Aggregate planning is the process of developing, analyzing, and maintaining a preliminary, approximate schedule of the overall operations of an organization.

It generally contains targeted sales forecast, production levels, inventory levels and customer backlogs. Aggregate planning schedule is mainly prepared to satisfy the demand forecast at minimum cost by balancing capacity and demand. It is an intermediate-range capacity planning that typically covers a time horizon of 2 to 12 months. It is particularly useful for organizations which experience seasonal or other changes in demand or capacity. As such, when there is low demand, then resources or capacity can be reduced i.e. reduction in inventory and workers. Similarly, in season when demands are too high, the production capacity can be increased by increasing the resources. The first step in developing an aggregate plan is determination of demand and capacity. Demand is the total number of units needed where as capacity is the total number of units that can be produced. In order to make sure that both are equal, firm must decide whether to increase the demand to match the capacity or to increase or decrease the capacity to meet the demand. This can be achieved by the following options: INCREASING DEMAND TO MEET CAPACITY: y Pricing There is always variation in demand and there will be periods when the demand is less than the peak. For these periods, one can lower the pricing to boost demand. For e.g. Show prices in movie theatres, off-season rates in travel and tourism industry etc. Promotion Promotion methods like advertisements or direct marketing can be used to influence demand. Back ordering Demand can be smoothed out, or partitioned, by delaying delivery on current orders, thereby shifting the demand to a period when full utilization of capacity is not taking place. For e.g. Service industry smoothens out demand by taking in reservations or by making appointments in an attempt to avoid walk-in customers. New demand creation A complementary (but not free) demand is created for a service. For e.g.- The customers waiting in a restaurant are diverted to bar. Similarly, arcade gaming zones in malls and multiplexes is also another example for new demand creation.

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INCREASE OR DECREASE CAPACITY TO MEET DEMAND: y y y y Hire or Layoff To maintain a balance between capacity and demand, company can recruit additional workers or layoff excess workers to minimize cost incurred. Overtime Companies can create a temporary increase in capacity by making workers work overtime, thereby eliminating hiring of additional workers. Part-time or casual labor Temporary workers can be utilized on an on-call basis so as to match increased demand, without having to incur the cost of benefits given to full-time workers. Inventory Inventory can be built up when demand is low so as to match increased demand in future peak seasons.

Sub-contracting Companies can sub-contract to an alternative source to manufacture their products or provide services thereby gaining temporary additional capacity.