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CTL.

SC2x -Supply Chain Design

Introduc)on  to  Produc)on  Planning  


and  Fixed  Planning  Horizons  

MIT Center for


Transportation & Logistics
Over-­‐Arching  Ques)on  
How  should  we  use  informa)on  to  coordinate  the  
different  ac)vi)es  of  the  various  players  in  the  
supply  chain?  

Firm

Customer
Supplier

SRM ISCM CRM


“source” “make, move, store” “sell”

Supplier  /  Vendor   Internal  Produc)on   Customer  Demand  


Management   Management   Management  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 2


Supply Chain Integration
Inventory Deployment
Materials Physical
Management Distribution

Vendor Procurement Production Marketing Customer

MRP MRP MRP MPS DRP DRP DRP

Information / Planning

Material Requirements Planning


Master Production Scheduling
Distribution Requirements Planning
CTL.SC2x - Supply Chain Design Lesson: Production Planning
MRP / DRP Integration
Purchase Orders
C C C C C C C C

SA SA SA SA
MRP

A A

MPS Product

CDC

DRP RDC RDC

Retail Retail Retail Retail

Sales/Marketing Plan

CTL.SC2x - Supply Chain Design Lesson: Production Planning


Master  Produc)on  Schedule    

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What  is  the  Master  Produc)on  Schedule?  
•  The  MPS:  
n  is  the  basic  communica)on  between  the  market  and  manufacturing.    
n  is  a  statement  of  PRODUCTION  not  of  the  DEMAND.  
w  Produc)on  might  lag  or  lead  forecasted  demand  
w  Produc)on  might  be  in  batches  when  demand  is  eaches  
n  is  a  plan  to  meet  the  forecasted  demand,  not  a  forecast  of  demand.  
n  translates  S&OP  of  a  firm  into  a  manufacturing  plan  in  terms  of  
quan))es  and  )ming.  
n  shows  when  products  will  be  available  in  the  future  –  when  sales  can  
promise  them  to  customers.  
n  )es  together  the  produc)on  and  the  sales.  
n  statement  of  planned  future  output  for  the  firm.  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 6


Manufacturing  Strategy  
Delivery Lead Time
Engineer Design Procure Manufacture Assemble Deliver
to Order

Delivery Lead Time


Make Procure Inventory Manufacture Assemble Deliver
to Order

Delivery Lead Time


Assemble Procure Manufacture Inventory Assemble Deliver
to Order
Delivery
Lead Time
Make
Procure Manufacture Assemble Inventory Deliver
to Stock
Adapted from Arnold, Chapman, Clyde (2012)
CTL.SC2x - Supply Chain Design Lesson: Production Planning 7
Time  Phased  Record  
The  MPS  connects  the  forecast,  the  produc)on  plan,  
and  the  expected  inventory  level  or  balance.    
Given: Current inventory level Given: Forecast of demand by period

Calculated: Expected inventory a


Entered: Production plan to the END of period 1
be made during that period
It = It-1 + Pt – Ft

Two  classic  “pure”  strategies:    Level  and  Chase  


CTL.SC2x - Supply Chain Design Lesson: Production Planning 8
Level  Produc)on  Strategy  
•  Objec)ve:    Keep  produc)on  level  throughout  by  manufacturing  
average  demand  each  period    
•  Produc)on  in  Period  t  =  Pt=  (ΣFt  –  I0  )/n  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 9


Level  Produc)on  Strategy  
•  Objec)ve:    Keep  produc)on  level  throughout  by  manufacturing  
average  demand  each  period    
•  Produc)on  in  Period  t  =  Pt=  (ΣFt  –  I0  )/n  

Pro’s    
•  Smooth  and  stable  produc)on  opera)ons  for  labor  
•  Avoid  change  or  switching  costs  
•  Minimizes  need  for  extra  capacity  

Con’s    
•  Can  lead  to  excessive  inventory  build  up  in  low-­‐demand  periods  
•  Can  result  in  shortages  during  peak  demand  periods  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 10


Chase  Produc)on  Strategy  
•  Objec)ve:    Match  produc)on  level  to  the  demand  each  period    
•  Produc)on  in  Period  t  =  Pt=  Ft      
           -­‐      given  that  desired  Inventory  level  is  met  

