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Planning Demand and Supply in a Supply Chain Aggregate Planning. Dealing with Predictable Variability. Suppose you have forecasted demand for your product to be. Production capacity is 3000 per month. How do you fill demand?. Dealing with Predictable Variability. Carry inventory
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Planning Demand and Supply in a Supply ChainAggregate Planning
Dealing with Predictable Variability • Suppose you have forecasted demand for your product to be Production capacity is 3000 per month. How do you fill demand?
Dealing with Predictable Variability • Carry inventory • Produce 3000 each month through April • Advantage: Meet demand • Disadvantage: Carrying inventory is expensive • Increase capacity to 4800 per month • Hire more workers • Buy more machines • Disadvantage: Expensive! Wasted capacity in low demand months • Advantage: Minimize inventory holding
Dealing with Predictable Variability • Influence demand • Offer promotions (sales) in January, May, June • Advantage: Attempt to smooth demand • Disadvantage: Forward buying, artificial demand pattern What is EDLP? Everyday Low Pricing Why? Must coordinate marketing and production.
Dealing with Predictable Variability • Flexible capacity • Overtime, extra shift (8-4-8 shift) • Cross-trained workers • Temp workers • Outsourcing • Offer portfolio of products • Lawnmowers and snowblowers Potential problems? How do you decide which one to use? Aggregate Planning!
Aggregate Planning • What does aggregate planning involve? • Aggregate planning and forecasting • Single product vs. multi-product planning
Fundamental Tradeoffs in Aggregate Planning • Capacity (regular time, over time, subcontract) • Inventory • Backlog / lost sales Basic Strategies • Chase strategy • Level strategy
Aggregate Planning Methods • Simple spreadsheet models • Limited set of options • Sub-optimal solutions • Optimization models • Linear and integer programming
Aggregate Planning (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 units for month t, t = 1, ..., 6 It = Inventory in units at the end of month t, t = 1, ..., 6 St = Number of units stocked out 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
Aggregate Planning (Define Constraints Linking Variables) • Workforce size for each month is based on hiring and layoffs
Aggregate Planning (Constraints) • Production for each month cannot exceed capacity
Aggregate Planning (Constraints) • Inventory balance for each month
Aggregate Planning (Constraints) • Over time for each month
Promotion Decisions • Product margins • Demand increase from discounting • Market growth • Stealing market share • Forward buying Discount of $1 increases period demand by 10% and moves 20% of next two months demand forward
Off-Peak (January) Discount from $40 to $39 Cost = $421,915, Revenue = $643,400, Profit = $221,485
Peak (April) Discount from $40 to $39 • Cost = $438,857, Revenue = $650,140, Profit = $211,283
Optimal Promotion Decisions for Red Tomato • Based on the given information it is optimal to offer a promotion in January (off-peak) than in April (peak)
Coordinated Decisions • Pricing and Aggregate Planning must be done jointly • Factors affecting discount timing • Product Margin: Impact of higher margin ($40 instead of $31) • Consumption: Changing fraction of increase in demand (100% increase in consumption instead of 10% increase) • Forward buy