Inventory & Supply Chain Managementfaculty.washington.edu/apurva/443/Planning.pdf · 300 Cost of...
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1 Inventory & Supply Chain Management Prof. Apurva Jain Module 2: Session 5-8 Manufacturing Planning Module 2 Learning Objectives 1. Forecasting 2. Making 3. Delivering □ Identify medium-term mfg./inventory planning inputs and decisions □ Compute chase & level plans □ Optimize spreadsheet plan model □ Adjust and Modify Plan □ Improve Planning Process 4. Sourcing
Transcript of Inventory & Supply Chain Managementfaculty.washington.edu/apurva/443/Planning.pdf · 300 Cost of...
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Inventory & Supply Chain Management
Prof. Apurva Jain
Module 2: Session 5-8Manufacturing Planning
Module 2 Learning Objectives
1.Forecasting
2.Making
3.Delivering
□ Identify medium-term mfg./inventory planning inputs and decisions
□ Compute chase & level plans
□ Optimize spreadsheet plan model
□ Adjust and Modify Plan
□ Improve Planning Process
4.Sourcing
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Planning Slides Organization
1. Medium Term manufacturing Planning Decisions
2. Chase and Level Calculations
3. Optimization Model; Spreadsheet
4. Big picture & Implementation Issues
5. Adjustments and Modifications
6. Forecasting & Planning process Improvements
Hierarchy of Mfg. Planning Decisions
Network Design
Sales and Operations Planning
Forecasting
ProductionScheduling
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A Typical Planning Problem
Shermag Inc., with revenues of $170 million (2007),is one of the largest Canadian producers of hardwood household furniture and is among the leaders in this market in North America.
Up to 70% of its sales revenue is from US market.
Fierce competition from Asian manufacturers.
Ref: M.Ouhimmou, Interfaces 39(4),2009
Shermag Supply Chain
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Demand and Supply
Demand and Supply
What planning decisions would you make?
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Aggregate Planning DecisionMedium-Term Operations Planning.
Features: Medium-Term: usually up to 18-24 months; not day-to-day
Unit of planning: aggregated unit across similar items; not at each sku
Planning-bucket: usually month or even quarter
Inputs: Periodic demand targets in medium-termDecisions/output: How much to produce in each time-bucket and how
much inventory to carry?
Aggregate Planning CostsCost of producing in regular time:
Labor cost & any other regular resource costsNeeds how much resource time is needed to produce one unit
Cost of producing extra:Sub-contract costCost of changing labor capacity by hiring/firingOvertime production costs
Cost of inventory / backlog:Carrying or holding cost of inventoryStockout or backlog cost
Objective: Minimize sum of relevant costs over the medium-term horizonwhile satisfyingConstraints: limits on overtime, limits on hiring/firing, limits on supply
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Planning Slides Organization
1. Medium Term manufacturing Planning Decisions
2. Chase and Level Calculations
3. Optimization Model; Spreadsheet
4. Big picture & Implementation Issues
5. Adjustments and Modifications
6. Forecasting & Planning process Improvements
Planning Trade-off: Chase and LevelThere is a trade-off between changing production levels and carrying inventory.
One extreme way to resolve this trade-off is to never carry any inventoryand produce exactly what is needed: Chase strategy.
Pure Chase Production Policy
1 2 3 4 5 6 7 8 9 10 11 12month
cumulative demand
cumulative
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Planning Trade-off: Chase and Level
Pure Level Production Policy
1 2 3 4 5 6 7 8 9 10 11 12month
cumulative demand
cumulative production
invento ry
backo rder
There is a trade-off between changing production levels and carrying inventory.
One extreme way to resolve this trade-off is to never carry any inventoryand produce exactly what is needed: Chase strategy.
Another extreme will be to never change production levels but meet excess demand by building and carrying inventory: Level strategy.
