Manufacturing Supply Chain

Project Team: Serdar Benderli, Raluca Eftimoiu, Lyla Fadden, Michal Leszczynski

Systems Engineering 5220 Systems Dynamics Final Project December 04, 2012

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Contents
Purpose ................................................................................................................................ 3 Base Model Description ...................................................................................................... 3 Inventory Model .............................................................................................................. 4 Key Variables .................................................................................................................. 4 Reference Mode Graphs .................................................................................................. 5 Production Starts ............................................................................................................. 6 Work In Process Inventory.............................................................................................. 7 Customer Orders ............................................................................................................. 8 Desired Production .......................................................................................................... 9 Model Improvements ...................................................................................................... 9 Feedback Loops............................................................................................................. 11 System Dynamics .......................................................................................................... 12 Labor Model ...................................................................................................................... 13 Key Variables ................................................................................................................ 13 Increased Demand Impact ............................................................................................. 14 Backlog Model .................................................................................................................. 14 Key Variables ................................................................................................................ 15 Increased Demand Impact ............................................................................................. 15 Outcomes ....................................................................................................................... 17 Raw Materials Model ........................................................................................................ 19 Key Variables ................................................................................................................ 19 Calculation of the desired material delivery rate .......................................................... 20 Material delivery rate policy ......................................................................................... 20 Calculation of the feasible production starts ................................................................. 20 Basic behavior of the raw materials inventory model ................................................... 21 Raw Materials Replenishment Policies ......................................................................... 22 Threshold Policy ....................................................................................................... 22 Fixed Policy............................................................................................................... 24 Comparison ................................................................................................................... 24 Conclusion......................................................................................................................... 24

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Purpose
The purpose of this project is to simulate various policies of inventory management. The company maintains a Finished Goods Inventory and fulfills customer orders as they arrive. Customer orders or demand is an exogenous variable. Customer orders may be modeled as sporadic or user defined, over a period of time. Ideally: 1) 2) 3) 4)

Product Shipment Rate equals the Customer Order Rate over a period of time Desired Labor equals the Actual Labor over a period of time Throughput or production completion rate equals the Desired Throughput Desired Inventory equals actual Inventory over a period of time

Challenges include: 1) Inventory Management: Filling customer orders based on adequacy of inventory, while taking backorder into account 2) Production Scheduling: Determining the rate of Production Starts based on Demand Forecast and Labor and Inventory availability. The following Inventory Management and Production Scheduling policies may be simulated: 1) Fixed replenishment point / Fixed replenishment quantity when the inventory level on-hand falls below a replenishment threshold point, the site will generate a replenishment order for a fixed predetermined quantity. 2) Complex policy adequate inventory levels are calculated taking backorders into account.

Base Model Description

The starting point for the project was the information presented in Chapter 18-Manufacturing Supply Chain in John Stermans book Business Dynamics. The model presented in this chapter is available in from AnyLogic, as an example model named Inventory Workforce Model. The model models the interaction between the inventory management sector and the labor supply chain. This project aims at improving the existing Inventory Model, simulating various inventory management policies and simplifying the existing Labor Supply Chain model.

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Inventory Model
Component Type Units

Raw Materials Inventory Raw Materials-Order rate Raw Materials-Delivery Rate Desired Raw Materials Inventory Available Labor Desired Labor Production Starts Desired Starts Throughput Yield Loss Desired Throughput Work In Process Inventory-WIP Desired WIP Yield Loss Manufacturing Cycle Time Finished Goods Inventory Desired Finished Goods Inventory Shipment rate Desired Shipment Rate Customer Order Rate Order Fulfillment Demand Forecast

Stock Flow Flow Auxiliary Stock Auxiliary Flow Auxiliary Flow Constant Auxiliary Stock Auxiliary Constant Auxiliary Stock Auxiliary Flow Auxiliary Flow Flow Auxiliary

