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Aggregate PlanningManipulating Demand

Prof. Metin Çakanyıldırım used various resources to prepare this document for teaching/training. To use this in your own course/training, please obtain permission from Prof. Çakanyıldırım.

If you find any inaccuracies, please contact metin@utdallas.edu for corrections.Updated in Spring 2020

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SCMMatching Demand and Supply

Supply = Demand Supply < Demand => Lost revenue opportunity Supply > Demand => Inventory Manage Supply – Productions Management Manage Demand – Marketing

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SCMManaging Predictable Variability with Supply

Manage capacity» Time flexibility from workforce (OT and otherwise)» Seasonal workforce, agriculture workers» Subcontracting» Counter cyclical products: complementary products

Similar products with negatively correlated demands– Snow blowers and Lawn Mowers– AC pumps and Heater pumps

» Flexible capacities/processes: Dedicated vs. flexible

a,b,c,d

Similar capabilities One super facility

a

bc

d a

bc

d

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SCMManaging Predictable Variability with Inventory

Component commonality– Remember fast food restaurant menus– Component commonality increase the benefit of postponement.

» More on this later

Build seasonal inventory of predictable products in preseason– Nothing can be learnt by procrastinating

Keep inventory of predictable products in the downstream supply chain and keep the others (spare parts) at the upstream

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Managing Predictable Variability with PricingRevisit Red Tomato Tools

Manage demand with pricing– Original pricing: Cost = $422,275, Revenue = $640,000, Profit=$217,725

Demand increases from discounting– Market growth– Stealing market share from competitors– Forward buying

» stealing your own market share from the future

Discount of $1 in a period increases that period’s demand by 10% (market and market share growth) and moves 20% of next two months demand forward

Can you gather this information –price sensitivity of the demand- easily? Does your company have this information?

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SCMA Forward Buyer’s Success Story Yesterday was an ordinary shopping day with an extraordinary experience. At my neighborhood store, I was walking

to the cleaning-supplies aisle to buy a tile-cleaner. Then I saw a mountain of toilet paper at the end-of the aisle. They were all on sale, a great deal that I could not afford to miss.

Yes, I wanted the entire mountain: 12 packages, each with 32 rolls. Why not! I easily loaded 12 packages into 4-carts but struggled to push my 4-cart load, a recently acquired treasure. Yup, as a man eagerly pushing a white mountain to the check-out lane, I got strange looks. Lucky I was, I did not run into one of my sarcastic neighbors.

A tired-looking woman with two kids, I say early 30-ish, gathered courage to ask whether there was a toilet paper clearance. I said -- what I should, but no more – that there was, conveniently forgetting to say I practically ended the clearance with my mountain-purchase. The cashier also joked about my soft mountain. I said my children were feeling sick so we needed more than usual amount. I am sure they will feel sick before we can finish the mountain anyway.

The most difficult of all is stacking 12 packages of toilet paper into my car. I squished 4 packages to fit in the trunk; 6 went to the back seat. I was going to put 2 in the front but they did not fit. So I opened packages and simply poured 64 rolls on the passenger seat, into the glove box, under the seats, under my own feet, some over the dashboard. I got in the car, pushed the rolls to make space for my body and closed the door. Rolls were pushing up against the windows/doors and me. I was floating in the soft medium of toilet paper.

At that time it occurred to me that the store might be videotaping the parking lot. If they had recorded me and posted it on a website, I would have been certainly getting offers for the next comedy blockbuster. No producer is knocking on my door, no worries for Adam Sandler. The store might have kept the video for itself, a ridiculous customer’s misery is not a good selling point. Perhaps my video is featured on the security guards’ coffee break to increase the morale.

Arriving home, I drove to the indoor garage and quickly unloaded my trophy. I realized that I forgot to buy the tile cleaner in my excitement. Anyway it perhaps was not on sale. Otherwise, I would have found it easily.

