Supply Chain Planning Using Optimization

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Introduction to Optimization Models

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Optimization-Based Planning Models

In constraint-based planning, production processes can be represented as optimization models.

A production model based on optimization consists of Objective Function(s), Decision Variables, and constraints based on market conditions, physical processes, and resources/capacity. These kinds of models are usually called mathematical programs.

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Decision Variables
Decisions variable are the independent variables of the problem. Typically, decisions take the form of Production lot sizes, Transport lot sizes, Purchase of additional capacities and so on. Examples of Decisions Variables: How much do we invest in new machines? How much do we spend in labor? How many units to make? Repair or replace?

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Objective Functions
The Objective Function is the single benchmark for evaluating all combinations of decisions that satisfy the constraints. It usually represents a quantifiable goal, and sometimes 2 or more goals. Examples of Objective Functions: Minimize total production costs Minimize total material costs Maximize total sales revenue Minimize total inventory costs Minimize total lead time

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Constraints
Constraints represent limitations on which decision can be made and how decisions can be made. For example, the production capacity is 5000 Units/day. Constraints are also used to apply business rules when solving a problem. For example, all inventory must be non-negative.

Other examples of constraints: Market conditions/demand Material/supplies Capacity/resources Transportation/logistics Policy/managerial

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Steps for Constructing a Planning Model

Typically, a simplified production model comes from performing VAT analysis on the existing production process that we want to model. What are the decisions variables? What are the constraints? What is the objective function?

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Objective Functions, Decision Variables, Constraints in APO

Objectives SNP, Distribution & PP
Lateness, Storage Costs, Transportation Costs, Production Costs, Purchase of additional Capacities Production Resources, Transportation (Fleets) Products

Decision Variables
Lateness Production Lot Sizes Transportation Lot Sizes Purchase of Additional Capacities

Constraints
Production Capacities Transportation Capacities Handling Capacity Due Dates Safety Stock Discrete Values Production Lot Size, Transportation Lot Size, Extra Shifts Time Constraints (maximal due date, shelf life Minimal production stages, campaign) Due Dates Setup Times, Productivity Resource network Calendar Shifts, Effectivity of receipts

DS

Lateness Makespan Setup Costs

Resource Allocation (Alternative Machines/Storage) Start Dates NOT Lot Sizes or Alternative Recipes

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SNP Optimization
One time period (bucket)

Demand at a location Dependent demand at a location Processing flow

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Optimization of the Network

Control costs Penalty costs

Sourcing production & purchasing requirements

Forecasts Customers orders

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Goal: Minimize costs Goal: Maximize Profits*

Priorities for: demand types defined via costs

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Optimization Methods
Linear Programming Continuous Linear Optimization Problems Primal Simplex Method Dual Simplex Method Interior Point Method Discrete Linear Optimization Problems Mixed Integer Linear Programming Prioritization Decomposition Vertical Aggregated Planning

Horizontal Aggregated Planning

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Optimization Methods
Discretization

Discretization until a certain date*

Detailed Discretization for different restrictions for daily, weekly, or monthly buckets* Maintain discretization in PPM or transportation lane individually

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Optimization Parameters
Decision Variables Production lot sizes Transportation lot sizes Capacity increase Constraints Production capacities Transportation capacities Handling capacity Due dates (demands) Safety stock Discrete Values Production Lot Size Transportation Lot Size

Objectives Lateness Storage costs Transportation costs Production costs Penalty for increasing capacity Penalty cost for not maintaining safety stock* Penalty cost for late or non delivery*
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Cost Maintenance function

Use Use this function to maintain all costs used by the Optimizer and assigned to the master data from a single point of access. If you maintain the costs using this function, the master data for the selected planning version is automatically updated. Integration This function integrates costs assigned to PPM, Resource, and Product master data. These costs include Production, Handling, Storage, Transportation, Procurement, and Delay/NonDelivery costs.
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Optimizer Profile

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Costs
Due date violation

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Optimizer Profile

Transport Capacity

Storage Capacity

Determines which constraints are considered

Handling Capacity Other Constraints

A B C D

Safety Stock Violation

Production Capacity
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SNP Cost Profile

AB C A D

Penalty for falling below the minimum safety stock limit

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Optimization Bound Profile*

Specifies the time buckets where the new plan is constrained by an upper and lower limit on the allowable change. For example, you change the plans in the first month only within 10% of the original value. The basis for the change is the last optimization run for the same planning area

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Optimization Run - Interactive Planning Desktop

Range of location products can be selected. Predefined Optimizer profiles can be selected

Changes to the predefined profiles is allowed

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Costs in the APO Environment (I)

Model considers the following costs: Higher non-delivery cost results in: forced production Higher relative storage cost results in: moving products from one location to another ahead of requirement Higher delay cost results in: control lateness/build early scenarios Maximum delay used to: control number of days demand fill is delayed by Transportation cost used to: prioritize source location Costs are Interdependent!
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Costs in the APO Environment (II)

To specify a site manufacturing priority: Production cost in preferred site Transportation cost from preferred site To influence inventory storage location: Relative storage costs between sites To ensure meeting inventory targets: Safety stock violation penalties

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Costs in the APO Environment (III)

To meet delivery date early/late Meet Early: Delay Cost Storage Cost Meet Late: Maximum Delay Allowed Delay Cost Storage Cost
To use stock before build Storage Cost To prioritize a site for downstream supply Vary Transportation Cost

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SNP Decisions
What? Decision Products to plan. Key drivers Priority for planning each product Where ? To source a product from in the given network - Total production cost per location: - Transportation cost - Available capacity How ? To produce? - Which process - Which components Total cost of production process: - Components - Process When ? To produce a product Cost of missed due date: - Late penalty - Storage costs if produced early - Available capacity - Demand priority - Delay cost - Max delay - Non-delivery cost - Storage cost

Data

Demand - Production cost priority (PPM) - Customer - Transportation orders cost - Forecast - Resource - Safety available stock capacity

PPM Storage cost Resource Capacity Resource costs

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Optimization Total Costs

Total Cost (Sum Total)
Production Storage

Source of cost data

PPM Resource

Storage expansion
Penalty cost for safety stock Transport cost Handling capacity expansion

Resource
Cost Profile Resource Resource

Transport capacity expansion

Production resource expansion Penalty for non-delivery Delay Penalty Procurement costs

Resource
Resource Master data Master data Master data

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Relevant Costs for the Optimizer

Resource costs
Production Transport Transport (mat) Storage Storage (mat) Handling

Standard (variant 1) Increase (variant 2)

(X) X (X) X X X X X

Additional costs
PPM-header: Safety stock: Variable costs Penalty (cost profile) Non delivery (penalty)

Material priority: Late delivery (penalty)

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Product Master Data: Global Data

Penalty Costs for Requirements and Customer Forecast Penalty costs for non-delivery Penalty costs for delayed delivery Maximum allowed delay (in days)

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$

Sales order
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Forecast

Input Parameters for SNP Optimization Run

Planning Version Level ID Product and Location Planning Book and Data View Planning Start and End Date Optimizer and Cost Profile Optimizer Bound Profile

Modify Quota Arrangement

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SNP Optimization Run Results

Distribution Plan Production Plan SNP Resulting Costs Alerts

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