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

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

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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

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SLIDE 1

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

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SLIDE 2

Introduction

Introduction

Methodology Modeling Findings

2 May 22-23, 2013 MIT SCM Research Fest

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SLIDE 3

Products We Are Dealing With

X Fertilizer X Weed Killer

3

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SLIDE 4

Problem Description

Capacity Inventory

Production Demand Inventory

Time Capacity Limit Units

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

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SLIDE 5

Methodology

Introduction

Methodology

Modeling Findings

5 May 22-23, 2013 MIT SCM Research Fest

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SLIDE 6

Methodology

Theory of Constraints Linear Programming Model Production Process

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SLIDE 7

Pre-mix Formulation Storage Packaging

1st Constraint 2nd Constraint 3rd Constraint

1 2 3 1 2 3

Production Process

Theory of Constraints

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SLIDE 8

Objective Function

  • Maximize NPV of Return on Operating Assets (ROOA)
  • Revenue
  • Cost
  • Manufacturing
  • Overtime
  • Outsourcing
  • Holding
  • Depreciation
  • Asset Value
  • Equipment
  • Inventory

8 May 22-23, 2013 MIT SCM Research Fest

Linear Programming Model

  • Maximize NPV of Operating Assets Value Add (OAVA)
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SLIDE 9

PM&F PCK

Intermediate 2 FG2 Demand Raw Materials Intermediate 1 FG1

  • Meet Demand
  • Stage Dependence
  • Capacity Limit
  • Capacity Expansion
  • Outsourcing Limit
  • Non-Negativity

Constraints

9 May 22-23, 2013 MIT SCM Research Fest

Linear Programming Model

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SLIDE 10

Modeling

Introduction Methodology

Modeling

Findings

10 May 22-23, 2013 MIT SCM Research Fest

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SLIDE 11
  • Master Production Schedule
  • Capacity Increase Options and Timing

The Model’s Outputs

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SLIDE 12
  • 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'') Binary (PM&F''')

  • Master Production Schedule

The Model’s Outputs

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SLIDE 13

Validating the Model

13

  • Inventory
  • Expensive vs. Cheap
  • 4 scenarios

vs.

“instead of prebuilding the least expensive products, we should prebuild the ones with the Lowest ratio of “ Bradley and Arntzen (1999)

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SLIDE 14

Validating the Model

  • Inventory
  • Expensive vs. Cheap
  • 4 scenarios
  • Baseline
  • PM&F upgrade
  • PCK upgrade
  • Full upgrade

14

PM&F PCK

Intermediate 2 FG2 Demand Raw Materials Intermediate 1 FG1

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SLIDE 15

Model Demonstration

15 May 22-23, 2013 MIT SCM Research Fest

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SLIDE 16

Findings

Introduction Methodology Modeling

Findings

16 May 22-23, 2013 MIT SCM Research Fest

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SLIDE 17

Research Findings

About Increasing Capacity

  • Acquiring New Assets
  • Overtime
  • Outsourcing

About Asset Utilization

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SLIDE 18
  • 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000

  • 1,000

2,000 3,000 4,000 5,000 6,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec kL Thousands USD

PM&F Capacity and Production Management in Year 5

PM&F Asset Value

Demand (prod 1) P&MF (prod 1) Outsourced (prod 1) OT (PM&F) (prod 1) Asset Value (PM&F) Demand (prod 2) P&MF (prod 2) Outsourced (prod 2) OT (PM&F) (prod 2)

Production and Demand

Increasing Capacity

Overtime (25% markup) Acquiring new assets Outsourcing (40% markup)

Options:

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  • 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000

  • 500

1,000 1,500 2,000 2,500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec kL Thousands USD

PCK Capacity and Production Management in Year 8

PCK Asset Value Production and Demand

Demand (prod 1) P&MF (prod 1) Outsourced (prod 1) OT (PM&F) (prod 1) Asset Value (PM&F) Demand (prod 2) P&MF (prod 2) Outsourced (prod 2) OT (PM&F) (prod 2)

Increasing Capacity

Overtime (25% markup) Acquiring new assets Outsourcing (40% markup)

Options:

PM&F PCK

Intermediate 2 FG2 Demand Raw Materials Intermediate 1 FG1

19

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SLIDE 20

Should we maximize asset utilization?

20 May 22-23, 2013 MIT SCM Research Fest

About Asset Utilization

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SLIDE 21
  • Combine resources strategically

Recommendations

  • Communicate effectively across teams
  • Set relevant success metrics
  • Use the model wisely
  • Revise continuously

21 May 22-23, 2013 MIT SCM Research Fest

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SLIDE 22

Thank you!

22

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SLIDE 23

Backup Slides

23 May 22-23, 2013 MIT SCM Research Fest

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SLIDE 24

Methodology – Setting Up a Linear Programming Model Objective Function

(1-25%) MAX: (12%) (1+12%)

24 May 22-23, 2013 MIT SCM Research Fest

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SLIDE 25

PM&F PCK

Intermediate 2 FG2 Demand Raw Materials Intermediate 1 FG1

Methodology – Setting Up a Linear Programming Model Constraints

  • Meet Demand
  • Stage Dependence
  • Capacity Limit
  • Capacity Expansion
  • Outsourcing Limit
  • Non-Negativity

25 May 22-23, 2013 MIT SCM Research Fest

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  • 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000

  • 500

1,000 1,500 2,000 2,500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec kL Thousands USD

PCK Capacity and Production Management in Year 8

PCK Asset Value Production and Demand

Demand (prod 1) P&MF (prod 1) Outsourced (prod 1) OT (PM&F) (prod 1) Asset Value (PM&F) Demand (prod 2) P&MF (prod 2) Outsourced (prod 2) OT (PM&F) (prod 2)

  • Objective Function:
  • Acquiring assets only after exploiting OT and outsourcing

Acquiring New Assets – PCK

  • 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000

  • 500

1,000 1,500 2,000 2,500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec kL Thousands USD

PCK Capacity and Production Management in Year 7

PCK Asset Value Production and Demand

Demand (prod 1) P&MF (prod 1) Outsourced (prod 1) OT (PM&F) (prod 1) Asset Value (PM&F) Demand (prod 2) P&MF (prod 2) Outsourced (prod 2) OT (PM&F) (prod 2)

26

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  • 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000

  • 500

1,000 1,500 2,000 2,500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec kL Thousands USD

PCK Capacity and Production Management in Year 10

PCK Asset Value Production and Demand

Demand (prod 1) P&MF (prod 1) Outsourced (prod 1) OT (PM&F) (prod 1) Asset Value (PM&F) Demand (prod 2) P&MF (prod 2) Outsourced (prod 2) OT (PM&F) (prod 2)

  • Objective Function:
  • Acquiring assets only after exploiting OT and outsourcing

Acquiring New Assets – PCK

  • 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000

  • 500

1,000 1,500 2,000 2,500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec kL Thousands USD

PCK Capacity and Production Management in Year 9

PCK Asset Value Production and Demand

Demand (prod 1) P&MF (prod 1) Outsourced (prod 1) OT (PM&F) (prod 1) Asset Value (PM&F) Demand (prod 2) P&MF (prod 2) Outsourced (prod 2) OT (PM&F) (prod 2)

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