Planning%20Demand%20and%20Supply%20in%20a%20Supply%20Chain

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Planning Demand and Supply in a Supply Chain
???? (3)Planning Demand and Supply in a Supply
Chain
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Outline

• Part I Aggregate planning
• Part II Managing predictable variability

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Aggregate Planning

• A process by which a company determines levels of
  capacity, production, subcontracting, inventory,
  stockouts, and pricing to maximize the firms
  profit over the planning horizon (3-18 months)
  given the demand forecast for each period.
• Focus on aggregate decisions rather than SKU
  level decisions.
• Identify operational parameters

• Production rate
• Workforce
• Overtime
• Machine capacity level
• Subcontracting
• Backlog
• Inventory on hand

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Information Required for Aggregate Planning

• Demand forecast for each period in the planning
  horizon
• Production costs
• Labor/machine hours required per unit
• Inventory holding cost
• Stockout or backlog cost
• Constraints limits on overtime, layoffs,
  capital, stockouts/backlogs

• Labor costs regular time and overtime costs
• Subcontracting cost
• Cost of changing capacity hiring/laying off
  labor, machine capacity change

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Aggregate Planning
Determinations

• Production quantity from regular time, overtime,
  and subcontracted time
• Inventory held
• Backlog/stockout quantity
• Workforce hired/laid off
• Machine capacity increase/decrease

Tradeoffs

• Capacity (regular time, overtime, subcontracted)
• Inventory
• Backlog/lost sales

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Basic Strategy
Chase Strategy

• Use capacity as the lever
• Production rate synchronized with demand rate by
  varying capacity of employee and machine
• Result in low inventory and high level of change
  in capacity and workforce
• Used when the cost of carrying inventory is very
  expensive and cost to change levels of capacity
  and workforce are low

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Basic Strategy
Time Flexibility from Workforce or Capacity
Strategy

• Use utilization as the lever
• Workforce is kept stable but the number of hours
  worked is varied over time
• Result in low inventory and lower average
  utilization
• Used when inventory carrying cost are high and
  capacity is inexpensive

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Basic Strategy
Level Strategy

• Use inventory as the lever
• Stable machine capacity and workforce are
  maintained with a constant output rate
• Result in large inventory and backlogs
• Used when inventory carrying costs and backlog
  costs are low

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Scenario 1 Aggregate Planning at Red Tomato Tools
Month Demand Forecast
January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200
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Costs for Red Tomato
Item Cost
Material cost 10/unit
Inventory holding cost 2/unit/month
Marginal cost of stockout/backlog 5/unit/month
Hiring and training costs 300/worker
Layoff cost 500/worker
Labor hours required 4/unit
Regular time cost 4/hour
Overtime cost 6/hour
Cost of subcontracting 30/unit
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Red Tomato

• Sell gardening tool which is highly seasonal
• Peak in spring
• Main capacity is size of workforce
• Sell each tool at 40
• Starting inventory in January is 1000 tools
• Starting employees in January is 80 persons
• The plant has a total of 20 working days/month
  and 8 regular hours/day
• Ending inventory is 500
• All demand must be satisfied no stock out in the
  last period

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Costs for Red Tomato
Item Cost
Material cost 10/unit
Inventory holding cost 2/unit/month
Marginal cost of stockout/backlog 5/unit/month
Hiring and training costs 300/worker
Layoff cost 500/worker
Labor hours required 4/unit
Regular time cost 4/hour
Overtime cost 6/hour
Cost of subcontracting 30/unit
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Aggregate Planning Model
Define Decision Variables
Wt Workforce size for month t, t 1, ...,6 Ht
Number of employees hired at the beginning of
month t, t 1, ...,6 Lt Number of employees
laid off at the beginning of month t, t 1,
...,6 Pt Production in month t, t 1, ...,6 It
Inventory at the end of month t, t 1,
...,6 St Number of units stocked out/backlogged
at the end of month t, t 1, ...,6 Ct Number
of units subcontracted for month t, t 1,
...,6 Ot Number of overtime hours worked in
month t, t 1, ...,6
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Define Objective Function
Since all demands is met, revenue is
fixed maximizing profit minimizing cost
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Define Constraints

• Workforce size for each month is based on hiring
  and layoffs
• Production for each month cannot exceed capacity
• Inventory balance for each month
• Overtime limit for each month

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Define Constraints

• Workforce size for each month is based on hiring
  and layoffs
• Production for each month cannot exceed capacity
• Inventory balance for each month
• Overtime limit for each month

