Download Forecasting and Aggregate Planning

Supply Chain Management
(3rd Edition)
Chapter 8
Aggregate Planning
in the Supply Chain
© 2004 Prentice-Hall, Inc.
8-1
Outline
 Role
of aggregate planning in a supply chain
 The aggregate planning problem
 Aggregate planning strategies
 Implementing aggregate planning in practice
© 2004 Prentice-Hall, Inc.
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Role of Aggregate Planning
in a Supply Chain



Imagine a world where all costs and lead times are zero...
However capacity is costly and LT’s are not zero.. How to use
capacity? When to outsource?
Aggregate planning:
– process by which a company determines levels of capacity, production,
subcontracting, inventory, stockouts, and pricing over a specified time
horizon
– goal is to maximize profit
– decisions made at a product family (not SKU) level
– time frame of 3 to 18 months
– how can a firm best use the facilities it has?
© 2004 Prentice-Hall, Inc.
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Role of Aggregate Planning
in a Supply Chain
 Specify
–
–
–
–
–
–
–
operational parameters over the time horizon:
production rate
workforce
overtime
machine capacity level
subcontracting
backlog
inventory on hand
 All
supply chain stages should work together on an
aggregate plan that will optimize supply chain
performance
© 2004 Prentice-Hall, Inc.
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The Aggregate Planning Problem
 Given
the demand forecast for each period in the
planning horizon, determine the production level,
inventory level, and the capacity level for each period
that maximizes the firm’s (supply chain’s) profit over
the planning horizon
 Specify the planning horizon (typically 3-18 months)
 Specify the duration of each period
 Specify key information required to develop an
aggregate plan
© 2004 Prentice-Hall, Inc.
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Information Needed for
an Aggregate Plan
 Demand
forecast in each period
 Production costs
– labor costs, regular time ($/hr) and overtime ($/hr)
– subcontracting costs ($/hr or $/unit)
– cost of changing capacity: hiring or layoff ($/worker) and
cost of adding or reducing machine capacity ($/machine)
 Labor/machine
hours required per unit
 Inventory holding cost ($/unit/period)
 Stockout or backlog cost ($/unit/period)
 Constraints: limits on overtime, layoffs, capital
available, stockouts and backlogs
© 2004 Prentice-Hall, Inc.
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Outputs of Aggregate Plan
 Production
quantity from regular time, overtime, and
subcontracted time: used to determine number of
workers and supplier purchase levels
 Inventory held: used to determine how much warehouse
space and working capital is needed
 Backlog/stockout quantity: used to determine what
customer service levels will be
 Machine capacity increase/decrease: used to determine
if new production equipment needs to be purchased
!! A poor aggregate plan can result in lost sales, lost
profits, excess inventory, or excess capacity
© 2004 Prentice-Hall, Inc.
8-7
Aggregate Planning Strategies
Capacity
Costs
Inventory
Costs
Backlog/lost sales
Costs
strategy – using capacity as the lever
 Time flexibility startegy – using workforce or
capacity utilization as the lever
 Level strategy – using inventory as the lever
 Mixed strategy – a combination of one or more of
the first three strategies
 Chase
© 2004 Prentice-Hall, Inc.
8-8
Chase Strategy
 Production
rate is synchronized with demand by
varying machine capacity or hiring and laying off
workers as the demand rate varies
 However, in practice, it is often difficult to vary
capacity and workforce on short notice
 Expensive if cost of varying capacity is high
 Negative effect on workforce morale
 Results in low levels of inventory
 Should be used when inventory holding costs are high
and costs of changing capacity are low
© 2004 Prentice-Hall, Inc.
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Time Flexibility Strategy
 Can
be used if there is excess machine capacity
 Workforce is kept stable, but the number of hours
worked is varied over time to synchronize production
and demand
 Can use overtime or a flexible work schedule
 Requires flexible workforce, but avoids morale
problems of the chase strategy
 Low levels of inventory, but lower utilization
 Should be used when inventory holding costs are high
and capacity is relatively inexpensive
© 2004 Prentice-Hall, Inc.
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Level Strategy
 Maintain
stable machine capacity and workforce
levels with a constant output rate
 No synchronization of demand and supply results in
Shortages and surpluses
 Inventories that are built up in anticipation of future
demand or backlogs are carried over from high to low
demand periods
 Better for worker morale
 Large inventories and backlogs may accumulate
 Should be used when inventory holding and backlog
costs are relatively low
© 2004 Prentice-Hall, Inc.
8-11
Ex: Red Tomato Tools



Demand for the gardening tools is highly seasonal.
Handle demand and maximize profits??
Options:
–
–
–
–