I have toilet paper stacked inside the oven, on top of the book shelves, under my bed and practically in every available unused, invisible corner of the house. Yes the operation, albeit tiring and ridiculing, was over. For at least a year, I will have the delight of using my soft and cheaply acquired toilet paper. As a poor man with no great accomplishments, I feel great knowing that I shall be the king of the toilet and have my moments of glory every day for just a few cents.

Ohh that is pricelesssss!

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SCM

Month Demand ForecastJanuary 1,600February 3,000

March 3,200April 3,800May 2,200June 2,200Total 16,000

Instance name: Original, from 40

See Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔

Original with price of $40

Original, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔

Record as

Revenue = 16 K∗ 40 = $640 K

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SCM

Discounting during off-peak ⇒ Revenue ↑ & Profit ↑

Month Demand ForecastJanuary 3,000 = 1,600 ∗ (1.1) + (3,000 + 3,200) ∗ (0.2)

February 2,400 = 3,000 ∗ 0.8March 2,560 = 3,200 ∗ 0.8April 3,800May 2,200June 2,200Total 16,160

Instance name: Off-Peak discount, Small market growth, from 40 to 39

See Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟐𝟐,𝟗𝟗𝟐𝟐𝟗𝟗Profit = 𝟒𝟒𝟒𝟒𝟔𝟔,𝟔𝟔𝟒𝟒𝟗𝟗

Off-Peak (January) Discount from $40 to $39

Original, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔

Off-peak, Small, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟐𝟐,𝟗𝟗𝟐𝟐𝟗𝟗Profit = 𝟒𝟒𝟒𝟒𝟔𝟔,𝟔𝟔𝟒𝟒𝟗𝟗

More demand ⇒More stable demand ⇒

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SCMPeak (April) Discount from $40 to $39

Discounting during peak ⇒ Revenue ↑ but Profit ↓

Month Demand ForecastJanuary 1,600

February 3,000March 3,200April 5,060 = 3,800 ∗ 1.1 + (2,200 + 2,200) ∗ 0.2May 1,760 = 2,200 ∗ 0.8June 1,760 = 2,200 ∗ 0.8Total 16,380

Instance name: Peak discount, Small market growth, from 40 to 39

See Revenue = 𝟔𝟔𝟗𝟗𝟗𝟗,𝟒𝟒𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟗𝟗𝟔𝟔𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟔𝟔,𝟒𝟒𝟒𝟒𝟔𝟔

Original, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔

Off-peak, Small, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟐𝟐,𝟗𝟗𝟐𝟐𝟗𝟗Profit = 𝟒𝟒𝟒𝟒𝟔𝟔,𝟔𝟔𝟒𝟒𝟗𝟗

More demand ⇒Less stable demand ⇒

Peak, Small, from 40Revenue = 𝟔𝟔𝟗𝟗𝟗𝟗,𝟒𝟒𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟗𝟗𝟔𝟔𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟔𝟔,𝟒𝟒𝟒𝟒𝟔𝟔

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SCMDemand Management

Pricing and Aggregate Planning must be done jointly Factors affecting discount timing and their new values

– Consumption: 100% increase in consumption instead of 10% increase– Forward buy, still 20% of the next two months– Product Margin: Impact of higher margin. What if discount from $31 to $30 instead

of from $40 to $39.)

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SCM

Discounting during off-peak ⇒ Revenue ↑ & Profit ↑

Month Demand ForecastJanuary 4,440 = 1,600 ∗ (2) + (3,000 + 3,200) ∗ (0.2)

February 2,400 = 3,000 ∗ 0.8March 2,560 = 3,200 ∗ 0.8April 3,800May 2,200June 2,200Total 17,600

Instance name: Off-Peak discount, Large market growth, from 40 to 39

See Revenue = 𝟐𝟐𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟔𝟔𝟔𝟔,𝟐𝟐𝟒𝟒𝟒𝟒

