Inventory & Supply Chain Management Prof. Apurva Jain

Transcription

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 4. Sourcing Identify medium-term mfg./inventory planning inputs and decisions Compute chase & level plans Optimize spreadsheet plan model Adjust and Modify Plan Improve Planning Process 1

2 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 Forecasting Sales and Operations Planning Production Scheduling 2

3 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 3

4 Demand and Supply Demand and Supply What planning decisions would you make? 4

5 Aggregate Planning Decision Medium-Term Operations Planning. Features: Medium-Term: usually up to 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-term Decisions/output: How much to produce in each time-bucket and how much inventory to carry? Aggregate Planning Costs Cost of producing in regular time: Labor cost & any other regular resource costs Needs how much resource time is needed to produce one unit Cost of producing extra: Sub-contract cost Cost of changing labor capacity by hiring/firing Overtime production costs Cost of inventory / backlog: Carrying or holding cost of inventory Stockout or backlog cost Objective: Minimize sum of relevant costs over the medium-term horizon while satisfying Constraints: limits on overtime, limits on hiring/firing, limits on supply 5

6 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 Level 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 inventory and produce exactly what is needed: Chase strategy. Pure Chase Production Policy cumulative demand cumulative month 6

7 Planning Trade-off: Chase and Level 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 inventory and 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. Pure Level Production Policy cumulative demand backorder cumulative production inventory month Chase & Level Plans Demand Forecast Forecast (lb) Cumulative Forecast (lb) Chase Plan Forecast Production Cumulative Forecast Cumulative Production Spring Summer Fall Winter Level Plan Forecast Production Cumulative Forecast Cumulative Production Spring Summer Fall Winter Forecast Production Cumulative Forecast Cumulative Production Mixed Plan Spring Summer Fall Winter Spring Summer Fall Winter 7

8 Planning Options Chase vs. Level: Summary 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 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-related Costs. Chase and Level are two ways to resolve this trade-off. 8

9 Example: Planning Inputs 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 worker Inventory Carrying Cost = $0.50 per pound per quarter Production per employee = 1000 pounds per quarter Beginning work force = 100 workers, Beginning Inventory=0. Quarter Spring Summer Fall Winter Sales Forecast (lb) Example: Chase Plan Targets are forecasts adjusted for beginning and ending inventory requirements. 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. Quarter Forecast Target Prodn. Rate Chase Workers Prod. Quantity Inven-tory Hired Fired Spring 80,000 Summer 50,000 Fall 120,000 Winter 150,000 Total Cost Total Cost = 1

10 Example: Level Plan Quarter Forecast Target Prodn. Rate Level Workers 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 There is a beginning inventory of 500 units and we wish to keep safety stock Of 500 units at the end of each quarter. Quarter Forecast Target Prodn. Rate Spring 80,000 Level Workers Prod. Quantity Inven-tory Hired Fired Summer 150,000 Fall 120,000 Winter 50,000 Total Cost Total Cost = 2

11 Level Workforce Calculation Computing level work force Assuming no shortages allowed. Level Production Plan Workers Needed in each Period = Cumulative Production till that Period divided by Cumulative 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 ( ) = Example: Chase & Level calculations Number of worker at the end of December = 300 Ending Inventory in December = 500 Plan inventory at the end of June = 600 Cost of hiring one worker = 500 Cost of firing one worker = 1000 Cost of holding one unit of inventory for one month = 80 Over 22 working days, with a workforce of 76 workers, the firm produced 245 disk drives. Forecast Days Jan Feb Mar Apr May Jun

12 Example: Chase & Level calculations Number of worker at the end of December = 300 Ending Inventory in December = 500 Plan inventory at the end of June = 600 Cost of hiring one worker = 500 Cost of firing one worker = 1000 Cost of holding one unit of inventory for one month = 80 Over 22 working days, with a workforce of 76 workers, the firm produced 245 disk drives. Forecast Days Jan Feb Mar Apr May Jun Chase & Level Formulas Target = forecast initial inventory at the beginning of first period Target = 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 ] 12

13 Example: A Better Plan There is a beginning inventory of 500 units and we wish to keep safety stock Of 500 units at the end of each quarter. Quarter Forecast Target Prodn. Rate Spring 80,000 Workers Prod. Quantity Inven-tory Hired Fired Summer 150,000 Fall 120,000 Winter 50,000 Total Cost Total Cost = 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 1

