Aggregate Planning in Supply Chain Spring, 2014 Supply Chain Management: Strategy, Planning, and Operation Chapter 8 Byung-Hyun Ha

Contents Introduction Aggregate planning problem Aggregate planning strategy Aggregate planning using LP Further discussion

Introduction Ideal supply chain Aggregate planning Infinite capacity and zero lead time  impossible We need plans with different levels Strategic plans -- aggregate plans -- operational plans Aggregate planning “A process by which a company determines planned levels of capacity, production, subcontracting, inventory, stockouts, and even pricing over a specified time horizon” Key question How can a firm best use the facilities it has? Decisions made at a product family (aggregates, not SKU) level Planning horizon of 3 to 18 months

Aggregate Planning Problem Aggregate planning as optimization problem (typical) Objective Profit maximization Input Forecasted demand Unit cost of each resource Cost of inventory, stockout, backlog Constraints Capacity, supply chain network configuration Output Production rate, machine capacity level Workforce, overtime, subcontracting Inventory on hand, stockout (backlog or lost sales)  Supply chain coordination (global optimization)?

Aggregate Planning Problem Identifying aggregate units of production Examples of aggregate units Number of final production items Weight or length of output Hours of lobar Dollars of sales Simple approach to aggregating product mix Weighted average, bottleneck process, ... Effective capacity consideration Identifying input for planning Example (Table 8-1) Family Material Cost/Unit Revenue/ Unit Setup Time/Batch Average Batch Size Production Time/Unit Net Production Time/Unit % Share of Units Sold A B ... 15 7 54 30 8 6 50 150 5.60 3.00 5.76 3.04 10 25

Aggregate Planning Strategy Tradeoff max. profit  min. (cost  capacity + inventory + stockout) Heuristics Chase strategy using capacity as the lever Flexibility strategy using utilization as the lever Level strategy using inventory as the lever Mixed strategy Optimal approach?

Aggregate Planning Using LP Example: Red Tomato Tools Demand forecast (T = 6) Costs Others Initial inventory: 1,000, final inventory: 500, initial workforce: 80 20 working days per month, $4 per hour regular time, 8 hours per day At most 10 hours of overtime per month Decision variables Wt, Ht, Lt, Pt, It, St, Ct, Ot  Is it linear? Jan Feb Mar Apr May Jun 1,600 3,000 3,200 3,800 2,200 Materials $10/unit Hiring $300/worker Regular time $4/hour Inventory $2/unit/month Layoff $500/worker Over time $6/hour Stockout $5/unit/month Labor required 4 hours/unit Subcontracting $30/unit

Aggregate Planning Using LP Analysis Revenue over planning horizon Average inventory = ((I0 + IT)/2 + t=1..(T–1) It)/T Average time in inventory = (average inventory) / (total demand) Impact of higher demand variability Revised demand forecast Impact of lower costs of hiring and layoff Revised costs of hiring and layoff: 50$ each Coping with forecast error Maintaining buffers of safety inventor and/or safety capacity Jan Feb Mar Apr May Jun 1,000 3,000 3,800 4,800 2,000 1,400

Further Discussion Building a rough master production planning schedule Role of IT in aggregate planning Implementing aggregate planning in practice