Computers

&Chemical
Engineering
Computers and Chemical Engineering 24 (2000) 329-335
www.elsevier.com/locate/compchemeng

A model predictive framework for planning and scheduling

problems: a case study of consumer goods supply chain
S. Bose, J.F. Pekny *
School of Chemical Engineering, Purdue University, West Lafayette, IN 47907-1283, USA

Abstract

Model Predictive Control is a well established technique for the control of processes and plants. We present a similar concept
for planning and scheduling problems. There have mainly been two approaches to solve the planning and scheduling problems.
The first approach is to model the planning and scheduling as one monolithic problem and solve it for the entire horizon. Needless
to say, this approach requires an extensive computational effort and becomes impossible to solve in the case of large-scale
scheduling problems. The other approach is to hierarchically-decompose the problem into a planning level problem and a
scheduling level problem. This approach leads to tractable problems. Neither of these approaches provide the framework for
incorporating uncertainties in the processing time of batches, or random equipment breakdowns, or demand uncertainties in the
future. Furthermore, these approaches only provide ‘one snapshot’ of the planning problem and not a ‘walk through the timeline’.
Model predictive planning and scheduling provides a framework for studying dynamics. Model predictive planning and scheduling
requires a forecasting model and an optimization model. Both these models work in tandem in a simulation environment that
incorporates uncertainty. The similarity with the model predictive approach which is widely used in process-control is that in each
period, the forecasting model calculates the target inventory (controlled variable) in the future periods. These inventory levels
ensure desired customer service level while minimizing average inventory. The scheduling model then tries to achieve these target
inventory levels in the future periods by scheduling tasks (manipulated variables). 0 2000 Elsevier Science Ltd. All rights reserved.

Keywords: Supply chain; Consumer; Planning and scheduling

1. Introduction instead depend critically on the relationships and inter-

Operation of a supply chain for fast moving con-
sumer goods is a challenging and difficult task. Fast
moving consumer goods are characterized by promo-
tional demands, which take a toll on the target cus-
tomer service level as well as result in higher inventory
costs. The operation of a supply chain, in which the
demands are known accurately, is tractable. So a
difficulty in controlling a supply chain for fast moving
consumer goods arises from the highly uncertain nature
of the promotional part in the demand signal. To cope
with the challenges of improving customer service level
and reducing inventory costs, organizations cannot rely
solely on isolated changes to specific parts of the supply
chain, like suppliers or distributors or retailers, but
* Corresponding author. Tel.: + l-317-4947901; fax: + 1-317-
4940805.
E-mail addresses.. shantanu@ecn.purdue.edu (S. Bose),
pekny@ecn.purdue.edu (J.F. Pekny).
dependencies among different organizational units.
This, in turn, translates into establishing efficient mate-
rial and information flows across the supply chain.
The ongoing competitiveness of an organization is
linked with the dynamics of the supply chain(s) in
which it participates, and recognition of this fact is
leading to considerable change in the way organizations
interact with their supply chain partners. The interac-
tion among the parts of supply chain can be captured
by studying the coordination structure of the supply
chain.
For the purposes of this study, we shall remain
focused on the coordination between the production
units and demand units of the supply chain. The key
issues that will be addressed are:
1. What is the best organizational structure for the
effective coordination of activities between the sup-
ply and demand units (centralized control, decen-
tralized control or an intermediate form of control)?