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Define Constraints

• Workforce size for each month is based on hiring
  and layoffs
• Production for each month cannot exceed capacity
• Inventory balance for each month
• Overtime limit for each month

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Define Constraints

• Workforce size for each month is based on hiring
  and layoffs
• Production for each month cannot exceed capacity
• Inventory balance for each month
• Overtime limit for each month

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Aggregate Planning Model
Define Decision Variables
Wt Workforce size for month t, t 1, ...,6 Ht
Number of employees hired at the beginning of
month t, t 1, ...,6 Lt Number of employees
laid off at the beginning of month t, t 1,
...,6 Pt Production in month t, t 1, ...,6 It
Inventory at the end of month t, t 1,
...,6 St Number of units stocked out/backlogged
at the end of month t, t 1, ...,6 Ct Number
of units subcontracted for month t, t 1,
...,6 Ot Number of overtime hours worked in
month t, t 1, ...,6
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Defining Constraints
208160 hrs
160
4 hours/unit
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Net supply in current period
Net supply in previous period
Supply
Demand
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Evaluation of Performance

• Average inventory
• Average flow time

Littles law average flow time average
inventory / throughput
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Evaluation of Performance

• Average inventory
• Average flow time

Littles law average flow time average
inventory / throughput
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EXCEL-DEMO
Wt Workforce size for month t, t 1, ...,6 Ht
Number of employees hired at the beginning of
month t, t 1, ...,6 Lt Number of employees
laid off at the beginning of month t, t 1,
...,6 Pt Production in month t, t 1, ...,6 It
Inventory at the end of month t, t 1,
...,6 St Number of units stocked out/backlogged
at the end of month t, t 1, ...,6 Ct Number
of units subcontracted for month t, t 1,
...,6 Ot Number of overtime hours worked in
month t, t 1, ...,6
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EXCEL-DEMO
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EXCEL-DEMO2
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EXCEL-DEMO3
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EXCEL-DEMO4
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EXCEL-DEMO5
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EXCEL-DEMO6
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Define Constraints

• Workforce size for each month is based on hiring
  and layoffs
• Production for each month cannot exceed capacity
• Inventory balance for each month
• Overtime limit for each month

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EXCEL-DEMO7
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Optimal Aggregate Plan for Scenario 1

• Total cost over planning horizon 422,275
• Revenue over planning horizon 40 ? 16,000
  640,000
• Average seasonal inventory 895
• Average flow time 895 / 2,667 0.34 months

Period t No. Hired Ht No. Laid Off Lt Workforce Size Wt Overtime Ot Inventory It Stockout St Subcontract Ct Total Production Pt
0 0 0 80 0 1,000 0 0
1 0 15 65 0 1,983 0 0 2,583
2 0 0 65 0 1,567 0 0 2,583
3 0 0 65 0 950 0 0 2,583
4 0 0 65 0 0 267 0 2,583
5 0 0 65 0 117 0 0 2,583
6 0 0 65 0 500 0 0 2,583
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Define Constraints

• Workforce size for each month is based on hiring
  and layoffs
• Production for each month cannot exceed capacity
• Inventory balance for each month
• Overtime limit for each month

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Optimal Aggregate Plan for Scenario 1

• Total cost over planning horizon 422,275
• Revenue over planning horizon 40 ? 16,000
  640,000
• Average seasonal inventory 895
• Average flow time 895 / 2,667 0.34 months

Period t No. Hired Ht No. Laid Off Lt Workforce Size Wt Overtime Ot Inventory It Stockout St Subcontract Ct Total Production Pt
0 0 0 80 0 1,000 0 0
1 0 15 65 0 1,983 0 0 2,583
2 0 0 65 0 1,567 0 0 2,583
3 0 0 65 0 950 0 0 2,583
4 0 0 65 0 0 267 0 2,583
5 0 0 65 0 117 0 0 2,583
6 0 0 65 0 500 0 0 2,583
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Scenario 2 Increased Demand Fluctuation
The same overall demand (16,000 units) as
scenario 1
Month Demand Forecast
January 1,000
February 3,000
March 3,800
April 4,800
May 2,000
June 1,400
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Optimal Aggregate Plan for Scenario 2

• Total cost over planning horizon is higher
  432,858
• Average seasonal inventory 1,075
• Average flow time 1,075 / 2,667 0.40 months
• Inventories and stockouts go up compared with the
  plan for scenario 1

