Planning Demand and Supply in a Supply Chain

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