Planning Demand and Supply in a Supply Chain Forecasting and Aggregate Planning 8/29/009/7/99 S. Chopra / Demand Planning

S. Chopra / Demand Planning Learning Objectives Phases of supply chain decisions Identify components of a demand forecast Time series forecasting Estimate forecast error Aggregate planning in the supply chain Notes: 8/29/00 S. Chopra / Demand Planning

Phases of Supply Chain Decisions Strategy or design: Forecast Planning: Forecast Operation Actual demand 8/29/00 S. Chopra / Demand Planning

Characteristics of forecasts Forecasts are always wrong. Should include expected value and measure of error. Long-term forecasts are less accurate than short-term forecasts: Forecast horizon Aggregate forecasts are more accurate than disaggregate forecasts 8/29/00 S. Chopra / Demand Planning

S. Chopra / Demand Planning Forecasting Methods Qualitative Time Series Static Adaptive Causal Simulation Notes: 8/29/00 S. Chopra / Demand Planning

Components of an observation Observed demand (O) = Systematic component (S) + Random component (R) Level (current deseasonalized demand) Trend (growth or decline in demand) Seasonality (predictable seasonal fluctuation) 8/29/00 S. Chopra / Demand Planning

Time Series Forecasting Forecast demand for the next four quarters. Notes: 8/29/00 S. Chopra / Demand Planning

Time Series Forecasting Notes: 8/29/00 S. Chopra / Demand Planning

S. Chopra / Demand Planning Forecasting methods Excel File Static Adaptive Moving average Simple exponential smoothing Holt’s model (with trend) Winter’s model (with trend and seasonality) 8/29/00 S. Chopra / Demand Planning

S. Chopra / Demand Planning Error measures MAD Mean Squared Error (MSE) Mean Absolute Percentage Error (MAPE) Bias Tracking Signal 8/29/00 S. Chopra / Demand Planning

Aggregate Planning at Red Tomato Tools Notes: 8/29/00 S. Chopra / Demand Planning

Fundamental tradeoffs in Aggregate Planning Capacity (regular time, over time, subcontract) Inventory Backlog / lost sales Basic Strategies Chase strategy Time flexibility from workforce or capacity Level strategy Notes: 8/29/00 S. Chopra / Demand Planning

S. Chopra / Demand Planning Aggregate Planning Notes: 8/29/00 S. Chopra / Demand Planning

Aggregate Planning (Define Decision Variables) Excel File 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 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 Notes: 8/29/00 S. Chopra / Demand Planning

Aggregate Planning (Define Objective Function)) Notes: 8/29/00 S. Chopra / Demand Planning

Aggregate Planning (Define Constraints Linking Variables) Workforce size for each month is based on hiring and layoffs Notes: 8/29/00 S. Chopra / Demand Planning

Aggregate Planning (Constraints) Production for each month cannot exceed capacity Notes: 8/29/00 S. Chopra / Demand Planning

Aggregate Planning (Constraints) Inventory balance for each month Notes: 8/29/00 S. Chopra / Demand Planning

Aggregate Planning (Constraints) Over time for each month Notes: 8/29/00 S. Chopra / Demand Planning

S. Chopra / Demand Planning Scenarios Increase in holding cost (from $2 to $6) Over time cost drops to $4.1 per hour Increased demand fluctuation Notes: 8/29/00 S. Chopra / Demand Planning

Increased Demand Fluctuation Notes: 8/29/00 S. Chopra / Demand Planning

Managing Predictable Variability Manage Supply Manage capacity Time flexibility from workforce (OT and otherwise) Use of seasonal workforce Use of subcontracting Flexible processes Counter cyclical products Manage inventory Component commonality Seasonal inventory of predictable products Notes: 8/29/00 S. Chopra / Demand Planning

Managing Predictable Variability Manage demand with pricing Original pricing: Cost = $422,275, Revenue = $640,000 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 Notes: 8/29/00 S. Chopra / Demand Planning

Off-Peak (January) Discount from $40 to $39 Notes: Cost = $421,915, Revenue = $643,400, Profit = $221,485 8/29/00 S. Chopra / Demand Planning

Peak (April) Discount from $40 to $39 Notes: Cost = $438,857, Revenue = $650,140, Profit = $211,283 8/29/00 S. Chopra / Demand Planning

S. Chopra / Demand Planning Demand Management 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 coming from forward buy (100% increase in consumption instead of 10% increase) Forward buy 8/29/00 S. Chopra / Demand Planning

Performance Under Different Scenarios 8/29/00 S. Chopra / Demand Planning

Factors Affecting Promotion Timing 8/29/00 S. Chopra / Demand Planning

Summary of Learning Objectives Forecasting Aggregate planning Supply and demand management during aggregate planning with predictable demand variation Supply management levers Demand management levers 8/29/00 S. Chopra / Demand Planning

Factors Influencing Discount Timing Impact of discount on consumption Impact of discount on forward buy Product margin 8/29/00 S. Chopra / Demand Planning

Inventory/Capacity tradeoff Leveling capacity forces inventory to build up in anticipation of seasonal variation in demand Carrying low levels of inventory requires capacity to vary with seasonal variation in demand or enough capacity to cover peak demand during season Notes: 8/29/00 S. Chopra / Demand Planning

January Discount: 100% increase in consumption, sale price = $40 ($39) Notes: Off peak discount: Cost = $456,750, Revenue = $699,560 8/29/00 S. Chopra / Demand Planning

S. Chopra / Demand Planning Peak (April) Discount: 100% increase in consumption, sale price = $40 ($39) Notes: Peak discount: Cost = $$536,200, Revenue = $783,520 8/29/00 S. Chopra / Demand Planning