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Chase  Produc)on  Strategy  
•  Objec)ve:    Match  produc)on  level  to  the  demand  each  period    
•  Produc)on  in  Period  t  =  Pt=  Ft      
           -­‐      given  that  desired  Inventory  level  is  met  

Pro’s    
•  Inventory  is  kept  to  a  minimum  
•  Product  is  made  when  required  –  minimizes  obsolesence  

Con’s    
•  Can  lead  to  wild  swings  in  produc)on  &  labor  needs  
•  Requires  firm  to  have  capacity  equal  to  peak  demand  
•  U)liza)on  of  equipment  will  be  very  inconsistent  
CTL.SC2x - Supply Chain Design Lesson: Production Planning 12
Produc)on  Strategies  
•  Pure  Strategies  
n  Level  –  stable  produc)on  =>  varying  inventory  
n  Chase  –  varying  produc)on  =>  stable  inventory  

•  Hybrid  Strategies  
n  Outsourcing/Subcontrac)ng  
w  Keep  level  produc)on  in-­‐house  
w  Outsource  the  variable  component  of  demand  
n  Op)mal  Cost  Trade-­‐offs    
w  Lot  Sizing    
w  Fixed  Planning  Horizon    

CTL.SC2x - Supply Chain Design Lesson: Production Planning 13


Fixed  Planning  Horizon  Problem  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 14


Fixed  Planning  Horizon  Problem  
Find the production plan that minimizes total costs given . . .
•  Demand   •  Discounts  
n  Constant  vs  Variable   n  None  
n  Known  vs  Random   n  All  Units  or  Incremental  
n  Con.nuous  vs  Discrete     •  Excess  Demand  
•  Lead  )me   n  None  
n  Instantaneous     n  All  orders  are  backordered  
n  Constant  or  Variable  (determinis)c/ n  Lost  orders  
stochas)c)   n  Subs)tu)on  
•  Dependence  of  items   •  Perishability  
n  Independent   n  None  
n  Correlated   n  Uniform  with  )me  
n  Indentured   •  Planning  Horizon  
•  Review  Time   n  Single  Period  
n  Con.nuous   n  Finite  Period  
n  Periodic   n  Infinite  
•  Number  of  Echelons   •  Number  of  Items  
n  One   n  One  
n  Mul)  (>1)   n  Many  
•  Capacity  /  Resources   •  Form  of  Product  
n  Unlimited   n  Single  Stage  
n  Limited  /  Constrained   n  Mul)-­‐Stage  
CTL.SC2x - Supply Chain Design Lesson: Production Planning 15
Example:    Queenstown  Gyroscopes  
Your company, Queenstown Gyroscopes, Month Demand
has just received a one year contract with 1 200
Aussie Satellite Systems to provide 2,000 2 150
of your special Kiwi-99 gyroscopes. 3 100
The contract stipulates the exact number of 4 50
gyroscopes to be shipped to them each 5 50
month of the 12 month contract. 6 100
7 150
8 200
9 200
10 250
11 300
12 250
Total: 2,000
CTL.SC2x - Supply Chain Design Lesson: Production Planning 16
Example:    Queenstown  Gyroscopes  
•  Costs  
n  Produc)on  Set  Up  Cost    500  $/run  
n  Cost  per  Gyroscope      50    $/item  
n  Holding  Charge      0.24  $/$/year  
w  Thus  holding  cost  =  1.00  $/item/month  
•  Other  Informa)on  
n  Gyroscopes  manufactured  in  a  period  are  ready  for  use  in  that  period  
n  Gyroscopes  accrue  no  holding  costs  if  consumed  in  same  month  they  
are  produced,  but  accrue  for  future  months  
•  Objec)ve:      
n  Find  the  lowest  cost  produc)on  plan  for  Kiwi-­‐99  gyroscopes  for  the  12  
month  contract.      