14 Formulating & Solving a Medium-Term Planning Problem Step 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) =0 Inventory 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)>=0 Others: 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 15

15 Candy Company Planning Problem Candy Company With OT, Backlog, Subcontracting Reg.+OT DecisionsHired Fired Workers Overtime InventoryBacklog Subcont. Prod. Worker Inventory Period Forecast Starting: 100 hours 0 Balance Balance Capacity Overtime Spring Summe Fall Winter Total: cost/unit: Cost: Total Cost Modify the LP to include following features one at a time. Decision Variables: Ht, Ft, Wt, Ot, It, Bt, St, Pt where t=1,2,3,4 Recall 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 Planning Problem Candy Company With OT, Backlog, Subcontracting Reg.+OT DecisionsHired Fired Workers Overtime InventoryBacklog Subcont. Prod. Worker Inventory Period Forecast Starting: 100 hours 0 Balance Balance Capacity Overtime Spring Summe Fall Winter Total: cost/unit: Cost: Total Cost 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? 16

16 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 Feb Mar Apr E May Jun Total: cost rate: Cost: Total Cost 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 perunit prices; used a weighted average. 17

17 Optimization Minimize (procurement + sawing + drying + outsourcing + market + transportation) Cost over the wood supply chain during the 52-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 in Total Cost 18

18 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 19

19 Big Picture: Improving Medium-Term Inventory Plan 1. 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 or subcontracting to satisfy demand? Should we incur backlogs or build extra inventory early and carry it over many periods? 20

20 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 levels or overtime or 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 21

21 Medium-Term Planning: Aggregation Why Aggregate? To mange the size of the problems To have better accuracy in forecast Aggregate products based on similarity in 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. 22

22 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 perunit 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. 23

23 Example: Frito-Lay Planning Horizon: 18 months Planning bucket: quarter Aggregation: Lay s, Doritos, Sun chips Cheetos, 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 the demand levels rather than capacity/inventory levels. Tool for changing demand levels: pricing. Decision: a pricing plan over medium-term. Aggregation: across different demand segments 24

24 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 Software Optimization ability is now available in ERP systems: Advanced Planning & Scheduling Systems (APS) SAS os/supplychain/demos/ JDA 25

25 Implementation: Selling Optimization Intuitive or rule-based planning is difficult and most likely leaves money on the table. In medium-term, aggregations and approximations help keep optimization simple and doable. Reasonably simple tools (spreadsheet) are available. User-friendliness of more sophisticated 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 26

26 Adjust & Modify: Variability Forecast is never right. There is always error. Demand Variability. How to guard ourselves against changes in forecast Safety Stock Extra Overtime Adjust & Modify: Flexibility / Resilience Medium-term plan is the an appropriate time to think about: Supply Disruption Risk. Mitigation strategies in medium-term: Flexible contracts Access to spot markets 27

27 Adjust & Modify: Influence Demand Matching Supply and Demand in medium-term. Can we influence demand?. Maximize revenue. How do we influence demand? Promotions Discounts Timing Depth Adjust & Modify: Influence Demand Matching 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 28

28 Adjust & Modify: Suppliers plans Customer s medium-term plan drives rolling 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 The direct benefits include tens of millions of dollars in savings for Intel, and a tenfold improvement in productivity for the suppliers personnel and the Intel personnel involved. Ref: Shirodkar. Interfaces

29 Example: Sony Electronics Collaboration on Medium-Term Planning Sony Electronics implementing a one number plan among sales, Finance, and supply chain organizations. Sony asked its retail partners to communicate sell-in and sell-through forecasts 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. Examples Infineon 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 the business groups of Doosan Corporation. Founded in 1974, the manufacturer focuses on the production of high-quality copper clad laminate (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 30

30 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 presented as 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 31

31 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 supply planning), to balance midterm to long-term demand and supply plans. As such, S&OP is a collaborative, multi-departmental discipline focused explicitly on balancing cost, investment and revenue. One key responsibility of an effective S&OP process is to help manage demand and supply changes 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 32

32 Process Improvement: Symptoms, Problems, Performance metrics. Step-by-Step workflow, who does what? Root cause / Improvement ideas / Best Practices. Continuous monitoring & Improvement. Leitax: Workflow before redesign: 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. 33

33 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 4. Sourcing Identify medium-term mfg./inventory planning inputs and decisions Compute chase & level plans Optimize spreadsheet plan model Adjust and Modify Plan Improve Planning Process 34