Demand Planning & Fulfillment: Exam 1

Aggregate Operations Plan: Formal statement of the aggregate planning problem:

"Given the demand forecast 𝐹_𝑡 for each period 𝑡 in the planning horizon that extends over 𝑇 periods, determine the production level 𝑃_𝑡, inventory level 𝐼_𝑡, and workforce level 𝑊_𝑡 for periods 𝑡=1, 2, ..., 𝑇 that minimizes the relevant costs over the planning horizon."

Establishing Safety Stock Levels:

-A common approach is to simply keep a certain number of weeks of supply. -A better approach is to use PROBABILITY: --Assume demand is normally distributed. --Assume we know mean and standard deviation of the demand distribution. --To determine probability, we plot a normal distribution for expected demand and note where the amount we have lies on the curve.

Multi-Period Models: FIXED-ORDER QUANTITY MODELS:

-Also called as Economic Order Quantity (EOQ) and Q-model. -Event Triggered.

Multi-Period Models: FIXED-TIME PERIOD MODELS:

-Also called as periodic system, periodic review system, fixed-order interval system, and P-model. -Time Triggered.

Who are the customers & resources? What is the object? What are customer & resource constraints:

-Assign vehicles to delivery routes -Assign aircraft to gates -Assign crews to flight legs -Assign fares to taxis.

Where should S&OP Occur?

-At an AGGREGATE (at the level of major groups of products). -Also at the level of major groups of products. -- Since the demand is often quite dynamic, it is important that we monitor our expected needs 3 to 18 months or further in the future.

Four Costs Relevant to the Aggregate Production Plan:

-Basic Production Costs. -Costs associated with changes in the production rate. -Inventory holding costs. -Backorder Costs.

Other S&OP Objectives:

-Beyond balancing supply and demand, other primary objectives of may S&OP include: --Maximizing revenue --Minimizing risk --Improving customer service --Responding quickly to market changes --Reducing inventory

Production Planning Strategies:

-Chase Strategy -Stable Workforce (Variable work hours) -Level Strategy -Subcontracting

Four Costs Relevant to the Aggregate Production Plan: INVENTORY HOLDING COSTS:

-Cost of capital tied up in inventory -Storing, insurance, taxes, spoilage, and obsolescence.

Inventory Costs: SETUP (Or Production Change) COSTS:

-Costs for arranging specific equipment setups, and so on.

Inventory Costs: HOLDING (Or Carrying) COSTS:

-Costs for storage, handling, insurance, and so on.

Four Costs Relevant to the Aggregate Production Plan: BACKORDER COSTS:

-Costs of expediting, loss of customer goodwill, and loss of sales revenues resulting from backordering. -Hard to measure.

Multi Period Models: Comparison: FIXED-TIME PERIOD:

-Counting takes place only at the end of the review period -Has a larger average inventory -Favors less expensive items -Is sufficient for less-important items -Requires less time to maintain -Is less expensive to implement.

AGGREGATE PLANNING TECHNIQUES:

-Cut-and-try approach -Linear Programming -Simulation

Yield Management Success Factors:

-Demand can be segmented by customer. -Fixed costs are high and variable costs are low. -Inventory is perishable. -Product can be sold in advance. -Demand is highly variable.

1. Fixed-Order Quantity Models: Assumptions:

-Demand for the product is constant and uniform throughout the period. -Lead time (i.e. Time from ordering to receipt) is constant. -Price per unit of product is constant. -Inventory holding cost is based on average inventory. -Ordering or setup costs are constant. -All demands for the product will be satisfied.

Demand Types:

-Dependent Demand -Independent Demand

Inventory Systems Comparison: MULTI-PERIOD INVENTORY MODELS:

-Fixed-order quantity models --Event triggered (e.g. running out of stock) -Fixed-time period models --Time triggered (e.g. Monthly sales call by sales representative).

Yield Management:

-Has existed as long as there has been limited capacity for serving customers -Its widespread scientific application began with American Airlines' computerized reservation system (SABRE) introduced in the mid-1980s.

Inventory Costs:

-Holding (or carrying) costs -Setup (or production change) costs -Ordering costs -Shortage costs

Yield Management Example: Hotels:

-Hotels offer one set of rates during the week and another set during the weekend. -The variable costs associated with a room are low in comparison to the cost of adding rooms to the property. -Available rooms cannot be transferred from night to night. -Blocks of rooms can be sold to conventions or tours. -Potential guests may cut short their stay or not show up at all.

