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Chapter 8Aggregate Planningin the Supply Chain
Supply Chain Management(3rd Edition)
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Outline
Role of aggregate planning in a supply chain The aggregate planning problem Aggregate planning strategies Implementing aggregate planning in practice
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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?
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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Ex: Red Tomato Tools-Demand Forecast
Month Demand ForecastJanuary 1,600February 3,000
March 3,200April 3,800May 2,200June 2,200
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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
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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
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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
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? 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.
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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
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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
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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
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Production Capacity Constraints
Production for each month cannot exceed regular+overtime working capacity
.6,...,1
,0440
,440
tforPOW
OWP
ttt
ttt
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Overtime Capacity Constraints
Over time for each month
.6,...,1
,010
,10
tforOW
WO
tt
tt
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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?
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Scenarios
Increased demand fluctuation Increase in holding cost (from $2 to $6) Overtime cost drops to $4.1 per hour
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Increased Demand Fluctuation
Month Demand ForecastJanuary 1,000February 3,000
March 3,800April 4,800May 2,000June 1,400
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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
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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?
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