0098-1354/00/$- see front matter 0 2000 Elsevier Science Ltd. All rights reserved.
PII: SOO98-1354(00)00469-5
330 S. Bose, J.F. Pekny /Computers and Chemical Engineering 24 (2000) 329-335
2. What are the appropriate ways of measuring fore-
cast accuracy, specifically, the accuracy of forecast-
ing promotional demand?
To address the issues given above, one must capture
the dynamics of the supply chain by modeling each
element of the supply chain (the supply unit and the
individual markets) and the interaction among these
elements. The framework chosen for this study captures
the forecasting, optimization and simulation aspects of
the supply chain. One must also classify the coordina-
tion structure by some quantifiable parameters. The
rest of the paper explains these in detail and also
presents the results obtained from the study so far.
Industrial data has been used to obtain results and
draw conclusions to be sure that realistic assumptions
have been made about supply chain behavior.
2. The model predictive approach
Here we present a model predictive approach for
solving this problem. Model predictive planning and
scheduling requires a forecasting model and an opti-
mization model. Both these models work in tandem in
a simulation environment that incorporates uncertainty.
The similarity with the model predictive approach
which is widely used in process-control is that in each
period, the forecasting model calculates the target in-
ventory (controlled variable) in the future periods.
These inventory levels ensure desired customer service
level while minimizing average inventory. The schedul-
ing model then tries to achieve these target inventory
levels in the future periods by scheduling tasks (manip-
Output Vorlrble flaqet Inventory)
mvu?
ulated variables). This is repeated till the end of the
planning period. Refer to Fig. 1.
3. Coordination structure of the supply chain:
definitions
The coordination structure of a supply chain is
jointly determined by its decision rights structure
(whether the plant or the distributors decide what to
produce and when) and its information structure (local
knowledge of promotions, distributor’s stock visibility,
etc.). The coordination structures can be classified in
the following categories.
3.1. Centralized control
The quantities to be supplied to each market are
centrally determined. The forecasts for the demands are
based on past sales and recorded data. The forecasts of
the promotional part of the demand incorporate infor-
mation that is centrally available, and do not include
local knowledge of promotions. Thus, in a centralized
control, even though most of the promotional events
are known, the actual quantity of the promotional
demand and the exact week of occurrence have a lot of
uncertainty.
3.2. Decentralized control
The individual markets place orders with the supply
unit based on local promotional knowledge. Each indi-
vidual market is unaware of the capacity constraints in
the factory, as well as, demands placed by the other
 S. Bose, J.F. Pekny / Computers
markets. Thus, even though the forecast quantity
of promotional demands is relatively accurate, the
markets do not provide enough lead-time for
SUPPlY.
3.3. Distributed Control
The quantities are determined using both central and
local promotional knowledge. There is information
sharing and negotiation among the supply units and
individual markets.
4. Forecasting-optimization-simulation framework
This framework is developed to study the supply
chain dynamics under uncertainty. Each module of the
framework is explained below. Please refer to Fig. 2 for
the schematic diagram of ‘forecasting-optimization-sim-
ulation architecture’ which shows the interaction
among each module of the framework.
4.1. Forecasting module
The forecasting module de-convolutes the demand
data into a base demand and a promotional demand.
The de-convolution technique is explained in the next
sub-section section. The promotional demand consists
of an expected promotional demand (with some uncer-
tainty) and an unexpected promotional demand. As-
suming a reasonable market growth, a weekly demand
forecast is generated. This also takes into account the
coordination structure of the supply chain. The coordi-
nation structure is captured by the following para-
meters:
l How far ahead are these promotional demands
known to the factory.
and Chemical Engineering 24 (2000) 329-335 331
l Uncertainty in the actual quantity of the promo-
tional demand.
l Uncertainty in the actual week of occurrence of the
promotional demand.
For various values of the above, different forecasts
can be generated. With each forecast, a parameter c1
can be associated which is defined as the fraction of the
total promotional demand that is expected (known).
Known Prom. Demand
’ = Total Prom Demand
The parameter CImeasures the overall efficiency of the
business processes in the supply chain.
5. De-convolution of the demand signal
The following method is used to de-convolute the
demand signal into a base demand and promotional
demand. Since it is not known a priori what the promo-
tional demand is and in which of the weeks it appears
we have to use an iterative (trial and error) method.
This involves estimating a base demand. The estimation
is done by assuming the base demand to be of the
following functional form:Base demand = A + Bt +
C sin(w x t)where A, B, C and w are the estimated
parameters and t denotes the time (measured in week in
this case).
Promotional demand is defined as any demand that
is in excess of the base demand. Initially, all the sales
data is assumed to be base demand (i.e. no promotional
demand). As a first step of the iteration, the base
demand parameters are fitted to the total sales. The sale
in any given week is then compared with the predicted
base demand. If the actual sales is in excess of the
predicted base demand by a certain value (specified by
332 S. Bose, J.F. Pekny /Computers and Chemical Engineering 24 (2000) 329-335

