Strategies for Managing Demand
boco52
strategies_for_managing_demand.docxStrategies for Managing Demand
Aggregate planning can also involve proactive demand management. Strategies for managing demand include:
· Shifting demand into other time periods with incentives, sales promotions, and advertising campaigns;
· Offering products or services with countercyclical demand patterns; and
· Partnering with suppliers to reduce information distortion along the supply chain.
Winter coat specials in July, bathing-suit sales in January, early-bird discounts on dinner, lower long-distance rates in the evenings, and getaway weekends at hotels during the off-season are all attempts to shift demand into different time periods. Electric utilities are especially skilled at off-peak pricing. Promotions can also be used to extend high demand into low-demand seasons. Holiday gift buying is encouraged earlier each year, and beach resorts plan festivals in September and October to extend the season. Successful demand management depends on accurate forecasts of demand and accurate forecasts of the changes in demand brought about by sales, promotions, and special offers.
Shift demand into other time periods.
For industries with extreme variations in demand, offering products or services with counter-cyclical demand patterns helps smooth out resource requirements. This approach involves examining the idleness of resources and creating a demand for those resources. McDonald’s offers breakfast to keep its kitchens busy during the prelunch hours, pancake restaurants serve lunch and dinner, and heating firms also sell air conditioners.
Create demand for idle resources.
Amadas Industries, a small U.S. manufacturer of peanut harvesting equipment, does an especially good job of finding countercyclical products to smooth the load on its manufacturing facilities. The company operates a job shop production system with general-purpose equipment, 50 highly skilled workers, and a talented engineering staff. With these flexible resources, the company can make virtually anything its engineers can design. Inventories of finished goods are limited because of the significant investment in funds and the size of the finished product. Demand for the product is highly seasonal. Peanut-harvesting equipment is generally purchased on an as-needed basis from August to October, so during the spring and early summer, the company makes bark-scalping equipment for processing mulch and pine nuggets used by landscaping services. Demand for peanut-harvesting equipment is also affected by the weather each growing season, so during years of extensive drought, the company produces and sells irrigation equipment. The company also decided to market its products internationally with a special eye toward countries whose growing seasons are opposite to that of the United States. Thus, many of its sales are made in China and India during the very months when demand in the United States is low.
· Internet Exercises
Along the Supply Chain: The Bullwhip Effect in a Slowdown
The bullwhip effect shows how demand at one end of a supply chain can become inflated by the time it reaches the other end. Lack of communication and visibility along the supply chain leaves supply chain partners in the dark about each other’s activities, and batching of orders converts seemingly steady demand into undulating surges that come as a surprise and are difficult and costly to manage. But does this happen in reverse in a slowdown?
Consider this electronics supply chain. Best Buy (in Minnesota) orders DVD players from Toshiba (in Japan) about six weeks before they want to stock them on their shelves. Toshiba outsources production to Foxconn (in China) who orders video and audio chips from Zoran (in California) who tells its sub-contractor Taiwan Semiconductor (TSMC) to ramp up production. TSMC buys its equipment from Applied Materials (in California) which gets its machining done by D&H Manufacturing (in California). Since it takes longer than six weeks to make DVD players, each part of the supply chain holds some inventory (but not too much) to be ready to roll when the orders come in. The supply chain extends through large and small companies at some distances apart. The ripple effect of cancelled orders is felt quickly, and globally.
It started in October 2008, when stores normally order for the holiday season and manufacturers are gearing up production. Orders from retailers like Best Buy were down by 19% in October, 21% in November, and 58% in December. In Japan, the economy shrank almost 13%. In China, 20 million factory workers returned to the countryside. Zoran’s sales dropped 37%. TSMC factories operated at 35% of capacity, furloughed 20,000 workers for five days a month, and reduced equipment purchases by 20%. Applied Materials laid off 2000 workers and asked all 12,000 remaining workers to take unpaid leaves. D&H, sitting on a year’s worth of inventory, reduced its work-force from 600 workers to 150.
