Aggregate Planning

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9/19 Agenda
6:00 7:15: Discuss cases (7-11, Guinness) and Ch. 4 7:15 7:30: Crash course on Linear Programming 7:30 8:15: Aggregate Production Planning example 8:30 9:30: Using Excels LP Solver for Aggregate Planning 9:30 10:00: Aggregate Planning investigation/experimentation Due next class (10/1): Case readings: World Co. & Wal-Mart Group Project: Specialty Packaging Corporation, Parts A&B

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Linear Programming: A Simple Example

Jack makes Xylophones and Yo-yos out of string and wood (and time). The following table provides per-unit resource and profit data for X and Y, and resource availability this week. X Profit String Wood $2 2m 1 lb Y $3 1m 2 lb Avail 60m 50 lb

Time

1 hr

1 hr

32 hr

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Linear Programming: A Simple Example (cont)

Let X and Y represent the number of xylophones and yo-yos Jack will make this week. Because of resource constraints (and common sense), X and Y must obey:

2 x y 60 x 2 y 50 x y 32 x, y 0

50 Time 32 25 String

Feasible Region
30

Wood

32

60

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Linear Programming: A Simple Example (cont)

All points inside the 5-vertex polygonal feasible region represent possible production plans for the week. But profit = 2x+3y, so the vector (2,3) points in the direction of more profitability.

50 Time 32 25 2 String

Feasible Region
30 32

Wood

60

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Linear Programming: A Simple Example (cont)

Which point is most profitable? The intersection of constraints Time and Wood is furthest in the profitable direction. Solve 50
Time String

32
25

2 x y 60 x y 32 x 14, y 18
60

Feasible Region
30 32

Wood

prof it 2(14) 3(18) 82

6

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Linear Programming: A Simple Example (cont)

Formulated as a Linear Program, the whole problem looks like:
Commercial software exists to solve very large problems of this form very quickly, and MANY business problems take this form. Permissible variations include:

max 2 x 3 y st 2 x y 60 x 2 y 50 x y 32 x, y 0

Max or Min Constraints <, =, or > Free variables (allowed to be negative)

Other variations can be optimized using other techniques:

Variables

forced to be integer or binary (0,1)

Nonlinear Objective function and/or constraints

Constraints satisfied with a specified probability

Etc!

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Aggregate Planning at Red Tomato Tools

Month January February March April May June Demand Forecast 1,600 3,000 3,200 3,800 2,200 2,200

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Fundamental tradeoffs in Aggregate Planning

Capacity

(regular time, over time, subcontract)

Inventory Backlog

/ lost sales

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Basic Production Planning Strategies

Chase strategy
Manipulate

production capacity to meet changes

in demand
Hire/layoff workforce
Buy/sell machinery/facilities
Low High

inventory/stockout cost workforce/capital cost

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Basic Production Planning Strategies

Time flexibility from workforce or capacity

Maintain high capacity, and manipulate utilization

Alternate tasking for workforce/machinery in periods of

low demand

Low inventory/stockout cost High overhead due to lower average utilization Need flexible/skilled workforce
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Basic Production Planning Strategies

Level Strategy

Maintain capacity and high utilization Manipulate Inventory/Stockout levels to meet changing

demand

High inventory/stockout cost Low operating costs due to efficiency (high utilization)

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Aggregate Planning: Specify Data

Item Materials Inventory holding cost Marginal cost of a stockout Hiring and training costs Layoff cost Labor hours required Regular time cost Overtime cost Cost of subcontracting Cost $10/unit $2/unit/month $5/unit/month $300/worker $500/worker 4/unit $4/hour $6/hour $30/unit

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Aggregate Planning: Define Decision Variables

Wt = Workforce size during month t Ht = Number of employees hired at the beginning of month t Lt = Number of employees laid off at the beginning of month t Pt = Production in month t It = Inventory at the end of month t St = Number of units stocked out at the end of month t Ct = Number of units subcontracted for month t Ot = Number of overtime hours worked in month t All for t = 16
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Aggregate Planning: Define Objective Function

Min (160)(4)W t 300 H t

t 1 t 1

500 Lt 6 Ot 2 I t
t 1 6 t 1 t 1

5 S t 10 Pt 30 C t
t 1 t 1 t 1
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Aggregate Planning: Define Variable Relationships (Constraints)

Workforce

size for each month is based on hiring and layoffs

t

W W
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W t 1 H t Lt,

or

t 1

H t Lt W t 0
0

for t 1,..., 6, where W 80 .

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Aggregate Planning (Constraints)

Production

for each month cannot exceed

capacity

4 Pt 160Wt Ot , or 160Wt Ot 4 Pt 0 f or t 1,..., . 6

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Aggregate Planning (Constraints)

Inventory

balance for each month

I t 1 Pt C t Dt S t 1 I t S t , or I t 1 Pt C t Dt S t 1 I t S t 0, for t 1...6, where I 0 1000, S 0 0, and I 6 500, S 6 0

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Aggregate Planning (Constraints)

Overtime

for each month

Ot 10 W t, 10 W t Ot 0, for t 1,..., 6.

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Scenarios
Increase

in holding cost (from $2 to $6) Overtime cost drops to $4.1 per hour Increased demand fluctuation

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Increased Demand Fluctuation

Month January February March April May June Demand Forecast 1,000 3,000 3,800 4,800 2,000 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 January February March April May June Demand Forecast 3,000 2,400 2,560 3,800 2,200 2,200

Cost = $421,915, Revenue = $643,400, Profit = $221,485

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Peak (April) Discount from $40 to $39

Month January February March April May June Demand Forecast 1,600 3,000 3,200 5,060 1,760 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 Scenarios

Regular Price $40 $40 $40 $40 $40 $31 $31 $31 Promotion Price $40 $39 $39 $39 $39 $31 $30 $30 Promotion Period NA January April January April NA January April Percent increase in demand NA 20 % 20% 100% 100% NA 100% 100% Percent forward buy NA 20 % 20% 20% 20% NA 20% 20% Profit Average Inventory 895 523 938 208 1,492 895 208 1,492

$217,725 $221,485 $211,283 $242,810 $247,320 $73,725 $84,410 $69,120

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Factors Affecting Promotion Timing

Factor High forward buying High stealing share High growth of market High margin Low margin High holding cost Low flexibility Favored timing Low demand period High demand period High demand period High demand period Low demand period Low demand period 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 low levels of inventory requires capacity to vary with seasonal variation in demand or enough capacity to cover peak demand during season

Carrying

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January Discount: 100% increase in consumption, sale price = $40 ($39)

Month January February March April May June Demand Forecast 4,440 2,400 2,560 3,800 2,200 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 January February March April May June Demand Forecast 1,600 3,000 3,200 8,480 1,760 1,760

Peak discount: Cost = $$536,200, Revenue = $783,520

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