Table 1
Range of values for control parameters

Parameters Regimes

Low Medium High

LT: lead-time for satisfying promotional demand 4 weeks 8 weeks 12 weeks

Q: accuracy in the quantity of promotional demands (denoted by mean Qm, and Mean = 1.0; Mean = 1.O; Mean = 1.O;
S.D. Qd) S.D. = 0.25 S.D. = 0.25 SD. = 0
X: accuracy in the exact week of occurrence (denoted by mean Xm, and S.D. Xd) +4 weeks +2 weeks *O weeks

the user as ‘Promotional Criteria’), then that week is
marked as a promotional week. This is done for all the
weeks. Now the base demand estimated again to fit the
predicted base demand to on& those weeks, which are
not marked as promotional. The sale for each week is
compared with the predicted base demand and the
weeks, which meet the promotional criterion, are
marked and added to the previous set of promotional
weeks. This iteration is performed until no more weeks
can be marked as promotional weeks.
5.2. Simulation module
The simulation module simulates production in the
factory for one week, at a time during which the
schedule is frozen. The inventory levels at the market
warehouses are updated accounting for the actual de-
mands and allowing time for transportation of stock
keeping units.
Each of the three modules is invoked for each period
of the plan.

5.1. Optimization module

The optimization module solves a Mixed Integer
Linear Program (MILP) to decide on a production
schedule which ensures a target customer service level
while minimizing inventory costs at the same time. The
optimization considers a time horizon over which it
solves. The horizon determines how many weeks of
demand information are available to the optimizer.
This production schedule is frozen for a single period (a
week, in this case). Since detailed scheduling is a hard
problem to solve and the difficulty increases exponen-
tially with the problem size, the optimization problem
does detailed scheduling only for the first week and a
rough cut capacity planning for the rest of the weeks in
the horizon. Since only the first week is implemented,
the rough cut capacity planning does not pose any
unfeasibility. The optimization module enforces the
minimum-run-length- constraint for the tasks. The opti-
mization module also ensures that the production fre-
quency of the stock keeping units does not exceed the
stipulated production frequency as practiced by the
plant.
6. Design of simulation runs
In order to study the supply chain dynamics, it is
important to perform simulation runs, which are spe-
cifically designed to address the key issues. The simula-
tion runs should bring out the differences in the various
possible organizational and coordination structures of
the supply chain. Each run must be classified as either
Centralized Control or Decentralized Control or Dis-
tributed Control.
6.1. Control parameters
There are several control parameters that affect the
performance of the supply chain. They are:
1. How far ahead in the future are the promotional
demands known (i.e. how much lead-time is avail-
able to meet the promotional demands).
2. The accuracy in the actual quantity of the promo-
tional demands.
3. The accuracy in the actual week of occurrence of the
promotions.

