Forecasting and Aggregate Planning - PowerPoint

					        Planning Demand and Supply
             in a Supply Chain
           Forecasting and Aggregate Planning
                      Chapters 8 and 9

     Learning Objectives
              Overview  of forecasting
              Forecast errors

              Aggregateplanning in the supply chain
              Managing demand
              Managing capacity

     Phases of Supply Chain Decisions
         Strategyor design:                   Forecast
         Planning:                            Forecast
         Operation/Execution                  Actual demand

         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 sample averages/totals=0
               » Variance of {3,5,2,6}=5/2
         – Several ways to aggregate
               » Products into product groups; Telecom switch boxes
               » Demand by location; Texas region
               » Demand by time; April demand                                                           4
     Forecasting Methods
        Qualitative
           – Expert opinion
                 » 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
           – Static
           – Adaptive
        Causal: Linear regression
        Forecast Simulation for planning purposes

     Master Production Schedule (MPS)

        MPS is    a schedule of future deliveries. A combination
           of forecasts and firm orders.                         9
                      Aggregate Planning
                           Chapter 8

   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
                  » Short and long sleeve shirts = shirt
                          Single product
                  » AC and Heating unit pipes = pipes at Lennox Iowa plant
            – Pooled capacities = aggregated capacity
                  » Dedicated machine and general machine = machine
                          Single capacity
                             – E.g. SOM has 100 instructors
            – 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?          11
                          Increase the number of time buckets; decrease the bucket length.
Fundamental tradeoffs in Aggregate Planning
   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
      Time flexibility; high levels of workforce or capacity
         – machining shops, army
      Deliver late strategy
         – spare parts for your Jaguar                                         12
                                                            - Which is which?
                                                                    Deliver late
     Matching the Demand                                            Time flexibility

                                      Adjust the capacity                              Demand
                                      to match the demand

                      Use inventory


                                         Use delivery time                      Demand    13
      Capacity Demand Matching
      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

     Case Study:
     Aggregate planning at Red Tomato

                       Farm    tools:

                                         Same characteristics?
                       Shovels

                       Spades            Generic tool, call it Shovel

                       Forks

                        Aggregate by similar characteristics
     Aggregate Planning at Red Tomato Tools

   Aggregate Planning

    What is the cost of production per tool? That is materials plus labor.
                Overtime production is more expensive than subcontracting.         17
    What is the saving achieved by producing a tool in house rather than subcontracting?
 1. Aggregate Planning (Decision Variables)
     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?

   2. Objective Function:

   3. Constraints
   Workforce         size for each month is based on hiring and layoffs

   Production (in hours)     for each month cannot exceed capacity (in hours)

     3. Constraints
       Inventory balance for each month

                Period          Period     Period
                 t-1              t         t+1

     3. Constraints

              Overtime for each month

         Solve the formulation, see Table 8.3
            – Total cost=$422.275K, total revenue=$640K

         Apply the first month of the plan
         Delay applying the remaining part of the plan until the next
         Rerun the model with new data next month

         This is called rolling horizon execution
     Aggregate Planning at Red Tomato Tools
   This solution was for the following demand numbers:

      What if demand fluctuates more?
     Increased Demand Fluctuation

            Total costs=$432.858K.
            16000 units of total production as before why extra cost?            24                       With respect to $422.275K of before.
                      Manipulating the Demand
                              Chapter 9

     Matching Demand and Supply
        Supply = Demand
        Supply < Demand => Lost revenue opportunity
        Supply > Demand => Inventory
        Manage Supply – Productions Management
        Manage Demand – Marketing

     Managing Predictable Variability with Supply
      Manage capacity
                  »   Time flexibility from workforce (OT and otherwise)
                  »   Seasonal workforce, agriculture workers
                  »   Subcontracting
                  »   Counter cyclical products: complementary products
                           Similar products with negatively correlated demands
                              – Snow blowers and Lawn Mowers
                              – AC pumps and Heater pumps
                  » Flexible capacities/processes: Dedicated vs. flexible

                                                 d                 a              d
                                                     c                 c,d            c
                                   b                           b
                             Similar capabilities              One super facility         27
Managing Predictable Variability with Inventory
         Component commonality
            – Remember fast food restaurant menus
            – Component commonality increase the benefit of postponement.
                  » More on this later
         Build seasonal inventory of predictable products in preseason
            – Nothing can be learnt by procrastinating
         Keep inventory of predictable products in the downstream supply chain