Chase & Level Plans
Spring Summer Fall Winter
Forecast (lb)Cumulative Forecast (lb)
Demand Forecast
Spring Summer Fall Winter
ForecastProductionCumulative ForecastCumulative Production
Chase Plan
Spring Summer Fall Winter
ForecastProductionCumulative ForecastCumulative Production
Level Plan
Spring Summer Fall Winter
ForecastProductionCumulative ForecastCumulative Production
Mixed Plan
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Planning Options
Chase vs. Level: Summary
To summarize, aggregate planning is a medium-term operations decision to determine periodic production and inventory levels while resolving the trade-off between costs of changing capacity and inventory-relatedCosts. Chase and Level are two ways to resolve this trade-off.
Chase Approach
Advantages
– Investment in inventory is low
– Labor utilization in high
Disadvantages
– The cost of adjusting output rates and/or workforce levels
Level Approach
Advantages
- Stable output rates and workforce
Disadvantages
- Greater inventory costs- Greater backlog costs
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Example: Planning Inputs
Quarter Spring Summer Fall Winter
Sales Forecast (lb)
80000 50000 120000 150000
The Good and Rich Candy Company makes a variety of candies in three factories worldwide. Its line of chocolate candies exhibits a highly seasonal demand pattern, with peaks during the winter months (for holiday season and Valentine’s day) and valleys during the summer months (when chocolate tends to melt and customers are watching their weight). Given the following costs and quarterly sales forecasts, create a production plan.Hiring Cost = $100 per worker Firing Cost =$500 per workerInventory Carrying Cost = $0.50 per pound per quarterProduction per employee = 1000 pounds per quarterBeginning work force = 100 workers, Beginning Inventory=0.
Example: Chase Plan
Quarter Forecast Target Prodn.Rate
ChaseWorkers
Prod.Quantity
Inven-tory Hired Fired
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000
Total
Cost
Total Cost =
Production Rate is one employee’s capacity in each time-bucket (quarter).If each time-bucket has different days, production rate can be different in each quarter.
Targets are forecasts adjusted for beginning and ending inventory requirements.
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Example: Level Plan
Quarter Forecast Target Prodn.Rate
LevelWorkers
Prod.Quantity
Inven-tory Hired Fired
Spring 80,000
Summer 50,000
Fall 120,000
Winter 150,000
Total
Cost
Total Cost =
Example: Level Plan
Quarter Forecast Target Prodn.Rate
LevelWorkers
Prod.Quantity
Inven-tory Hired Fired
Spring 80,000
Summer 150,000
Fall 120,000
Winter 50,000
Total
Cost
Total Cost =
There is a beginning inventory of 500 units and we wish to keep safety stockOf 500 units at the end of each quarter.
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Level Workforce CalculationComputing level work force Assuming no shortages allowed.
Level Production Plan Workers Needed in each Period =Cumulative Production till that Period divided byCumulative Production by 1 worker till that period
Level Work Force = MAX (Workers needed in each period)
Period 1 =
Period 2 =
Period 3 =
Period 4 =
Level Work Force Needed = Max of ( ) =
Number of worker at the end of December = 300
Cost of hiring one worker = 500
Ending Inventory in December = 500
Cost of firing one worker = 1000
Plan inventory at the end of June = 600
Cost of holding one unit of inventory for one month = 80Over 22 working days, with a workforce of 76 workers, the firm produced 245 disk drives.
Forecast Days
Jan 1280 20
Feb 640 24
Mar 900 18
Apr 1200 26
May 2000 22
Jun 1400 15
Example: Chase & Level calculations
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Number of worker at the end of December = 300
Cost of hiring one worker = 500
Ending Inventory in December = 500
Cost of firing one worker = 1000
Plan inventory at the end of June = 600
Cost of holding one unit of inventory for one month = 80Over 22 working days, with a workforce of 76 workers, the firm produced 245 disk drives.