Hire worker in peak season
Subcontraction of some work
Build up inventory in slow period
Backlogging
Constraints:
–
–
–
–
No limit on subcontracting, inventories, stockouts, backlog
All stockouts are backlogged from the following month.
Inventory costs are incurred on the ending inventory in a month.
Inventory level at the end of June is at least 500 units.
© 2004 Prentice-Hall, Inc.
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Ex: Red Tomato Tools-Demand Forecast
Month
January
February
March
April
May
June
© 2004 Prentice-Hall, Inc.
Demand Forecast
1,600
3,000
3,200
3,800
2,200
2,200
8-13
Ex: Red Tomato Tools-Initialization
 Unit
price=$40/unit
 Inventory at the beginning of January=1000 units
 Workforce at the beginning of January=80 employees
 Total of 20 workdays/month are available
 Regular work hours=8hrs/day/employee
 Overtime work hours can not exceed
10hrs/month/employee
 Required labor hours= 4hrs/unit
© 2004 Prentice-Hall, Inc.
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Ex: Red Tomato Tools-Costs
Item
Materials
Inventory holding cost
Marginal cost of a stockout
Hiring and training costs
Layoff cost
Labor hours required
Regular time cost
Over time cost
Cost of subcontracting
© 2004 Prentice-Hall, Inc.
Cost
$10/unit
$2/unit/month
$5/unit/month
$300/worker
$500/worker
4/unit
$4/hour
$6/hour
$30/unit
8-15
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 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
© 2004 Prentice-Hall, Inc.
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?
Min cost = Max profit
 Min
cost and max profit are equivalent if
– All demand has to be met in some way
– The unit price is fixed,
i.e., total revenue is fixed.
 Then,
min cost and max profit gives the same optimal
plan.
© 2004 Prentice-Hall, Inc.
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Aggregate Planning
(Define Objective Function)
6
 640W
Min TC 

t
t 1



2I
t
t 1


InventoryHoldingCost
© 2004 Prentice-Hall, Inc.

 6O
6
t
t 1



Regular Time Labor Cost
6
6
  300 H t   500 Lt
t 1
t 1

 


Overtime Labor Cost
6
5S
t
t 1


Stockout Cost

6
Cost of Hiring
6
10 P
t
t 1



ProductionCost

Cost of Layoff
6
 30 C
t
t 1



Subcontraction Cost
8-18
Workforce Balance Equations
 Workforce
size for each month is based on hiring
and layoffs
W t  W t 1  H t  Lt, or
W t  W t 1  H t  Lt  0
for t  1,...,6, where W 0  80.
Ht
Wt-1
© 2004 Prentice-Hall, Inc.
Period t
Wt
Lt
8-19
Inventory Balance Equations
Pt
It-1
Ct
It
Period t
St-1
Dt
St
I t 1  P t  C t  Dt  S t 1  I t  S t ,
I t 1  P t  C t  Dt  S t 1  I t  S t  0,
for t  1,...,6,where I 0  1,000 ,
S 0  0,and I 6  500 .
© 2004 Prentice-Hall, Inc.
8-20
Production Capacity Constraints
 Production
for each month cannot exceed
regular+overtime working capacity
P t  40 W t  O t 4 ,
40 W t  O t 4  P t  0,
for t  1,...,6.
© 2004 Prentice-Hall, Inc.
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Overtime Capacity Constraints
 Over
time for each month
Ot  10 W t,
10 W t  Ot  0,
for t  1,...,6.
© 2004 Prentice-Hall, Inc.
8-22
Average Flow Time

Little’s Law:
Average Flow time=Average Inventory/Throughput
T 1
1 T 1
1 1

Average Inventory   ( I t 1  I t )   ( I 0  IT )   I t 
T t 1 2
T 2
t 1

1 T
Average Throughput   Dt
T t 1
•Average Flow Time for Red Tomato=895/2,667=0.34 months
?? What happens to Average Flow Time if uncertainty in demand
increases?
© 2004 Prentice-Hall, Inc.
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Scenarios
 Increased
demand fluctuation
 Increase in holding cost (from $2 to $6)
 Overtime cost drops to $4.1 per hour
© 2004 Prentice-Hall, Inc.
8-24
Increased Demand Fluctuation
Month
January
February
March
April
May
June
© 2004 Prentice-Hall, Inc.
Demand Forecast
1,000
3,000
3,800
4,800
2,000
1,400
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Aggregate Planning in Practice
 Think
beyond the enterprise to the entire supply chain
 Make plans flexible because forecasts are always
wrong
 Rerun the aggregate plan as new information emerges
 Use aggregate planning as capacity utilization
increases
© 2004 Prentice-Hall, Inc.
8-26
Summary of Learning Objectives
 What
types of decisions are best solved by aggregate
planning?
 What is the importance of aggregate planning as a
supply chain activity?
 What kinds of information are needed to produce an
aggregate plan?
 What are the basic trade-offs a manager makes to
produce an aggregate plan?
 How are aggregate planning problems formulated and
solved using Microsoft Excel?
© 2004 Prentice-Hall, Inc.
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