The Disadvantages of Aggregate Planning
Original post by Walter Johnson of Demand Media
“Aggregate planning” is one method by which a firm can schedule its production over a period of time. The single concept here is the “anticipation” of demand. Demand is assumed to exist at a certain level, and then the entire firm is meant to produce according to that level. Periodic adjustments can be made, but in general, the demand schedule permits only limited flexibility. If demand goes above or below the plan, back-ordering or inventory surplus is the result.
The fact that this system is a “plan” that seeks to organize production around anticipated demand is itself a disadvantage. There is little flexibility if demand spikes or falls drastically. If the firm has planned for a certain amount of output over the next six months and demand declines, then workers sit idle and inventory rots in warehouses. It is very rare that “scheduling demand” ever really fits perfectly with reality.
The “real-world” concept of aggregate planning is that the plan gets fulfilled no matter what happens on the “outside.” The firm in capitalism is meant to be a transmission belt between supply and demand. Instead, under aggregate planning, the firm looks more like a Soviet-style enterprise fulfilling a quota rather than focusing on customers and what they want. At least at certain times in the production cycle, the creation of goods might have no or little connection to customers at all.
In general terms, if a company's product suddenly becomes demanded in greater quantities, the firm doing the supplying has few options in the short term. Either the plan is totally thrown away and the company retooled, or the prices for the firm's product skyrockets without any short term response. Under extreme conditions, a sudden increase in demand might entice competitors to try and siphon off this demand if the firm is too tied to its “aggregate plan” to respond quickly. Aggregate planning is based on the desire for a smooth, bureaucratic routine. A firm, however, is meant to be a rapid response machine.
Under aggregate planning, stability is the main desire. If all goes according to plan, then the aggregate system works well. No one is surprised and the routine becomes normal. On the other hand, a sudden spike in demand means that workers are paid much in overtime, machinery is used beyond its capacity and, possibly, new workers must be rapidly hired and trained. All of this takes time and obviates the firm's short run flexibility. If demand shifts too far apart from the plan in any direction, labor is mismatched to the work at hand.
About the Author
Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” "The Constantian" and “The Social Justice Review."