Units/period Units/period/period Units/period/period Units/period Units/period Units/period Units/period/period Units/period Units/period/period Units/period Units/period/period Units/period Units/period Units/period Units/period Units/period Units/period Units/period/period Units/period/period Units/period/period Units/period/period Units/period

Key Variables
Key Variables Behavior: 1) WIP is increased by Production Starts and decreased by Throughput 2) Raw Materials Inventory is increased by Raw Materials Inventory-Order Rate and decreased by Production Starts. Finished goods Inventory is increased by Throughput and decreased by Shipment Rate 3) Desired Raw Materials Inventory and Raw Materials Inventory influence the Raw Materials-Order Rate 4) Raw Materials-Delivery Rate influences Raw Materials Inventory 5) Raw Materials Inventory and Labor influence Production Starts 6) Yield Loss influences Throughput 7) Raw Materials Order Rate influences Yield via materials purity 8) Customer Order Rate influences the Desired Shipment Rate 9) Customer Order Rate influences the Demand Forecast 10) Demand Forecast influences Production Scheduling 11) WIP influences Production Scheduling 12) Inventory influences the Order Fulfillment, which influences Shipment Rate 13) Desired Throughput influences Production Starts

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Reference Mode Graphs

Demand Forecast Sporadic

Time

Raw Materials Inventory

Time

WIP Inventory

Time

Finished Goods Inventory Time

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Production Starts
The production start rate is driven by the feasible prod starts from raw materials, and is constrained by the component of the model (workweek, productivity, and the labor stock). Feasible production starts represent the constraint on resources and is driven by the desired production start rate. The production start rate also determines the production rate which determines how quickly products in the WIP inventory are moved into finished product Inventory.

Constrains from the Labor Model.

Primary driver is the desired production start rate, which governs the raw materials.

Constrains from the Raw Material Model.

The following formulas are used to determine the production start rate:
Production_start_rate=min(Feasible_Prod_Starts_from_Materials,Labor * Workweek * Productivity) Productivity=0.25 Workweek=40

The feasible production starts from materials represents the rate at which production can be begun and is calculated in the Raw Materials Inventory model. This will be explained in the Raw Materials Model section of this report.

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Work In Process Inventory

To Inventory

Desired production rate governs both the labor and raw material inventories.

Calculated to meet customer orders and maintain a certain level of inventory

The work in process inventory is increased by production starts, and depleted by the production rate, as products are finished and moved to inventory. This rate is equal to the production starts, however, a 3rd order delay is included to realistically represent the factorys work process. The production rate is defined to be:
Production_rate=delay3( Production_Start_Rate, Manufacturing_Cycle_Time ) d(Work_In_Process_Inventory)/dt=Production_Start_Rate-Production_rate Initial value of Work_In_Process_Inventory=Desired_WIP

The desired WIP reflects the rate of production that will satisfy customer orders, taking under consideration the cycle time.1 The Adjustment_For_WIP constant modifies production starts to keep the WIP inventory in line with the desired level. Desired_WIP is set to provide a level of work in process sufficient to yield the desired rate of production given the current manufacturing cycle time.
WIP_Adjustment_Time=6 weeks Adjustment_For_WIP= ( Desired_WIP - Work_in_Process_Inventory ) / WIP_Adjustment_Time Desired_WIP=Manufacturing_Cycle_Time * Desired_Production Desired_Production=max(0,Expected_Order_Rate + Production_Adjustment_from_Inventory) Desired_Inventory= Desired_Inventory_Coverage * Expected_Order_Rate
Desired_Inventory_Coverage= Minimum_Order_Processing_Time + Safety_Stock_Coverage

John D. Sterman, Business Dynamics (McGraw-Hill Companies 2010) p. 714.

