Brief Discussion 2

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Aggregate Planning in a Supply Chain

PowerPoint presentation to accompany

Chopra and Meindl Supply Chain Management, 5e

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https://www.youtube.com/watch?v=EIfU43OKqYw

Learning Objectives

Identify the decisions that are best solved by aggregate planning.

Understand the importance of aggregate planning as a supply chain activity.

Describe the information needed to produce an aggregate plan.

Explain the basic trade-offs to consider when creating an aggregate plan.

Formulate and solve basic aggregate planning problems using Microsoft Excel.

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Usually planned in this area by middle management. – Establishes operation and capacity strategies.

Family of products are planned for capacity.

Role of Aggregate Planning in a Supply Chain

Capacity has a cost and lead times are often long

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 – Subcontracting

Workforce – Backlog-(Back Orders)

Overtime – Inventory on hand

Machine capacity level

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 for an Aggregate Plan

Aggregate demand forecast Ft for each Period t over T periods

Production costs

Labor costs, regular time ($/hr) and overtime ($/hr)

Subcontracting costs ($/hr or $/unit)

Cost of changing capacity – hiring or layoff ($/worker), adding or reducing machine capacity ($/machine)

Labor/machine hours required per unit

Inventory holding cost ($/unit/period)

Stockout or backlog cost ($/unit/period)

Constraints – overtime, layoffs, capital available, stockouts, backlogs, from suppliers

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Outputs of Aggregate Plan

Production quantity from regular time, overtime, and subcontracted time

Inventory held

Backlog/stockout quantity

Machine capacity increase/decrease

A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity

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Identifying Aggregate Units of Production

Aggregate unit should be identified in a way that the resulting production schedule can be accomplished in practice

Focus on the bottlenecks when selecting the aggregate unit and identifying capacity and production times

Account for activities such as setups and maintenance

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Red Tomato Tools

Family	Material Cost/ Unit ($)	Revenue/ Unit ($)	Setup Time/Batch (hour)	Average Batch Size	Production Time/ Unit (hour)	Net Production Time/Unit (hour)	Percentage Share of Units Sold
A	15	54	8	50	5.60	5.76	10
B	7	30	6	150	3.00	3.04	25
C	9	39	8	100	3.80	3.88	20
D	12	49	10	50	4.80	5.00	10
E	9	36	6	100	3.60	3.66	20
F	13	48	5	75	4.30	4.37	15

Table 8-1

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Red Tomato Tools

Weighted average approach

Material cost per aggregate unit

= 15 x 0.10 + 7 x 0.25 + 9 x 0.20

+ 12 x 0.10 + 9 x 0.20 + 13 x 0.15

= $10

Similarly

Revenue per aggregate unit = $40

Net production time per aggregate unit = 4.00 hours

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Aggregate Planning Strategies

Trade-off between 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

Tailored or hybrid strategy – a combination of strategies

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Balance between capacity and demand.

Chase Strategy: (Hiring and Layoffs)

Level production for creating stock and then use the stock in periods when demand is high.

Layoffs- or sub contractor

Influence demand- by price. Minimum order quantities. E.g. toilet paper in covid

Chase Strategy

Vary machine capacity or hire and lay off workers as demand varies

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

Used when inventory holding costs are high and costs of changing capacity are low

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Time Flexibility Strategy

Use excess machine capacity

Workforce stable, number of hours worked varies

Use overtime or a flexible work schedule

Flexible workforce, avoids morale problems

Low levels of inventory, lower utilization

Used when inventory holding costs are high and capacity is relatively inexpensive

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Level Strategy

Stable machine capacity and workforce levels, constant output rate

Inventory levels fluctuate over time

Inventories carried over from high to low demand periods

Better for worker morale

Large inventories and backlogs may accumulate

Used when inventory holding and backlog costs are relatively low

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Aggregate Planning Using Linear Programming

Red Tomato Tools

Highly seasonal demand

Develop a forecast

Month	Demand Forecast
January	1,600
February	3,000
March	3,200
April	3,800
May	2,200
June	2,200

