Supply Chain Management

Lecture 14
Outline
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
Measures of Forecast Error
Error measure Formula
E
t
Forecast Error F
t
- D
t
Bias
t
Bias
t
n=1
E
t
A
t
Absolute Deviation |E
t
|
MAD
n
Mean absolute deviation (1/n)*
n
t=1
A
t

TS
t
Tracking signal Bias
t
/ MAD
t
MAPE
n
Mean absolute percentage
error
(1/n)*
n
t=1
(A
t
/ D
t
)*100

MSE
n
Mean squared error (1/n)*
n
t=1
E
t
2
Measures of Forecast Error
Error measure Description
E
t
Forecast Error Forecast Demand
Bias
t
Bias Sum of errors
A
t
Absolute Deviation Absolute error
MAD
t
Mean absolute deviation Average of absolute error
TS
t
Tracking signal Bias
t
/ MAD
t
MAPE
n
Mean absolute percentage
error
Average of absolute percentage
error
MSE
n
Mean squared error Average of squared error
Measures of Forecast Error
Error measure Desired outcome / Use
E
t
Forecast Error Close to zero
Bias
t
Bias Close to zero
A
t
Absolute Deviation Close to zero
MAD
t
Mean absolute deviation STDEV(E
t
) ~ 1.25 MAD
t
TS
t
Tracking signal Stay within (-6, +6)

MAPE
n
Mean absolute percentage
error
Stay under 10% (30% not
uncommon)
MSE
n
Mean squared error VAR(E
t
) ~ MSE
t

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
Demand for Jacobs product in Pangea
Existing and new markets
Air conditioner
retrofit kit
Hardwood floor
laminates
Premium home
appliances
Premium home
appliances
Insulation
products
Demand
Average demand for Jacobs product in Pangea
Existing and new markets
0
20
40
60
80
100
120
1 145 289 433 577 721 865 1009 1153 1297 1441
0
20
40
60
80
100
120
140
1 145 289 433 577 721 865 1009 1153 1297 1441
0
2
4
6
8
10
12
14
16
18
1 142 283 424 565 706 847 988 1129 1270 1411
0
2
4
6
8
10
12
14
16
18
1 142 283 424 565 706 847 988 1129 1270 1411
0
2
4
6
8
10
12
14
16
18
1 142 283 424 565 706 847 988 1129 1270 1411
250
Assignment
Jacobs management would like to design a supply chain
network for Pangea. Its 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?
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
Serve region?
Production parameters

20
Production parameters
A factory must serve the region in which it is
located
300
Production parameters

20
20
20
20
20
Production parameters
You have $20,000,000 to design your network
The cost of building a factory is $500,000
regardless of the factory capacity
The cost of capacity is $50,000
20
5
500,000 + 5*50,000 =
$750,000
Production parameters
You have $20,000,000 to design your network
The cost of building a factory is $500,000
regardless of the factory capacity
The cost of capacity is $50,000
40
5
500,000 + 5*50,000 =
$750,000
20*50,000 =
$1,000,000
Transportation parameters
Finished drums are shipped from the factory
warehouse by mail to the customers
Factories may ship to all the regions in Pangea
Shipping time is 1 day independent of origin and
destination
To Calopeia To Sorange To Tyran To Entworpe To Fardo
From Calopeia 50 100 100 100 200
From Sorange 100 50 100 100 200
From Tyran 100 100 50 100 200
From Entworpe 100 100 100 50 200
From Fardo 200 200 200 200 50
Financial and Other Parameters
All customers pay $1450 per drum and the production cost
is $1200 per drum
The drum must be shipped within 24 hours of receiving
the order or the order is lost
Orders may be partially filled and one order may be filled
from multiple factories
Each factory has warehouse space to hold up to 500
finished drums
If warehouse space is used completely, the factory will remain idle
until warehouse space becomes available
Interest accrues on cash at 10% per year, compounded
daily
The Goal
Your network design will run from day 1 till day
1460
Investment in capital (such as new factories and
factory capacity) will become obsolete on day
1460
The winning team is the one with the
highest cash position on day 1460
From Forecasting to Planning
0
500
1000
1500
2000
2500
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
D
e
m
a
n
d
Forecast
Capacity
How should a company best utilize the
resources that it has?
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
Aggregate Planning
Aggregate planning involves aggregate decisions rather
than stock-keeping unit (SKU)-level decisions for a
medium term planning horizon (2-18 months)
All-Terrain
Vehicle (ATV)
Engine
Assembly
Transmission
Model A Model B Model C Automatic Manual
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
Importance of Aggregate Planning
Without a sufficiently long-term view one
may make short-term decisions that hurt
the organization in the long-term
Importance of Aggregate Planning
Aggregate planning at Henry Ford Hospital
involves matching available capacity, workers,
and supplies to a highly variable customer
demand pattern
Importance of Aggregate Planning
Aggregate planning at Henry Ford Hospital
involves matching available capacity, workers,
and supplies to a highly variable customer
demand pattern
903 beds arranged into 30 nursing units
Cost $5,000 of turning away a patient (simple cases)
Cost of one idle 8-bed module is $35,000/month or
$420,000/year
High degree of demand variability
Demand for beds could change by as many as 16% in less
than two weeks
Importance of Aggregate Planning