Period t No. Hired Ht No. Laid Off Lt Workforce Size Wt Overtime Ot Inventory It Stockout St Subcontract Ct Total Production Pt
0 0 0 80 0 1,000 0 0
1 0 15 65 0 2,583 0 0 2,583
2 0 0 65 0 2,167 0 0 2,583
3 0 0 65 0 950 0 0 2,583
4 0 0 65 0 0 1,267 0 2,583
5 0 0 65 0 0 683 0 2,583
6 0 0 65 0 500 0 0 2,583
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Optimal Aggregate Plan for Scenario 3

• Suppose holding cost is increased from 2 to 6
  compared to scenario 1
• Total cost over planning horizon is higher
  441,200
• Average seasonal inventory 558
• Average flow time 558 / 2,667 0.21 months
• Inventories carried is reduced while
  subcontracted amount is increased compared with
  the plan for scenario 1

Period t No. Hired Ht No. Laid Off Lt Workforce Size Wt Overtime Ot Inventory It Stockout St Subcontract Ct Total Production Pt
0 0 0 80 0 1,000 0 0
1 0 23 57 0 1,667 0 0 2,267
2 0 0 57 0 933 0 0 2,267
3 0 0 57 0 0 0 0 2,267
4 0 0 57 0 0 67 1,467 2,267
5 0 0 57 0 0 0 0 2,267
6 0 0 57 0 500 0 433 2,267
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Handle Forecast Error in Aggregate Plans

• Use safety stock or safety capacity
• Use overtime (safety capacity)
• Carry extra workforce (safety capacity)
• Use subcontractors (safety capacity)
• Build and carry extra inventory (safety
  inventory)
• Purchase capacity or product from open market
  (safety capacity)

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Outline

• Part I Aggregate planning
• Part II Managing predictable variability

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Managing Predictable Variability- Managing
Supply -

• Managing capacity
• Time flexibility from workforce
• Use of seasonal workforce
• Use of subcontracting
• Use of dual facilities dedicated and flexible
• Designing product flexibility into the production
  processes

• Managing inventory
• Using common components across multiple products
• Building inventory of high demand or predictable
  demand products

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Managing Predictable Variability- Managing
Demand -

• Demand can be influenced using pricing and other
  forms of promotions.
• Four key factors influence the timing of a trade
  promotion
• Demand increase from promotion results from three
  factors
• Market growth
• Stealing market share
• Forward buying

• Impact of the promotion on demand
• Product margins
• Cost of holding inventory
• Cost of changing capacity

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Scenario 4 Aggregate Planning and Promotion at
Red Tomato

• Discounting a unit from 40 to 39 results in the
  period demands increasing by 10 percent because
  of increased consumption or substitution.
  Further, 20 percent of each of the two following
  months demand is moved forward.
• Consider the discount offering in off-peak month
  of January.
• The demand forecast is shown below

Month Demand Forecast
January 3,000
February 2,400
March 2,560
April 3,800
May 2,200
June 2,200
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Optimal Aggregate Plan for Scenario 4

• Total cost over planning horizon 421,915
• Revenue over planning horizon 643,400
• Profit over planning horizon 221,485

Period t No. Hired Ht No. Laid Off Lt Workforce Size Wt Overtime Ot Inventory It Stockout St Subcontract Ct Total Production Pt
0 0 0 80 0 1,000 0 0
1 0 15 65 0 610 0 0 2,610
2 0 0 65 0 820 0 0 2,610
3 0 0 65 0 870 0 0 2,610
4 0 0 65 0 0 320 0 2,610
5 0 0 65 0 90 0 0 2,610
6 0 0 65 0 500 0 0 2,610
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Scenario 5 Aggregate Planning and Promotion at
Red Tomato

• Discounting a unit from 40 to 39 results in the
  period demands increasing by 10 percent because
  of increased consumption or substitution.
  Further, 20 percent of each of the two following
  months demand is moved forward.
• Consider the discount offering in peak month of
  April.
• The demand forecast is shown below

Month Demand Forecast
January 1,600
February 3,000
March 3,200
April 5,060
May 1,760
June 1,760
Demand fluctuation has increased relative to the
profile in scenario 1.
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Optimal Aggregate Plan for Scenario 5

• Total cost over planning horizon 438,857
• Revenue over planning horizon 650,140
• Profit over planning horizon 211,283

Period t No. Hired Ht No. Laid Off Lt Workforce Size Wt Overtime Ot Inventory It Stockout St Subcontract Ct Total Production Pt
0 0 0 80 0 1,000 0 0
1 0 14 66 0 2,047 0 0 2,647
2 0 0 66 0 1,693 0 0 2,647
3 0 0 66 0 1,140 0 0 2,647
4 0 0 66 0 0 1,273 0 2,647
5 0 0 66 0 0 387 0 2,647
6 0 0 66 0 500 0 0 2,647
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Conclusions based on Scenarios 1, 4 5