Forecast Days
Jan 1280 20
Feb 640 24
Mar 900 18
Apr 1200 26
May 2000 22
Jun 1400 15
Example: Chase & Level calculations
Chase & Level FormulasTarget = forecast – initial inventory at the beginning of first periodTarget = forecast + ending inventory required at the end of horizon
Chase workers in a period = target / (production rate in units per worker per period)Usually rounded up
Production: usually maximum production by workers available in that period(practically, can be less)
Inventory at the end of a period = inventory at the end of previous period+ production in this period – forecast for this period
Number of hires = Max (workers this period – workers previous period, 0)Number of fires = Max (workers previous period – workers this period, 0)
Level workers in all periods (you can hire/fire once at the beginning)= Max [ (cumulative target / cumulative production rate) in each period ]
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Example: A Better Plan
Quarter Forecast Target Prodn.Rate
Workers Prod.Quantity
Inven-tory Hired Fired
Spring 80,000
Summer 150,000
Fall 120,000
Winter 50,000
Total
Cost
Total Cost =
There is a beginning inventory of 500 units and we wish to keep safety stockOf 500 units at the end of each quarter.
Planning Slides Organization
1. Medium Term manufacturing Planning Decisions
2. Chase and Level Calculations
3. Optimization Model; Spreadsheet
4. Big picture & Implementation Issues
5. Adjustments and Modifications
6. Forecasting & Planning process Improvements
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Formulating & Solving a Medium-Term Planning ProblemStep 1: Record all inputs. forecasts, costs, starting values, and production-rates.
Step 2: decision variables in each period: number of hirings & firings, workers, overtime hours, inventory, backlog, subcontract, regular & overtime production.
Step 3: Develop a calculation for the total cost based on decision variables and inputs.
Step 4: Identify various constraints:Worker balance: (workers) - (previous period's workers + hiring - firing) =0Inventory balance: (inventory - backorders) - (previous period's inventory - previous
periods' backorders + regular & overtime production + subcontract quantity -forecast) = 0
Capacity: (workers* production rate per worker per period) + (overtime hours * production rate per worker per hour) - (regular & overtime production) >=0
Overtime: (maximum overtime hours allowed) - (overtime hours)>=0Others: usually referring to inventory and backorder levels at the end of the horizon
or any other supply or capacity constraints.
Step 5: Enter it in solver and solve.
Planning Problem Formulation
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Candy Company Planning Problem
Modify the LP to include following features – one at a time.Decision Variables: Ht, Ft, Wt, Ot, It, Bt, St, Pt where t=1,2,3,4Recall that production rate is 1000 units per worker per quarter. Worker cost $10 per hr. Overtime is 1.5 times that. Focus on second-period constraints.
Recall that production rate is 1000 units per worker per quarter. Using standard assumptions, what is the capacity constraint?
Suppose we wish to impose an upper limit of 10% of demand on number of backlog units allowed in a period?
Suppose we do not wish more than 5% of workers in any quarter to be fired?
Candy Company
With OT, Backlog, Subcontracting Reg.+OT
Decisions Hired Fired Workers Overtime InventoryBacklog Subcont. Prod. Worker Inventory
Period Forecast Starting: 100 hours 0 Balance Balance Capacity Overtime
Spring 80000 0 20 80 0 0 0 0 80000 0 0 0 800
Summe 50000 0 0 80 0 30000 0 0 80000 0 0 0 800
Fall 120000 10 0 90 0 0 0 0 90000 0 0 0 900
Winter 150000 60 0 150 0 0 0 0 150000 0 0 0 1500
Total: 70 20 400 0 30000 0 0 400000
cost/unit: 100 500 4800 15 0.5 2 5
Cost: 7000 10000 1920000 0 15000 0 0 0
Total Cost 1952000
Candy Company Planning Problem
Suppose the subcontractor makes an offer to charge $1 per unit up to the first 10 units and $5 for any unit beyond that, how can we incorporate that in the program?
If there is one period lead time; that is work carries out in one period results in finished goods in next period, how can we incorporate that?
If there is a learning curve, that is, for example, newly hired workers take one period before they achieve full production rate, how do we incorporate that?
There are sometimes significant set up times between batches. How can that be included?
