Sc Aggregate

Forecasting and Aggregate PlanningForecasting and Aggregate Planning
Chapters 8 and 9
S. Chopra / Demand Planning
Managing demand
Managing capacity
Strategy or design: Forecast
Since actual demands differ from the forecasts, …
so does the execution from the plans.
E.g. Supply Chain degree plans for 40 students per year whereas the actual is ??
Characteristics of forecasts
Forecasts are always wrong. Include expected value and measure of error.
Long-term forecasts are less accurate than short-term forecasts.
Too long term forecasts are useless: Forecast horizon
Forecasting to determine
Raw material purchases for the next week; Ericsson
Annual electricity generation capacity in TX for the next 30 years; Texas Utilities
Boat traffic intensity in the upper Mississippi until year 2100; Army Corps of Engineers
Aggregate forecasts are more accurate than disaggregate forecasts
Variance of aggregate is smaller because extremes cancel out
Two samples: {3,5} and {2,6}.
Averages: 4 and 4.
Totals : 8 and 8.
Variance of {3,5,2,6}=5/2
Several ways to aggregate
Demand by location; Texas region
Demand by time; April demand
E.g. Why do you listen to Wall Street stock analysts?
What if we all listen to the same analyst? S/He becomes right!
Time Series
A touch of philosophy:
Pragmatic answer:
Everything we cannot afford to study in detail is random!
Level (current deseasonalized demand)
Seasonality (predictable seasonal fluctuation)
Master Production Schedule (MPS)
MPS is a schedule of future deliveries. A combination of forecasts and firm orders.
Aggregate Planning (Ag-gregate: Past part. of Ad-gregare: Totaled)
If the actual is different than the plan, why bother sweating over detailed plans
Aggregate planning: General plan for our frequency decomposition
Combined products = aggregate product
Single product
AC and Heating unit pipes = pipes at Lennox Iowa plant
Pooled capacities = aggregated capacity
Single capacity
Time periods = time buckets
Consider all the demand and production of a given month together
When does the demand or production take place in a time bucket?
Increase the number of time buckets; decrease the bucket length.
Capacity: Regular time, Over time, Subcontract?
Inventory: Backlog / lost sales, combination: Customer patience?
Basic Strategies
Chase (the demand) strategy; produce at the instantaneous demand rate
fast food restaurants
Level strategy; produce at the rate of long run average demand
swim wear
machining shops, army
Deliver late strategy
Inventory/Capacity tradeoff
Level strategy: Leveling capacity forces inventory to build up in anticipation of seasonal variation in demand
Chase strategy: Carrying low levels of inventory requires capacity to vary with seasonal variation in demand or enough capacity to cover peak demand during season
Farm tools:
Same characteristics?
utdallas.edu/~metin
Aggregate Planning
What is the cost of production per tool? That is materials plus labor.
Overtime production is more expensive than subcontracting.
What is the saving achieved by producing a tool in house rather than subcontracting?
$5/unit/month
10hours
Wt = Number of employees in 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 units of shovels in month t, t = 1, ..., 6
It = Inventory at the end of month t, t = 1, ..., 6
St = Number of units backordered 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
Did we aggregate production capacity?
3. Constraints
Workforce size for each month is based on hiring and layoffs
Production (in hours) for each month cannot exceed capacity (in hours)
Period
t
Period
Apply the first month of the plan
Delay applying the remaining part of the plan until the next month
Rerun the model with new data next month
This is called rolling horizon execution
This solution was for the following demand numbers:
What if demand fluctuates more?
16000 units of total production as before why extra cost?
With respect to $422.275K of before.
Supply > Demand => Inventory
Manage capacity
Seasonal workforce, agriculture workers
Similar products with negatively correlated demands
Snow blowers and Lawn Mowers
AC pumps and Heater pumps
Flexible capacities/processes: Dedicated vs. flexible
a,b,
c,d
Component commonality
Component commonality increase the benefit of postponement.