Shortly after Henry Ford Hospital reduced staff, it
determined the staff was needed
New staff was recruited
Both staff reduction and recruiting costs were incurred
Without a sufficiently long-term view one
may make short-term decisions that hurt
the organization in the long-term
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)
Generic tool, call it Shovel
Example: Aggregate planning at
RedTomatoTools
RedTomatoTools
A small manufacturer of gardening equipment
Shovels

Spades

Forks
Demand forecast
0
1,000
2,000
3,000
4,000
1 2 3 4 5 6
Inputs of an Aggregate Plan
Demand forecast in each period
Production costs
labor costs, regular time ($/hr) and overtime ($/hr)
subcontracting costs ($/hr or $/unit)
cost of changing capacity: hiring or layoff ($/worker) and cost of
adding or reducing machine capacity ($/machine)
Other costs
Labor/machine hours required per unit
Inventory holding cost ($/unit/period)
Stockout or backlog cost ($/unit/period)
Constraints
Limits on overtime, layoffs, capital available, stockouts and
backlogs
Example: Red Tomato Tools
Constraints
Workforce, hiring, and layoff constraints
Capacity constraints
Inventory balance constraints
Overtime limit constraints
Inventory at end of Period 6 is at least 500
Stockout at end of Period 6 equals 0
Example: Red Tomato Tools
Aggregate plan decision variables
t Ht Lt Wt Ot It St Ct Pt
Month Period Hired Laid off WorkforceOvertime Inventory Stockout Subcontract Production
December 0 0 0 80 0 1000 0 0
January 1 0 0 0 0 0 0 0 0
February 2 0 0 0 0 0 0 0 0
March 3 0 0 0 0 0 0 0 0
April 4 0 0 0 0 0 0 0 0
May 5 0 0 0 0 0 0 0 0
June 6 0 0 0 0 0 0 0 0
Table 8-1
Month Period Demand Price
January 1 1,600 40
February 2 3,000 40
March 3 3,200 40
April 4 3,800 40
May 5 2,200 40
June 6 2,200 40
Average Flow Time
Average flow time
Average time one unit spends in inventory


Average inventory
Throughput
Average flow time =
992
1775
1258
475
58
308
Average Inventory
Average Inventory = (0.5(I
0
+ I
1
) +
0.5(I
1
+ I
2
) +
0.5(I
2
+ I
3
) +
0.5(I
3
+ I
4
) +
0.5(I
4
+ I
5
) +
0.5(I
5
+ I
6
))/6

t It
Month Period Inventory
Decemb 0 0
January 1 1983
February 2 1567
March 3 950
April 4 0
May 5 117
June 6 500
Average Inventory
Average Inventory = (0.5I
0
+ 0.5I
1
+
0.5I
1
+ 0.5I
2
+
0.5I
2
+ 0.5I
3
+
0.5I
3
+ 0.5I
4
+
0.5I
4
+ 0.5I
5
+
0.5I
5
+ 0.5I
6
)/6

t It
Month Period Inventory
Decemb 0 0
January 1 1983
February 2 1567
March 3 950
April 4 0
May 5 117
June 6 500
0
1983
1567
950
0
117
250
Average Inventory
Average Inventory = (0.5I
0
+ 0.5I
6
+
I
1
+ I
2
+ I
3
+ I
4
+ I
5
)/6
= (0.5(I
0
+ I
6
) + I
1
+ I
2
+ I
3
+ I
4
+ I
5
)/6


t It
Month Period Inventory
Decemb 0 0
January 1 1983
February 2 1567
March 3 950
April 4 0
May 5 117
June 6 500
Average Flow Time
Littles Law
(

+ + = + =


= =

1
1
0
1
1
) (
2
1 1
) (
2
1 1
Inventory Average
T
t
t T
T
t
t t
I I I
T
I I
T

=
=
T
t
t
D
T
1
1
Throughput Average
Average inventory
Throughput
Average flow time =