Aggregate Planning in Supply Chain

Spring, 2014

Supply Chain Management:Strategy, Planning, and Operation

Chapter 8

Byung-Hyun Ha

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Contents

Introduction

Aggregate planning problem

Aggregate planning strategy

Aggregate planning using LP

Further discussion

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Introduction

Ideal supply chain Infinite capacity and zero lead time impossible We need plans with different levels

• Strategic plans -- aggregate plans -- operational plans

Aggregate planning “A process by which a company determines planned levels of ca

pacity, production, subcontracting, inventory, stockouts, and even pricing over a specified time horizon”

Key question• How can a firm best use the facilities it has?

Decisions made at a product family (aggregates, not SKU) level Planning horizon of 3 to 18 months

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Aggregate Planning Problem

Aggregate planning as optimization problem (typical) Objective

• Profit maximization

Input• Forecasted demand

• Unit cost of each resource

• Cost of inventory, stockout, backlog

Constraints• Capacity, supply chain network configuration

Output• Production rate, machine capacity level

• Workforce, overtime, subcontracting

• Inventory on hand, stockout (backlog or lost sales)

Supply chain coordination (global optimization)?

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Aggregate Planning Problem

Identifying aggregate units of production Examples of aggregate units

• Number of final production items

• Weight or length of output

• Hours of lobar

• Dollars of sales

Simple approach to aggregating product mix• Weighted average, bottleneck process, ...

Effective capacity consideration

Identifying input for planning Example (Table 8-1)

FamilyMaterial

Cost/UnitRevenue/

UnitSetup

Time/BatchAverage

Batch SizeProduction Time/Unit

Net Production Time/Unit

% Share of Units Sold

AB...

157

...

5430...

86

...

50150

...

5.603.00

...

5.763.04

...

1025...

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Aggregate Planning Strategy

Tradeoff max. profit min. (cost capacity + inventory + stockout)

Heuristics Chase strategy

• using capacity as the lever

Flexibility strategy• using utilization as the lever

Level strategy• using inventory as the lever

Mixed strategy

Optimal approach?

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Aggregate Planning Using LP

Example: Red Tomato Tools Demand forecast (T = 6)

Costs

Others• Initial inventory: 1,000, final inventory: 500, initial workforce: 80

• 20 working days per month, $4 per hour regular time, 8 hours per day

• At most 10 hours of overtime per month

Decision variables• Wt, Ht, Lt, Pt, It, St, Ct, Ot

Is it linear?

Jan Feb Mar Apr May Jun

1,600 3,000 3,200 3,800 2,200 2,200

Materials $10/unit Hiring $300/worker Regular time $4/hour

Inventory $2/unit/month Layoff $500/worker Over time $6/hour

Stockout $5/unit/month Labor required 4 hours/unit Subcontracting $30/unit

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Aggregate Planning Using LP

Analysis Revenue over planning horizon Average inventory = ((I0 + IT)/2 + t=1..(T–1) It)/T

Average time in inventory = (average inventory) / (total demand)

Impact of higher demand variability Revised demand forecast

Impact of lower costs of hiring and layoff Revised costs of hiring and layoff: 50$ each

Coping with forecast error Maintaining buffers of safety inventor and/or safety capacity

Jan Feb Mar Apr May Jun

1,000 3,000 3,800 4,800 2,000 1,400

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Further Discussion

Building a rough master production planning schedule

Role of IT in aggregate planning

Implementing aggregate planning in practice