Supply Chain Management

Lecture 15
Outline (last week)
• February 25 (Today)
– Network design simulation description
– Chapter 8
– Homework 4 (short)
• March 2
– Chapter 8, 9
– Network design simulation due before 5:00pm
• March 4
– Simulation results
– Midterm overview
– Homework 4 due
• March 9
– Midterm
Outline
• March 2 (Today)
– Network design simulation
– Chapter 8, 9
• Chapter 8
– Sections 1, 2, and 3 only
• Chapter 9
– Sections 1, 2, and part of 3 only
• March 4
– Simulation results
– Midterm overview
• Important sections
• Formula sheet
• Practice questions
• March 9
– Midterm
Simulation Assignment (25%)
• Design the supply chain network for Jacobs Industries on
the fictional continent of Pangea
– Jacobs only product is an industrial chemical that can be mixed
with air to form a foam (used in air conditioner retrofit kits)
Demand

• Average demand for Jacob’s product in Pangea

– Existing and new markets

140

120

120 100

100 80

60
80
40
60
20
40
0
20 1 145 289 433 577 721 865 1009 1153 1297 1441

0
1 145 289 433 577 721 865 1009 1153 1297 1441

18
16
14

18 12

16 10
8
14
18 6
12
16

250
4
10
14 2
8
12 0
6
10 1 142 283 424 565 706 847 988 1129 1270 1411
4
8
2
6
0
4
1 142 283 424 565 706 847 988 1129 1270 1411
2
0
1 142 283 424 565 706 847 988 1129 1270 1411
Assignment
• Jacobs management would like to design a supply chain
network for Pangea. It’s current network consist of a
factory in Calopeia with a capacity of 20. You have been
hired to suggest a network design that will maximize
profits for Jacobs Industry. Designing such a network is
complex and includes the following decisions:
– Should the factory in Calopeia be expanded?
– Should factories in other regions be built? If so, what should their
capacity be?
– What regions should each factory serve?
Serve region?
Total
Factory? Capacity? Calopeia Sorange Tyran Entworpe Fardo
Calopeia YES 40 YES YES YES YES YES
Sorange
Tyran
Entworpe YES 20 YES YES YES YES NO
Fardo
Questions

• What to do with Fardo?

– Service Fardo demand from the mainland
– Service Fardo demand from local (to be built) factory
– Don’t service Fardo demand
• What to do with Calopeia?
– Add capacity to existing factory or not
– Service other regions or not
• What to do with Sorange, Entworpe, and Tyran?
– Built new factory or not
– Service other regions or not
From Forecasting to Planning

2500
Forecast
2000
Demand

1500
Capacity
1000

500

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Month
How should a company best utilize the
resources that it has?
From Forecasting to Planning

2500
Forecast
2000
Demand

1500
Capacity
1000

500

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Month
How much should be produced and
when?
Aggregate Planning

• Aggregate planning
– A general plan that determines ideal levels of capacity,
production, subcontracting, inventory, stockouts, and
even pricing over a specified time horizon (i.e. planning
horizon)
• Production rate (number of units to produce)
• Workforce (number of workers needed)
• Overtime (number of overtime hours)
• Machine capacity level (machine capacity needed)
• Subcontracting (subcontracted capacity)
• Backlog (total demand carried over to future periods)
• Inventory on hand (total inventory carried over to future periods)
Aggregate Planning
• Aggregate planning involves aggregate decisions rather
than stock-keeping unit (SKU)-level decisions for a
medium term planning horizon (3-18 months)
All-Terrain
Vehicle (ATV)

Engine
Transmission
Assembly

Model A Model B Model C Automatic Manual

Aggregate Planning Strategies
• Basic strategies
– Level strategy (using inventory as lever)
• Synchronize production rate with long term average demand
• Swim wear
– Chase (the demand) strategy (using capacity as lever)
• Synchronize production rate with demand
• Fast food restaurants
– Time flexibility strategy (using utilization as lever)
• High levels excess (machine and/or workforce) capacity
• Machine shops, army
– Tailored strategy
• Combination of the chase, level, and time flexibility strategies
Case Study Results
• In general, the chase strategy is used when
– Products are valuable
– Products are bulky or hard to store
– Products are perishable or carry an appreciable risk of
obsolescence
– High variety
• Accurate sales predictions are hard to obtain making stockpiling
hazardous
• Fashion items
• In general, the level strategy is used when
– Operators take a long time to become proficient at critical tasks
– Products with negligible probability of obsolescence
– Low variety
• Forecasts are quite good
Aggregate Planning in Services

Is aggregate planning useful for the service

industry?
What is the major variable in managing supply
for service industries?
Managing Supply
• Managing capacity
– Time flexibility from workforce
– Use of seasonal workforce
– Use of subcontracting
– Use of flexible facilities
• Managing inventory
– Built inventory for high-demand or predictable demand products
– Use common components across multiple products
Managing Demand
• Pricing and other forms of promotion
– Timing of promotion is important
Timing of Promotion

Why would a firm want to offer pricing

promotions during its low-demand periods?

Why would a firm want to offer pricing

promotions during its peak-demand periods?
Why would a firm want to offer pricing
promotions during its low-demand periods?

Market growth – new customers

Forward buying – existing customers move up purchases
Why would a firm want to offer pricing
promotions in its peak-demand periods?

• Price sensitivity is higher during periods of peak

demand
• Brands that are losing market share reduce prices

Stealing share – customers substitute the firm’s product for a

competitor product
Managing Demand
• Pricing and other forms of promotion
– Timing of promotion is important
• Demand increases from promotion can result from a
combination of three factors:
– Market growth (increased sales, increased market size)
• Increase in consumption from both new and existing customers
• Example: Toyota Camry attracting buyers who were considering
lower-end models
– Stealing share (increased sales, same market size)
• Product substitution (overall demand stays the same)
• Example: Toyota Camry attracting buyers who were considering
Honda Accord
– Forward buying (same sales, same market size)
• Customers move up purchases (does not increase sales)
Factors Affecting Promotion Timing

Factor Impact on Timing of Promotion

High forward buying Favors promotion during low-demand periods
High ability to steal
Favors promotion during peak-demand periods
market share
High ability to increase Favors promotion during peak-demand periods
overall market
High margin Favors promotion during peak-demand periods
Low margin Favors promotion during low-demand periods
High holding cost Favors promotion during low-demand periods
High costs of changing Favors promotion during low-demand periods
capacity