Planning Demand and Supply in a Supply Chain

第二單元 (3)：Planning Demand and Supply in a Supply Chain Planning Demand and Supply in a Supply Chain 郭瑞祥教授【本著作除另有註明外，採取創用CC「姓名標示－非商業性－相同方式分享」台灣3.0版授權釋出】 1

Outline • Part I: Aggregate planning • Part II: Managing predictable variability 2

Aggregate Planning • A process by which a company determines levels of capacity, production, subcontracting, inventory, stockouts, and pricing to maximize the firm’s 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 3

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 4

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 5

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 6

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 7

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 8

Scenario 1: Aggregate Planning at Red Tomato Tools Microsoft Office 2010多媒體藝廊 9

Costs for Red Tomato 10

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 11

Costs for Red Tomato 12

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 13

Regular time labor cost Regular time labor cost Overtime labor cost Overtime labor cost Regular time labor cost = 4/hr * 8 hr/day * 20 day/month = 640 Cost of hiring and layoffs Cost of hiring and layoffs Cost of inventory and stockout Cost of inventory and stockout Cost of materials and subcontracting Define Objective Function Since all demands is met, revenue is fixed maximizing profit = minimizing cost 14

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 15

160 4 20*8=160 hrs 4 hours/unit 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 16

Net supply in current period Net supply in previous period Supply Demand 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 17

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 19

Defining Constraints 20*8=160 hrs 160 4 hours/unit 4 Net supply in current period Net supply in previous period Supply Demand 20

Evaluation of Performance • Average inventory = • Average flow time = Little’s law: average flow time = average inventory / throughput 21

Evaluation of Performance • Average inventory = • Average flow time = Little’s law: average flow time = average inventory / throughput 22

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 23

300 X B5 EXCEL-DEMO 24

Define Objective Function Define Objective Function EXCEL-DEMO2 25

Decision Variables cost EXCEL-DEMO3 26

Define Objective Function EXCEL-DEMO4 27

EXCEL-DEMO5 28

EXCEL-DEMO6 29

EXCEL-DEMO7 31

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 32

Define Objective Function Regular time labor cost Overtime labor cost Cost of hiring and layoffs Cost of inventory and stockout Cost of materials and subcontracting 33

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 35

Scenario 2: Increased Demand Fluctuation The same overall demand (16,000 units) as scenario 1 Microsoft Office 2010多媒體藝廊 36

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 37

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 38

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) 39

Outline • Part I: Aggregate planning • Part II: Managing predictable variability 40

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 41

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 42

Scenario 4: Aggregate Planning and Promotion at Red Tomato • Discounting a unit from $40 to $39 results in the period demand’s 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: 43

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 44

Scenario 5: Aggregate Planning and Promotion at Red Tomato • Discounting a unit from $40 to $39 results in the period demand’s 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: Demand fluctuation has increased relative to the profile in scenario 1. 45

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. 47

Scenario 6: Aggregate Planning and Promotion at Red Tomato • Discounting a unit from $40 to $39 results in the period demand’s 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: 48

Scenario 7: Aggregate Planning and Promotion at Red Tomato • Discounting a unit from $40 to $39 results in the period demand’s 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: Demand fluctuation has increased relative to the profile in scenario 1. 50

Planning Demand and Supply in a Supply Chain