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Planning Demand and Supply in a Supply Chain

Learn about the phases of supply chain decisions, components of demand forecast, time series forecasting, forecasting methods, error measures, aggregate planning, demand management tactics, and factors affecting promotion timing.

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Planning Demand and Supply in a Supply Chain

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  1. Planning Demand and Supply in a Supply Chain Forecasting and Aggregate Planning S. Chopra / Demand Planning

  2. Learning Objectives • Phases of supply chain decisions • Identify components of a demand forecast • Time series forecasting • Estimate forecast error • Aggregate planning in the supply chain S. Chopra / Demand Planning

  3. Phases of Supply Chain Decisions • Strategy or design: Forecast • Planning: Forecast • Operation Actual demand S. Chopra / Demand Planning

  4. Characteristics of forecasts • Forecasts are always wrong. Should include expected value and measure of error. • Long-term forecasts are less accurate than short-term forecasts: Forecast horizon • Aggregate forecasts are more accurate than disaggregate forecasts S. Chopra / Demand Planning

  5. Forecasting Methods • Qualitative • Time Series • Static • Adaptive • Causal • Simulation S. Chopra / Demand Planning

  6. Components of an observation Observed demand (O) = Systematic component (S) + Random component (R) Level (current deseasonalized demand) Trend (growth or decline in demand) Seasonality (predictable seasonal fluctuation) S. Chopra / Demand Planning

  7. Time Series Forecasting Forecast demand for the next four quarters. S. Chopra / Demand Planning

  8. Time Series Forecasting S. Chopra / Demand Planning

  9. Forecasting methods Excel File • Static • Adaptive • Moving average • Simple exponential smoothing • Holt’s model (with trend) • Winter’s model (with trend and seasonality) S. Chopra / Demand Planning

  10. Error measures • MAD • Mean Squared Error (MSE) • Mean Absolute Percentage Error (MAPE) • Bias • Tracking Signal S. Chopra / Demand Planning

  11. Aggregate Planning at Red Tomato Tools S. Chopra / Demand Planning

  12. Fundamental tradeoffs in Aggregate Planning • Capacity (regular time, over time, subcontract) • Inventory • Backlog / lost sales Basic Strategies • Chase strategy • Time flexibility from workforce or capacity • Level strategy S. Chopra / Demand Planning

  13. Aggregate Planning S. Chopra / Demand Planning

  14. Aggregate Planning (Define Decision Variables) Excel File Wt = Workforce size for month t, t = 1, ..., 6 Ht = Number of employees hired at the beginning of month t, t = 1, ..., 6 Lt = Number of employees laid off at the beginning of month t, t = 1, ..., 6 Pt = Production in month t, t = 1, ..., 6 It = Inventory at the end of month t, t = 1, ..., 6 St = Number of units stocked out at the end of month t, t = 1, ..., 6 Ct = Number of units subcontracted for month t, t = 1, ..., 6 Ot = Number of overtime hours worked in month t, t = 1, ..., 6 S. Chopra / Demand Planning

  15. Aggregate Planning (Define Objective Function)) S. Chopra / Demand Planning

  16. Aggregate Planning (Define Constraints Linking Variables) • Workforce size for each month is based on hiring and layoffs S. Chopra / Demand Planning

  17. Aggregate Planning (Constraints) • Production for each month cannot exceed capacity S. Chopra / Demand Planning

  18. Aggregate Planning (Constraints) • Inventory balance for each month S. Chopra / Demand Planning

  19. Aggregate Planning (Constraints) • Over time for each month S. Chopra / Demand Planning

  20. Scenarios • Increase in holding cost (from $2 to $6) • Over time cost drops to $4.1 per hour • Increased demand fluctuation S. Chopra / Demand Planning

  21. Increased Demand Fluctuation S. Chopra / Demand Planning

  22. Managing Predictable Variability • Manage Supply • Manage capacity • Time flexibility from workforce (OT and otherwise) • Use of seasonal workforce • Use of subcontracting • Flexible processes • Counter cyclical products • Manage inventory • Component commonality • Seasonal inventory of predictable products S. Chopra / Demand Planning

  23. Managing Predictable Variability • Manage demand with pricing • Original pricing: Cost = $422,275, Revenue = $640,000 • Demand increase from discounting • Market growth • Stealing market share • Forward buying Discount of $1 increases period demand by 10% and moves 20% of next two months demand forward S. Chopra / Demand Planning

  24. Off-Peak (January) Discount from $40 to $39 Cost = $421,915, Revenue = $643,400, Profit = $221,485 S. Chopra / Demand Planning

  25. Peak (April) Discount from $40 to $39 • Cost = $438,857, Revenue = $650,140, Profit = $211,283 S. Chopra / Demand Planning

  26. Demand Management • Pricing and Aggregate Planning must be done jointly • Factors affecting discount timing • Product Margin: Impact of higher margin ($40 instead of $31) • Consumption: Changing fraction of increase coming from forward buy (100% increase in consumption instead of 10% increase) • Forward buy S. Chopra / Demand Planning

  27. Performance Under Different Scenarios S. Chopra / Demand Planning

  28. Factors Affecting Promotion Timing S. Chopra / Demand Planning

  29. Summary of Learning Objectives • Forecasting • Aggregate planning • Supply and demand management during aggregate planning with predictable demand variation • Supply management levers • Demand management levers S. Chopra / Demand Planning

  30. Factors Influencing Discount Timing • Impact of discount on consumption • Impact of discount on forward buy • Product margin S. Chopra / Demand Planning

  31. Inventory/Capacity tradeoff • Leveling capacity forces inventory to build up in anticipation of seasonal variation in demand • Carrying low levels of inventory requires capacity to vary with seasonal variation in demand or enough capacity to cover peak demand during season S. Chopra / Demand Planning

  32. January Discount: 100% increase in consumption, sale price = $40 ($39) Off peak discount: Cost = $456,750, Revenue = $699,560 S. Chopra / Demand Planning

  33. Peak (April) Discount: 100% increase in consumption, sale price = $40 ($39) • Peak discount: Cost = $$536,200, Revenue = $783,520 S. Chopra / Demand Planning

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