Consumption Increase 100%Off-Peak (January) Discount from $40 to $39

Original, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔

More demand ⇒More stable demand ⇒

Off-peak, Large, from 40Revenue = 𝟐𝟐𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟔𝟔𝟔𝟔,𝟐𝟐𝟒𝟒𝟒𝟒

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SCM

Discounting during peak ⇒ Largest Revenue & Profit

Instance name: Peak discount, Large market growth, from 40 to 39

See Revenue = 𝟐𝟐𝟗𝟗𝟒𝟒,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟗𝟗𝟒𝟒𝟔𝟔,𝟒𝟒𝟔𝟔𝟔𝟔Profit = 𝟒𝟒𝟗𝟗𝟗𝟗,𝟒𝟒𝟔𝟔𝟔𝟔

Consumption Increase 100%Peak (April) Discount from $40 to $39

Original, from 40Revenue = 𝟔𝟔𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔

More demand ⇒More demand ⇒

Off-peak, Large, from 40Revenue = 𝟐𝟐𝟔𝟔𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟔𝟔𝟔𝟔,𝟐𝟐𝟒𝟒𝟒𝟒

Month Demand ForecastJanuary 1,600

February 3,000March 3,200April 8,480 = 3,800 ∗ 2 + (2,200 + 2,200) ∗ 0.2May 1,760 = 2,200 ∗ 0.8June 1,760 = 2,200 ∗ 0.8Total 19,800

Peak, Large, from 40Revenue = 𝟐𝟐𝟗𝟗𝟒𝟒,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟗𝟗𝟒𝟒𝟔𝟔,𝟒𝟒𝟔𝟔𝟔𝟔Profit = 𝟒𝟒𝟗𝟗𝟗𝟗,𝟒𝟒𝟔𝟔𝟔𝟔

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SCM

Month Demand ForecastJanuary 1,600

February 3,000March 3,200April 3,800May 2,200June 2,200Total 16,000

Instance name: Original, from 31 to 30

See Revenue = 𝟔𝟔𝟗𝟗𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟐𝟐𝟒𝟒,𝟐𝟐𝟒𝟒𝟔𝟔

Reduced Margin: Original from $31 to $30Original

Original, from 31Revenue = 𝟔𝟔𝟗𝟗𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟐𝟐𝟒𝟒,𝟐𝟐𝟒𝟒𝟔𝟔

Record as

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SCM

Discounting during off-peak ⇒ Revenue ↑ & Profit ↑

Month Demand Forecastsame as in Off-Peak, Large

January 4,440February 2,400

March 2,560April 3,800May 2,200June 2,200Total 17,600

Instance name: Off-Peak discount, Large market growth, from 31 to 30

See Revenue = 𝟗𝟗𝟔𝟔𝟗𝟗,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟒𝟒,𝟒𝟒𝟒𝟒𝟒𝟒

Off-Peak (January) Discount from $31 to $30Consumption Increase 100%

More demand ⇒More demand ⇒

Off-peak, Large, from 31Revenue = 𝟗𝟗𝟔𝟔𝟗𝟗,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟒𝟒,𝟒𝟒𝟒𝟒𝟒𝟒

Original, from 31Revenue = 𝟔𝟔𝟗𝟗𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟐𝟐𝟒𝟒,𝟐𝟐𝟒𝟒𝟔𝟔