CTL.SC2x - Supply Chain Design Lesson: Production Planning 17


Approaches  for  Solving  the  FPH  Problem  
•  Simple  Heuris)cs  
n  One  Time  Run  
n  Lot  for  Lot  (Chase)  
n  Fixed  EOQ  
n  Periodic  Order  Quan)ty  
•  Specialized  Heuris)cs  
n  Least  Period  Cost  (Silver-­‐Meal)  
n  Least  Unit  Cost  
n  Part-­‐Period  Balancing  
•  Op)mal  Methods  
n  Wagner-­‐Whi)n  
n  Mixed  Integer  Linear  Program  (MILP)  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 18


Simple  Heuris)cs  for  FPH  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 19


Approaches  for  Solving  the  FPH  Problem  

•  Simple  Heuris)cs  
n  One  Time  Run  
n  Lot  for  Lot  (Chase)  

n  Fixed  EOQ  (FOQ)  

n  Periodic  Order  Quan)ty  (POQ)  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 20


One  Time  Run  
Manufacture  all  2000    
gyroscopes  in  Month  1  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 21


Lot  for  Lot  
Each  month  manufacture  
the  number  of  gyroscopes  
forecasted  for  that  month  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 22


Fixed  Order    
Quan)ty  
Order  Q*  if  Ft>IOH  
Q*~400  units  
(Q  is  stable,  T  varies)  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 23


Periodic  Order    
Quan)ty  
Order  sum  of  forecasts  
every  ~T*  periods    
(T  is  stable,  Q  varies)  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 24


Comparing  Simple  Heuris)c  Approaches  
Inventory     Set-­‐Up   Total   Avg  Monthly   Inventory  
Costs   Costs   Costs   IOH   Turns  
One  Time  Run   $13,100   $500   $13,600   1,092   1.83  
Lot  for  Lot   $0   $6,000   $6,000   0   infinite  
FOQ   $1,900   $2,500   $4,400   158.3   12.6  
POQ   $2,000   $2,000   $4,000   166.7   12  

AIOH = Total Inventory / 12 IT = D / AIOH

Pro’s    
•  Very  simple  to  implement  and  very  fast!  

Con’s    
•  No  guarantee  of  op)mality  or  proximity  
•  Single  dimension  -­‐  tend  to  reduce  either  inventory  or  set  ups    
CTL.SC2x - Supply Chain Design Lesson: Production Planning 25
Specialized  Heuris)cs  for  FPH  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 26


Approaches  for  Solving  the  FPH  Problem  

•  Specialized  Heuris)cs  
n  Silver-­‐Meal  (Least  Cost  Period)    
n  Least  Unit  Cost  (LUC)  

n  Part-­‐Period  Balancing  (PPB)  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 27


Silver-­‐Meal  Algorithm  
•  The  basic  idea:  
n  Make  the  next  period’s  forecasted  demand  this  period  if  it  
reduces  the  average  cost  per  period.  
n  Minimize  TRC  per  unit  )me  (TRCUT)  =  TRCt/n  
n  The  algorithm  
1.  Start  at  t=1  
2.  Set  n  =  0  
3.  Calculate  TRCUTt+n    
4.  Set  n  =  n  +  1  
5.  Calculate  TRCUTt+n    
6.  If  TRCUTt+n  >  TRCUTt+n-­‐1  then    
a.  Place  an  order  in  )me  period  t  for  the  quan)ty  
 equal  to  the  forecast  demand  of  periods  t  to  t+n-­‐1  
b.  Set  t  =  t+n  go  to  Step  2  
7.  Else,  go  to  Step  4  
CTL.SC2x - Supply Chain Design Lesson: Production Planning 28
Silver-­‐Meal  Algorithm  
1.  Start  at  t=1  
2.  Set  n  =  0  
3.  Calculate  TRCUTt+n    
Set up 500 $/run 4.  Set  n  =  n  +  1  
Holding 1 $/item/mon 5.  Calculate  TRCUTt+n    
6.  If  TRCUTt+n  >  TRCUTt+n-­‐1  then    
a.  Make  Sum(Ft  to  Ft+n-­‐1)    in  t  
b.  Set  t  =  t+n  go  to  Step  2  
7.  Else,  go  to  Step  4  

1   0   TRCUT(1)  =  (500+0)/1  =  500   Make  200  in  month  1  –  no  holding  costs  

1   1   TRCUT(2)  =  (500+150)/2  =  325   Make  350  in  month  1,  hold  150  for  1  month  

