1. 8-1 Aggregate Planning in the Supply Chain Supply Chain Management

2. 8-2 Outline uRole of aggregate planning in a supply chain uThe aggregate planning problem uAggregate planning strategies uImplementing aggregate planning in practice

3. 8-3 Role of Aggregate Planning in a Supply Chain Aggregate planning: –process by which a company determines levels of capacity, production, subcontracting, inventory, stockouts, and pricing over a specified time horizon –goal is to maximize profit –time frame of 3 to 18 months –how can a firm best use the facilities it has?

4. 8-4 Role of Aggregate Planning in a Supply Chain uSpecify operational parameters over the time horizon: –production rate –workforce –overtime –machine capacity level –subcontracting –backlog –inventory on hand uAll supply chain stages should work together on an aggregate plan that will optimize supply chain performance

5. 8-5 The Aggregate Planning Problem uGiven the demand forecast for each period in the planning horizon, determine the production level, inventory level, and the capacity level for each period that maximizes the firm’s (supply chain’s) profit over the planning horizon uSpecify the planning horizon (typically 3-18 months) uSpecify the duration of each period uSpecify key information required to develop an aggregate plan

6. 8-6 Information Needed for an Aggregate Plan uDemand forecast in each period uProduction 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 ($/machine) uLabor/machine hours required per unit uInventory holding cost ($/unit/period) uStockout or backlog cost ($/unit/period) uConstraints: limits on overtime, layoffs, capital available, stockouts and backlogs

7. 8-7 Outputs of Aggregate Plan uProduction quantity from regular time, overtime, and subcontracted time: used to determine supplier purchase levels uInventory held: used to determine how much warehouse space and working capital is needed uBacklog/stockout quantity: used to determine what customer service levels will be uMachine capacity increase/decrease: used to determine if new production equipment needs to be purchased uA poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity

8. 8-8 Aggregate Planning Strategies uTrade-off between capacity, inventory, backlog/lost sales uChase strategy – using capacity as the lever uTime flexibility from workforce or capacity strategy – using utilization as the lever uLevel strategy – using inventory as the lever uMixed strategy – a combination of one or more of the first three strategies

9. 8-9 Chase Strategy uProduction rate is synchronized with demand by varying machine capacity or hiring and laying off workers as the demand rate varies uHowever, in practice, it is often difficult to vary capacity and workforce on short notice uExpensive if cost of varying capacity is high uNegative effect on workforce uResults in low levels of inventory uShould be used when inventory holding costs are high and costs of changing capacity are low

10. 8-10 Time Flexibility Strategy uCan be used if there is excess machine capacity uWorkforce is kept stable, but the number of hours worked is varied over time to synchronize production and demand uCan use overtime or a flexible work schedule uRequires flexible workforce, but avoids morale problems of the chase strategy uLow levels of inventory, lower utilization uShould be used when inventory holding costs are high and capacity is relatively inexpensive

11. 8-11 Level Strategy uMaintain stable machine capacity and workforce levels with a constant output rate uShortages and surpluses result in fluctuations in inventory levels over time uInventories that are built up in anticipation of future demand or backlogs are carried over from high to low demand periods uBetter for worker morale uLarge inventories and backlogs may accumulate uShould be used when inventory holding and backlog costs are relatively low

12. 8-12 Aggregate Planning at Red Tomato Tools

13. 8-13 Fundamental Tradeoffs in Aggregate Planning uCapacity (regular time, overtime, subcontract) uInventory uBacklog / lost sales Basic Strategies uChase strategy uTime flexibility from workforce or capacity uLevel strategy

14. 8-14 Aggregate Planning

15. 8-15 Aggregate Planning (Define Decision Variables) W t = Workforce size for month t, t = 1,..., 6 H t = Number of employees hired at the beginning of month t, t = 1,..., 6 L t = Number of employees laid off at the beginning of month t, t = 1,..., 6 P t = Production in month t, t = 1,..., 6 I t = Inventory at the end of month t, t = 1,..., 6 S t = Number of units stocked out at the end of month t, t = 1,..., 6 C t = Number of units subcontracted for month t, t = 1,..., 6 O t = Number of overtime hours worked in month t, t = 1,..., 6

16. 8-16 Aggregate Planning (Define Objective Function)

17. 8-17 Aggregate Planning (Define Constraints Linking Variables) uWorkforce size for each month is based on hiring and layoffs

18. 8-18 Aggregate Planning (Constraints) uProduction for each month cannot exceed capacity

19. 8-19 Aggregate Planning (Constraints) uInventory balance for each month

20. 8-20 Aggregate Planning (Constraints) uOver time for each month

21. 8-21 Scenarios uIncrease in holding cost (from $2 to $6) uOvertime cost drops to $4.1 per hour uIncreased demand fluctuation

22. 8-22 Increased Demand Fluctuation

23. 8-23 Aggregate Planning in Practice uThink beyond the enterprise to the entire supply chain uMake plans flexible because forecasts are always wrong uRerun the aggregate plan as new information emerges uUse aggregate planning as capacity utilization increases

24. 8-24 Summary of Learning Objectives uWhat types of decisions are best solved by aggregate planning? uWhat is the importance of aggregate planning as a supply chain activity? uWhat kinds of information are needed to produce an aggregate plan? uWhat are the basic trade-offs a manager makes to produce an aggregate plan? uHow are aggregate planning problems formulated and solved using Microsoft Excel?