Table 8-2

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Red Tomato Tools

Item	Cost
Material cost	$10/unit
Inventory holding cost	$2/unit/month
Marginal cost of stockout/backlog	$5/unit/month
Hiring and training costs	$300/worker
Layoff cost	$500/worker
Labor hours required	4/unit
Regular time cost	$4/hour
Overtime cost	$6/hour
Cost of subcontracting	$30/unit

Table 8-3

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Red Tomato Tools Decision Variables

For t = 1, ..., 6

Wt = Workforce size for month t

Ht = Number of employees hired at the beginning of month t

Lt = Number of employees laid off at the beginning of month t

Pt = Production in month t

It = Inventory at the end of month t

St = Number of units stocked out at the end of month t

Ct = Number of units subcontracted for month t

Ot = Number of overtime hours worked in month t

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Red Tomato Tools Objective Function

Minimize

(Regular-time labor cost + Overtime labor cost + Cost of hiring and layoffs + Cost of holding inventory + Cost of stocking out + Cost of subcontracting + Material cost)

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Red Tomato Tools Constraints

Workforce, hiring, and layoff constraints

All for t = 1,..., 6

Capacity constraints

Inventory balance constraints

Overtime limit constraints

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Red Tomato Tools

Average time

in inventory

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Red Tomato Tools

Total cost over planning horizon = $422,275

Revenue over planning horizon = 40 x 16,000 = $640,000

Period, t	No. Hired, Ht	No. Laid Off, Lt	Workforce Size, Wt	Overtime, Ot	Inventory, It	Stockout, St	Subcontract, Ct	Total Production, Pt
0	0	0	80	0	1,000	0	0
1	0	15	65	0	1,983	0	0	2,583
2	0	0	65	0	1,567	0	0	2,583
3	0	0	65	0	950	0	0	2,583
4	0	0	65	0	0	267	0	2,583
5	0	0	65	0	117	0	0	2,583
6	0	0	65	0	500	0	0	2,583

Table 8-4

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Red Tomato Tools

Average seasonal inventory

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Red Tomato Tools

Higher demand variability

Month	Demand Forecast
January	1,000
February	3,000
March	3,800
April	4,800
May	2,000
June	1,400

Table 8-5

Average seasonal inventory

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Red Tomato Tools

Total cost over planning horizon = $432,858

Period, t	No. Hired, Ht	No. Laid Off, Lt	Workforce Size, Wt	Overtime, Ot	Inventory, It	Stockout, St	Subcontract, Ct	Total Production, Pt
0	0	0	80	0	1,000	0	0
1	0	15	65	0	2,583	0	0	2,583
2	0	0	65	0	2,167	0	0	2,583
3	0	0	65	0	950	0	0	2,583
4	0	0	65	0	0	1,267	0	2,583
5	0	0	65	0	0	683	0	2,583
6	0	0	65	0	500	0	0	2,583

Table 8-6

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Red Tomato Tools

Lower hiring and layoff costs

Average seasonal inventory

Total cost over planning horizon = $412,688

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Red Tomato Tools

Period, t	No. Hired, Ht	No. Laid Off, Lt	Workforce Size, Wt	Overtime, Ot	Inventory, It	Stockout, St	Subcontract, Ct	Total Production, Pt
0	0	0	80	0	1,000	0	0
1	0	35	45	0	1,200	0	0	2,267
2	0	0	45	0	0	0	0	2,267
3	42	0	87	0	300	0	0	2,267
4	0	0	87	0	0	1,267	0	2,267
5	0	26	61	0	250	683	0	2,267
6	0	0	61	0	500	0	0	2,267

Table 8-7

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Forecast Error in Aggregate Plans

Forecast errors must be considered

Safety inventory

Safety capacity

Use overtime as a form of safety capacity

Carry extra workforce permanently as a form of safety capacity

Use subcontractors as a form of safety capacity

Build and carry extra inventories as a form of safety inventory

Purchase capacity or product from an open or spot market as a form of safety capacity

