Planning Supply and Demand: Aggregate Planning

Chapter 5A

Responding to Predictable Variability in a Supply Chain

Predictable

variability is change in demand that can be forecasted May cause increased costs and decreased responsiveness in the supply chain

Responding to Predictable Variability in a 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

Managing Supply
Managing

capacity

Time flexibility from workforce Use of seasonal workforce Use of subcontracting Use of dual facilities dedicated and flexible
How

would you decide which products to make with each type of capacity?

Designing product flexibility into production processes

Anheuser-Busch

Anheuser-Busch produced nearly 40% of the beer consumed in the U.S.

Matched fluctuating demand by brand to plant, labor, and inventory capacity to achieve high facility utilization High facility utilization requires

Meticulous cleaning between batches

Effective maintenance Efficient employees Efficient facility scheduling

Managing Capacity
Determine the quantity and timing of production for the immediate future

Objective is to minimize cost over the planning period by adjusting

Production rates
Labor levels Inventory levels

Overtime work
Subcontracting Other controllable variables

Managing Capacity
Long-range plans (over one year)
Research & Development New product plans Capital investment Facility location/expansion Top executives

Intermediate-range plans (3 to 18 months)

Sales planning Production planning and budgeting Setting employment, inventory, subcontracting levels Analyzing cooperating plans

Operations managers

Short-range plans (up to 3 months)

Operations managers, supervisors, foremen Responsibility Job assignments Ordering Job scheduling Dispatching Overtime Part-time help Planning tasks and horizon

Managing Capacity
Quarter 1 Feb 120,000

Jan 150,000

Mar 110,000 Quarter 2 May 130,000

Apr 100,000

Jun 150,000 Quarter 3 Aug 150,000

Jul 180,000

Sep 140,000

Managing Capacity

Use inventories to absorb changes in demand Accommodate changes by varying workforce size Use part-timers, overtime, or idle time to absorb changes Use subcontractors and maintain a stable workforce Change prices or other factors to influence demand

Managing Capacity

Changing inventory levels

Increase inventory in low demand periods to meet high demand in the future
Increases costs associated with storage, insurance, handling, obsolescence, and capital investment

Need to weigh

costs of each

Shortages can mean lost sales due to long lead times and poor customer service

Capacity Options

Varying workforce size by hiring or layoffs

Match production rate to demand

Training and separation costs for hiring and laying off workers

New workers may have lower productivity

Laying off workers may lower morale and productivity

Capacity Options

Varying production rate through overtime or idle time

Allows constant workforce

May be difficult to meet large increases in demand

Overtime can be costly and may drive down productivity

Absorbing idle time may be difficult

Capacity Options

Subcontracting

Temporary measure during periods of peak demand

May be costly

Assuring quality and timely delivery may be difficult

Exposes your customers to a possible competitor

Capacity Options

Using part-time workers

Useful for filling unskilled or low skilled positions, especially in services

Aggregate Planning Options

Option Advantages Disadvantages Some Comments

Changing inventory levels

Changes in Inventory human holding cost resources are may increase. gradual or Shortages may none; no abrupt result in lost production sales. changes Avoids the costs Hiring, layoff, of other and training alternatives costs may be significant

Applies mainly to production, not service, operations

Varying workforce size by hiring or layoffs

Used where size of labor pool is large

Aggregate Planning Options

Option Varying production rates through overtime or idle time Subcontracting Advantages Matches seasonal fluctuations without hiring/ training costs Permits flexibility and smoothing of the firms output Disadvantages Overtime premiums; tired workers; may not meet demand Some Comments Allows flexibility within the aggregate plan

Loss of quality Applies mainly in control; production reduced profits; settings loss of future business

Aggregate Planning Options

Option Using parttime workers Advantages Is less costly and more flexible than full-time workers Disadvantages High turnover/ training costs; quality suffers; scheduling difficult Some Comments Good for unskilled jobs in areas with large temporary labor pools Creates marketing ideas. Overbooking used in some businesses.

Influencing demand

Tries to use Uncertainty in excess demand. Hard capacity. to match Discounts draw demand to new customers. supply exactly.