Building Blocks of Linear Programming:

-INPUTS --(Things that are known to you) -DECISION VARIABLES --(What you are looking to find/solve for). -OBJECTIVE FUNCTION --(What you are trying to do ((Maximize Profits etc.)) -CONSTRAINTS --(Things that constrain your organization ((Staffing limitations etc.))

Basic Formulation of Resource Allocation Problems:

-Inputs --J, set of resources and sj the supply (in integer units) --K, set of customers and dk , the demand --pjk penalty for assigning resource j to demand k -Decision Variables --Xjk =1 if ONE unit of resource j allocated to customer k.

INVENTORY = Money:

-Inventory can be visualized as stacks of money sitting on forklifts, on shelves, and in trucks and planes while in transit -For many businesses, inventory is the largest asset on the balance sheet at any given time -Inventory can be difficult to convert back into cash -It is a good idea to try to get your inventory down as far as possible. --The average cost of inventory in the United States is 30 to 35 percent of its value.

2. Fixed-Time Period Model:

-Inventory is counted only at particular times ("P-Model"). -Generates order quantities that vary from period to period -Generally requires a higher level of safety stock than a fixed-order quantity model (Q-Model) -Assumes that inventory is counted only at the time specified for review --Whereas the Q-Model assumes continual tracking of inventory on hand, with an order immediately placed when the reorder point reached.

Multi Period Models: Comparison: FIXED-ORDER QUANTITY:

-Inventory remaining must be continually monitored -Has a smaller average inventory -Favors more expensive items -Is more appropriate for important items -Requires more time to maintain - but is usually more automated -Is more expensive to implement.

Types of Planning:

-Long-Range Planning -Intermediate-range planning -Short-range planning

Production Planning Strategies: LEVEL STRATEGY:

-Maintain a stable workforce at a constant output rate. -Demand changes such as shortages and surpluses are absorbed by fluctuating inventory levels, order backlogs, and lost sales..

Production Planning Strategies: CHASE STRATEGY:

-Match the production rate to the order rate by hiring and laying off employees. -Must have a pool of easily trained applicants to draw on as order volumes increase.

Inventory Systems Comparison: SINGLE-PERIOD INVENTORY MODEL:

-One time purchasing decision (e.g. vendor selling t-shirts at a football game) -Seeks to balance the costs of inventory overstock and under stock.

Assigning Medical Residents to hospitals: "The Match":

-Open positions around the US -Medical students apply and rank preferences -Hospitals rank their preferences of students -Make assignment only when student and hospital rank each other -Hospitals in undesirable places may have vacancies -Students with poor grades may have no match -Two body problem is considered.

SINGLE-PERIOD MODEL APPLICATIONS:

-Overbooking of airline flights -Ordering of clothing and other fashion based items -One-time order for events - e.g. t-shirts for a concert

Yield Management Systems:

-Pricing structures must appear logical to the customer and justify the different prices. -Must handle variability in arrival or starting times, duration, and time between customers. -Must be able to handle the service process. -Must train employees to work in an environment where overbooking and price changes are standard occurrences that directly impact the customer. -The essence of yield management is the ability to manage demand.

Production Planning Strategies: Definitions:

-Production planning strategies are the plans for meeting demand. -Involve tradeoffs among the workforce size, work hours, inventory, and shortages. A PURE strategy uses just one of these approaches, a MIXED strategy uses two or more.

Resource Allocation at Rutgers:

-Professors to courses -Rooms to classes -Parking spaces to students -Dorm rooms to students -Advisors to Students -Funding to students -Roommates to students -Faculty to offices

Goals of the S&OP Process:

-Reduce Lead Times -Lower inventory -Improve responsiveness to changes in demand -Asset utilization -Improve customer service -New product introductions -Better management of trade spending in promotion management -Balance Supply with Demand

Production Planning Strategies: SUBCONTRACTING:

-Similar to chase strategy. -Hiring and laying off are translated into subcontracting and not subcontracting.

What is Sales & Operations Planning? (Part 2)

-The process consists of a series of meetings, finishing with a high-level meeting where key intermediate-term decisions are made. -The process integrates all business plans into a single set that meets all needs of the functions of the business. (APICS, 2012) --The end goal here is an agreement between various departments on the best course of action to achieve the optimal balance between supply and demand.

