1. Planning Demand and Supply in a Supply Chain
Forecasting and Aggregate Planning
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2. 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
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3. Phases of Supply Chain Decisions
Strategy or design: Forecast
Planning: Forecast
Operation Actual demand
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4. 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
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5. S. Chopra / Demand Planning
Forecasting Methods
Qualitative
Time Series
Static
Adaptive
Causal
Simulation
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6. 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)
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7. Time Series Forecasting
Forecast demand for the
next four quarters.
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8. Time Series Forecasting
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9. 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)
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10. S. Chopra / Demand Planning
Error measures
MAD
Mean Squared Error (MSE)
Mean Absolute Percentage Error (MAPE)
Bias
Tracking Signal
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11. Aggregate Planning at Red Tomato Tools
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12. 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
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13. S. Chopra / Demand Planning
Aggregate Planning
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14. 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
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15. Aggregate Planning (Define Objective Function))
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16. Aggregate Planning (Define Constraints Linking Variables)
Workforce size for each month is based on hiring and layoffs
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17. Aggregate Planning (Constraints)
Production for each month cannot exceed capacity
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18. Aggregate Planning (Constraints)
Inventory balance for each month
Notes:
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19. Aggregate Planning (Constraints)
Over time for each month
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20. 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
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21. Increased Demand Fluctuation
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22. 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
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23. 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
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24. Off-Peak (January) Discount from $40 to $39
Notes:
Cost = $421,915, Revenue = $643,400, Profit = $221,485
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25. Peak (April) Discount from $40 to $39
Notes:
Cost = $438,857, Revenue = $650,140, Profit = $211,283
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26. 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
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27. Performance Under Different Scenarios
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28. Factors Affecting Promotion Timing
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29. Summary of Learning Objectives
Forecasting
Aggregate planning
Supply and demand management during aggregate planning with predictable demand variation
Supply management levers
Demand management levers
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30. Factors Influencing Discount Timing
Impact of discount on consumption
Impact of discount on forward buy
Product margin
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31. 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
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32. January Discount: 100% increase in consumption, sale price = $40 ($39)
Notes:
Off peak discount: Cost = $456,750, Revenue = $699,560
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33. S. Chopra / Demand Planning
Peak (April) Discount: 100% increase in consumption, sale price = $40 ($39)
Notes:
Peak discount: Cost = $$536,200, Revenue = $783,520
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