     Managing Predictable Variability with Pricing
     Revisit Red Tomato Tools
       Manage demand with pricing
          – Original pricing:
                » Cost = $422,275, Revenue = $640,000, Profit=$217,725
       Demand increases from discounting
          – Market growth
          – Stealing market share from competitors
          – 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?
Off-Peak (January) Discount from $40 to $39

  Cost = $421,915, Revenue = $643,400, Profit = $221,485
     Peak (April) Discount from $40 to $39

      Cost = $438,857, Revenue = $650,140, Profit = $211,283
      Discounting during peak increases the revenue
      but decreases the profit!                           31
     Demand Management
 Pricingand Aggregate Planning must be done jointly
 Factors affecting discount timing and their new values
      – Consumption: 100% increase in consumption instead of 10%
      – 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                                     33
     Peak (April) Discount: 100% increase
     in consumption, sale price = $40 ($39)

         Peak discount: Cost = $536,200, Revenue = $783,520
         Profit=$247,320                                  34
    Performance Under Different Scenarios

   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?                                                   35      Need empirical data. What is available?
     Empirical Data:
     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
                 »    Adults: 25-34 spend $160.37.
                 »    Young adults: 18-24 spend $145.59.
                 »    Upper Middle age: 45-54 spend $117.91.
                 »    Lower Middle age: 35-44 spend $116.35.
                 »    Elderly: 55-64 spend $110.97.
        Gifts
                 »    56.8% of all consumers give a greeting card.
                 »    48.2% plan a special night out.
                 »    48.0% buy candy.
                 »    35.9% buy flowers.
                 »    12.3% give a gift card.
                 »    11.8% buy clothing.
                 »    ??.?% buy diamonds                                                              36
                              – Source: National Retail Federation
     Factors Affecting Promotion Timing

     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?

                                                                                                 38    See the appendix of scaggregate.pdf for more on continuous compounding.
     Deterministic Capacity Expansion Issues
                 Single vs. Multiple Facilities
                      – Dallas and Atlanta plants of Lockheed Martin
                 Single vs. Multiple Resources
                      – Machines and workforce; or aggregated capacity
                 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
                      – Recallable capacity: Electricity block outs vs Electricity buy outs
                           » Happens in Wisconsin Electricity market
                           » What if American Airlines recalls my ticket
                 Single vs. Multiple decision makers                                         39
     A Simple Model

          No stock outs. x is the size of the capacity increments.
          δ is the increase rate of the demand.                   40
     Infinite Horizon Total Discounted Cost

    f(x)      is expansion cost of capacity increment of size x

    C(x) is the long run (infinite horizon) total discounted
   expansion cost

     Solution of the Simple Model

            Solution can be: Each time expand capacity by an amount
                                  that is equal to 30-week demand.
     Shortages, Inventory Holding, Subcontracting

        Use of Inventory and subcontracting to delay capacity expansions
     Stochastic Capacity Planning:
     The case of flexible capacity

                                                   A    y1A=1, y2A=1, y3A=0


                                                    B   y1B=0, y2B=0, y3B=1

                 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 D A + DB = Constant               44
     Capacity allocation
     Saycapacities 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.
  Scenario        DA        DB    X1A   X2A X3A X1B X2B   X3B      Shortage
            1         200   100   100   100                100            0
            2         150   150   100    50                100        50 B
            3         100   200   100     0                100       100 B

   If the scenarios are equally likely, expected shortage is 50.         45
     Capacity allocation with more flexibility
     Saycapacities 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.
  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

   Flexibility can decrease shortages. In this case, from 50 to 0.
    A Formulation with Known Demands: Dj=dj

        i denotes plants
        j denotes products, not necessarily substitutes
        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
                      Solutions depend on scenarios:
                            - If DA=200 and DB=100, then y1A=y2A=y3B=1.   47
                            - If DA=100 and DB=200, then y1A=y2B=y3B=1.
      Unknown Demands: Dj=djk with probability pk

          Dj=djk product j demand
       under scenario k
        xijk= units of j produced
       at plant i if scenario k

          yij=1 if plant i can produce
       product j, 0 o.w.
        Does yij differ under
       different scenarios?