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Safety_Stock_Coverage=2 weeks

Desired production is determined by the Expected Order Rate, modified by the Production_Adjustment_from_Inventory. Desired production is constrained to be non-negative. To provide adequate inventory as a buffer against unexpected variations in demand or production, the firm seeks to maintain a certain coverage of expected demand. Desired inventory coverage is composed of two components. First, the firm must maintain enough coverage to ship at the expected rate, requiring a base coverage level equal to the minimum order processing time. Second, to ensure an adequate level of service, the firm maintains additional safety stocks. The higher the coverage provided by the safety stock, the greater the service level. 2 However, there is a tradeoff as too much safety stock can result in inventories that are too high and which provide financial disadvantages.

Customer Orders
As orders come in, the model calculates the shipping rates based on not only current orders, but also the backlog. The maximum order rate is also accounted for, by dividing the inventory by the minimum order processing time. This rate is then used in conjunction with the desired shipping rate in order to arrive at order fulfillment rate found by using a lookup table.
Minimum_Order_Processing_Time=2 weeks Shipment_Rate= Desired_Shipment_Rate * Order_Fulfillment_Ratio Order_Fulfillement_Rate=Table_for_Order_Fulfillment(Maximum_Shipment_Rate/Desired_Shipment_R ate) Maximum_Shipment_Rate= Inventory / Minimum_Order_Processing_Time Desired_Shipment_Rate= Backlog/Target_Delivery_Delay

The Backlog stock is explained in the Backlog Model section of this report.
desired shipment rate, with backorders taken under consideration. To calculate the desired shipment rate, backorders must be calculated in the Backorder part of the model

In this part of Companies John D. Sterman, Business Dynamics (McGraw-Hill the model, 2010) p. 714. the maximum order fulfillment ratio is determined.

The customer order rate also influences Page 8 order the expected of 24 rate, which then drives the rest of the model.

Desired Production
The desired production is an output of the forecasted order rate (expected order rate), combined with the adjustment that is needed to bring the inventory in line with safety stock requirements.

This part of the model determines how much safety stock should be kept in inventory

The expected order rate determines what the rate of production is necessary to keep u[p with future demand.

Model Improvements
The following weaknesses were identified in the model presented in Chapter 18: 1. Orders not immediately filled are assumed to be lost forever. Desired shipment rate equals the customer order rate and order backlogs are not being modeled. 2. Production start rate always equals the desired production start rate, implying that raw materials resources are always ample. Raw materials are assumed to be exogenous The improvements presented in this report are: 1. The existing Labor Model was simplified. Vacancies and their attrition rate were disregarded. A dislike layoffs company policy was modeled as follows: The speed of layoff versus hiring is differentiated so that the Labor_Adjustment_Time depends on whether there is excess or insufficient labor: Labor_Adjustment_Time equals 100 weeks if Desired_Labor is greater or equal to actual Labor. Labor Adjustment_Time equals 200 weeks if Desired_Labor is smaller than actual Labor. Since the Labor_Adjustment_Time is smaller in the first case than in the second one, this ensures that the dislike layoffs policy is simulated.

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2. Order Backlogs were modeled and taken into account when adjusting the desired production rate. Unfulfilled sales are no longer assumed to be lost. 3. Raw Materials Inventory model was defined and modeled. 4. Two Raw Materials Replenishment Policies were defined and modeled. A Threshold Policy that keeps raw materials inventory at a threshold at all times and a Complex Policy where raw materials order rate is determined by desired production start rate, taking backlogs into account.

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Feedback Loops
+
Desired Raw Materials Inventory

+ + + +
Labor Desired Labor

Raw MaterialsOrder rate

+
Shipment Rate Customer Order Rate

Raw Materials Inventory

+ + + +
Throughput

+ + +
Production Starts

Work In Process Inventory

Raw MaterialsDelivery rate

+ +
Manuf. Cycle Time

_ _ _
Yield Loss Demand Forecast Desired Finished Goods Inventory

Finished Goods Inventory

Desired Shipment Rate

Order Fulfillment

+ + Desired
WIP

+ +

Desired Starts

+
Desired Throughput

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System Dynamics

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Labor Model
The labor resource was modeled as follows:

Key Variables
The main stock is Labor and the flows rates are Hire_Rate and Quit_Rate. The model allows for negative Labor.
Quit Rate=Labor/Avg. Employment Duration Hire Rate= (Desired_Labor-Labor)/Labor_Adjustment_Time Labor Adj.Time= 150-50*signum(Desired_Labor-Labor) If Desired_Labor>=Labor, Labor Adj. Time = 100 weeks If Desired_Labor<Labor, Labor Adj. Time = 200 weeks Firm dislikes layoffs Desired_Labor= Desired_Production_Start_Rate / (Workweek * Productivity) Productivity=0.25 Workweek=40 hours Avg. Employment Duration=200 weeks

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Increased Demand Impact

With a step increase in order rate, Desired Labor rises above actual Labor, and Actual Labor catches up in time:

Backlog Model
The backlogs were modeled as follows:

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Key Variables
The main stock is the Backlog and its flows are the Order_Rate and the Order_Fulfillment_Rate. To ensure that the model begins in balance equilibrium, the initial backlog must equal the target delivery delays worth of incoming orders:
Backlog Initial value = Target_Delivery_Delay * Order_Rate

Desired shipment rate is the rate of shipments that will ensure orders are filled within the target delivery delay:
Desired_Shipment_Rate= Backlog/Target_Delivery_Delay

The goal for the interval between placement and receipt of orders is the target delivery delay:
Target_Delivery_Delay=2 weeks

Using Littles Law, the Avgerage Delivery Delay at any moment is modeled to be equal to:
Delivery_Delay= Backlog/Order_Fulfillment_Rate Order_Rate=Customer_Order_Rate Order_Fulfillment_Rate=Shipment_Rate

Increased Demand Impact

With a step increase in order rate, desired shipments exceed actual shipments as the firm works off excess backlog

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A gradual Production increase can be observed: With backlogs:

Without backlogs:

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Outcomes
Outcome #1: Backlog Inventory buffers orders and shipments. Therefore, Desired Shipments rise more gradually than without backlogs. Decline in Inventory is more gradual, as can be observed in the two graphs below. With backlogs:

Without backlogs:

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Outcome #2: Orders are no longer lost forever. Therefore, Shipment Rate rises above the Customer Order Rate as the firm works off its excess backlog inventory, as can be seen below: With backlogs:

Without backlogs:

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Raw Materials Model

Component Type Units

Feasible Production Starts from Materials Material Usage per Unit Desired Material Usage Rate Material Usage Ratio Table for Material Usage Material Safety Stock Coverage Desired Material Inventory Desired Material Inventory Coverage Minimum Material Inventory Coverage Maximum Material Usage Rate Materials Inventory Adjustment for Material Inventory Material Inventory Adjustment Time Desired Material Delivery Rate Material Delivery Rate

Auxiliary Constant Auxiliary Flow Auxiliary Auxiliary Auxiliary Constant Constant Auxiliary Stock Auxiliary Auxiliary Auxiliary Flow

Units/period Unit/period Units/period/period Ratio Units/period [lookup] Units/period Units/period/period Units/period Units/period Units/period/period Units Units/period Units/period Units/period/period Units/period/period

Key Variables
Key Variables Behavior: 1) Desired production start rate (from Inventory model) increases Desired Material usage rate. 2) Material Usage per Unit increase Desired Material usage rate 3) Desired Material usage rate increases Material Usage Ratio and Material Usage Rate. 4) Material Usage Ratio increases Material Usage Rate. 5) Material Usage Rate increases Feasible Production Starts from Materials. 6) Feasible Production Starts from Materials increases Production Start Rate. 7) Desired Material Inventory increases Adjustment for Material Inventory 8) Material Inventory Adjustment time increases Adjustment for Material Inventory. 9) Adjustment for Material Inventory increases the Desired Material Delivery Rate. 10) Desired Material Delivery Rate increases Material Delivery Rate. 11) Material Delivery Rate flow increases the stock of Material Inventory. 12) The Material Inventory stock decreases the Adjustment for Material Inventory and the Maximum Material Usage Rate. 13) The Material Inventory stock is depleted by the Material Usage Rate. 14) The Maximum Material Usage Rate increases Material Usage Rate. 15) The minimum material inventory coverage decrease the Maximum Material Usage Rate