• A price promotion in January (scenario 4) results
  in a higher profit than no promotion (scenario
  1). A promotion in April (scenario 5) results in
  a lower profit than no promotion (scenario 1).
• Even though revenues are higher when promotions
  is offered in April, the increase in operating
  costs makes it a less profitable option.
• Red Tomato should offer the discount in the
  off-peak month of January.
• The above conclusions could be different if Red
  Tomato were in a situation in which most of the
  demand increase comes from market growth or
  stealing market share rather than forward buying
  (see scenarios 6 7)
• It is not appropriate for a firm to leave pricing
  decisions solely in the domain of marketing and
  aggregate planning solely in the domain of
  operations. It is crucial that forecasts,
  pricing, and aggregate planning be coordinated in
  the supply chain.

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Scenario 6 Aggregate Planning and Promotion at
Red Tomato

• Discounting a unit from 40 to 39 results in the
  period demands increasing by 100 percent because
  of increased consumption or substitution.
  Further, 20 percent of each of the two following
  months demand is moved forward.
• Consider the discount offering in off-peak month
  of January.
• The demand forecast is shown below

Month Demand Forecast
January 4,440
February 2,400
March 2,560
April 3,800
May 2,200
June 2,200
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Optimal Aggregate Plan for Scenario 6

• Total cost over planning horizon 456,750
• Revenue over planning horizon 699,560
• Profit over planning horizon 242,810

Period t No. Hired Ht No. Laid Off Lt Workforce Size Wt Overtime Ot Inventory It Stockout St Subcontract Ct Total Production Pt
0 0 0 80 0 1,000 0 0
1 0 0 80 0 0 240 0 3,200
2 0 11 69 0 140 0 0 2,780
3 0 0 69 0 360 0 0 2,780
4 0 0 69 0 0 660 0 2,780
5 0 0 69 0 0 80 0 2,780
6 0 0 69 0 500 0 0 2,780
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Scenario 7 Aggregate Planning and Promotion at
Red Tomato

• Discounting a unit from 40 to 39 results in the
  period demands increasing by 100 percent because
  of increased consumption or substitution.
  Further, 20 percent of each of the two following
  months demand is moved forward.
• Consider the discount offering in peak month of
  April.
• The demand forecast is shown below

Month Demand Forecast
January 1,600
February 3,000
March 3,200
April 8,480
May 1,760
June 1,760
Demand fluctuation has increased relative to the
profile in scenario 1.
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Optimal Aggregate Plan for Scenario 7

• Total cost over planning horizon 536,200
• Revenue over planning horizon 783,520
• Profit over planning horizon 247,320
• When forward buying is a small part of the
  increase in demand from discounting, Red Tomato
  should offer the discount in the peak demand
  month of April.

Period t No. Hired Ht No. Laid Off Lt Workforce Size Wt Overtime Ot Inventory It Stockout St Subcontract Ct Total Production Pt
0 0 0 80 0 1,000 0 0
1 0 0 80 0 2,600 0 0 3,200
2 0 0 80 0 2,800 0 0 3,200
3 0 0 80 0 2,800 0 0 3,200
4 0 0 80 0 0 2,380 100 3,200
5 0 0 80 0 0 940 0 3,200
6 0 0 80 0 500 0 0 3,200
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Performance Under Different Scenarios
Regular Price Promotion Price Promotion Period Percent Increase in Demand Percent Forward Buy Profit Average Inventory
40 40 NA NA NA 217,725 895
40 39 January 20 20 221,485 523
40 39 April 20 20 211,283 938
40 39 January 100 20 242,810 208
40 39 April 100 20 247,320 1,492
31 31 NA NA NA 73,725 895
31 30 January 100 20 84,410 208
31 30 April 100 20 69,120 1,492
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Conclusions Regarding Promotions

• Pricing and aggregate planning must be done
  jointly.
• Average inventory increases if a promotion is run
  during the peak period and decreases if run
  during off-peak period.
• Promotion during the peak period may decrease
  overall profitability if a significant fraction
  of the demand increase results from a forward
  buy.
• Promotion during the peak period may increase
  overall profitability if forward buying becomes a
  smaller fraction of the demand increase.
• As product margin declines, promotion during the
  peak period becomes less profitable.

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Summary of Impact on Promotion Timing
Factor Favored timing
High forward buying Low demand period
High stealing market share High demand period
High growth of market High demand period
High margin High demand period
Low margin Low demand period
High holding costs Low demand period
High cost of changing capacity Low demand period
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