1   2   TRCUT(3)  =     Make  450  in  month  1,  hold  150  for  1  month,  and  100  
(500+150+2(100))/3  =  283   for  2  months  
1   3   TRCUT(4)  =   Make  500  in  month  1,  hold  150  for  1  month,  100  for  
 (500+150+2(100)+3(50))/4  =  250   2  months,  and  50  for  3  months  
1   4   TRCUT(5)  =   Make  550  in  month  1,  hold  150  for  1  month,  100  for  
(500+150+2(100)+3(50)+4(50))/5  =  240   2  months,  50  for  3  months,  and  50  for  4  months  
1   5   TRCUT(6)  =  (500+150+2(100)+3(50)     Make  650  in  month  1,  hold  150  for  1  month,  100  for  
                                                     +4(50)+5(100))/6  =  283     2  months,  50  for  3  months,  50  for  4  months,  and  100  
for  5  months.  
1   5  
TRCUT(6)  >  TRCUT(5)  so:       Set  t=6,  Go  to  Step  2  –  so  we  now  want  to  determine  
Make  
CTL.SC2x - Supply 550  units  in  Month  1.       Lesson:
Chain Design how  much  to  make  in  month  6  
Production Planning 29
Silver-­‐Meal  Algorithm  
1.  Start  at  t=1  
2.  Set  n  =  0  
3.  Calculate  TRCUTt+n    
Set up 500 $/run 4.  Set  n  =  n  +  1  
Holding 1 $/item/mon 5.  Calculate  TRCUTt+n    
6.  If  TRCUTt+n  >  TRCUTt+n-­‐1  then    
a.  Make  Sum(Ft  to  Ft+n-­‐1)    in  t  
b.  Set  t  =  t+n  go  to  Step  2  
7.  Else,  go  to  Step  4  

6   0   TRCUT(6)  =  (500+0)/1  =  500   Make  100  in  month  6  –  no  holding  costs  
6   1   TRCUT(7)  =  (500+150)/2  =  325   Make  250  in  month  6,  hold  150  for  1  month  
6   2   TRCUT(8)  =  (500+150+2(200))/3  =  350   Make  450  in  month  6,  hold  150  for  1  month,  and  200  
for  2  months  
6   2   TRCUT(8)  >  TRCUT(7)  so:       Set  t=8,  Go  to  Step  2  –  so  we  now  want  to  determine  
Make  250  units  in  Month  6.       how  much  to  make  in  month  8  

8   0   TRCUT(8)  =  (500+0)/1  =  500   Make  200  in  month  8  –  no  holding  costs  
8   1   TRCUT(9)  =  (500+200)/2  =  350   Make  400  in  month  8,  hold  200  for  1  month  
8   2   TRCUT(10)  =  (500+200+2(250))/3  =  400   Make  650  in  month  8,  hold  200  for  1  month,  and  250  
for  2  months  
8   2   TRCUT(10)  >  TRCUT(9)  so:       Set  t=10,  Go  to  Step  2  –  so  we  now  want  to  
Make  400  units  in  Month  8.       determine  how  much  to  make  in  month  10  
CTL.SC2x - Supply Chain Design Lesson: Production Planning 30
Silver-­‐Meal  Algorithm  
1.  Start  at  t=1  
2.  Set  n  =  0  
3.  Calculate  TRCUTt+n    
Set up 500 $/run 4.  Set  n  =  n  +  1  
Holding 1 $/item/mon 5.  Calculate  TRCUTt+n    
6.  If  TRCUTt+n  >  TRCUTt+n-­‐1  then    
a.  Make  Sum(Ft  to  Ft+n-­‐1)    in  t  
b.  Set  t  =  t+n  go  to  Step  2  
7.  Else,  go  to  Step  4  

10   0   TRCUT(10)  =  (500+0)/1  =  500   Make  250  in  month  10  –  no  holding  costs  
10   1   TRCUT(11)  =  (500+300)/2  =  400   Make  550  in  month  10,  hold  300  for  1  month  
10   2   TRCUT(12)  =  (500+300+2(250))/3  =  433   Make  800  in  month  10,  hold  300  for  1  month,  and  
250  for  2  months  
10   2   TRCUT(12)  >  TRCUT(11)  so:       Set  t=12,  Go  to  Step  2  –  so  we  now  want  to  
Make  550  units  in  Month  10.       determine  how  much  to  make  in  month  12  

12   0   Make  250  units  in  Month  12.       Make  the  remaining  amount.    