The original model assumed that raw materials were infinitely plentiful and accessible. In our Supply Chain Management and Design of Manufacturing Systems courses, we learned that raw materials are a critical consideration when designing a manufacturing operation. Therefore, we opted to integrate a raw materials sub-model with the rest the inventory model. The raw materials model was created on the bases on the WIP components of the inventory model. As the desired production rate controlled the desired production start rate, which directly increased the WIP stock, so too does the desired production start rate now affect Page 19 of 24

the material delivery rate, which feeds the raw materials into the system. The material usage rate now controls the original production start rate. The primary parts of the raw material model include (1) the calculation of the desired material delivery rate, which determines how quickly the system intends to consume raw materials, taking safety stocks under account, (2) the material delivery policy that determines how the material delivery rate is actually met, and (3) the feasible production start rate at which raw materials move into the WIP in the original model.

Calculation of the desired material delivery rate

Once the inventory model determines a suitable desired production start rate for the WIP, it is then passed onto the raw materials model. Here, it is converted to raw materials (number of raw materials per product, in our simulation, it was a one-to-one relationship). Next, a desired material inventory coverage time frame is calculated by adding the number of time periods that current inventory should cover and the amount of time periods representing a certain safety stock. The sum of these is multiplied by the current desired materials usage rate to arrive at the desired materials inventory. This is how much raw materials are expected to be in the stock in order to allow the system to perform optimally, without taking into account current demand. Just as in the work in process part of the inventory model, an adjustment is calculated based on the difference between actual and desired material inventory. It is adjusted for the time it takes to complete an inventory adjustment cycle (essentially the lead time to wait for the materials to arrive at the factory, combined with preparing it for storage). Finally, the adjustment and the desired production start rate are combined to form the desired material delivery rate.

Material delivery rate policy

Once the desired material delivery rate is calculated, one of two policies is applied to the rate, and this is finally fed into the material inventory stock.

Calculation of the feasible production starts

Orders increase the materials inventory stock, material usage depletes it. The usage rate is calculated by considering the current inventory, and dividing it by the minimum material Page 20 of 24

coverage time period. This will indicate the amount of materials that can be used at a given point in time, considering current inventory. A materials usage ratio determines the usage of materials based on the availability of the inventories to sustain the desired rate. This is achieved by creating a lookup table, as in the case of the WIP. In essence, this ratio indicates that as long as the inventory stock is adequate, the actual material usage rate will fulfill the desired need. However, if this stock falls, the usage ratio will fall below the desired rate. This ratio is then combined with the desired material usage rate to arrive at the actual materials usage rate, which depletes the stock. Before being able to use this rate in the inventory model to feed the WIP, it needs to be converted back into the production units, from materials, by dividing by the material usage per unit constant. The final rate is stored in the feasible production starts.

Basic behavior of the raw materials inventory model

With a step increase in demand, the desired materials rate is communicated to the raw material model quickly, and the raw materials inventory catch up quickly to the demand, soon surpassing it. This is mostly due to the fact that there are no delays in the raw materials inventory model, and the lead times are short.

The amplified response of material deliveries to the demand is visible below. This occurs because with the step increase in demand, not only is the inventory stock depleted faster, but the system must replenish it to a higher level than before in order to meet customer demand.

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As the amplified response allows of inventory levels to return to normal, the desired production starts level off, as does the resultant desired material delivery rate.