Purposes of Inventory:

-To maintain independence of operations. -To meet variation in product demand. -To allow flexibility in production scheduling. -To provide a safeguard for variation in raw material delivery time. -To take advantage of economic purchase orde size.

At the clinic - assign patients to appointment times:

-WHO IS CUSTOMER? -WHAT IS RESOURCE? -SOURCES OF VARIABLILTY --No shows --when patient shows up for appointment at 2:00 --Time patient spends with doctor --Emergency patients arrive. -BENEFITS --Patients get treatment -COSTS --Doctor and staff idle time --Patient waiting times --Overtime for doctors and staff.

Resource Allocation: FUNDAMENTALS:

-WHO IS THE CUSTOMER? -WHAT IS THE RESOURCE? -What are the constraints? --limit on the resource --requirements for the customer -What are the costs & benefits? --Benefit/cost of allocating resource to a customer --Penalties for NOT satisfying customer requirement. -Decision Variables --Assignments 𝑋_𝑖𝑗 of customer 𝑖 to resource 𝑗 -Objective Function --Minimize cost of assignment -Constraints --Capacity on resource --Minimum requirements for customers.

Questions to ask during S&OP?

-What information do I need to know? -What information should everyone else know about my department or area of responsibility? -What information should S&OP track to develop success in my area? -Where do I anticipate challenges in the future? -What are the unpredictable outcomes? --Asking these questions leads to sharing valuable information, which builds visibility and transparency, and leads to higher performing S&OP processes.

Challenges of S&OP (Add later)

Add later

Establishing Safety Stock Levels: SAFETY STOCK DEFINITION:

Amount of inventory carried in addition to expected demand. --Safety stock can be determined based on many different criteria.

Four Costs Relevant to the Aggregate Production Plan: COSTS ASSOCIATED WITH CHANGES IN THE PRODUCTION RATE:

Costs involved in hiring, training, and laying off personnel.

Inventory Costs: ORDERING COSTS:

Costs of placing an order.

Inventory Costs: SHORTAGE COSTS:

Costs of running out.

What else may be discussed? (S&OP Part 1)

Demand Review: 80% Supply Review: 69% Demand Consensus Review: 43% Product Rationalization Review: 24% Network Design Review: 5% Inventory Target Review: 44% Supplier Review: 15% Pre-S&OP for the Executive Team: 39% S&OP Executive Review: 61% Not Sure: 3%

Solve, EXERCISE, and Analyze Model:

Even if you are exhausted...exercise the model -Change INPUTS -Make service time very small -Make a CONSTRAINT very tight -Make a constraint very loose -Push the OBJECTIVE function -Alternative policies -Sensitivity

Four Costs Relevant to the Aggregate Production Plan: BASIC PRODUCTION COSTS:

Fixed and variable costs incurred in producing a given product type in a given time period (e.g. direct/indirect labor costs, regular/overtime compensation, etc.).

SINGLE-PERIOD INVENTORY MODEL EXAMPLE:

Go to INVENTORY MANAGEMENT (Part 1) SLIDE DECK.

Fixed-Time Period Model EXAMPLE and FORMULA:

Go to Inventory Management (Part 2) Slide Deck.

EXAMPLE OF RESOURCE ALLOCATION AND FORMULAS:

Go to Resource Allocation Slide Deck.

Modeling and Decision Making Process:

Identify Problem > Collect Data > Identify Modeling Assumptions > Develop Mathematical Model > Solve, exercise, and analyze model > Convert model outputs into action recommendations > Adopt and Implement recommendations > Monitor Outcomes. View slide for better visual.

Aggregate Planning Techniques: CUT-AND-TRY APPROACH:

Involves costing out various production planning alternatives and selecting the best one.

Aggregate Operations Plan:

Main purpose of the aggregate (operations) plan: To specify the OPTIMAL COMBINATION of product rate, workforce level, and inventory on hand.

Types of Planning: SHORT-RANGE PLANNING:

Planning which covers a period from one day to six months with daily or weekly time increments.

Types of Planning: LONG RANGE PLANNING:

Planning which focuses on a horizon greater than one year; Usually performed annually.

