© 2004 Prentice-Hall, Inc. 8-1 Chapter 8 Aggregate Planning in the Supply Chain Supply Chain Management (3rd Edition)

© 2004 Prentice-Hall, Inc. 8-1

Chapter 8Aggregate Planningin the Supply Chain

Supply Chain Management(3rd Edition)


Outline

Role of aggregate planning in a supply chain The aggregate planning problem Aggregate planning strategies Implementing aggregate planning in practice


Role of Aggregate Planning in a Supply Chain

Imagine a world where all costs and lead times are zero... However capacity is costly and LT’s are not zero.. How to use

capacity? When to outsource? 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– 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?


Role of Aggregate Planning in a Supply Chain

Specify operational parameters over the time horizon:– production rate– workforce– overtime– machine capacity level– subcontracting– backlog– inventory on hand

All supply chain stages should work together on an aggregate plan that will optimize supply chain performance


The Aggregate Planning Problem

Given 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

Specify the planning horizon (typically 3-18 months) Specify the duration of each period Specify key information required to develop an

aggregate plan


Information Needed foran 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


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


Aggregate Planning Strategies

Capacity Inventory Backlog/lost sales Costs Costs Costs

Chase strategy – using capacity as the lever Time flexibility startegy – using workforce or

capacity utilization as the lever Level strategy – using inventory as the lever Mixed strategy – a combination of one or more of

the first three strategies


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


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, but lower utilization Should be used when inventory holding costs are high

and capacity is relatively inexpensive


Level Strategy Maintain stable machine capacity and workforce levels with a

constant output rate No synchronization of demand and supply results in

Shortages and surpluses 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


Ex: Red Tomato Tools

Demand for the gardening tools is highly seasonal. Handle demand and maximize profits?? Options:

– Hire worker in peak season

– Subcontraction of some work

– Build up inventory in slow period

– Backlogging

Constraints:– No limit on subcontracting, inventories, stockouts, backlog

– All stockouts are backlogged from the following month.

– Inventory costs are incurred on the ending inventory in a month.

– Inventory level at the end of June is at least 500 units.


Ex: Red Tomato Tools-Demand Forecast

Month Demand ForecastJanuary 1,600February 3,000

March 3,200April 3,800May 2,200June 2,200


Ex: Red Tomato Tools-Initialization

Unit price=$40/unit Inventory at the beginning of January=1000 units Workforce at the beginning of January=80 employees Total of 20 workdays/month are available Regular work hours=8hrs/day/employee Overtime work hours can not exceed

10hrs/month/employee Required labor hours= 4hrs/unit


Ex: Red Tomato Tools-Costs

Item Cost Materials $10/unit Inventory holding cost $2/unit/month Marginal cost of a stockout $5/unit/month Hiring and training costs $300/worker Layoff cost $500/worker Labor hours required 4/unit Regular time cost $4/hour Over time cost $6/hour Cost of subcontracting $30/unit


Aggregate Planning (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 (backlogged) 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


? Min cost = Max profit

Min cost and max profit are equivalent if– All demand has to be met in some way

– The unit price is fixed,

i.e., total revenue is fixed.

Then, min cost and max profit gives the same optimal plan.


Aggregate Planning(Define Objective Function)

Costtion Subcontrac

6

1

Cost Production

6

1

CostStockout

6

1

Cost HoldingInventory

6

1

Layoff ofCost

6

1

Hiring ofCost

6

1

CostLabor Overtime

6

1

CostLabor TimeRegular

6

1

301052

5003006640

tt

tt

tt

tt

tt

tt

tt

tt

CPSI

LHOWTCMin


Workforce Balance Equations

Workforce size for each month is based on hiring and layoffs

.80,6,...,1

0

,

0

1

1

WwheretforLHWW

orLHWW

tttt

tttt

Period tWt-1 Wt

Ht

Lt


Inventory Balance Equations

.500,0

,000,1,6,...,1

,0

,

60

0

11

11

IandS

IwheretforSISDCPI

SISDCPI

ttttttt

ttttttt

Period tIt-1 It

Pt

DtSt-1 St

Ct


Production Capacity Constraints

Production for each month cannot exceed regular+overtime working capacity

.6,...,1

,0440

,440

tforPOW

OWP

ttt

ttt


Overtime Capacity Constraints

Over time for each month

.6,...,1

,010

,10

tforOW

WO

tt

tt


Average Flow Time Little’s Law:

Average Flow time=Average Inventory/Throughput

1

10

11 )(

2

11)(

2

11Inventory Average

T

ttT

T

ttt III

TII

T

T

ttDT 1

1Throughput Average

•Average Flow Time for Red Tomato=895/2,667=0.34 months

?? ?? What happens to Average Flow Time if uncertainty in demand increases?


Scenarios

Increased demand fluctuation Increase in holding cost (from $2 to $6) Overtime cost drops to $4.1 per hour


Increased Demand Fluctuation

Month Demand ForecastJanuary 1,000February 3,000

March 3,800April 4,800May 2,000June 1,400


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


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?

© 2004 Prentice-Hall, Inc. 8-1 Chapter 8 Aggregate Planning in the Supply Chain Supply Chain Management (3rd Edition)

Documents

planning horizon u

months u

hand u

supply chain u

unit u inventory

unitperiod u stockout

unitperiod u constraints

u backlogstockout quantity