Supply Chain Management

Supply and Demand Planning in Supply Chains:

Exercises and Discussion

Exercise 1

A manufacturer of stainless steel sinks is in the middle of demand and supply planning exercise for the coming year. Anticipated monthly demand from distributors over the 12 months is shown in the table below. The plant capacity is governed by the number of machine operators it hires.

The firm works 20 days a month, with a regular operating shift of 8 hours a day. Any time beyond that is considered overtime. Regular- time pay is $15 per hour and overtime is $22 per hour. Overtime is limited to 20 hours per month per employee. The plant currently has 250 employees.

Exercise 1

Each sink requires two hours of labor input. It costs $3 to carry a sink in inventory for a month. Materials cost per sink is $40. Sinks are sold to distributors at a price of $125 each. We assume that no stockouts are allowed and the starting inventory entering January is 5,000 units and the desired ending inventory in December is also 5,000 units.

Market research has indicated that a promotion dropping prices by 1 percent in a given month will increase sales in that month by 20 percent and bring forward 10 percent demand from each of the following two months. For example, a 1 percent drop in price in March increases sales in March by 3,000 (= 0.2 × 15,000) and shifts 1,800 (= 0.1 × 18,000) units in demand from April and 2,500(= 0.1 × 25,000) units from May forward to March.

Demand Forecast for Exercise 1 Month Demand January 10,000 February 11,000 March 15,000 April 18,000 May 25,000 June 26,000 July 30,000 August 29,000 September 21,000 October 18,000 November 14,000 December 11,000

Exercise 1 Questions

Develop Aggregate Planning mathematical model and implement it to answer the following questions:

a) What is the optimal production plan for the year if we assume no promotions? What is the annual profit from this plan? What is the cost of this plan?

b) Is it better to promote in April or July? How much increase in profit can be achieved as a result?

c) If sinks are sold for $250 instead of $125, does the decision about the timing of the promotion change? Why?

Aggregate Planning Math Model Decision Variables: Ht = # of workers hired in month t (t = 1,..,12) Lt = # of workers laid-off in month t (t = 1,..,12) Wt = # of workers employed in month t (t = 1,..,12) Ot = # of hours of overtime in month t (t = 1,..,12) It = # of units (000s) held in inventory at the end of month t (t = 1,..,12) Ct = # of units (000s) subcontracted in month t (t = 1,..,12) Pt = # of units (000s) produced in month t (t = 1,..,12)

Parameters: Dt = # of units (000s) demanded in time period t (t = 1,…12)

Aggregate Planning Math Model

∑∑∑∑ ====

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i t

i t

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t t PIOWMinimize

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12,...1,0,,, =≥ tIWOP tttt

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Summary Price=$125

No promotion Promotion (April) Promotion (July) Total Cost = $16,803,000 $17,036,400 $17,339,500 Total Revenue = $28,500,000 $28,916,625 $29,198,750 Profit = $11,697,000 $11,880,225 $11,859,250

Price= $250 No promotion Promotion (April) Promotion (July)

Total Cost = $16,803,000 $17,036,400 $17,339,500 Total Revenue = $57,000,000 $57,833,250 $58,397,500 Profit = $40,197,000 $40,796,850 $41,058,000

Profit increase = $599,850 $861,000

Profit increase = $183,225 $162,250

Supply and Demand Planning in Supply Chains:

Discussion Questions

Discussion Questions

1. What are some obstacles to creating a flexible workforce? What are the benefits?

2. Discuss why the use of subcontractors to handle peak demand can often allow a company to meet demand at a lower cost.

3. In which industries would you tend to see dual facility types (some facilities focusing on only one type of product and others able to produce a wide variety)? In what industries would this be relatively rare? Why?

4. What are some product lines that use common parts across many products? What are the advantages of doing this?