How to Integrate your Production and Logistics Strategy for a CPG - - PowerPoint PPT Presentation

A NEW FORMULATION

How to Integrate your Production and Logistics Strategy for a CPG Company

Production Planning with Complex Cost Drivers

Agenda

• 1. Overview of Problem
• 2. Overview of Model
• 3. Benchmarking
• 4. Sensitivity Analysis
• 5. Key Takeaways
• 6. Further Research

Areas

• 1. Manual planning processes are time consuming

and cannot consider all cost drivers.

• 2. Implementation of lot sizing problems requires

the right formulation that fits the business environment.

• 3. Production lot sizing optimization is not always

a trade-off between setups and inventory.

Key Messages

Overview of Problem

Is this caused by the lot sizing decision?

Model Overview Selection

• Seasonality
• Deterministic Demand
• Capacitated
• Multiple Lines
• Multiple Items
• Plant and 3PL Storage

Capacitated Lot Sizing Problem (CLSP) EOQ?

with new extensions

Model Overview New Extensions

ØDouble Echelon Setups Costs

ØProduct families with shared setups

ØDouble Echelon Inventory Costs

ØPlant and 3PL Warehouses

Ø3PL Transport and Handling Cost ØBeginning and Ending Inventory Positions

Item Level Package Level Bottle Level

1 Gallon Bottle 6-Pack Customer X, Spring Water Customer Y, Mineral Water 4-Pack Customer X, Spring Water

Costing Methodology

Setups Costs

• Opportunity cost of not producing product while the machine is down for setups

Holding Costs

• Rent, Labor, Tax, Insurance à Annual cost per footprint à Weekly cost per

bottle

Transfer Cost

• Freight Cost ($ per TL)
• Handling Cost ($ per pallet) à Handling Cost ($ per TL)
• Estimated Transfer Size (TLs per week)

Model Overview Comparison

Inventory Costs Setup Costs Setup Costs Inventory Costs

Thesis Model Basic CLSP

Basic CLSP vs Model

Plant Storage Capacity Transfer Event Binary Setup Level 1 Binary Setup Level 2 Binary Machine Capability Binary Inventory NA NA NA NA NA

Process Flow

Model Formulation: Inputs:

• Weekly Demand Forecast per item
• Plant Capacities (MSA)
• Setup Costs/Times
• Inventory Costs
• Line Capabilities

Outputs:

• Lot Size Plan
• Inventory
• Setups

Regional Benchmark Scenario Selection Rationale

Strength - Represents network complexity

• Assets – 3 plants, 12 lines, 1 3PL Warehouse
• Lines have varying capacity and capabilities
• Products – 5 bottle sizes, 14 bottle-pack categories
• Represents both core and non-core products

3,504 DECISION VARIABLES

Regional Benchmark Demand

Burn Period

During this period no pallets should be moved into 3PL warehouse

Capacity Demand

0% 20% 40% 60% 80% 100% 120% 140% 35 36 37 38 39 40 41 42

Week Number

Demand Model Production Capacity Actual Production

Regional Benchmark Production

MTS Burn

% Production Capacity

0% 5% 10% 15% 20% 25%

34 35 36 37 38 39 40 41 42

Week Number

Model Plant Inventory Model 3PL Inventory Actual Plant Inventory Actual 3PL Inventory

Regional Benchmark Inventory

Transfer 3PL Inventory to Plant

% Plant WH Capacity

Regional Benchmark

Weakness : Actual Production Data doesn’t match Demand Data

• Actual Production data produces 17% more bottles than forecast data

requires

• Dynamic Sourcing?
• Actual Production data is not a good benchmark for a planning