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SCM

Discounting during peak ⇒ Revenue ↑ but Profit ↓

Instance name: Peak discount, Large market growth, from 31 to 30

See Revenue = 𝟔𝟔𝟐𝟐𝟒𝟒,𝟒𝟒𝟔𝟔𝟔𝟔

Cost = 𝟗𝟗𝟒𝟒𝟔𝟔,𝟒𝟒𝟔𝟔𝟔𝟔Profit = 𝟐𝟐𝟐𝟐,𝟔𝟔𝟔𝟔𝟔𝟔

More demand ⇒More demand ⇒

Month Demand Forecastsame as in Peak, Large

January 1,600February 3,000

March 3,200April 8,480May 1,760June 1,760Total 19,800

Peak, Large, from 31Revenue = 𝟔𝟔𝟐𝟐𝟒𝟒,𝟒𝟒𝟔𝟔𝟔𝟔

Cost = 𝟗𝟗𝟒𝟒𝟔𝟔,𝟒𝟒𝟔𝟔𝟔𝟔Profit = 𝟐𝟐𝟐𝟐,𝟔𝟔𝟔𝟔𝟔𝟔

Peak (April) Discount from $31 to $30Consumption Increase 100%

Original, from 31Revenue = 𝟔𝟔𝟗𝟗𝟔𝟔,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟒𝟒𝟒𝟒,𝟒𝟒𝟐𝟐𝟔𝟔Profit = 𝟐𝟐𝟒𝟒,𝟐𝟐𝟒𝟒𝟔𝟔

Off-peak, Large, from 31Revenue = 𝟗𝟗𝟔𝟔𝟗𝟗,𝟔𝟔𝟔𝟔𝟔𝟔

Cost = 𝟔𝟔𝟗𝟗𝟐𝟐,𝟒𝟒𝟐𝟐𝟒𝟒Profit = 𝟒𝟒𝟒𝟒,𝟒𝟒𝟒𝟒𝟒𝟒

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SCM

What dominates?Demand Growth, Demand Stability, Margin Size

Silver Medal:Original, from 40

Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔

Gold Medal:Off-peak, Small, from 40

Profit = 𝟒𝟒𝟒𝟒𝟔𝟔,𝟔𝟔𝟒𝟒𝟗𝟗Bronze Medal:

Peak, Small, from 40Profit = 𝟒𝟒𝟐𝟐𝟔𝟔,𝟒𝟒𝟒𝟒𝟔𝟔

Demand stability > Demand growth when consumption by 10% & large margin

Bronze Medal:Original, from 40

Profit = 𝟒𝟒𝟐𝟐𝟐𝟐,𝟐𝟐𝟒𝟒𝟔𝟔

Silver Medal:Off-peak, Large, from 40

Profit = 𝟒𝟒𝟔𝟔𝟔𝟔,𝟐𝟐𝟒𝟒𝟒𝟒

Gold Medal:Peak, Large, from 40

Profit = 𝟒𝟒𝟗𝟗𝟗𝟗,𝟒𝟒𝟔𝟔𝟔𝟔

Demand growth > Demand stability when consumption by 100% & large margin

Discount ⇒ Demand growth; Off-peak discount ⇒ Demand stability

Silver Medal:Peak, Large, from 31

Profit = 𝟐𝟐𝟐𝟐,𝟔𝟔𝟔𝟔𝟔𝟔

Bronze Medal:Original, from 31

Profit = 𝟐𝟐𝟒𝟒,𝟐𝟐𝟒𝟒𝟔𝟔

Gold Medal:Off-peak, Large, from 31

Profit = 𝟒𝟒𝟒𝟒,𝟒𝟒𝟒𝟒𝟒𝟒

Demand stability > Demand growth when consumption by 100% & small margin

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SCMPerformance Under Different Scenarios

Use rows in blue to explain Xmas discounts. Limited forward buy wrt consumption.The product, with more (market growth/forward buy) ratio, is discounted during peak.

Price Discount price

Promotion period

Consump-tion ↑

Forward buy ↑

Profit in $K

Average inventory

40 40 NA NA NA 217 85340 39 Off-Peak 10% 20% 224 48240 39 Peak 10% 20% 216 91240 39 Off-peak 100% 20% 246 13940 39 Peak 100% 20% 255 145031 30 NA NA NA 73 85331 30 Off-Peak 100% 20% 88 13931 30 Peak 100% 20% 77 1450

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SCMDiscount Timing by Forward Buy Amount

Silver Medal:Original, from 40

Gold Medal:Off-peak, Small, from 40 Bronze Medal:

Peak, Small, from 40

Forward buy large wrt consumption growth of 10%

Bronze Medal:Original, from 40

Silver Medal:Off-peak, Large, from 40

Gold Medal:Peak, Large, from 40

Forward buy small wrt consumption growth of 100%

Discount ⇒ Forward Buy; Off-Peak discount ⇒ Demand stability

Small Forward Buy ⇒ Discount During Peak

What gift should you buy on the special days (peak demand) when retailers supposedly give discounts?