Raw Materials Replenishment Policies

We decided to implement two policies in order to further enhance the model and demonstrate the shortfalls of ignoring dynamics in a system. AnyLogic allowed us to implement a policy control pane. The policy types implemented are: Fixed Policy Order Amount = PolicyInputRate When the materials inventory falls below a certain threshold (user defined), the factory replenishes raw materials at a fixed rate (user defined) Complex Policy Order Amount = desired_material_delivery_rate Desired Material Delivery rate is determined through the raw materials model

Threshold Policy In our Design of Manufacturing Systems course, a capacity-driven safety method was presented. This method specifies that a target inventory for a given type of material is set, and that the system should strive to order enough items to either meet the target level, or order up to a certain capacity. We implemented a simple threshold policy to demonstrate a method of maintaining raw material inventory. The policy dictates that if the raw materials inventory drops below a certain threshold, the system will submit orders at a user-defined replenishment rate. The order amount determines how the material inventory stock is fed: If PolicyType == 0 Then If(materials_inventory < PolicyInputThreshold) Then PolicyInputRate Else 0 Else desired_material_delivery_rate The shortcomings of this policy are easy to demonstrate. The success of this policy is dependent on the difference between the order rate and the replenishment rate. If the replenishment rate Page 22 of 24

falls below the order rate, the system will not have enough raw materials, unless the initial threshold is high enough to maintain and adequate raw materials inventory stock, and the spike in demand is temporary. In the accompanying figure, it the difference between the demand and the actual raw rate is shown the system uses up all raw materials. The raw materials inventory can only recover when the daily replenishment rate is greater than the order rate, and the threshold is set to an amount higher than the demand. In this case, the raw materials inventory recovers, and overshoots the desired amount. This leads to inefficiencies, as the system is incurring holding costs. The implifcations of this threshold policy were observed further downstream in the WIP. It was assumed that the raw materials inventory would be replenished if the stock fell below 4000 units, at a rate of 2000 per day. The customer order rate was set to 8000. To amend this, the threshold had to be raised to the level of the customer order demand rate, and the order rate was amended to be equal or greater than the customer order rate. Following a step increase in demand, the inventory plummets and the gap between desired and actual inventory grows. The implication of this is that the production start rate is throttled by the lack of raw materials. The feasible production start rate rises slightly, but due to the poorly chosen threshold and reorder rate limitations, it does not allow the system to fulfill orders.

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Fixed Policy This policy allowed the desired material usage rate to be passed through directly to the desired materials delivery rate. By analyzing a step increase demand, the response of this policy can be observed. The change in demand triggers an increase in the desired production rate. Both labor and raw material stocks begin to rise. Given that there are no lead times when ordering raw materials, the raw material inventory responds very quickly, and the actual inventory remains high, the production rate overshoots the customer order rates. Once the backlog of orders begins the clear and the inventory coverage recovers, the production start rates being to approach the order rates again.

Comparison
The two policies were compared; the simulation was run for 50,000 days under each scenario. The threshold policy resulted in a 0.002 fulfillment rate, while operating under the assumption that the threshold should be equal to the mean demand of 10,000, and that the system is capable of replenishing material at a rate double that of the threshold (20,000). The complex policy resulted in a 0.397 fulfillment rate.

Conclusion
Adding in the raw material model into the inventory model has demonstrated the fallacy of ignoring the dynamics in a system. To further enhance the model, we recommend combing the two policies, and creating new ones. The fixed policy is simplistic and limited, and reacting to change in the system often resulted in poor results. The complex policy, meanwhile, did not account for the fact that the holding capacity of raw materials may be limited in the real world, and that there is a limit of materials that can be ordered (and processed upon arrival) during one day. A combination of both policies can be developed to better reflect real-world processes. A further extension to this is to take the costs into account when running the model such as holding costs and expedited shipping costs, and combining these with real-world constraints (minimum batch size, etc.), to understand the performance of the supply chain from the financial side.

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