More on this later
Nothing can be learnt by procrastinating
Keep inventory of predictable products in the downstream supply chain
Revisit Red Tomato Tools
Manage demand with pricing
Demand increases from discounting
Forward buying
stealing your own market share from the future
Discount of $1 in a period increases that period’s demand by 10% (market and market share growth) and moves 20% of next two months demand forward
Can you gather this information –price sensitivity of the demand- easily? Does your company have this information?
Cost = $421,915, Revenue = $643,400, Profit = $221,485
Cost = $438,857, Revenue = $650,140, Profit = $211,283
Discounting during peak increases the revenue
but decreases the profit!
Consumption: 100% increase in consumption instead of 10% increase
Forward buy, still 20% of the next two months
Product Margin: Impact of higher margin. What if discount from $31 to $30 instead of from $40 to $39.)
January Discount: 100% increase in consumption, sale price = $40 ($39)
Off peak discount: Cost = $456,750, Revenue = $699,560
Profit=$242,810
utdallas.edu/~metin
Peak (April) Discount: 100% increase in consumption, sale price = $40 ($39)
Peak discount: Cost = $536,200, Revenue = $783,520
Profit=$247,320
Use rows in bold to explain Xmas discounts.
The product, with less (forward buying/market growth) ratio, is discounted more.
What gift should you buy on the special days (peak demand) when retailers
supposedly give discounts?
E.g. Think of flowers on valentine’s day. How about diamonds?
For flowers, what is (forward buying/market growth) due to discounting?
How about for diamonds?
Who spends / How much on Valentine’s day
The average consumer spends $122.98 on 2008 Valentine’s Day, similar to $119.67 of 2007. Total US spending on Valentine’s Day is $17.02 B by 18+.
Spending
by gender
Men again dishes out the most in 2008, spending an average of $163.37 on gifts and cards, compared to an average of $84.72 spent by women.
by age
Upper Middle age: 45-54 spend $117.91.
Lower Middle age: 35-44 spend $116.35.
Elderly: 55-64 spend $110.97.
48.2% plan a special night out.
48.0% buy candy.
35.9% buy flowers.
11.8% buy clothing.
Where is forward buy or market growth
due to discounting?
Aside: Continuous Compounding
If my $1investment earns an interest of r per year, what is my interest+investment at the end of the year?
Answer: (1+r)
If I earn an interest of r/2 per six months, what is my interest+ investment at the end of the year?
Answer: (1+r/2)2
If I earn an interest of (r/m) per (12/m) months, what is my interest+investment?
Answer: (1+r/m)m
Think of continuous compounding as the special case of discrete-time compounding when m approaches infinity.
What if I earn an interest of (r/infinity) per (12/infinity) months?
See the appendix of scaggregate.pdf for more on continuous compounding.
Single vs. Multiple Resources
Single vs. Multiple Product Demands
Have you aggregated your demand when studying the capacity?
Expansion only or with Contraction
Is there a second-hand machine market?
Discrete vs. Continuous Expansion Times
Can you expand SOM building capacity during the spring term?
Discrete vs. Continuous Capacity Increments
Can you buy capacity in units of 2.313832?
Resource costs, economies of scale
Penalty for demand-capacity mismatch
Happens in Wisconsin Electricity market
What if American Airlines recalls my ticket
Single vs. Multiple decision makers
A Simple Model
No stock outs. x is the size of the capacity increments.
δ is the increase rate of the demand.
f(x) is expansion cost of capacity increment of size x
C(x) is the long run (infinite horizon) total discounted
expansion cost
Solution can be: Each time expand capacity by an amount
that is equal to 30-week demand.
Plant 1 and 2 are tooled to produce product A
Plant 3 is tooled to produce product B
A and B are substitute products
with random demands DA + DB = Constant
Products
1
2
3
A
B
Plants
Say capacities are r1=r2= r3=100
Suppose that DA + DB = 300 and DA >100 and DB >100
With plant flexibility y1A=1, y2A=1, y3A=0, y1B=0, y2B=0, y3B=1.
If the scenarios are equally likely, expected shortage is 50.