Production Plan
•  Produce 550 in month 1 •  Produce 550 in month 10
•  Produce 250 in month 6 •  Produce 250 in month 12
•  Produce 400 in month 8
CTL.SC2x - Supply Chain Design Lesson: Production Planning 31
Silver-­‐Meal  
Algorithm    
Order  to  minimize  
cost  per  unit  )me  
(T  and  Q  vary)  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 32


Comparing  Heuris)c  Approaches  
Inventory     Set-­‐Up   Total   Avg  Monthly   Inventory  
Costs   Costs   Costs   IOH   Turns  
One  Time  Run   $13,100   $500   $13,600   1,092   1.83  
Lot  for  Lot   $0   $6,000   $6,000   0   infinite  
FOQ   $1,900   $2,500   $4,400   158.3   12.6  
POQ   $2,000   $2,000   $4,000   166.7   12  
Silver-­‐Meal   $1,350   $2,500   $3,850   112.5   17.8  

Pro’s    
•  Simple  to  implement  and  SM  tends  to  lead  to  beter  solu)ons  

Con’s    
•  No  guarantee  of  op)mality  or  proximity  
 
CTL.SC2x - Supply Chain Design Lesson: Production Planning 33
Op)mal  Methods  for  FPH  Problem  
 Wagner-­‐Whi)n  
 MILP  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 34


Algorithm for Wagner-Whitin
•  Wagner  Whi)n  Algorithm  
n  An  applica)on  of  dynamic  programming    
n  Guarantees  to  find  the  minimum  of  set  up  and  inventory  costs  

•  Relies  on  Two  Key  Proper)es  


n  Zero  Inventory  Ordering  Property  exists  
w  We  will  only  order  when  there  is  no  inventory  on-­‐hand  
w  Replenishments  arrive  at  start  of  period,  shortages  are  not  allowed,  demand  is  
determinis)c  
n  There  is  an  upper  limit  on  holding  )me  for  demand  
w  If  cost  of  holding  an  item  for  a  number  of  periods  exceeds  the  set-­‐up  cost  
w  Condi)on:    D(j)  >  ctce    for  our  example  500  units.      

CTL.SC2x - Supply Chain Design Lesson: Production Planning 35


Algorithm for Wagner-Whitin
•  Rough  Algorithm  (Forward  &  Backward)  
1.  Start  at  )me  t=1    
2.  Find  cost  for  ordering  just  enough  to  sa)sfy  demand  in  
period  t,  D(t).  
3.  Look  at  all  past  orders  (un)l  t=1)  and  find  cost  for  
ordering  enough  for  D(t)  by  adding  it  onto  an  exis)ng  
previous  order  for  D(t-­‐1).  
4.  Pick  lowest  cost  of  op)ons  –  Go  to  next  t  un)l  t-­‐N.  
5.  At  t=N  work  backwards  from  period  N  finding  lowest  cost  
op)ons  for  sa)sfying  each  D(t)  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 36


Wagner-­‐Whi)n  (forward)  
1.  Start  at  )me  t=1    
2.  Find  cost  for  D(t).  
3.  Find  cost  for  ordering  enough  for  
Set up 500 $/run
Holding 1 $/item/mon D(t)  by  adding  it  to  exis)ng  
previous  order  for  D(t-­‐1).  
4.  Pick  lowest  cost  of  op)ons  –  Go  to  
next  t  un)l  t-­‐N.  
5.  At  t=N  work  backwards  to  find  
lowest  cost  op)ons  for  each  D(t).  

