Module 11.02 Key Concept: Aggregate Demand and Supply Planning Methods
Many company leaders think of Demand Planning as a passive activity. Companies offer “stuff” for sale and customers purchase at will. Customer demand must be forecast but the selling company has no control over when and how much the customer will buy so forecasts are tentative at best. Is this really true? Actually selling companies have a great deal of control over demand. Marketing campaigns, product portfolio management, time to market management, customer service management, distribution strategy development and execution, all impacts product / service demand.
Once the Demand Plan is developed, a Supply Planning strategy must be decided and implemented. We already discussed different manufacturing environments: Make-to-Stock, Make-to-Order, Assemble-to-Order and Engineer to Order. In the case of Make-to-Stock, supply planners are developing forward plans to meet forecasted sales and inventory targets. In the case of the other three strategies, planners are developing forward plans to support forecasted sales with raw materials, components and capacity, and they are managing customer backlog. From a Sales & Operations Planning Perspective, Make-to-Stock teams create a demand plan, a supply plan, and an inventory plan for each product family. For other environments teams create a demand plan, a supply plan and a backlog plan for each product family.
- Should inventories be used to absorb changes in demand?
- Should changes be accommodated by varying the size of the workforce?
- Should part-timers, overtime, or idle time be used to absorb changes?
- Should subcontractors be used and maintain a stable workforce?
- Should prices or other factors be changed to influence demand?
If there are imbalances then different options are available.
Demand can be influenced by using advertising or promotion to increase demand in low periods. This represents an attempt to shift demand to slow periods but may not be
There are two basic strategies for balancing supply with demand:
Chase–production: Supply output is changed to match sales quantities. Since demand is dynamic, this means that supply plans vary each period. This approach minimizes changes in inventory but can have significant negative impact on production efficiency and cost if production flexibility is difficult to achieve.
Level–production: Supply output is constant from period to period. This optimizes production / supplier efficiency but can result in large variations in inventory as it is built up and depletion over time. A level production strategy may result in high safety stocks in order to meet customer delivery expectations.
A Mixed strategy (combination of chase and level) and sub-contracting are often used to result in acceptable levels of flexibility and inventory / backlog. There are many different possible mixing strategies and it may be difficult to determine the optimal approach,
A usual output of the Sales and Operations Planning Process is a spreadsheet that expands out, on a rolling bases, 18 months or more in the future. The length of the planning horizon depends on the basic strategy of the business and the time to secure / expand key resources (i.e. production assets.) The spreadsheet consists of a Demand Plan, a Production Plan and an Inventory Plan (for Make-to-Stock businesses). The text shows a very basic example of the components of such a spreadsheet. Alternate Production Strategies are then shown to achieve the ending inventory objective.
Many organization chose a Make-to-Order strategy rather than Make-to-Stock. In this case:
- Products are made to customer specifications
- The customer is willing to wait for completion
- Generally products are more expensive to make and/or store
- Several options are often available
- Company often monitors a backlog of unfilled customer orders rather than inventory
The same approach is applied in a Make-to-Order environment but instead of an Inventory Plan the S&OP creates a Backlog Plan.
The text provides a Graphical Approach as an alternate. Graphical methods are practical because they are easy to understand and use. A trial-and-error approach may not guarantee an optimal solution but requires only limited computations.
- Determine the demand for each period
- Determine the capacity for regular time, overtime, and subcontracting each period
- Find labor costs, hiring and layoff costs, and inventory holding costs
- Consider company policy on workers and stock levels
- Develop alternative plans and examine their total cost
So, here we have a fairly simple example of trying different strategies and optimizing based on a single parameter – lowest total cost. If you review the example you can see that we are balancing the cost of changes in inventory with a level production planning approach vs. the cost of changing production capacity (usually people but can be equipment as well) with a chase type of strategy.
More complex mathematical models can also be employed in simulation mode to test different solutions vs. multiple parameters. Linear programing is one of these approaches that is available in sophisticated information management systems and can even be accomplished in Excel for simple models. The text provides an example of the use of Linear Programing to optimize based on transportation. This approach produces an optimal plan and works well for inventories, overtime, subcontracting. It does not work when nonlinear or negative factors are introduced – other models will need to be applied.