Lecture

PLANNING AND

5 COORDINATION
IN THE SUPPLY
CHAIN
 AGGREGATE

8 PLANNING IN A
SUPPLY CHAIN

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AGGREGATE PLANNING
Introduction

• Why is it interesting to look from a

supply chain perspective to the
planning?

• What solutions do organisations have

to upscale (or down scale) capacity?

• What is the role of ICT related to the

planning issue?

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AGGREGATE PLANNING
Example
• Paper is seasonal product, in spring
more paper is consumed because
of printing the annual year reports.
Running a mill is costly. To
optimize revenues the industry
uses aggregate planning to
determine production and
inventory levels.

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AGGREGATE PLANNING
Introduction
• Aggregate planning is the process where a company
determines planned levels of:
– Capacity
– Production
– Sub-contraction
– Inventory
– Stock-outs
– Pricing

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AGGREGATE PLANNING
Objectives
• Main objectives of aggregate planning are to identify
following operational parameters:
– Production rate –units to produce per time unit
– Workforce
– Overtime
– Machine capacity level
– Sub contracting
– Backlog
– Inventory on hand

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AGGREGATE PLANIING
The planning challenge

• Forecast
• Production costs
• Labour
• Subcontracting
• Changing capacity
• Labor/machine hours
required per unit
• Inventory holding costs
• Stock-out costs
• Constraints
• Limits on overtime
• Limits on layoffs
• Limits on capital
• Limits on stock-outs
• Constraints from
suppliers
Aggregate • Production quantities
Planning from:
• Regular time
• Overtime
• Subcontracting
• Inventory held
• Backlog/Stock-outs
• Workforce hired/laid off
• Machine capacity
increase/decrease
Profitability

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AGGREGATE PLANNING
Aggregate strategies
• Aggregate planning is focusing on three costs:
– Capacity (regular, overtime, subcontracting)
– Inventory
– Backlog

• Three strategies:
– Chase strategy – using capacity as the lever
– Flexibility strategy – using utilization as the lever
– Level strategy – using inventory as the lever

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AGGREGATE PLANNING
Leveling and chasing demand
Level production Chase demand
demand

Production units
Production units

Time Time
Stock units

Stock units

Time Time

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AGGREGATE PLANNING
Constraints

• Workforce, hiring and layoff constraints

• Capacity constraints
• Inventory balance constraints
• Overtime limit constraints

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AGGREGATE PLANNING
Building a master production schedule
• Master Production Schedule (MPS) identifies all
batches which needs to be produced in each period.

• Example:
Family Set-up Batch Prod. Prod. Numb. Set-up Prod.
time size time quant. set-ups time time
A 8 50 5.60 256 5 40 1,433.6
B 6 150 3.00 640 4 24 1,920.0
C 8 100 3.80 512 5 40 1,945.6
D 10 50 4.80 256 5 50 1,228.8
E 6 100 3.60 512 5 30 1.843.2
F 5 75 4.30 384 5 25 1,651,2

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AGGREGATE PLANNING
The role of IT
• The most early IT supply chain products were
aggregate planning modules

• Advantages of using IT:

– Can go beyond linear programming to solve the
problem
– Possibility to combine with production planning and
inventory planning

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AGGREGATE PLANNING
Implementing aggregate planning
• Today aggregate planning modules are part of ERP
packages.

• Important aspects related to implementation:

– Think beyond the enterprise, focus on supply chain
– Make plans flexible, forecasts are never accurate
– Rerun planning when new data emerges
– Use aggregate planning as capacity increases

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 SALES AND

9 OPERATIONS
PLANNING

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SALES AND OPERATIONS PLANNING
Introduction

• What can you tell about demand and

demand patterns?

• How does demand connect sales to

operations and the supply chain?

• What solutions do organizations have

to influence the capacity and/or
demand?

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SALES AND OPERATIONS PLANNING
Example
• Red Tomato Tools is selling garden
products which is seasonal,
concentrated in spring.

• Two strategies for managing

inventory:
– Producing only during season,
leaving plant capacity unused
– Producing flat during year absorbing
sales fluctuation via stock

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SALES AND OPERATIONS PLANNING
Predictable variability
• Predictable variability is change in demand that can
be forecasted.

• Objective: balance supply with demand maximizing

profitability by:
– Manage supply using capacity, inventory,
subcontracting
– Manage demand using short-term price discounts and
promotions

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SALES AND OPERATIONS PLANNING
Managing supply
• A firm can manage supply by following factors:
– Production capacity
– Inventory

Customer

Inventory
Capacity

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SALES AND OPERATIONS PLANNING
Managing capacity
• Firms can manage capacity by using a combination
of:
– Time flexibility from workforce
– Use of seasonal workforce
– Use of subcontracting
– Use of dual facilities
– Design product flexibility in the process

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SALES AND OPERATIONS PLANNING
Managing inventory
• Firms can manage capacity by using a combination
of:
– Using common components across multiple products
– Build inventory of high-demand or predictable-demand
products

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SALES AND OPERATIONS PLANNING
Managing demand
• Supply chains can manage demand by using a
combination of:
– Pricing
– Promotion

• Note: Promotion decisions are mostly made by

retailers without taking into account the impact on
the rest of the supply chain.

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SALES AND OPERATIONS PLANNING
Factors influencing timing of promotion
• Four key factors influencing promotion:
– Impact of the promotion on demand
– Cost of holding inventory
– Cost of changing the capacity level
– Product margins

• The increase in demand comes from:

– Market growth
– Stealing share
– Forward buying

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SALES AND OPERATIONS PLANNING
Implementing sales & operations planning
• Important aspects related to implementation:
– Coordinate planning across enterprises in the supply
chain
– Take predictable variability into account when making
strategic decisions
– Design S&OP to understand and manage the drivers of
demand usage
– Ensure that S&OP process modifies plans as the reality
of forecasts changes

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