Candy Company
With OT, Backlog, Subcontracting Reg.+OT
Decisions Hired Fired Workers Overtime InventoryBacklog Subcont. Prod. Worker Inventory
Period Forecast Starting: 100 hours 0 Balance Balance Capacity Overtime
Spring 80000 0 20 80 0 0 0 0 80000 0 0 0 800
Summe 50000 0 0 80 0 30000 0 0 80000 0 0 0 800
Fall 120000 10 0 90 0 0 0 0 90000 0 0 0 900
Winter 150000 60 0 150 0 0 0 0 150000 0 0 0 1500
Total: 70 20 400 0 30000 0 0 400000
cost/unit: 100 500 4800 15 0.5 2 5
Cost: 7000 10000 1920000 0 15000 0 0 0
Total Cost 1952000
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Red Tomato Planning Formulation
Decisions: Hired Fired Workers Overtime Inventory Backlog Subcont. Prod. Worker Inventory
Period Forecast Starting: 80 hours 1000 Balance Balance Capacity Overtime
Jan 1600 0 16 64 0 1960 0 0 2560 0 0 0 640
Feb 3000 0 0 64 0 1520 0 0 2560 0 0 0 640
Mar 3200 0 0 64 0 880 0 0 2560 0 0 0 640
Apr 3800 0 0 64 0 0 220 140 2560 0 ‐7E‐13 0 640
May 2200 0 0 64 0 140 0 0 2560 0 0 0 640
Jun 2200 0 0 64 0 500 0 0 2560 0 0 0 640
Total: 0 16 384 0 5000 220 140 15360
cost rate: 300 500 640 6 2 5 30 10
Cost: 0 8000 245760 0 10000 1100 4200 153600
Total Cost 422660
Why do we have balance constraints?
How does capacity constraint work?
Example: Shermag Planning
Planning decisions:What is the annual volume of raw material to be procured from each kiln?What is the inventory level of each product in each business unit?
Additional decisions:What are the supply and demand allocation policies?What proportion of sawing and drying should be outsourced?
Aggregation: all dining tables treated as one;…
Approximation: different suppliers offer different per-unit prices; used a weighted average.
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Optimization
Minimize (procurement + sawing + drying + outsourcing + market + transportation) Costover the wood supply chain during the52-week planning horizon
subject to• Raw material supplier capacity constraints,• Sawmill and kiln capacity constraints,• Sawmill and kiln setup constraints,• Flow-conservation constraints, and• Furniture mill demand constraints.
Results
22%Reduction inTotal Cost
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Results
Planning Slides Organization
1. Medium Term manufacturing Planning Decisions
2. Chase and Level Calculations
3. Optimization Model; Spreadsheet
4. Big picture & Implementation Issues
5. Adjustments and Modifications
6. Forecasting & Planning process Improvements
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Big Picture: Improving Medium-Term Inventory Plan1. Improve forecast accuracy by using spreadsheet models, judgment,and using errors to improve the method.
2. Gather relevant costs & inputs that will help focus on changing capacity (chase) vs. changing inventory (level) trade-off.
3. Set up a spreadsheet model for total cost evaluation. Optimize, if possible.
4. Improve / Adjust / Modify the plan to incorporate issues that not modeled above.
5. Focus on the forecasting and planning process improvements and best practices.
Adding other real costs
Material cost: Cost per unit produced.
Labor cost: Cost per worker per period.trade-off: Should we carry idle workers or fire/hire them?Production can be less than total capacity (idle workers).
Overtime cost: Cost per worker per overtime hour.trade-off: Should we have fewer workers and incur some overtime?Number of overtime hours are usually limited by a fraction of regular hours.
Subcontract cost: Cost per unit purchased.trade-off: Should we produce on overtime or subcontract?
Backlog cost: Cost per unit of unsatisfied demand per period. Unsatisfied demand must be met in future.trade-off: Should we incur backlogs or use more regular workers or OT orsubcontracting to satisfy demand? Should we incur backlogs or build extra inventory early and carry it over many periods?