Table 2
Relation between control parameters and coordination structure

Parameters Type of coordination structure

Centralized De-centralized Distributed

LT: lead-time for satisfying promotional demand HIGH LOW MEDIUM

Q: accuracy in the quantity of promotional demands LOW HIGH MEDIUM
X: accuracy in the exact week of occurrence LOW HIGH MEDIUM
 S. Bose, J.F. Pekny / Computers and Chemical Engineering 24 (2000) 329-335
Fig. 3. Sensitivity of overall customer service level on the exact week
of occurrence of promotional demands.
Theoretically, these parameters can vary over a con-
tinuous range of values. To perform any meaningful
simulations, we must first set some bounds on these
parameters and then divide the range between the
bounds into regimes, such as low, medium and high.
Depending upon the coordination in the supply chain,
the parameter values will lie in one of the regimes.
Table 1 defines the regimes for the parameters.
The bounds on the parameters must be substantiated
by data and observations. From the forecast data avail-
able, only the accuracy in the quantity of the promo-
tional demands could be verified. The corresponding
values from the forecast data were calculated to be 0.98
(mean) and 0.45 (S.D.). The bounds for the other two
parameters (LT and X) are based on reasonable esti-
mates. In the case of ‘lead-time’, the upper bound of 12
weeks is justified because it is highly unlikely to sched-
ule for more than 12 weeks at a time. Hence, any
demands beyond 12 weeks will not be seen by the
scheduling-model anyway. It was also observed during
the simulation runs that if the lead-time is reduced to
less than 4 weeks, or, if the inaccuracy in the exact
week of occurrence of promotional demand is more
than + / -4 weeks, the performance of the supply
chain deteriorates considerably. Hence, these values
were assumed to be bounds. The medium regime was
assumed to be the middle value of the range, since there
is no data to suggest otherwise.
The entries in Table 2 are explained below for each
coordination structure.
333
4.2. Centralized
All the promotions originate from the supply unit,
hence the information about the promotions is avail-
able to the supply unit (which decides the demand
forecasts in case of centralized coordination) well in
advance. This means that lead-time is also high for
centralized control. The uncertainty lies in knowing the
actual effect of these promotions that are offered by the
plant. Since knowledge from the local markets is not
available to the factory, the actual orders requested by
the markets is substantially different from what the
factory forecasts. Hence, the ‘low’ accuracy in the exact
quantity as well as the exact occurrence of the promo-
tional demands. Furthermore, the individual markets
often create unnecessary noise in the supply chain, by
excessive hoarding or stock clearance, which reduce the
accuracy of promotional demands even more. So, over-
all the centralized coordination structure promises
longer lead-times but loses out in the accuracy of
forecasting promotional demands.
6.3. De-centralized
In case of de-centralized control, the forecasting is
primarily based on demand information provided by
the individual markets. The result is high accuracy in
the forecast quantity of the promotional demand as
well as the exact week of occurrence. Since the markets
can see their own stock levels, they place fairly accurate
orders based on their current stock levels and local
promotional knowledge. But, the down side is that they
do not give enough lead-time for production. When the
lead-time given is too small, the factory may not be
able to accommodate the demand because of capacity
limitations. So, overall the de-centralized coordination
structure promises high accuracy in predicting promo-
tional demands but settles for lower lead-times.
6.4. Distributed
Distributed control is a mix of the centralized and
de-centralized control structures. Obviously, there is
trade-off between the centralized and de-centralized
types of coordination. The distributed control can ei-
ther be highly efficient and have the benefits of both
centralized and de-centralized control, or it can repre-
sent a highly unsynchronized supply chain. The Ideal
Coordination Structure would be achieved when the
very best of both worlds (centralized and de-central-
ized) is integrated.
6.5. Performance measure
Each simulation run is measured by an overall cus-
tomer service level achieved and the overall inventory
334 S. Bose, J.F. Pekny /Computers
level. Obviously, increasing the inventory safety stock-
levels result in higher customer service level. The aim
is to attain the desired customer service level of 99.7%
with the minimum possible inventory.
6.6. Computational effort
The number of simulations increases combinatori-
ally with the number of parameter and combinations
thereof. There are three control parameters (LT, Q
and x), with three values each, hence, a total of 33
times 3, i.e. 27 combinations. The parameter CI,which
was introduced as a lumped parameter for measuring
the efficiency of business processes, can take any value
Fig. 4. Sensitivity of overall customer service level on the exact
quantity of promotional demands.
I3
1rlhW
Fig. 5. Sensitivity of overall customer service level on lead-time.
and Chemical Engineering 24 (2000) 329-335
between 0 and 1. The u values were chosen to be
0.2, 0.4, 0.6, 0.8 and 1.0, a total of five values. For
each value of c1 the 27 combinations calculated above