Aggregate Planning Options

Option Advantages Disadvantages Some Comments

Back ordering during highdemand periods

Counterseasonal product and service mixing

May avoid overtime. Keeps capacity constant.

Customer must be willing to wait, but goodwill is lost.

Allows flexibility within the aggregate plan

Fully utilizes resources; allows stable workforce

May require skills or equipment outside the firms areas of expertise

Risky finding products or services with opposite demand patterns

Methods for Aggregate Planning

A mixed strategy may be the best way to achieve minimum costs

There are many possible mixed strategies

Finding the optimal plan is not always possible

Mixing Options to Develop a Plan

Chase strategy

Match output rates to demand forecast for each period Vary workforce levels or vary production rate

Favored by many service organizations

Mixing Options to Develop a Plan

Level strategy

Daily production is uniform Use inventory or idle time as buffer

Stable production leads to better quality and productivity

Some combination of capacity options, a mixed strategy, might be the best solution

Graphical and Charting Methods

Popular techniques Easy to understand and use

Trial-and-error approaches that do not guarantee an optimal solution

Require only limited computations

Graphical and Charting Methods

1. Determine the demand for each period 2. Determine the capacity for regular time, overtime, and subcontracting each period

3. Find labor costs, hiring and layoff costs, and inventory holding costs
4. Consider company policy on workers and stock levels 5. Develop alternative plans and examine their total costs

Planning Example 1 Level Production

Month Jan
Feb Mar Apr May June

Expected Demand 900

700 800 1,200 1,500 1,100 6,200

Production Days 22 18 21 21 22 20 124

Demand Per Day (computed) 41 39 38 57 68 55

Total expected demand Average requirement = Number of production days 6,200 = = 50 units per day 124

Planning Example 1 Level Production

Production rate per working day Forecast demand

70 60 50 40 30

Level production using average monthly forecast demand

Jan 22

Feb 18

Mar 21

Apr 21

May 22

June 20

= Month
= Number of working days

Planning Example 1 Level Production

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs) $ 5 per unit per month $10 per unit

$ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit
$300 per unit $600 per unit

Planning Example 1 Level Production

Cost Information Production at Inventory carry cost Month 50 Units per unit Subcontracting costper Day Jan 1,100 Average pay rate
Overtime pay rate

Monthly Demand $ 5 per unit per month Inventory Ending Forecast $10 per unit Change Inventory 900 700 +200 200 $ 5 per hour ($40 per day) +200 400 $ 7 per hour (above 8 hours per day) +250 650 1.6 hours per unit -150 -400 500 100 0 1,850
$300 per unit

Feb

900

Mar
Apr

1,050
1,050

800
1,200

Labor-hours to produce a unit

Cost of increasing daily production rate May and training) 1,100 1,500 (hiring June 1,000 1,100 Cost of decreasing daily production rate (layoffs)
Table 13.3

-100 $600 per unit

Total units of inventory carried over from one month to the next = 1,850 units Workforce required to produce 50 units per day = 10 workers

Planning Example 1 Level Production

Costs Inventory carrying Regular-time labor Other costs (overtime, hiring, layoffs, subcontracting) Total cost $9,250 49,600 Calculations (= 1,850 units carried x $5 per unit) (= 10 workers x $40 per day x 124 days)

0 $58,850

Total units of inventory carried over from one month to the next = 1,850 units Table 13.3 Workforce required to produce 50 units per day = 10 workers

Planning Example 1 Level Production

7,000

6,000
Cumulative demand units 5,000 4,000 3,000 2,000

Reduction of inventory Cumulative level production using average monthly forecast requirements

Cumulative forecast requirements Excess inventory Jan Feb Mar Apr May June

1,000

Planning Example 2 Subcontract

Month
Jan Feb Mar

Expected Demand
900 700 800

Production Days 22 18 21

Demand Per Day (computed) 41 39 38*

Apr
May June

1,200
1,500 1,100 6,200

21
22 20 124

57
68 55

*Minimum requirement = 38 units per day

Planning Example 2 Subcontract

Production rate per working day Forecast demand

70 60 50 40 30
Level production using lowest monthly forecast demand

Jan 22

Feb 18

Mar 21

Apr 21

May 22

June 20

= Month
= Number of working days

Planning Example 2 Subcontract

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs) $ 5 per unit per month $10 per unit

$ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit
$300 per unit $600 per unit

Planning Example 2 Subcontract

In-house production

= 38 units per day x 124 days = 4,712 units

= 6,200 - 4,712 = 1,488 units

Subcontract units

Planning Example 2 Subcontract

Costs Regular-time labor Subcontracting Total cost $37,696 14,880 $52,576

Calculations (= 7.6 workers x $40 per day x 124 days) (= 1,488 units x $10 per unit)

Planning Example 3 Chase Demand

Production Days 22 Demand Per Day (computed) 41

Month Jan

Expected Demand 900

Feb
Mar Apr May

700
800 1,200 1,500

18
21 21 22

39
38 57 68

June

1,100
6,200

20
124

55

Production = Expected Demand

Planning Example 3 Chase Demand

Production rate per working day

70 60 50 40 30

Forecast demand and monthly production

Jan 22

Feb 18

Mar 21

Apr 21

May 22

June 20

= Month
= Number of working days

Planning Example 3 Chase Demand

Cost Information
Inventory carrying cost Subcontracting cost per unit Average pay rate Overtime pay rate Labor-hours to produce a unit Cost of increasing daily production rate (hiring and training) Cost of decreasing daily production rate (layoffs) $ 5 per unit per month $10 per unit

$ 5 per hour ($40 per day) $ 7 per hour (above 8 hours per day) 1.6 hours per unit
$300 per unit $600 per unit

Planning Example 3 Chase Demand

Basic Production Inventory carrying cost Cost Daily (demand x Forecast Subcontracting Prod per unit x cost 1.6 hrs/unit Month (units) Rate $5/hr) Jan

Cost Information

Extra Cost of per unit per month Extra Cost of $5 Increasing Decreasing $10 per unit Production Production (hiring cost) (layoff cost) Total Cost

Average900 rate41 pay rate 39

$ 7,200 5,600

$ 5 per hour ($40 per day)

$ 7,200

Overtime pay Feb 700 Labor-hours Mar 800

to produce a 6,400 unit 38

$ 7 per hour $1,200 6,800 (above 2 xhours per day) (= 8 $600) 1.6 hours$600 unit per 7,000
(= 1 x $600) 15,300 15,300 16,600 $68,200

Cost of increasing daily production rate $300 per unit $5,700 Apr 1,200 57 9,600 (hiring and training) (= 19 x $300) Cost of decreasing daily production rate $600 per unit $3,300 May 1,500 68 12,000 (= 11 x $300) (layoffs)
June 1,100 55 8,800 $49,600 $9,000 $7,800 (= 13 x $600) $9,600

Comparison of Three Plans

Cost Inventory carrying Regular labor Overtime labor
Hiring Layoffs Subcontracting Total cost

Plan 1 $ 9,250 49,600 0

0 0 0 $58,850

Plan 2 $ 0

Plan 3 $ 0

37,696 0
0 0 14,880 $52,576

49,600 0
9,000 9,600 0 $68,200

Demand Options

Influencing demand

Use advertising or promotion to increase demand in low periods Attempt to shift demand to slow periods

May not be sufficient to balance demand and capacity

Demand Options

Back ordering during high- demand periods

Requires customers to wait for an order without loss of goodwill or the order Most effective when there are few if any substitutes for the product or service
Often results in lost sales

Demand Options

Counter-seasonal product and service mixing

Develop a product mix of counterseasonal items

May lead to products or services outside the companys areas of expertise

Managing Demand
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)

Demand Management
Pricing

and aggregate planning must be done jointly Factors affecting discount timing
Product margin: Impact of higher margin Consumption: Changing fraction of increase coming from forward buy Forward buy

Factors Affecting Promotion Timing

Factor High forward buying High stealing share High growth of market High margin Low margin High holding cost Low flexibility

Favored timing Low demand period High demand period High demand period High demand period Low demand period Low demand period Low demand period

Factors Influencing Discount Timing

Impact

of discount on consumption Impact of discount on forward buy Product margin

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