Modeling the Tradeoff between Inventory and Capacity to Optimize - PowerPoint PPT Presentation

Modeling the Tradeoff between Inventory and Capacity to Optimize Return on Assets in Production Scheduling Authors: Cindy Wu & Jose A Gonzalez Duhart Advisor: Dr. Bruce Arntzen MIT SCM Research Fest May 22-23, 2013 1

Introduction Introduction Methodology Modeling Findings 2 May 22-23, 2013 MIT SCM Research Fest

Products We Are Dealing With X X Fertilizer Weed Killer 3

Problem Description Units Capacity Limit Inventory Capacity Time Demand Production Inventory Find out: • The optimal mix of production capacity and inventory • At the highest Return on Operating Assets (ROOA) • In its net present value (NPV) 4

Methodology Introduction Methodology Modeling Findings 5 May 22-23, 2013 MIT SCM Research Fest

Methodology Production Process Theory of Constraints Linear Programming Model 6

Production Process Pre-mix Formulation Storage Packaging Theory of Constraints 1 2 3 1 st Constraint 1 2 nd Constraint 2 3 rd Constraint 3 7

Linear Programming Model Objective Function • Maximize NPV of Return on Operating Assets (ROOA) • Maximize NPV of Operating Assets Value Add (OAVA) • Revenue • Cost • Manufacturing • Overtime • Outsourcing • Holding • Depreciation • Asset Value • Equipment • Inventory 8 May 22-23, 2013 MIT SCM Research Fest

Linear Programming Model Constraints • Meet Demand • Stage Dependence • Capacity Limit • Capacity Expansion Intermediate 1 FG1 Raw PM&F PCK • Outsourcing Limit Demand Materials FG2 Intermediate 2 • Non-Negativity 9 May 22-23, 2013 MIT SCM Research Fest

Modeling Introduction Methodology Modeling Findings 10 May 22-23, 2013 MIT SCM Research Fest

The Model’s Outputs • Master Production Schedule • Capacity Increase Options and Timing 11

The Model’s Outputs • Master Production Schedule • Capacity Increase Options and Timing Pre-Mix & Formulation Y1_Jan Y1_Feb Y1_Mar Y1_Apr Y1_May Y1_Jun Y1_Jul Y1_Aug Y1_Sep Y1_Oct Binary (PM&F') 1 1 1 1 1 1 1 1 1 1 Binary (PM&F'') 0 0 0 0 0 0 0 0 0 0 Binary (PM&F''') 0 0 0 0 0 0 0 0 0 0 12

Validating the Model • Inventory - Expensive vs. Cheap vs. - 4 scenarios “instead of prebuilding the least expensive products, we should prebuild the ones with the Lowest ratio of “ Bradley and Arntzen (1999) 13

Validating the Model • Inventory - Expensive vs. Cheap Intermediate 1 FG1 Raw PM&F PCK Demand - 4 scenarios Materials FG2 Intermediate 2 o Baseline o PM&F upgrade o PCK upgrade o Full upgrade 14

Model Demonstration 15 May 22-23, 2013 MIT SCM Research Fest

Findings Introduction Methodology Modeling Findings 16 May 22-23, 2013 MIT SCM Research Fest

Research Findings About Increasing Capacity • Acquiring New Assets • Overtime • Outsourcing About Asset Utilization 17

Increasing Capacity Options: Acquiring new assets Overtime (25% markup) Outsourcing (40% markup) PM&F Capacity and Production Management in Year 5 6,000 4,000 kL Thousands USD 3,500 5,000 Production and Demand 3,000 4,000 2,500 PM&F Asset Value 3,000 2,000 1,500 2,000 1,000 1,000 500 - - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Demand (prod 1) P&MF (prod 1) P&MF (prod 2) Demand (prod 2) OT (PM&F) (prod 1) OT (PM&F) (prod 2) Asset Value (PM&F) Outsourced (prod 1) Outsourced (prod 2) 18

Increasing Capacity Options: Acquiring new assets Overtime (25% markup) Outsourcing (40% markup) PCK Capacity and Production Management in Year 8 2,500 4,000 kL Thousands USD Intermediate 1 FG1 Raw PM&F PCK Demand 3,500 Materials FG2 Intermediate 2 2,000 Production and Demand 3,000 2,500 1,500 PCK Asset Value 2,000 1,000 1,500 1,000 500 500 - - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Demand (prod 1) P&MF (prod 1) P&MF (prod 2) Demand (prod 2) OT (PM&F) (prod 1) OT (PM&F) (prod 2) Asset Value (PM&F) Outsourced (prod 1) Outsourced (prod 2) 19

About Asset Utilization Should we maximize asset utilization? 20 May 22-23, 2013 MIT SCM Research Fest

Recommendations • Combine resources strategically • Communicate effectively across teams • Set relevant success metrics • Use the model wisely • Revise continuously 21 May 22-23, 2013 MIT SCM Research Fest

Thank you! 22

Backup Slides 23 May 22-23, 2013 MIT SCM Research Fest

Methodology – Setting Up a Linear Programming Model Objective Function MAX: (1-25%) (1+12%) (12%) 24 May 22-23, 2013 MIT SCM Research Fest

Methodology – Setting Up a Linear Programming Model Constraints • Meet Demand • Stage Dependence • Capacity Limit • Capacity Expansion Intermediate 1 FG1 Raw PM&F PCK Demand Materials FG2 Intermediate 2 • Outsourcing Limit • Non-Negativity 25 May 22-23, 2013 MIT SCM Research Fest

Acquiring New Assets – PCK • Objective Function: • Acquiring assets only after exploiting OT and outsourcing PCK Capacity and Production Management in Year 7 PCK Capacity and Production Management in Year 8 2,500 4,000 2,500 4,000 kL kL Thousands USD Thousands USD 3,500 3,500 2,000 2,000 Production and Demand Production and Demand 3,000 3,000 2,500 2,500 1,500 1,500 PCK Asset Value PCK Asset Value 2,000 2,000 1,000 1,000 1,500 1,500 1,000 1,000 500 500 500 500 - - - - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Demand (prod 1) P&MF (prod 1) P&MF (prod 2) Demand (prod 1) P&MF (prod 1) P&MF (prod 2) Demand (prod 2) OT (PM&F) (prod 1) OT (PM&F) (prod 2) Demand (prod 2) OT (PM&F) (prod 1) OT (PM&F) (prod 2) 26 Asset Value (PM&F) Outsourced (prod 1) Outsourced (prod 2) Asset Value (PM&F) Outsourced (prod 1) Outsourced (prod 2)

Acquiring New Assets – PCK • Objective Function: • Acquiring assets only after exploiting OT and outsourcing PCK Capacity and Production Management in Year 9 PCK Capacity and Production Management in Year 10 2,500 4,000 2,500 4,000 kL kL Thousands USD Thousands USD 3,500 3,500 2,000 2,000 Production and Demand Production and Demand 3,000 3,000 2,500 2,500 1,500 1,500 PCK Asset Value PCK Asset Value 2,000 2,000 1,000 1,000 1,500 1,500 1,000 1,000 500 500 500 500 - - - - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Demand (prod 1) P&MF (prod 1) P&MF (prod 2) Demand (prod 1) P&MF (prod 1) P&MF (prod 2) Demand (prod 2) OT (PM&F) (prod 1) OT (PM&F) (prod 2) Demand (prod 2) OT (PM&F) (prod 1) OT (PM&F) (prod 2) 27 Asset Value (PM&F) Outsourced (prod 1) Outsourced (prod 2) Asset Value (PM&F) Outsourced (prod 1) Outsourced (prod 2)