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aggregate planning in the supply chain
This document discusses aggregate planning in supply chains. Aggregate planning determines production levels, inventory levels, and capacity levels over a 3-18 month horizon to maximize profit. It balances tradeoffs between capacity, inventory, and backlogs. Common strategies are chase, time flexibility, and level strategies. The document provides an example of formulating an aggregate planning problem and defines decision variables, objective function, and constraints to develop an optimal plan.
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aggregate planning in the supply chain
- 1. CHAPTER 8 AGGREGATE PLANNING INTHE SUPPLY CHAIN 8-1
- 2. OUTLINE Role ofaggregate planning in a supply chain The aggregate planning problem Aggregate planning strategies Implementing aggregate planning in practice 8-2
- 3. ROLE OF AGGREGATEPLANNING IN A SUPPLY CHAIN Capacity has a cost, lead times are greater than zero 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? 8-3
- 4. ROLE OF AGGREGATEPLANNING 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 8-4
- 5. 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 8-5
- 6. INFORMATION NEEDED FOR ANAGGREGATE 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 8-6
- 7. OUTPUTS OF AGGREGATEPLAN 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 8-7
- 8. AGGREGATE PLANNING STRATEGIES Trade-offbetween capacity, inventory, backlog/lost sales Chase strategy – using capacity as the lever Time flexibility from workforce or capacity strategy – using utilization as the lever Level strategy – using inventory as the lever Mixed strategy – a combination of one or more of the first three strategies 8-8
- 9. CHASE STRATEGY Productionrate 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 8-9
- 10. 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, lower utilization Should be used when inventory holding costs are high and capacity is relatively inexpensive 8-10
- 11. LEVEL STRATEGY Maintainstable machine capacity and workforce levels with a constant output rate Shortages and surpluses result in fluctuations in inventory levels over time 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 8-11
- 12. AGGREGATE PLANNING AT REDTOMATO TOOLS Month Demand Forecast January 1,600 February 3,000 March 3,200 April 3,800 May 2,200 June 2,200 8-12
- 13. FUNDAMENTAL TRADEOFFS IN AGGREGATEPLANNING Capacity (regular time, overtime, subcontract) Inventory Backlog / lost sales Basic Strategies Chase strategy Time flexibility from workforce or capacity Level strategy 8-13
- 14. AGGREGATE PLANNING 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 8-14
- 15. AGGREGATE PLANNING (DEFINE DECISIONVARIABLES) 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 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 8-15
- 16. AGGREGATE PLANNING (DEFINE OBJECTIVEFUNCTION) ∑+∑+∑+ ∑+∑+∑+ ∑+∑ === === == 6 1 6 1 6 1 6 1 6 1 6 1 6 1 6 1 30105 26500 300640 t t t t t t t t t t t t t t t t CPS IOL HWMin 8-16
- 17. AGGREGATE PLANNING (DEFINE CONSTRAINTSLINKING VARIABLES) Workforce size for each month is based on hiring and layoffs 8-17 .80,6,...,1 0 , 0 1 1 == =+−− −+= − − Wwheretfor LHWW orLHWW tttt tttt
- 18. AGGREGATE PLANNING (CONSTRAINTS) Productionfor each month cannot exceed capacity 8-18 .6,...,1 ,0440 ,440 = ≥−+ +≤ tfor POW OWP ttt ttt
- 19. AGGREGATE PLANNING (CONSTRAINTS) Inventorybalance for each month 8-19 .500,0 ,000,1,6,...,1 ,0 , 60 0 11 11 ≥= == =+−−−++ −++=++ −− −− IandS Iwheretfor SISDCPI SISDCPI ttttttt ttttttt
- 20. AGGREGATE PLANNING (CONSTRAINTS) Overtime for each month 8-20 .6,...,1 ,010 ,10 = ≥− ≤ tfor OW WO tt tt
- 21. SCENARIOS Increase inholding cost (from $2 to $6) Overtime cost drops to $4.1 per hour Increased demand fluctuation 8-21
- 22. INCREASED DEMAND FLUCTUATION Month DemandForecast January 1,000 February 3,000 March 3,800 April 4,800 May 2,000 June 1,400 8-22
- 23. 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 8-23
- 24. 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? 8-24