Think of flowers on Valentine’s day. How about diamonds?Compare forward buy for flowers and that for diamonds.Empirical data available?

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SCM

Empirical Data: Who spends / How much on Valentine’s day

The average consumer spends $122.98 on 2008 Valentine’s Day, similar to $119.67 of 2007. Total US spending on Valentine’s Day is $17.02 B by 18+.

Spending – by gender

» Men again dishes out the most in 2008, spending an average of $163.37 on gifts and cards, compared to an average of $84.72 spent by women.

– by age » Adults: 25-34 spend $160.37.» Young adults: 18-24 spend $145.59.» Upper Middle age: 45-54 spend $117.91. » Lower Middle age: 35-44 spend $116.35.» Elderly: 55-64 spend $110.97.

Gifts» 56.8% of all consumers give a greeting card. » 48.2% plan a special night out. » 48.0% buy candy.» 35.9% buy flowers.» 12.3% give a gift card.» 11.8% buy clothing. » ??.?% buy diamonds

– Source: National Retail Federation www.nrf.com

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SCMWhat does an MBA buy for a gift?

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SCMSummary

Optimality of peak vs. off-peak discounting depends on– Forward buy vs. Market growth

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SCMFactors Affecting Promotion Timing

Factor Favored timing High forward buying Low demand period High stealing share High demand period High growth of market High demand period High margin High demand period Low margin Low demand period High holding cost Low demand period Low capacity volume flexibility

Low demand period

Factor

Favored timing

High forward buying

Low demand period

High stealing share

High demand period

High growth of market

High demand period

High margin

High demand period

Low margin

Low demand period

High holding cost

Low demand period

Low capacity volume flexibility

Low demand period

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SCMPerformance Under Different Scenarios

Regular Price

Promotion Price

Promotion Period

% increase in demand

% forward buy

Profit Average Inventory

$40 $40 NA NA NA $217,725 895 $40 $39 January 10% 20% $221,485 523 $40 $39 April 10% 20% $211,283 938 $40 $39 January 100% 20% $242,810 208 $40 $39 April 100% 20% $247,320 1,492 $31 $31 NA NA NA $73,725 895 $31 $30 January 100% 20% $84,410 208 $31 $30 April 100% 20% $69,120 1,492

Regular Price

Promotion Price

Promotion Period

% increase in demand

% forward buy

Profit

Average Inventory

$40

$40

NA

NA

NA

$217,725

895

$40

$39

January

10%

20%

$221,485

523

$40

$39

April

10%

20%

$211,283

938

$40

$39

January

100%

20%

$242,810

208

$40

$39

April

100%

20%

$247,320

1,492

$31

$31

NA

NA

NA

$73,725

895

$31

$30

January

100%

20%

$84,410

208

$31

$30

April

100%

20%

$69,120

1,492

Aggregate Planning�Manipulating DemandMatching Demand and SupplyManaging Predictable Variability with SupplyManaging Predictable Variability with InventoryManaging Predictable Variability with Pricing�Revisit Red Tomato ToolsA Forward Buyer’s Success StorySlide Number 7Slide Number 8Peak (April) Discount from $40 to $39Demand ManagementSlide Number 11Slide Number 12Slide Number 13Slide Number 14Slide Number 15��What dominates?�Demand Growth, Demand Stability, Margin SizePerformance Under Different Scenarios��Discount Timing by Forward Buy AmountEmpirical Data: �Who spends / How much on Valentine’s day What does an MBA buy for a gift?Summary Factors Affecting Promotion TimingPerformance Under Different Scenarios