Integrated Distribution & Production Planning (DP/PP) EIN 5346 Logistics Engineering Fall, 2015 Integrated Distribution & Production Planning (DP/PP) EIN 5346 Logistics Engineering Fall, 2015

Integrated Distribution Planning & Production Planning (DP/PP) Theories & Concepts Integrated Distribution Planning & Production Planning (DP/PP) Theories & Concepts

SCM Overview SCM aims at managing and optimizing the information flow and the material flow through a network of suppliers, manufacturers, distributors, and customers.

SCM Overview

Traditionally, distribution planning and production planning are carried out, independent of each other. Each seeks its own local optimum. In SCM, distribution planning and production planning decisions should be integrated to promote global optimum. This integrated distribution and production planning aims at : 1)Reducing costs for sourcing products and raw materials, 2)Improving customer service, 3)Dramatically reducing on-hand stocks, and 4)Making better use of company resources.

An Integrated DP/PP Problem An integrated DP and PP problem: Suppose a supply chain system: 1. Two distribution centers (XXW1 and XXW2) 2. Two plants (XX01 and XX02). 3. Two finished products: GIN and KORN. - GIN produced in both plants XX01 and XX02, - KORN only produced in plant XX One semi-finished good: ALC - used by both finished products - only produced in plant XX01 - can be sent from the plant XX01 to XX DC XXW1 supplied from both plants XX01 to XX02 6. DC XXW2 supplied only by XX02 (see the Figure 10.1) This is a classical transportation problem.

An Integrated DP/PP Problem

Some planning decisions include: 1. Determine the source for warehouse XXW1: Procure GIN from XX01 or XX02, depending on the load in plants XX01 and XX02. 2.Prioritize production for plant XX02: Produce GIN for both warehouses XXW1 or XXW2, depending on whether XX01 has the capacity to supply additional quantities to XXW1. Produce GIN or KORN, depending on the product priorities. 3. Handle ALC: to ship ALC to XX02 or process it in XX01, depending on the production costs, the market and the product priorities and the demand structure in XX Balance loads for GIN between plants XX01 and XX02 depending on the production costs, the lot size dependent production costs and the capacity extension costs and possibilities. 5. Make trade off To optimize the lot size that strikes a balance between set-up cost and storage cost, while improving sales flexibility.

SNP Optimiser Objective: SNP optimiser is to plan the entire supply chain (i.e., from distribution, production to procurement) at optimal costs by modelling the complete supply chain as linear equations and solve them by linear programming (LP) or mixed integer linear programming (MILP). The difference between the two (LP and MILP) lies in the consideration of discrete decisions, as lot size intervals.

SNP Optimiser Objective function: Min {  product [(D –S) * Penalty + S * Cost supplychain ]} where D: the total demand quantity; S: total supply quantity (which is product and location dependent). The supply chain costs contain cost for 1) production, 2) procurement, 3) transport, 4) storage and 5) handling. The penalties are cost for lateness, non-delivery and safety stock violation.

SNP Optimiser The constraints for the plants are: P GIN-XX01 <= C GIN-XX01 P GIN-XX02 + P KRON-XX02 <= C GIN-KRON-XX02 P GIN-XX02 <= C GIN-XX02 P KRON-XX02 <= C KRON-XX02 P ALC-XX01 <= C ALC-XX01 P GIN-XX01 + P GIN-XX02 + P KRON-XX02 <= BOM Ratio * P ALC-XX01 Where P: is the produced quantity, C: is the production capacity.

SNP Optimiser P GIN-XX01 + P GIN-XX02 + P KRON-XX02 <= BOM Ratio * P ALC-XX , x x x 10 <= 9,500

Costs for SNP Optimiser 1. Supply chain costs are maintained in the master data for product, PDS, PPM, resource capacity variant and transportation lane. 2. Storage costs are calculated as stock quantity multiplied by the number of time buckets (or in addition, multiplied by the number of days per bucket), according to the setting. 3. SNP optimiser takes the production, transport, storage and handling costs into account for global optimization. The most critical issue in using the SNP optimiser is the appropriate maintenance of the costs. For example, if storage costs are too high, it may result in no production at all, because supply chain costs exceed the penalties for non-delivery or permanent transport

Penalty for SNP Optimiser 1. Penalty for delay and non-delivery are maintained in the product master, for three demand types, corresponding to the demand priorities (set in the optimiser profile per demand type): Type 1: customer demand, Type 5: corrected forecast demand, and Type 6: forecast demand. 2.Penalty costs for safety stock are defined with the number of stock-out days.

Constraints for SNP Optimiser Constraints for optimisation are demand, capacities, material availability and the production and stock transfer horizons. The user may define a priority for each demand type. The user may also set priority in the optimiser profile.

SNP Optimiser By setting these costs, penalties, and constraints, we can model for decisions such as: Extend production capacity in a plant or procure from a different plant considering increased production and transport costs, Extend production capacity in a plant or procure externally Switch to a more expensive transport method to speed up the transportation, Switch to another source if a transport capacity is already consumed, and Produce and ship just in time to minimise storage costs. The more sourcing alternatives exists, the more complicated the planning problem becomes.

Capable-to-Match (CTM) Capable-to-match (CTM) is an APO tool to perform DP/PP interactively. CTM is a heuristic approach; it does not optimize. CTM planning is a first-come, first-serve heuristic; as a result, shortages may occur to late comers. CTM approach usually applies when demand priorities (e.g. demand type, customer priorities, product priorities) exists There is no re-planning for the created orders for other demands.

Capable-to-Match (CTM) CTM Procedure: 1.Prioritize demands and orders, and categorize supplies (production and/or stocks), according to the planning mode and the search strategy; 2.Load the master data and the transaction data (demands and orders) into CTM engine; 3.Run CTM to match demands with supplies in a location- by-location procedure. All supply categories and the production are taken into account for each location, according to the search strategy.

CTM Categorisation and Search Strategy The search strategy defines the sequence for supplies to match demands. All the planning steps defined in the search strategy – the matching of supplies and the production – are carried out location-by-location. The sequence of the locations is determined by the priorities (see Figure 10.12), where the location SOURCE1 has a higher priority than SOURCE2, so first all the planning steps are performed for the location SOURCE1. Production is only able to cover one demand.

Supply and Demand Matching – Search Strategy

CTM Planning CTM takes into account, the transportation lane priority, the location priority, and the product priority; and uses them to make decisions as shown in Figure The transportation lane priority is used for sourcing decisions. The location and product priorities become significant when shortage occurs (in which the demand with the highest priority is considered first).

Priorities for CTM

Integrated Distribution & Production Planning SAP Implementation Integrated Distribution & Production Planning SAP Implementation

Maintain Distribution Definitions in SCM System

Define Transfer of SNP Orders in SCM System

Lab 5: Exercises: ( Due date: 12/12/2015) Questions 1 and 5 by team, 1. Create transportation lanes in SCM system 1) Create transportation lane from plant to DCs and assign materials 2) Mass generate transportation lanes with start locations for plant and DCs and destination locations for customers 3) Create transportation lane from MI## to SD## 2. Assign materials to transportation lanes 1) Assign materials for transportation lanes from plant to customers 2) Assign materials for transportation lanes from DCs to customers 3) Assign materials for transportation lane from MI## to SD## 3. Create quota arrangement in SCM system 1) Create inbound quota arrangement for vendor ) Create inbound quota arrangement for vendor Master Product settings 5. Model Consistency check