So the bullwhip effect does work both ways. One way to mitigate the effect is to collaborate with suppliers, even in an economic downturn. This will make things go smoother when the recovery hits and it’s time to ramp up again, too.
source: Phred Dvorak, “Clarity is Missing Link in Supply Chain,” Wall Sheet Journal, May 18, 2009.
Another approach to managing demand recognizes the information distortion caused by ordering goods in batches along a supply chain. Even though a customer may require daily usage of an item, he or she probably does not purchase that item daily. Neither do retail stores restock their shelves continuously. By the time a replenishment order reaches distributors, wholesalers, manufacturers, and their suppliers, the demand pattern for a product can appear extremely erratic. This bullwhip effect was discussed in Chapter 10. To control the situation, manufacturers, their suppliers, and customers form partnerships in which demand information is shared and orders are placed in a more continuous fashion.
Share information along the supply chain.
Mark Gibson/Index Stock
A carefully planned mix of services can smooth out resource requirements. At this resort, the pristine golf course during the summer months becomes a cross-country skiing path during the winter. The same company that maintains the fairways, grooms the snow for the skiers.
Kent Dufault/Index Stock
Quantitative Techniques for Aggregate Planning
One aggregate planning strategy is not always preferable to another. The most effective strategy depends on the demand distribution, competitive position, and cost structure of a firm or product line. Several quantitative techniques are available to help with the aggregate planning decision. In the sections that follow, we discuss pure and mixed strategies, linear programming, thetransportation method, and other quantitative techniques.
Solving aggregate planning problems involves formulating strategies for meeting demand, constructing production plans from those strategies, determining the cost and feasibility of each plan, and selecting the lowest cost plan from among the feasible alternatives. The effectiveness of the aggregate planning process is directly related to management’s understanding of the cost variables involved and the reasonableness of the scenarios tested. Example 14.1 compares the cost of two pure strategies: level production and chase demand.
Example 14.1 Aggregate Planning Using Pure Strategies
|
Q: |
The Good and Rich Candy Company makes a variety of candies in three factories worldwide. Its line of chocolate candies exhibits a highly seasonal demand pattern, with peaks during the winter months (for the holiday season and Valentine’s Day) and valleys during the summer months (when chocolate tends to melt and customers are watching their weight). Given the following costs and quarterly sales forecasts, determine whether (a) level production, or (b) chase demand would more economically meet the demand for chocolate candies:
|
|
Solution |
a. For the level production strategy, we first need to calculate average quarterly demand.
This becomes our planned production for each quarter. Since each worker can produce 1000 pounds a quarter, 100 workers will be needed each quarter to meet the production requirements of 100,000 pounds. Production in excess of demand is stored in inventory, where it remains until it is used to meet demand in a later period. Demand in excess of production is met by using inventory from the previous quarter. The production plan and resulting inventory costs are as follows:
Cost of Level Production Strategy = (400,000 × $2.00) + (140,000 × $.50) = $870.000 b. For the chase demand strategy, production each quarter matches demand. To accomplish this, workers are hired at a cost of $100 each and fired at a cost of $500 each. Since each worker can produce 1000 pounds per quarter, we divide the quarterly sales forecast by 1000 to determine the required workforce size each quarter. We begin with 100 workers and hire and fire as needed. The production plan and resulting hiring and firing costs are given here.
c. Cost of Chase Demand Strategy = (400,000 × $2.00) + (100 × $100) + (50 × $500) = $835,000 d. Comparing the cost of level production with chase demand, we find that chase demand is the best strategy for the Good and Rich line of candies. e. The problem can also be solved using Excel. Exhibit 14.1 shows two worksheets from the Excel file, Exhibit 14.1.xls, available on the text Web site. |
Although chase demand is the better strategy for Good and Rich from an economic point of view, it may seem unduly harsh on the company’s workforce. An example of a good “fit” between a company’s chase demand strategy and the needs of the workforce is Hershey’s, located in rural Pennsylvania, with a demand and cost structure much like that of Good and Rich. The location of the manufacturing facility is essential to the effectiveness of the company’s production plan. During the winter, when demand for chocolate is high, the company hires farmers from surrounding areas, who are idle at that time of year. The farmers are let go during the spring and summer, when they are anxious to return to their fields and the demand for chocolate falls. The plan is cost-effective, and the extra help is content with the sporadic hiring and firing practices of the company.