comparison

• Need alternative benchmarking data

Manual Plan Benchmark Scenario Selection Rationale

Simplified Data set

• 1 Plant
• 3 Lines
• 4 Products : 2 fast movers, 2 slow movers

Scenario Features

• Build Period – Full Capacity and significant inventory build target

Manual Benchmark Production

Both plans have similar overall production

60% 70% 80% 90% 100% 110% 120% 14 15 16 17 18 19 20 21 22

% Production Capacity

Week Number

Weekly Production Quantity

Demand Model Production Manual Production

0% 50% 100% 150% 200% 250% 300% 13 14 15 16 17 18 19 20 21 22

% Plant WH Capacity

Week Number

Weekly Inventory Position

Model Plant Inv Manual Plant Inv Model 3PL Inv Manual 3PL Inv

Manual Benchmark Inventory

Model Plan lowers inventory

Manual Benchmark Inventory

Model Plan lowers Setups

1 2 3 4 5 6 14 15 16 17 18 19 20 21 22

# of Setups

Week Number

Weekly Number of Setups

Model Setups Manual Setups

Performance Benchmark Manual Planning Method

• Current method uses average demand

every period for fast movers

• Planning done one line at a time to reduce

complexity

Line 1 Setups: 9 Line 2 Setups: 19 Line 3 Setups: 9

Total Setups: 37

Performance Benchmark Model Planning Results

• Utilize flexibility to make the right product at the

right time and reduce inventory

Line 1 Setups: 9 Line 2 Setups: 9 Line 3 Setups: 11

Total Setups: 29

Performance Benchmark Manual Planning Method vs Model Plan

Setup Reduction: 22% Inventory Reduction: 9% Transfer Event Reduction: 73% Total Relevant Cost Savings: 29%

Line 1 Line 2 Line 3 SubTotal Plant Holding 3PL Holding Transfer Costs SubTotal Setup Costs Inventory Costs Total

Costs Cost Comparison - Manual vs. Model

Manual Model

Sensitivity Analysis Rationale

Regional Benchmark Dataset

• Burn period offers best scenario for sensitivity analysis
• Spare Production Capacity
• Increasing setup costs should increase lot sizes à need spare capacity to see this
• Spare Inventory Capacity
• Increased lot sizes should add inventory

60% 70% 80% 90% 100% 110% 120% 35 36 37 38 39 40 41 42

% Production Capacity

Week Number

Weekly Production

Demand Base 4xSetup 4xHolding 0% 5% 10% 15% 20% 25% 35 36 37 38 39 40 41 42

% Plant WH Capacity

Week Number

Weekly Inventory

Base 4xSetup 4xHolding

Sensitivity Analysis Production & Inventory

High Setups increase production and inventory

60% 70% 80% 90% 100% 110% 120% 35 36 37 38 39 40 41 42

% Production Capacity

Week Number

Weekly Production

Demand Base 4xSetup 4xHolding 0% 5% 10% 15% 20% 25% 35 36 37 38 39 40 41 42

% Plant WH Capacity

Week Number

Weekly Inventory

Base 4xSetup 4xHolding

Sensitivity Analysis Production & Inventory

High holding costs increases make to order and reduces inventory

2 4 6 8 10 12 35 36 37 38 39 40 41 42

# of Setups

Week Number

Weekly Number of Setups

Base 4xSetup 4xHolding

Sensitivity Analysis Setups

Increased Holding Costs increases setups in only 3 instances by 1 setup

Sensitivity Analysis Conclusions

Change in Setups

• +/- 6% change in setups for +/-4x change in relative setup to holding cost value

shows robustness

Change in Inventory

• Plant warehouse utilization only increased to 9.4% with a 4x increase in setup cost

Key Takeaways

Improve Plant Warehouse Utilization Reduce Transfer Events to the 3PL Plan on Multi-Dimensions Utilize Flexibility of all Lines

Further Research Areas

• Three Echelon Formulation for Bottle-Packsize-Label
• Backordering and Safety Stock features
• Transportation Cost
• Uncertain Demand/Capacity

Thank You

Performance Benchmark How Do you Reduce Setups and Inventory?

• Manual Plan uses average
• carries extra inventory throughout

when you have inventory build target

• Model Plan uses inventory early and

builds to inventory target later

• Uses extra capacity to build slow

mover inventory to reduce setups

• Slow mover inventory build is less

than inventory reduction on fast movers