Planning Demand and Supply in a Supply Chain

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Planning Demand and Supply in a Supply Chain

• Demand Forecasting and Aggregate Planning

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Time Series Forecasting
Forecast demand for the next four quarters.
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(No Transcript)
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roughly (in average) 20,000 per quarter
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roughly parallel to the peaks or the
valleys roughly 500 more for each quarter
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assuming factors for 2Q, 3Q, 4Q, and 1Q 0.4,
0.7, 1.1, 1.8
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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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Key Steps for Static Method

• Systematic component (S) Level (L) Trend
  (T) Period (t) Seasonal Factors (St)
• How to estimate L, T, and St from the observed
  demand Dt?
• Forecast Ft(LtT)St

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Procedure to deseasonalize
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Deseasonalized Demands
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Estimation from deseasonalized demand

• Assume
• Find
• Find
• Find averaged S

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Forecast for the next coming year
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Error measures

• Error
• Absolute Error
• MAD(Mean Absolute Error)
• Mean Squared Error (MSE)
• Mean Absolute Percentage Error (MAPE)
• Bias
• Tracking Signal

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Forecasting methods

• Static
• Adaptive
• Moving average
• Simple exponential smoothing
• Holts model (with trend)
• Winters model (with trend and seasonality)

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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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Aggregate Planning at Red Tomato Tools
6 months planning horizon
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Basic Strategies

• Chase strategy- using capacity as the lever
• Level strategy - using inventory as the lever
• Time flexibility from workforce or capacity -
  using utilization as the lever

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Fundamental tradeoffs in Aggregate Planning

• Production
• Production level
• Workforce size (hire vs. lay off)
• Regular time vs. over time
• Make-or-buy (subcontract)
• Inventory
• Backlog / lost sales

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Aggregate Planning by LP
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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

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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

or
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Aggregate Planning (Constraints)

• Inventory balance for each month

or
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Aggregate Planning (Constraints)

• Over time for each month

or
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Optimized Solution from LP
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Scenarios - Increase in holding cost (from 2 to
6)
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Scenarios - Over time cost drops to 4.1 per hour
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Increased Demand Fluctuation
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Scenarios Peaked Demand
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Phases of Supply Chain Decisions

• Strategy or design Forecast
• Planning Forecast
• Operation Actual demand

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Learning Objectives

• Identify components of a demand forecast
• Time series forecasting
• Estimate forecast error
• Aggregate planning in the supply chain