Planning Demand and Supply in a Supply Chain Aggregate Planning

1. Planning Demand and Supply in a Supply ChainAggregate Planning

2. 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?

3. 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

4. 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.

5. 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!

6. Aggregate Planning • What does aggregate planning involve? • Aggregate planning and forecasting • Single product vs. multi-product planning

7. Fundamental Tradeoffs in Aggregate Planning • Capacity (regular time, over time, subcontract) • Inventory • Backlog / lost sales Basic Strategies • Chase strategy • Level strategy

8. Aggregate Planning Methods • Simple spreadsheet models • Limited set of options • Sub-optimal solutions • Optimization models • Linear and integer programming

9. Aggregate Planning at Red Tomato Tools

10. Data

11. 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

12. Aggregate Planning (Define Objective Function))

13. Aggregate Planning (Define Constraints Linking Variables) • Workforce size for each month is based on hiring and layoffs

14. Aggregate Planning (Constraints) • Production for each month cannot exceed capacity

15. Aggregate Planning (Constraints) • Inventory balance for each month

16. Aggregate Planning (Constraints) • Over time for each month

17. 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

18. Off-Peak (January) Discount from $40 to $39 Cost = $421,915, Revenue = $643,400, Profit = $221,485

19. Peak (April) Discount from $40 to $39 • Cost = $438,857, Revenue = $650,140, Profit = $211,283

20. 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)

21. 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

22. Performance Under Different Scenarios

23. Factors Affecting Promotion Timing