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Aggregate Planning In Excel

For t = 1, ..., 6

Wt = Workforce size for Month t

Ht = Number of employees hired at the beginning of Month t

Lt = Number of employees laid off at the beginning of Month t

Pt = Production in Month t

It = Inventory at the end of Month t

St = Number of units stocked out at the end of Month t

Ct = Number of units subcontracted for Month t

Ot = Number of overtime hours worked in Month t

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Aggregate Planning In Excel

Figure 8-1

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Aggregate Planning In Excel

Figure 8-2

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Aggregate Planning In Excel

Figure 8-3

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Aggregate Planning In Excel

Figure 8-4

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Building a Rough Master Production Schedule

Disaggregate an aggregate plan

Family	Setup Time/Batch (hour)	Average Batch Size	Production Time/Unit (hour)	Production Quantity	Number of Setups	Setup Time (hours)	Production Time (hours)
A	8	50	5.60	258	5	40	1,445
B	6	150	3.00	646	4	24	1,938
C	8	100	3.80	517	5	40	1,965
D	10	50	4.80	258	5	50	1,238
E	6	100	3.60	517	5	30	1,861
F	5	75	4.30	387	5	25	1,664

Table 8-8

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The Role of IT in Aggregate Planning

The ability to handle large problems

The ability to handle complex problems (through either nonlinear optimization or linear approximations)

The ability to interact with other core IT systems such as inventory management and sourcing

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Implementing Aggregate Planning in Practice

Think beyond the enterprise to the entire supply chain

Make plans flexible because forecasts are always inaccurate

Rerun the aggregate plan as new data emerge

Use aggregate planning as capacity utilization increases

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Summary of Learning Objectives

Identify the decisions that are best solved by aggregate planning

Understand the importance of aggregate planning as a supply chain activity

Describe the information needed to produce an aggregate plan

Explain the basic trade-offs to consider when creating an aggregate plan

Formulate and solve aggregate planning problems using Microsoft Excel

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https://www.youtube.com/watch?v=HOtai_3EdNY

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Printed in the United States of America.

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Min 640Wt t=1

∑ + 6Ot t=1

∑ + 300Ht t=1

∑ + 500Lt t=1

∑

Min640W

t=1

+6O

t=1

+300H

t=1

+500L

t=1

+ 2It t=1

∑ + 5St t=1

∑ + 10Pt t=1

∑ + 30Ct t=1

∑

+2I

t=1

+5S

t=1

+10P

t=1

+30C

t=1

Wt =W t–1+Ht – Lt

t–1

–L

Pt ≤ 40Wt + Ot 4

£40W

It–1 + Pt +Ct = Dt +St–1 + It – St

t–1

–S

Ot ≤10Wt

£10W

Average inventory = (I0 + IT ) / 2 + Itt=1

T –1 ∑( )

Average inventory=

)/2+ I

t=1

T–1

( )

= (I0 + IT ) / 2 + Itt=1

T –1 ∑( )

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⎣

⎢ ⎢ ⎢

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⎥ ⎥ ⎥

Dtt=1 T –1

∑( ) T

⎡

⎣

⎢ ⎢ ⎢

⎤

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)/2+ I

t=1

T–1

( )

t=1

T–1

( )

= (I0 + I6) / 2+ Itt=1

5 ∑( )

T = 5,367 6

= 895

)/2+I

t=1

()

5,367

=895

Average flow time = 895

2,667 = 0.34 = 0.34 months

Average flow time=

895

2,667

=0.34=0.34 months

= (I0 + IT) / 2+ Itt=1

T–1 ∑( )

T = 6,450 6

=1,075

)/2+ I

t=1

T–1

( )

6,450

=1,075

Average flow time = 1,075 2,667

= 0.40 months

Average flow time=

1,075

2,667

=0.40 months

= (I0 + IT) / 2+ Itt=1

T–1 ∑( )

T = 2,500 6

= 417

)/2+ I

t=1

T–1

( )

2,500

=417

Average flow time = 417

2,667 = 0.16 months

Average flow time=

417

2,667

=0.16 months