1   Op)on  #1:    Make  200  units  for  D(1)     There  are  no  other  op)ons  
                                           TC  =  $500  

2   Op)on  #1:    Make  enough  in  Period  1  for  D(1  &  2)   There  are  two  op)ons.    
                                           TC  =  500  +  (1)150  =  $650   Op)on  #1  is  the  best  current  
Op)on  #2:    Best  Period  1  Plan  +  Make  enough  for  D(2)   solu)on.      
                                           TC  =  500  +  500  =  $1000  

3   Op)on  #1:    Make  enough  in  Period  1  to  cover  D(1,  2,  &  3)   There  are  three  op)ons.    
                                           TC  =  500  +  (1)150    +  (2)100  =  $850   Op)on  #1  is  the  best  current  
Op)on  #2:    Best  Period  1  Plan  +  Make  enough  in  2  for  D(2)  &  D(3)   op)on.  
                                           TC  =  500  +  500  +  (1)100    =  $1100  
Op)on  #3:    Best  Period  2  Plan  +  Make  enough  for  D(3)  
                                           TC  =  650  +  500  =  $1150  
CTL.SC2x - Supply Chain Design Lesson: Production Planning 37
Wagner-­‐Whi)n  (forward)  
1.  Start  at  )me  t=1    
2.  Find  cost  for  D(t).  
3.  Find  cost  for  ordering  enough  for  
Set up 500 $/run
Holding 1 $/item/mon D(t)  by  adding  it  to  exis)ng  
previous  order  for  D(t-­‐1).  
4.  Pick  lowest  cost  of  op)ons  –  Go  to  
next  t  un)l  t-­‐N.  
5.  At  t=N  work  backwards  to  find  
lowest  cost  op)ons  for  each  D(t).  
Period 1 2 3 4 5 6 7 8 9 10 11 12
Demand 200 150 100 50 50 100 150 200 200 250 300 250
1 Order 1 $500 $650 $850 $1,000 $1,200 $1,700 $2,600 $4,000 $5,600 $7,850 $10,850 $13,600
2 Order 2 $1,000 $1,100 $1,200 $1,350 $1,750 $2,500 $3,700 $5,100 $7,100 $9,800 $12,300
3 Order 3 $1,150 $1,200 $1,300 $1,600 $2,200 $3,200 $4,400 $6,150 $8,550 $10,800
4 Order 4 $1,350 $1,400 $1,600 $2,050 $2,850 $3,850 $5,350 $7,450 $9,450
5 Order 5 $1,500 $1,600 $1,900 $2,500 $3,300 $4,550 $6,350 $8,100
6 Order 6 $1,700 $1,850 $2,250 $2,850 $3,850 $5,350 $6,850
7 Order 7 $2,100 $2,300 $2,700 $3,450 $4,650 $5,900
8 Order 8 $2,350 $2,550 $3,050 $3,950 $4,950
9 Order 9 $2,750 $3,000 $3,600 $4,350
10 Order 10 $3,050 $3,350 $3,850
11 Order 11 $3,500 $3,750
12 Order 12 $3,850

CTL.SC2x - Supply Chain Design Lesson: Production Planning 38


Wagner-­‐Whi)n  (backward)  
1.  Start  at  )me  t=1    
2.  Find  cost  for  D(t).  
3.  Find  cost  for  ordering  enough  for  
Set up 500 $/run
Holding 1 $/item/mon D(t)  by  adding  it  to  exis)ng  
previous  order  for  D(t-­‐1).  
4.  Pick  lowest  cost  of  op)ons  –  Go  to  
next  t  un)l  t-­‐N.  
5.  At  t=N  work  backwards  to  find  
lowest  cost  op)ons  for  each  D(t).  
Period 1 2 3 4 5 6 7 8 9 10 11 12
Demand 200 150 100 50 50 100 150 200 200 250 300 250
1 Order 1 $500 $650 $850 $1,000 $1,200 $1,700 $2,600 $4,000 $5,600 $7,850 $10,850 $13,600
2 Order 2 $1,000 $1,100 $1,200 $1,350 $1,750 $2,500 $3,700 $5,100 $7,100 $9,800 $12,300
3 Order 3 $1,150 $1,200 $1,300 $1,600 $2,200 $3,200 $4,400 $6,150 $8,550 $10,800
4 Order 4 $1,350 $1,400 $1,600 $2,050 $2,850 $3,850 $5,350 $7,450 $9,450
5 Order 5 $1,500 $1,600 $1,900 $2,500 $3,300 $4,550 $6,350 $8,100
6 Order 6 $1,700 $1,850 $2,250 $2,850 $3,850 $5,350 $6,850
7 Order 7 $2,100 $2,300 $2,700 $3,450 $4,650 $5,900
8 Order 8 $2,350 $2,550 $3,050 $3,950 $4,950
9 Order 9 Optimal Production Plan: $2,750 $3,000 $3,600 $4,350
10 Order 10 Make 550 in period 1, 450 in period 6, $3,050 $3,350 $3,850
11 Order 11 450 in period 9, and 550 in period 11 $3,500 $3,750
12 Order 12 $3,850