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Possible trade-offs to resolve:
Regular labor cost vs. Changing labor levels:
Overtime vs. Higher regular labor cost
Subcontract vs. Higher regular + OT capacity
Holding inventory vs. changing labor levelsor overtimeor subcontract
Costs & Inputs: Implementation Issues
1. too many SKUs
2. Different information from different sources
3. Demand ranges and demand scenarios
4. Other capacity flexibility options
5. Accuracy of data, uncertainty in cost data.
Aggregation
&
Approximation
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Medium-Term Planning: Aggregation
Why Aggregate?
To mange the size of the problemsTo have better accuracy in forecast
Aggregate products based on similarityin resources & inventory costs.
Medium-Term Planning: Approximation
Ignore the day-to-day resource scheduling.
Ignore the day-to-day inventory level changes.
Ignore short Lead times.
Weighted-Average of costs.
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Example: Shermag Planning
Planning decisions:What is the annual volume of raw material to be procured from each kiln?What is the inventory level of each product in each business unit?
Additional decisions:What are the supply and demand allocation policies?What proportion of sawing and drying should be outsourced?
Aggregation: all dining tables treated as one;…
Approximation: different suppliers offer different per-unit prices; used a weighted average.
Example: Welch’s Planning
Dynamic, uncertain demand.
Production lines that each produce two families of products.
Large setup times between families, low setup times between items.
Six month horizon.Run every two months.
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Example: Frito-Lay Planning
Horizon: 18 monthsPlanning bucket: quarter
Aggregation: Lay’s, Doritos, Sun chipsCheetos, Tostitos
(based on similarity of production resources)
Approximation: set up cost & time spread over a standard batch size
Decision: production & inventory levels
Additional issues: Sourcing constraints
Example: Hotel Yield management
In industries like Hotels,inventory (rooms) is fixed.
To match demand and supply in medium-term,we need to focus on changing thedemand levels rather than capacity/inventory levels.
Tool for changing demand levels: pricing.
Decision: a pricing plan over medium-term.
Aggregation: across different demand segments
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Example: Rental Cars
A combination where both demand and supply can be matched.
In medium-term horizon, it is possible to change inventory levels.
No production but sourcing options must be considered.
Aggregation: across different car types;across similar customer segments.
Implementation: Optimization SoftwareOptimization ability is now available in ERP systems:
Advanced Planning &Scheduling Systems (APS)
SAShttp://support.sas.com/sassamples/demos/supplychain/demos/
JDAhttp://www.jda.com/solutions/sales-operations-planning-overview/
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Implementation: Selling OptimizationIntuitive or rule-based planning is difficult and most likely leaves money on the table.
In medium-term, aggregations and approximations help keep optimizationsimple and doable.
Reasonably simple tools (spreadsheet)are available.
User-friendliness of moresophisticated tools is increasing.
It is likely that another firm in your industry is optimizing.
Planning Slides Organization
1. Medium Term manufacturing Planning Decisions
2. Chase and Level Calculations
3. Optimization Model; Spreadsheet
4. Big picture & Implementation Issues
5. Adjustments and Modifications
6. Forecasting & Planning process Improvements
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Adjust & Modify: VariabilityForecast is never right.
There is always error.
Demand Variability.
How to guard ourselves against changes in forecast
Safety Stock
Extra Overtime
Adjust & Modify: Flexibility / ResilienceMedium-term plan is the an appropriatetime to think about:
Supply Disruption Risk.
Mitigation strategies in medium-term:
Flexible contracts
Access to spot markets
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Adjust & Modify: Influence DemandMatching Supply and Demand in medium-term.
Can we influence demand?. Maximize revenue.
How do we influence demand?
Promotions
Discounts
Timing
Depth
Adjust & Modify: Influence DemandMatching Supply and Demand in medium-term.
Can we influence demand?. Maximize revenue
How do we influence demand?
Advertising: Different Modes
Sales Incentives Trade shows
Substitution Complementary products
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Adjust & Modify: Suppliers’ plansCustomer’s medium-term plan drivesrolling forecasts in supplier contracts
Is it a good plan for the supplier?
.
How do we plan collaboratively?