Types of Planning: INTERMEDIATE-RANGE PLANNING:

Planning which focuses on a period from 3 to 18 months; Time increments are weekly, monthly, or quarterly.

Inventory Systems Comparison:

SINGLE-PERIOD INVENTORY MODEL: -One time purchasing decision (e.g. vendor selling t-shirts at a football game) -Seeks to balance the costs of inventory overstock and under stock. MULTI-PERIOD INVENTORY MODELS: -Fixed-order quantity models --Event triggered (e.g. running out of stock) -Fixed-time period models --Time triggered (e.g. Monthly sales call by sales representative).

What is Sales & Operations Planning?

Sales and operations planning (S&OP) is a process that helps firms provide better customer service, lower inventory, shorten customer lead times, stabilize production rates, and give top management a handle on the business. -The process is designed to coordinate activities in the field with the manufacturing and service functions that are required to meet demand over time. -S&OP is a process that develops tactical plans based on managements strategic plans (APICS, 2012)

Who's involved in S&OP

Sales: 88.1% Marketing: 79.8% Production: 58.9% Logistics: 47.6% Finance: 67%

Inventory Models:

Single-Period Model Fixed Order Quantity Model Fixed Time Period Model

How is Aggregation Set Up within Supply and Demand?

Supply Side = Organized by Product Families. Demand Side = Organized by groups of customers.

Demand Types: INDEPENDENT DEMAND:

The demands for various items are UNRELATED TO EACH OTHER. --For example, a workstation may produce many parts that are unrelated but meet some external demand requirement.

Inventory Models: FIXED-TIME PERIOD MODEL:

The item is ordered at certain intervals of time.

Demand Types: DEPENDANT DEMAND:

The need for any one item is a DIRECT RESULT of the need for some other item. --Usually a higher-level item of which it is part.

Yield Management Definition:

The process of allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue or yield. --Can be a powerful approach to making demand more predictable.

Inventory System Definition:

The set of policies and controls that monitor levels of inventory. --Determines what levels should be maintained, when stock should be replenished, and how large orders should be.

Inventory Definition:

The stock of any item or resource used in an organization. --Includes: Raw materials, finished products, component parts, supplies, and work-in-process --Manufacturing inventory: Refers to items that contribute to or become part of a firm's product

End goal of S&OP:

To achieve the optimal balance between supply and demand.

1. Fixed-Order Quantity Model: Formula:

Total annual cost = Annual purchase cost + Annual ordering cost + Annual holding cost TC=DC+𝐷/𝑄 𝑆+𝑄/2 𝐻 TC=Total Annual Cost D=Actual Demand C=Cost Per Unit Q=Order Quantity S=Cost of placing an order (Setup Cost) H=Annual Cost of holding/storing one unit of inventory.

Aggregate Planning Techniques: LINEAR PROGRAMMING:

Use of mathematical analysis to determine an optimal plan.

Inventory Models: SINGLE-PERIOD MODEL:

Used when we are making a one-time purchase of an item.

Inventory Models: FIXED-ORDER QUANTITY MODEL:

Used when we want to maintain an item "in-stock," and when we restock, a certain number of units must be ordered.

Production Planning Strategies: STABLE WORKFORCE - VARIABLE WORK HOURS:

Vary the output by varying the # of hours worked through flexible work schedules or overtime.

Fixed-Order Quantity Model: Example:

View Inventory Management (Part 2) Slide Deck.

CUT AND TRY EXAMPLE:

View S&OP SLIDE (Part 1 & 2)

LINEAR PROGRAMMING EXAMPLE:

View S&OP SLIDES (Part 2)

Price/Service Duration Matrix:

View S&OP Slides (Part 2), Slide 21. -YIELD MANAGEMENT IS MOST COMMON WHEN PRICE IS VARIABLE AND DURATION IS PREDICTABLE.

Multi Period Models: Comparison: TABLE:

View Slide 4 on Inventory Management (Part 2) Slide Deck.

Aggregate Planning Techniques: SIMULATION:

What-if analysis using simulated demand to evaluate the effectiveness of alternative plans.

Aggregate Operations Plan: PRODUCTION RATE:

i.e. # of units completed per unit of time.

Aggregate Operations Plan: WORKFORCE LEVEL:

i.e. # of workers needed in a period.

Aggregate Operations Plan: INVENTORY ON HAND:

i.e. Inventory carried from previous period.