Planning Demand Supply in a Supply Chain Forecasting

Planning Demand Supply in a Supply Chain Forecasting and Aggregate Planning Chapter 8 1 utdallas. edu/~metin

Aggregate Planning (Ag-gregate: Past part. of Ad-gregare: Totaled) u u If the actual is different than the plan, why bother sweating over detailed plans Aggregate planning: General plan for our frequency decomposition – Combined products = aggregate product » Short and long sleeve shirts = shirt u Single product » AC and Heating unit pipes = pipes at Lennox Iowa plant – Pooled capacities = aggregated capacity » Dedicated machine and general machine = machine u Single capacity – E. g. SOM has 100 instructors – Time periods = time buckets » Consider all the demand production of a given month together u utdallas. edu/~metin u When does the demand or production take place in a time bucket? Increase the number of time buckets; decrease the bucket length. 2

Fundamental tradeoffs in Aggregate Planning Capacity: Regular time, Over time, Subcontract? Inventory: Backlog / lost sales, combination: Customer patience? Basic Strategies u Chase (the demand) strategy; produce at the instantaneous demand rate – fast food restaurants u Level strategy; produce at the rate of long run average demand – swim wear u Time flexibility; high levels of workforce or capacity – machining shops, army u Deliver late strategy – spare parts for your Jaguar utdallas. edu/~metin 3

- Which is which? Level Deliver late Chase Time flexibility Matching the Demand pa ci ty Adjust the capacity to match the demand Use inventory U se ca Demand Use delivery time utdallas. edu/~metin Demand 4

Capacity Demand Matching Inventory/Capacity tradeoff u Level strategy: Leveling capacity forces inventory to build up in anticipation of seasonal variation in demand u Chase strategy: Carrying low levels of inventory requires capacity to vary with seasonal variation in demand or enough capacity to cover peak demand during season 5 utdallas. edu/~metin

Case Study: Aggregate planning at Red Tomato u Farm tools: u Shovels u Spades Same characteristics? Generic tool, call it Shovel u Forks Aggregate by similar characteristics utdallas. edu/~metin 6

Aggregate Planning at Red Tomato Tools 7 utdallas. edu/~metin

Aggregate Planning What is the cost of production per tool? That is materials plus labor. Overtime production is more expensive than subcontracting. 8 What is the saving achieved by producing a tool in house rather than subcontracting? utdallas. edu/~metin

1. Aggregate Planning (Decision Variables) Wt = Number of employees in 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 units of shovels in month t, t = 1, . . . , 6 It = Inventory at the end of month t, t = 1, . . . , 6 St = Number of units backordered 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 Did we aggregate production capacity? 9 utdallas. edu/~metin

2. Objective Function: 3. Constraints u. Workforce size for each month is based on hiring and layoffs u. Production (in hours) for each month cannot exceed capacity (in hours) 10 utdallas. edu/~metin

3. Constraints u Inventory balance for each month Period t-1 Period t+1 11 utdallas. edu/~metin

3. Constraints u Overtime for each month 12 utdallas. edu/~metin

Execution u Solve the formulation, see Table 8. 3 – Total cost=$422. 275 K, total revenue=$640 K u Apply the first month of the plan Delay applying the remaining part of the plan until the next month Rerun the model with new data next month u This is called rolling horizon execution u u 13 utdallas. edu/~metin

Aggregate Planning at Red Tomato Tools This solution was for the following demand numbers: What if demand fluctuates more? utdallas. edu/~metin 14

Increased Demand Fluctuation Total costs=$432. 858 K. 16000 units of total production as before why extra cost? utdallas. edu/~metin With respect to $422. 275 K of before. 15

Summary u Qualitative strategies of matching demand supply u Quantitative methods 16 utdallas. edu/~metin

Material Requirements Planning u Master Production Schedule (MPS) u Bill of Materials (BOM) u MRP explosion u Advantages – Disciplined database – Component commonality u Shortcomings – Rigid lead times – No capacity consideration 17 utdallas. edu/~metin

Optimized Production Technology u Focus on bottleneck resources to simplify planning u Product mix defines the bottleneck(s) ? u Provide plenty of non-bottleneck resources. u Shifting bottlenecks 18 utdallas. edu/~metin

Just in Time production u u u u Focus on timing Advocates pull system, use Kanban Design improvements encouraged Lower inventories / set up time / cycle time Quality improvements Supplier relations, fewer closer suppliers, Toyota city JIT philosophically different than OPT or MRP, it is not only a planning tool but a continuous improvement scheme 19 utdallas. edu/~metin