       Should my variable depend on
          scenarios? (Yes / No)
          Anticipatory variable and
          Nonanticapatory variable
   Reality Check:
   How do car manufacturers assign products to plants?
        With the last formulation, we treated the problem of assigning products to
        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.                             49
      All of Toyota Plants in the North America

                                                                   Toyota. Cambridge
                                                                Corolla, Matrix, Lexus, Rav4

                                                           Toyota-Subaru. LaFayette

  Nummi: Toyota-GM. Freemont.
  Corolla, Tacoma, Pontiac Vibe
                                                            Toyota. Princeton
                                                         Tundra, Suquoia, Sienna

                                                               Toyota. Georgetown
                                                              Avalon, Camry, Solara

  Toyota. Long Beach
        Hino                                            Toyota. Blue Springs

 Toyota. Tijuana, Mexico

                                  Toyota. San Antonio

     All of Honda Plants in the North America

                                                               Honda. Alliston, Ca.
                                                              Civic, Acura, Odyssey,
                                                                 Pilot, Ridgeline

                                            Honda. Decatur
                                             TBO in 2008
                                                             Honda. Marysville
                                                              Accord, Acura

                                                Honda. Lincoln
                                                Odyssey, Pilot

                      Honda. El Salto, Me

     All of Nissan Plants in the North America

                                         Nissan. Smyrna
                                      Frontier, Xterra, Altima,
                                       Maxima, Pathfinder

                                    Nissan. Canton
                                    Quest, Armada,
                                  Titan, Infiniti, Altima

     All of Hyundai-Kia Plants in the North America

                                                  Kia. LaGrange
                                                   TBO in 2009
                                         Hyundai. Montgomery
                                          Sonata, Santa Fe

All of Mercedes and BMW Plants in the North America

                                                       BMW. Spartanburg
                                                           Z4, X5, X6
                                                       M roadster, coupes

                                     Mercedes. Tuscaloosa
                                         M, R classes

                 All of Ford Plants in the North America

                           Ford. Dearborn                 Ford. Oakville, Ca.
                        F-150, Lincoln Mark LT            Edge, Lincoln MKX
                                                                                                           Ford. Saint Paul
                                                                                                        Ranger, Mazda B series
                                                         Ford. Saint Thomas, Ca.
                         Ford. Flat Rock               Crown Victoria, Grand Marquis
                        Mustang, Mazda 6

                                    Ford. Wayne
                          Focus, Expedition, Lincoln Navigator
   Ford. Chicago
Taurus, Mercury Sable
                                                                 Ford. Avon Lake
                                                                    E Series

                                                                                                        Ford. Kansas City
                                                                                                      Escape, Escape Hybrid,
                                                                                                          Mazda Tribute,             Ford. Louisville
                                                                                                      Mercury Mariner, F-150     F-250, F-550, Explorer,
                                                                                                                                  Mercury Mountaineer

                                                       Ontario, Michigan, Illinois,
                                                        Indiana, Ohio in Focus

                              Ford. Hermosillo, Mex.
                               Ford Fusion, Lincoln
                               MKZ, Mercury Milan

                                                                                                                                                           55                                                                        Ford. Cuatitlan, Mex.
                                                                                       F-150, 250, 350, 450, 550,Ikon
            All of Chrysler Plants in the North America
                 Chrysler. Sterling Heights
              Dodge Avenger, Chrysler Sebring
                                                         Chrysler. Brampton, Ca
                    Chrysler. Warren                         Chrysler 300,
            Dodge Ram, Dakota, Mitsubishi Raider          Dodge Challenger,
                                                            Dodge Charger
               Chrysler. Detroit-Jefferson North
            Jeep Grand Cherokee and Commander

            Chrysler. Detroit-Conner Ave.             Chrysler. Windsor, Ca
            Dodge Viper, SRT 10 Roadster        Dodge Grand Caravan, Chrysler Town

                                                                                                                                        Chrysler. Newark
                                                                                                                                  Dodge Durango, Chrysler Aspen
                                                                                                        Chrysler. Belvidere             Will close in 2009
                                 Chrysler. Toledo                                                      Dodge Caliber, Jeep
                             Jeep Liberty, Dodge Nitro                                                Compass, Jeep Patriot