· Excel File
Exhibit 14.1a Level Production for Good and Rich
Exhibit 14.1b Chase Demand for Good and Rich
General Linear Programming Model
Strategies for production planning may be easy to evaluate, but they do not necessarily provide an optimal solution. Consider the Good and Rich Company of Example 14.1. The optimal production plan is probably some combination of inventory and workforce adjustment. We could simply try different combinations and compare the costs (i.e., the trial-and-error approach), or we could find the optimal solution by using linear programming. If you are unfamiliar with linear programming, please review the supplement to this chapter. Example 14.2 develops an optimal production plan for Good and Rich chocolate candies using linear programming.
Linear programming gives an optimal solution, but demand and costs must be linear.
Example 14.2 Production Planning Using Linear Programming
|
Q: |
Formulate a linear programming model for Example 14.1 that will satisfy demand for Good and Rich chocolate candies at minimum cost. Solve the model with Excel Solver. |
|
Solution |
Model Formulation:
where
· Objective function : The objective function seeks to minimize the cost of hiring workers, firing workers, holding inventory, and production. Cost values are provided in the problem statement for Example 14.1. The number of workers hired and fired each quarter and the amount of inventory held are variables whose values are determined by solving the linear programming (LP) problem. · Demand constraints : The first set of constraints ensures that demand is met each quarter. Demand can be met from production in the current period and inventory from the previous period. Units produced in excess of demand remain in inventory at the end of the period. In general form, the demand equations are constructed as It–1 + Pt – It = Dt where Dt is the demand in period t, as specified in the problem. Leaving demand on the right-hand side, we have It–1 + Pt = Dt + It There are four demand constraints, one for each quarter. Since there is no beginning inventory, I0 = 0, and it can be dropped from the first demand constraint. · Production constraints : The four production constraints convert the workforce size to the number of units that can be produced. Each worker can produce 1000 units a quarter, so the production each quarter is 1000 times the number of workers employed, or 1000Wt = Pt · Workforce constraints : The workforce constraints limit the workforce size in each period to the previous period’s workforce plus the number of workers hired in the current period minus the number of workers fired. Wt–1 + Ht – Ft = Wt Notice the first workforce constraint shows a beginning workforce size of 100. · Additional variables and constraints : Additional variables, such as overtime and subcontracting, can be added to the LP formulation as needed. The cost of those variables is then added to the objective function. Additional constraints such as limiting the amount of overtime or subcontracting can also be added in the Solver model. The LP formulation is solved using Excel Solver as shown in Exhibit 14.2b. The Excel file,Exhibit 14.2.xls, is available on the text Web site. The cost of the optimum solution is $832,000, an improvement of $3000 over the chase demand strategy and $38,000 over the level production strategy. |
Please read INSTRUCTORS instructions carefully and completely
Due date 5/27/15 in 6 hours or earlier
Summary of chapter
No plagiarism in own words
Will run through a plagiarism checker
Will not accept if after due date will dispute
Please cite and reference
References and citation page must include a valid URL to take the reader to the electronic copy of each source.
If cannot complete with the given instructions do not reply
Please contact me if you have questions
Write as a discussion with another student
Write as, I found the material interesting, or what do you think
I may ask to change some areas at later date
Word count is counted by answer only
Please write with question first followed by answer
Please write clearly simplify
I am in the U.S.
No charts or graphs
Needs to be like a discussion in class or post
Make answer at least 4 post 100 to 150 each