were simulated. That is a total of 27 times 5, i.e. 135
combinations. To determine the best possible customer
service level in each run, six trials were made with
a different inventory level in each trial. That results
in a total of 135 times 6, i.e. 810 combinations.
Each run takes about 25 min for simulating 52 weeks
on a Pentium II (400 MHz) processor. The total
simulation time for all these runs is 20 250 min, which
is about 14 days worth of computational time. Each
run is dependent on a random number seed, hence
for the same values of the parameters, several runs
should be simulated using a different random seed for
each run. It was found that the results of the runs do
not vary too much when a different random number
seed is used. This is because any peculiarities of a
random number are somewhat averaged over 52
weeks.
7. Results
There are several interesting results that can be ex-
tracted from the simulation runs. Although there are
many results and figures obtained from this study,
only the important ones are being discussed below.
7.1. Sensitivity analysis of control parameters
Sensitivity of overall customer service level on the
exact week of occurrence of promotional demands.
This is obtained by varying the parameter X and
keeping all the other parameters constant. Lead-time
is fixed at 8 weeks and CIis set to 0.8. Refer to Fig.
3.
Sensitivity of overall customer service level on the
exact quantity of promotional demands. This is ob-
tained by varying the parameter Q and keeping all
the other parameters constant. Lead-time is fixed at
8 weeks and a is set to 0.8. Refer to Fig. 4.
Sensitivity of overall customer service level on lead-
time. This is obtained by varying lead-time and
keeping all other parameters constant. The uncer-
tainties in the exact week of occurrence and the exact
quantity of promotional demands are both set to 0,
while CIis fixed at 0.8. Refer to Fig. 5.
Sensitivity of overall customer service level on tl.
This is obtained by varying the tl and keeping all the
other parameters constant. The other parameters are
kept constant so that they represent a particular
coordination structure. Fig. 6 shows the case of
de-centralized coordination structure.
 S. Bose, J.F. Pekny / Computers and Chemical Engineering 24 (2000) 329-335
Fig. 6. Sensitivity of overall customer service level on CI.
Fig. 7. Effect of various coordination structures.
7.2. Effect of coordination structure on overall
customer service level
This is the most important set of results derived from
this study. They are obtained by varying the coordi-
nation structure and keeping CI constant. As de-
scribed before, the coordination structures fix the
regimes of the control parameters (LT, Q and x).
Fig. 7 shows the effect of various coordination struc-
tures for c( = 0.8.
Conclusions
One of the objectives of this study was to determine
which of the parameters is important. This can be
deduced from the sensitivity analysis shown in the
results. We summarize the conclusions below.
335
By comparing results for same tl and same inventory
level, it is observed that medium uncertainties in the
occurrence and quantity of promotional demands
have about the same effect. But, high uncertainty in
occurrence is more harmful to the performance than
high uncertainty in quantity of promotional de-
mands.
Although the sensitivity of performance on lead-
time cannot be compared with any other parameter,
it is observed that there is a steady increase in
customer service level as the lead-time increases.
This suggests more simulation runs with still higher
lead-times to observe the point at which the gain in
service level tapers off.
The dependence of customer service level on inven-
tory level in the system is very high. This result was
rather intuitive. The interesting fact, however, is the
gradient of the dependence. The gradient is very
high at lower inventory levels and changes to almost
zero gradient at higher inventory levels. This sug-
gests that keeping the average inventory level at
about 120- 150 tons gives the best performance.
This target inventory level is about 20% higher than
the current practice of inventory coverage. It is also
observed that the service level drops slightly when
target inventory levels are very high. This is not
immediately intuitive. The reason is that pushing the
plant to maintain higher inventory levels unneces-
sary bottlenecks in many of the weeks during the
52-week simulation, Hence, some products, which
have an immediate demand, are not produced in
those weeks, since the plant is busy producing other
products to maintain their high target inventories.
This may seem more like a problem with the
scheduling, but most scheduling models minimize
the deviation of inventory levels from the target
inventory levels.
The dependence of customer service level on CI is
also very strong. A is a lumped parameter, which
reflects the efficiency of business processes in the
supply chain. A can be improved by better commu-
nications between the marketing and production
units, and, better knowledge of local information at
the markets.
Perhaps the most important result can be drawn
from Fig. 5. This figure clearly demarcates the re-
gions where different control structures are recom-
mended. For example, if we assume that the current
status of the supply chain is CI= 0.8 and average
inventory level = 115-125 tons, then we can con-
clude that the centralized coordination structure is
recommended.