                                                                                                         Chrysler. Fenton-North
                                                                                                             Dodge Ram
                                                                                                         Chrysler. Fenton-South
                                                                                                         Grand Voyager, Grand
                                                                                                          Caravan, Cargo Van

                                                 Ontario, Michigan, Illinois,
                                                  Indiana, Ohio in Focus

                                                               Chrysler. Saltillo, Mex.
                                                                   Dodge Ram

                                                                       Chrysler. Toluca, Mex.                                               Chrysler PT Cruise, Dodge Journey
               All of GM Plants in the North America
                                                                     GM. Oshawa, Ca
                                                                 Chevy Impala, Buick Allure,
                                        GM. Orion               Chevy Silverado, GMC Sierra.
          GM. Lansing-Grand River       Pontiac G6,               Trucks will stop in 2009.
              Cadillac E-SRX          Chevrolet Malibu

  GM. Lansing-Delta Township             GM. Flint
    Buick Enclave, Saturn       GMC Sierra, Chevy Silverado,
    Outlook, GMC Acadia         Chevy - GMC medium trucks.

                         GM. Pontiac                 GM. Detroit                                                GM. Janisville
                  Chevy Silverado, GMC Sierra      Buick Lucerne,                                               Chevy Tahoe,
                                                    Cadillac DTS                                            Suburban, GMC Yukon
                                                                                                               Will stop in 2010
                                                                                                                                                                GM. Wilmington
                                                                                                                                                                Saturn L series,
             GM. Fort Wayne                                                                                                                                     Pontiac Solstice
             Chevy Silverado,
               GMC Sierra
                                                                                                        GM. Fairfax
                                                                                                       Chevy Malibu,
                                                                                                       Malibu Maxx,                     GM. Bowling Green
                           GM. Moraine                                                                                                    Cadillac XLR,
                      Chevy Trailblazer, GMC                                                            Saturn Aura                      Chevy Corvette
                    Envoy, Oldsmobile Bravada,                                                                         GM. Wentzville
                                                                 GM. Lordstown                                         Chevy Express,
                    Isuzu Ascender, Saab 9-7X                  Chevy Cobalt, Pontiac                                    GMC Savana          GM. Spring Hill
                         Will stop in 2010                       Pursuit, G4, G5                                                          Saturn Ion and Vue
                                                                                                                                            Currently down

                                                                                                                                               GM. Doraville
                                                                                                                                              Chevy Uplander,
                                                                                                                                              Pontiac Montana

                                                                                             GM. Arlington
                                       Ontario, Michigan, Illinois,                          Chevy Tahoe,
                                                                                               Suburban,        GM. Shreveport
                                                                                                                Chevy Colorado,
                                        Indiana, Ohio in Focus                                GMC Yukon,
                                                                                            Cadillac Escalade
                                                                                                                 GMC Canyon,
                                                                                                                 Isuzu brands,
                                                                                                                  Hummer H3

                                                                           GM. Ramos Arizpe, Mex.
                                                                    Pontiac Aztek, Chevy Cavalier, Chevrolet
                                                                    Checy, Pontiac Sunfire, Buick Rendezvous

                                                             GM. Silao, Mex.
                                                 Chevrolet Suburban, Chevrolet Avalanche,
                                                     GMC Yukon, Cadillac Escalade
                                                                        GM. Toluca, Mex.
                                                                      Chevrolet Kodiak Truck                                                     Stopping in 2008
     Summary of Learning Objectives
              Forecasting
              Aggregate  planning
              Supply and demand management during
               aggregate planning with predictable demand
                      – Supply management levers
                      – Demand management levers
              Capacity       Planning

     Material Requirements Planning
              Master  Production Schedule (MPS)
              Bill of Materials (BOM)
              MRP explosion
              Advantages
                      – Disciplined database
                      – Component commonality
              Shortcomings
                      – Rigid lead times
                      – No capacity consideration

     Optimized Production Technology
              Focus  on bottleneck resources to simplify
              Product mix defines the bottleneck(s) ?
              Provide plenty of non-bottleneck resources.
              Shifting bottlenecks

     Just in Time production
                 Focus on timing
                 Advocates pull system, use Kanban
                 Design improvements encouraged
                 Lower inventories / set up time / cycle time
                 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