Scenario
DA
DB
X1A
X2A
X3A
X1B
X2B
X3B
Shortage
1
200
100
100
100
100
0
2
150
150
100
50
100
Say capacities are r1=r2= r3=100
Suppose that DA + DB = 300 and DA >100 and DB >100
With plant flexibility y1A=1, y2A=1, y3A=0, y1B=0, y2B=1, y3B=1.
Flexibility can decrease shortages. In this case, from 50 to 0.
Scenario
DA
DB
X1A
X2A
X3A
X1B
X2B
X3B
Shortage
1
200
100
100
100
0
100
0
2
150
150
100
50
50
100
0
3
100
200
100
0
100
100
0
i denotes plants
cij tooling cost to configure plant i to produce j
mj contribution to margin of producing/selling a unit of j
ri capacity at plant i
Dj=dj product j demand
yij=1 if plant i can produce product j, 0 o.w.
xij=units of j produced at plant i
- If DA=200 and DB=100, then y1A=y2A=y3B=1.
- If DA=100 and DB=200, then y1A=y2B=y3B=1.
Solutions depend on scenarios:
Dj=djk product j demand
under scenario k
at plant i if scenario k
happens
product j, 0 o.w.
Does yij differ under
Anticipatory variable and Nonanticapatory variable
How do car manufacturers assign products to plants?
With the last formulation, we treated the problem of assigning products to plants.
This type of assignment called for tooling/preparation of each plant appropriately so that it can produce the car type it is assigned to.
These tooling (nonanticipatory) decisions are made at most once a year and manufacturers work with the current assignments to meet the demand.
When market conditions change, the product-to-plant assignment is revisited.
Almost all car manufacturers in North America are retooling their previously truck manufacturing plants to manufacture compact cars as consumer demand basically disappeared for trucks with high gas prices.
Also note that the profit margin made from a truck sale is 2-5 times more than the margin made from a car sale. No wonder why manufacturers prefer to sell trucks!
In the following pages, you will find the product to plant assignment of major car manufacturers in the North America. These assignments were updated in the summer of 2008 just about the time when manufacturers started talking about retooling plants to produce compact cars.
Toyota. Tijuana, Mexico
Honda. El Salto, Me
Nissan. Canton
Nissan. Smyrna
Hyundai. Montgomery
All of Mercedes and BMW Plants in the North America
Mercedes. Tuscaloosa
Ford. Hermosillo, Mex. Ford Fusion, Lincoln MKZ, Mercury Milan
Ford. Kansas City
Escape, Escape Hybrid,
Ford. Saint Paul
Chrysler. Toluca, Mex.
Ontario, Michigan, Illinois,
Chrysler. Fenton-North
Dodge Ram
Chrysler. Belvidere
Chrysler. Toledo
Chrysler. Detroit-Jefferson North
Chrysler. Detroit-Conner Ave.
Chrysler. Warren
Chrysler. Sterling Heights
GM. Ramos Arizpe, Mex.
Ontario, Michigan, Illinois,
GM. Toluca, Mex.
Chevrolet Kodiak Truck
Stopping in 2008
GM. Fairfax
GM. Wentzville
GM. Lordstown
GM. Moraine
Chevy Trailblazer, GMC Envoy, Oldsmobile Bravada, Isuzu Ascender, Saab 9-7X
Will stop in 2010
Will stop in 2010
Trucks will stop in 2009.
GM. Lansing-Grand River
GM. Flint
GM. Pontiac
Supply and demand management during aggregate planning with predictable demand variation
Supply management levers
Demand management levers
Product mix defines the bottleneck(s) ?
Provide plenty of non-bottleneck resources.
Shifting bottlenecks
Design improvements encouraged
Quality improvements
Supplier relations, fewer closer suppliers, Toyota city
JIT philosophically different than OPT or MRP, it is not only a planning tool but a continuous improvement scheme
$40 $39
0
10,000
20,000
30,000
40,000
50,000
97,297,397,498,198,298,398,499,199,299,399,400,1
High growth of market High demand period
High margin High demand period
Low margin Low demand period
High holding cost Low demand period
Low capacity volume
Hiring and training costs $300/worker
Layoff cost $500/worker
Cost of subcontracting $30/unit

Date post:	07-Nov-2015
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