Lecture 4 supply chain planning

Lecture 4 supply chain planning

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  SUPPLY CHAIN MANAGEMENTSUPPLYCHAIN MANAGEMENT Lecture 4:Lecture 4: AGGREGATE PLANNING IN A SUPPLY CHAIN HUMAYUN AKHTARHUMAYUN AKHTAR
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  © 2007 PearsonEducation8-2 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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  © 2007 PearsonEducation8-3 Role of Aggregate Planning 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?
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  © 2007 PearsonEducation8-4 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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  © 2007 PearsonEducation8-5 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
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  © 2007 PearsonEducation8-6 Information Needed for an 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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  © 2007 PearsonEducation8-7 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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  © 2007 PearsonEducation8-8 Aggregate Planning Strategies  Trade-off between capacity, inventory,Trade-off between capacity, inventory, backlog/lost salesbacklog/lost sales  Chase strategyChase strategy – using capacity as the lever– using capacity as the lever  Time flexibility from workforce or capacityTime flexibility from workforce or capacity strategystrategy – using utilization as the lever– using utilization as the lever  Level strategyLevel strategy – using inventory as the lever– using inventory as the lever  Mixed strategyMixed strategy – a combination of one or more– a combination of one or more of the first three strategiesof the first three strategies
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  © 2007 PearsonEducation8-9 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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  © 2007 PearsonEducation8-10 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
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  © 2007 PearsonEducation8-11 Level Strategy  Maintain stable 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
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  © 2007 PearsonEducation8-12 Aggregate Planning at Red Tomato Tools Month Demand Forecast January 1,600 February 3,000 March 3,200 April 3,800 May 2,200 June 2,200
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  © 2007 PearsonEducation8-13 Fundamental Tradeoffs in Aggregate Planning  Capacity (regular time, overtime, subcontract)Capacity (regular time, overtime, subcontract)  InventoryInventory  Backlog / lost salesBacklog / lost sales Basic Strategies  Chase strategy  Time flexibility from workforce or capacity  Level strategy
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  © 2007 PearsonEducation8-14 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
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  © 2007 PearsonEducation8-15 Increased Demand Fluctuation Month Demand Forecast January 1,000 February 3,000 March 3,800 April 4,800 May 2,000 June 1,400
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  © 2007 PearsonEducation8-16 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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  THANK YOU 3-17