8/29/009/7/99s. chopra / demand planning1 planning demand and supply in a supply chain forecasting...
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8/29/009/7/99 S. Chopra / Demand Planning 1
Planning Demand and Supply in a Supply Chain
Forecasting and Aggregate Planning
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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
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Phases of Supply Chain Decisions
Strategy or design: Forecast Planning: Forecast Operation Actual demand
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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
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Forecasting Methods
Qualitative Time Series
– Static
– Adaptive
Causal Simulation
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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)
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Time Series ForecastingQuarter Demand Dt
II, 1998 8000III, 1998 13000IV, 1998 23000I, 1999 34000II, 1999 10000III, 1999 18000IV, 1999 23000I, 2000 38000II, 2000 12000III, 2000 13000IV, 2000 32000I, 2001 41000
Forecast demand for thenext four quarters.
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Time Series Forecasting
0
10,000
20,000
30,000
40,000
50,000
97,297,397,498,198,298,398,499,199,299,399,400,1
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Forecasting methods
Static Adaptive
– Moving average
– Simple exponential smoothing
– Holt’s model (with trend)
– Winter’s model (with trend and seasonality)
Excel File
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Error measures
MAD Mean Squared Error (MSE) Mean Absolute Percentage Error (MAPE) Bias Tracking Signal
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Aggregate Planning at Red Tomato Tools
Month Demand ForecastJanuary 1,600February 3,000
March 3,200April 3,800May 2,200June 2,200
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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
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Aggregate PlanningItem Cost
Materials $10/unitInventory holding cost $2/unit/monthMarginal cost of a stockout $5/unit/monthHiring and training costs $300/workerLayoff cost $500/workerLabor hours required 4/unitRegular time cost $4/hourOver time cost $6/hourCost of subcontracting $30/unit
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Aggregate Planning (Define Decision Variables)
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
Excel File
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Aggregate Planning (Define Objective Function))
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Aggregate Planning (Define Constraints Linking Variables)
Workforce size for each month is based on hiring and layoffs
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Aggregate Planning (Constraints)
Production for each month cannot exceed capacity
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Aggregate Planning (Constraints)
Inventory balance for each month
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Aggregate Planning (Constraints)
Over time for each month
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Scenarios
Increase in holding cost (from $2 to $6) Over time cost drops to $4.1 per hour Increased demand fluctuation
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Increased Demand Fluctuation
Month Demand ForecastJanuary 1,000February 3,000
March 3,800April 4,800May 2,000June 1,400
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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
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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
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Off-Peak (January) Discount from $40 to $39
Month Demand ForecastJanuary 3,000February 2,400
March 2,560April 3,800May 2,200June 2,200
Cost = $421,915, Revenue = $643,400, Profit = $221,485
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Peak (April) Discount from $40 to $39
Month Demand ForecastJanuary 1,600February 3,000
March 3,200April 5,060May 1,760June 1,760
Cost = $438,857, Revenue = $650,140, Profit = $211,283
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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
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Performance Under Different ScenariosRegularPrice
PromotionPrice
PromotionPeriod
Percentincrease indemand
Percentforwardbuy
Profit AverageInventory
$40 $40 NA NA NA $217,725 895$40 $39 January 20 % 20 % $221,485 523$40 $39 April 20% 20% $211,283 938$40 $39 January 100% 20% $242,810 208$40 $39 April 100% 20% $247,320 1,492$31 $31 NA NA NA $73,725 895$31 $30 January 100% 20% $84,410 208$31 $30 April 100% 20% $69,120 1,492
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Factors Affecting Promotion Timing
Factor Favored timingHigh forward buying Low demand periodHigh stealing share High demand periodHigh growth of market High demand periodHigh margin High demand periodLow margin Low demand periodHigh holding cost Low demand periodLow flexibility Low demand period
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Summary of Learning Objectives
Forecasting Aggregate planning Supply and demand management during
aggregate planning with predictable demand variation– Supply management levers
– Demand management levers
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Factors Influencing Discount Timing
Impact of discount on consumption Impact of discount on forward buy Product margin
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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
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January Discount: 100% increase in consumption, sale price = $40 ($39)
Month Demand ForecastJanuary 4,440February 2,400
March 2,560April 3,800May 2,200June 2,200
Off peak discount: Cost = $456,750, Revenue = $699,560
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Peak (April) Discount: 100% increase in consumption, sale price = $40 ($39)
Month Demand ForecastJanuary 1,600February 3,000
March 3,200April 8,480May 1,760June 1,760
Peak discount: Cost = $$536,200, Revenue = $783,520