Sales and operations planning
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About the author
Lean Manufacturing & Behavioral Management Specialist
Over 20 years in the automotive and metalworking industries (GM and Dana), Lean Manufacturing practitioner since 2006. SENAI instructor and mentor in Brazil’s Brasil Mais Produtivo program, delivering consulting, training and audits for 50+ companies, combining quality, productivity and people development.
