Presentation on theme: "Chapter 8 Aggregate Planning in a Supply Chain"— Presentation transcript:
1 Chapter 8 Aggregate Planning in a Supply Chain Supply Chain Management (2nd Edition)Chapter 8 Aggregate Planning in a Supply Chain
2 Outline Role of aggregate planning in a supply chain The aggregate planning problemAggregate planning strategiesImplementing aggregate planning in practice
3 Role of Aggregate Planning in a Supply Chain Capacity has a cost, lead times are greater than zeroAggregate planning:process by which a company determines levels of capacity, production, subcontracting, inventory, stockouts, and pricing over a specified time horizongoal is to maximize profitdecisions made at a product family (not SKU) leveltime frame of 3 to 18 monthshow can a firm best use the facilities it has?
4 Role of Aggregate Planning in a Supply Chain Specify operational parameters over the time horizon:production rateworkforceovertimemachine capacity levelsubcontractingbackloginventory on handAll supply chain stages should work together on an aggregate plan that will optimize supply chain performance
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 horizonSpecify the planning horizon (typically 3-18 months)Specify the duration of each periodSpecify key information required to develop an aggregate plan
6 Information Needed for an Aggregate Plan Demand forecast in each periodProduction costslabor 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 ($/machine)Labor/machine hours required per unitInventory holding cost ($/unit/period)Stockout or backlog cost ($/unit/period)Constraints: limits on overtime, layoffs, capital available, stockouts and backlogs
7 Outputs of Aggregate Plan Production quantity from regular time, overtime, and subcontracted time: used to determine number of workers and supplier purchase levelsInventory held: used to determine how much warehouse space and working capital is neededBacklog/stockout quantity: used to determine what customer service levels will beMachine capacity increase/decrease: used to determine if new production equipment needs to be purchasedA poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity
8 Aggregate Planning Strategies Trade-off between capacity, inventory, backlog/lost salesChase strategy – using capacity as the leverTime flexibility from workforce or capacity strategy – using utilization as the leverLevel strategy – using inventory as the leverMixed strategy – a combination of one or more of the first three strategies
9 Chase StrategyProduction rate is synchronized with demand by varying machine capacity or hiring and laying off workers as the demand rate variesHowever, in practice, it is often difficult to vary capacity and workforce on short noticeExpensive if cost of varying capacity is highNegative effect on workforce moraleResults in low levels of inventoryShould be used when inventory holding costs are high and costs of changing capacity are low
10 Time Flexibility Strategy Can be used if there is excess machine capacityWorkforce is kept stable, but the number of hours worked is varied over time to synchronize production and demandCan use overtime or a flexible work scheduleRequires flexible workforce, but avoids morale problems of the chase strategyLow levels of inventory, lower utilizationShould be used when inventory holding costs are high and capacity is relatively inexpensive
11 Level StrategyMaintain stable machine capacity and workforce levels with a constant output rateShortages and surpluses result in fluctuations in inventory levels over timeInventories that are built up in anticipation of future demand or backlogs are carried over from high to low demand periodsBetter for worker moraleLarge inventories and backlogs may accumulateShould be used when inventory holding and backlog costs are relatively low
13 Fundamental Tradeoffs in Aggregate Planning Capacity (regular time, overtime, subcontract)InventoryBacklog / lost salesBasic StrategiesChase strategyTime flexibility from workforce or capacityLevel strategyNotes:
15 Aggregate Planning (Define Decision Variables) Wt = Workforce size for month t, t = 1, ..., 6Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6Pt = Production in month t, t = 1, ..., 6It = Inventory at the end of month t, t = 1, ..., 6St = Number of units stocked out at the end of month t, t = 1, ..., 6Ct = Number of units subcontracted for month t, t = 1, ..., 6Ot = Number of overtime hours worked in month t, t = 1, ..., 6Notes:
23 Aggregate Planning in Practice Think beyond the enterprise to the entire supply chainMake plans flexible because forecasts are always wrongRerun the aggregate plan as new information emergesUse aggregate planning as capacity utilization increases
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?