1. Chapter 8 Aggregate Planning in the Supply Chain

2. Outline Role of aggregate planning in a supply chain
The aggregate planning problem
Aggregate planning strategies
Aggregate planning with Linear Programming
Implementing aggregate planning in practice

3. Tactical/Operational
Planning Horizon
Long Range
Medium Range
Short Range
1 to 10 years
6 to 18 months
1 to 10 weeks
Strategic
Aggregate Planning
Tactical/Operational
What is our business?
Capital investments
(new factories, new machines, etc.)
Production schedule for a product group
Production level
Labour force level
Inventory level
(Production capacity fixed)
Production schedule for specific products, detailed scheduling.

4. Role of Aggregate Planning in a Supply Chain
Capacity has a cost, lead times are greater than zero
Aggregate planning:
Match workforce and materials to available equipment so as to meet projected demand at low cost.
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?
First alert in marshalling resources!

5. Aggregate Planning Decisions
Specify operational parameters over the time horizon:
production rate
workforce
overtime
machine capacity usage
subcontracting
backlog
inventory on hand
All supply chain stages should work together on an aggregate plan that will optimize supply chain performance
Plant capacity fixed;
Adjust: labour,
materials,
utilisation.

6. The Aggregate Planning Problem
Given the demand forecast for each period in the planning horizon, determine the production level, inventory level, capacity level and the labour (type and 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

7. 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

8. 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

9. Aggregate Planning Strategies
Trade-off between capacity, inventory, backlog/lost sales
Chase strategy – using capacity as the lever
Time flexibility from workforce or capacity strategy – using utilization as the lever
Level strategy – using inventory as the lever
Mixed strategy – a combination of one or more of the first three strategies

10. 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

11. 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, lower utilization
Should be used when inventory holding costs are high and capacity is relatively inexpensive

12. Level Strategy
Maintain stable machine capacity and workforce levels with a constant output rate
Shortages and surpluses result in fluctuations in inventory levels over time
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

13. Fundamental Tradeoffs in Aggregate Planning
Capacity (regular time, overtime, subcontract)
Inventory
Backlog / lost sales
Basic Strategies
Chase strategy
Time flexibility from workforce or capacity
Level strategy
Notes:

14. Aggregate Planning at Red Tomato Tools
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15. Aggregate Planning at Red Tomato Tools
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17. Aggregate Planning Strategies
For level production, inventory buildup and backlogs can be reduced by “starting” the cycle differently
Adjusting production rate
Overtime and “furlough”
Subcontract (instead of hire-and-fire)
Mixed strategies
Linear programming!

18. 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?
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19. Aggregate Planning in Excel
Construct a table with the decision variables
Construct a table for constraints
Create a cell containing the objective function
Use Data Analysis Solver

20. Aggregate Planning at Red Tomato Tools (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 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:

21. Aggregate Planning at Red Tomato Tools (Define Objective Function)
Notes:

22. Workforce size for each month is based on hiring and layoffs
Aggregate Planning at Red Tomato tools (Define Constraints Linking Variables)
Workforce size for each month is based on hiring and layoffs
Notes:

23. Aggregate Planning at Red Tomato Tools (Constraints)
Production for each month cannot exceed capacity
Notes:

24. Aggregate Planning at Red Tomato Tools (Constraints)
Inventory balance for each month
Notes:

25. Aggregate Planning at Red Tomato Tools (Constraints)
Over time for each month
Notes:

26. Scenarios Increase in holding cost (from $2 to $6)
Overtime cost drops to $4.1 per hour
Increased demand fluctuation
Notes:

27. Increased Demand Fluctuation
Notes:

28. 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

29. Chapter 9 Sales and Operations Planning

30. Outline Responding to predictable variability in a supply chain
Managing supply
Managing demand
Implementing solutions – Sales and Operations Planning - to predictable variability in practice
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31. Responding to Predictable Variability in a Supply Chain
Predictable variability is change in demand that can be forecasted
Can cause increased costs and decreased responsiveness in the supply chain
A firm can handle predictable variability using two broad approaches:
Manage supply using capacity, inventory, subcontracting, and backlogs
Manage demand using short-term price discounts and trade promotions
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32. Managing Supply Managing capacity Managing inventory
Time flexibility from workforce
Use of seasonal workforce
Use of subcontracting
Use of dual facilities – dedicated and flexible
Designing product flexibility into production processes
Managing inventory
Using common components across multiple products
Building inventory of high demand or predictable demand products
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33. Inventory/Capacity Trade-off
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:
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34. Managing Demand Promotion Pricing
Timing of promotion and pricing changes is important
Demand increases can result from a combination of three factors:
Market growth (increased sales, increased market size)
Stealing share (increased sales, same market size)
Forward buying (same sales, same market size)
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35. 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
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36. Red Tomato Tools
Planning example
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37. Off-Peak (January) Discount from $40 to $39
Notes:
Cost = $421,915, Revenue = $643,400, Profit = $221,485
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38. Peak (April) Discount from $40 to $39
Notes:
Cost = $438,857, Revenue = $650,140, Profit = $211,283
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39. January Discount: 100% Increase in Consumption, Sale Price = $40 ($39)
Notes:
Off-peak discount: Cost = $456,750, Revenue = $699,560
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40. Peak (April) Discount: 100% Increase in Consumption, Sale Price = $40 ($39)
Notes:
Peak discount: Cost = $536,200, Revenue = $783,520
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41. Performance Under Different Scenarios
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42. Implementing Solutions to Predictable Variability in Practice
Coordinate planning across enterprises in the supply chain
Take predictable variability into account when making strategic decisions
Preempt, do not just react to, predictable variability
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43. Summary of Learning Objectives
How can supply be managed to improve synchronization in the supply chain in the face of predictable variability?
How can demand be managed to improve synchronization in the supply chain in the face of predictable variability?
How can sales and operations planning be used to maximize profitability when faced with predictable variability in the supply chain?
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