Include large suppliers in optimization
Ask for rules that can be used as constraints
Share early, share often
Example: Intel
Ref: Shirodkar. Interfaces 2006
The direct benefits include … tens of millions of dollars in savings for Intel, and a tenfold improvementin productivity for the suppliers’ personnel and the Intel personnel involved.
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Example: Sony Electronics
Sony Electronics…implementinga “one number” plan among sales,Finance, and supply chain organizations.
Sony asked its retail partners to communicate sell-in and sell-throughforecasts for a longer horizon and created a new common planning platform leading to a “one number”plan with its customers.
Sony then shared this plan each week with its factory suppliers who used it to develop production and shipment schedules.
Collaboration on Medium-Term Planning
ExamplesInfineon Technologies AG offers semiconductor and system solutions addressing three central challenges to modern society: energy efficiency, mobility and security. In the 2012 fiscal year, Infineon reported sales of €3.9 billion. The company employs more than 26,000 employees at its 12 production facilities and more than 20 R&D locations worldwide. Known for its innovative technologies, Infineon has more than 17,000 patents and patent applications.
• Reduced planning effort by 30 percent• Decreased planning errors up to 90 percent• Reduced forecast adjustments by a factor of 10
Doosan Electro-Materials is one of thebusiness groups of Doosan Corporation.Founded in 1974, the manufacturer focuseson the production of high-quality copper cladlaminate (CCL) electronic components.Revenues: 17 trillion KRW ($15.9 billion)Number of Employees: 37,500• Reduced raw material inventory by 58 percent• Reduced global inventory by 40 percent• Decreased factory inventory by 65 percent
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Example: How would you proceed?You are invited as a consultant to a auto component manufacturing firm that makes windshield wipers (and other external body maintenance products) and sells to OEMs as well as directly to aftermarket. The main issue is presentedas fluctuation in inventory levels across the year and high level of overtime. Suppliers complain about uneven ordering levels from the firm and customers, at least once a year, run into backlogs. The main competitor has a aggressive price discounting policy in the aftermarket.
Planning Slides Organization
1. Medium Term manufacturing Planning Decisions
2. Chase and Level Calculations
3. Optimization Model; Spreadsheet
4. Big picture & Implementation Issues
5. Adjustments and Modifications
6. Forecasting & Planning process Improvements
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Sales & Operations Planning Process
Many product-centric companies have some form of S&OP process. As a supply chain concept,S&OP has been around for about 20 years and is used as the consensus management process,layered on top of operational-planning processes (for example, demand planning and supplyplanning), to balance midterm to long-term demand and supply plans. As such, S&OP is acollaborative, multi-departmental discipline focused explicitly on balancing cost, investment andrevenue.
One key responsibility of an effective S&OP process is to help manage demand and supplychanges coherently across a supply chain by applying optimization and trade-off analyses to a single version of the "truth." It is also essential in getting the interested parties "talking together" and to re-validate the assumptions underpinning the various operational plans. An effective S&OP process is used especially to manage changes in these plans and to evaluate different scenarios for varying degrees of change in the plans. Operations is a key stakeholder in any S&OP process, but the IT department has a key role in ensuring that the relevant data and information are available to support the S&OP cycle.
Ref: Gartner Report
Sales and Operations Planning Software
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Leitax: Workflow before redesign:
Process Improvement:Symptoms, Problems, Performance metrics.Step-by-Step workflow, who does what?Root cause / Improvement ideas / Best Practices.Continuous monitoring & Improvement.
What were the problems with the process before redesign?
Leitax: Workflow after redesign:
What are the features and best practices of the redesigned Consensus forecasting process?
Main case take-away: a set of best practices.
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Missteps with SF-6000, Shoot XL/Optix-R :
What went wrong in the process?How can it be further improved?
Module 2 Learning Objectives
1.Forecasting
2.Making
3.Delivering
□ Identify medium-term mfg./inventory planning inputs and decisions
□ Compute chase & level plans
□ Optimize spreadsheet plan model
□ Adjust and Modify Plan
□ Improve Planning Process
4.Sourcing