CTL.SC2x - Supply Chain Design Lesson: Production Planning 39


Wagner-­‐Whi)n  
Algorithm    
Order  to  minimize  average  
cost  per  unit  )me  
(T  and  Q  vary)  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 40


Op)mal  Methods  for  FPH  Problem  
 Wagner-­‐Whi)n  
 MILP  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 41


Produc)on  Planning  MILP  
Set up Costs

Min z = ∑ csetup Z t + ∑ hI t Holding Costs


t t

s.t.
I0 = 0 Conservation of Flow or Inventory Balance
constraint for time period t.
Qt − Dt + I t−1 − I t = 0 ∀t ∈ T
Linking/logical constraint ensuring binary flag
MZ t − Qt ≥ 0 ∀t ∈ T for a time period is ON if we manufacture any
quantity during that time period.
Qt ≤ CAPt ∀t ∈ T
I t ,Qt ≥ 0 ∀t ∈ T Maximum capacity constraint for time period
t.
Z t = {0,1} ∀t ∈ T

Decision Variables
Qt = Quantity produced in time period t (units) ∀t
Z t = 1 if manufacture in time period t, = 0 o.w. ∀t
Input Data
CAPt = Manufacturing capacity for time period t (units) ∀t ∈ T
Dt = Demand for time period t (units) ∀t ∈ T
I t = Inventory at end of time period t (units) ∀t ∈ T
csetup = Cost to make a production run ($/run)
h = Inventory holding cost for one time period ($/unit/time period)
M = Large number
CTL.SC2x - Supply Chain Design Lesson: Production Planning 42
Produc)on  Planning  MILP  -­‐  Formula)on  

CTL.SC2x - Supply Chain Design Lesson: Production Planning


Produc)on  Planning  MILP  -­‐  Formula)on  

Optimal Order Policy:


Order 550 in period 1, 450 in period 6,
450 in period 9, and 550 in period 11

CTL.SC2x - Supply Chain Design Lesson: Production Planning


Comparing  Approaches  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 45


Comparison of Approaches
Mon Demand 1TB L4L EOQ POQ Optimal SM LUC PBB
1 200 2000 200 400 450 550 550 350 500
2 150 0 150 0 0 0 0 0 0
3 100 0 100 400 0 0 0 300 0
4 50 0 50 0 200 0 0 0 0
5 50 0 50 0 0 0 0 0 300
6 100 0 100 0 0 450 250 0 0
7 150 0 150 0 550 0 0 350 0
8 200 0 200 400 0 0 400 0 650
9 200 0 200 0 0 450 0 450 0
10 250 0 250 400 800 0 550 0 0
11 300 0 300 400 0 550 0 550 550
12 250 0 250 0 0 0 250 0 0

Holding Cost $13,100 $- $1,900 $2,000 $1,750 $1,350 $1,500 $1,850


Order Cost $500 $6,000 $2,500 $2,000 $2,000 $2,500 $2,500 $2,000
Total Cost $13,600 $6,000 $4,400 $4,000 $3,750 $3,850 $4,000 $3,850
Inv TurnOver 1.83 Inf 12.60 12.00 13.70 17.80 13.00 13.00
Pct > Optimal 263% 60% 17% 7% 0% 3% 7% 3%

CTL.SC2x - Supply Chain Design Lesson: Production Planning 46


Comparing Different FPH Models
•  There are many methods available :
n  Heuristics are fast and easy to implement, but are not always
good
n  Specialty heuristics are more sophisticated, a bit harder to set
up, but tend to give us better ‘real-world’ results
n  Optimal methods require more time and data, allow for
introduction of other constraints, and give the optimal solution
but…
w  They assume perfect forecast information
w  They treat today’s data equally to next year’s
w  The optimal production plan is based on all data

•  When forecasts exhibit significant change, myopic


heuristics (like SM) might perform better!

CTL.SC2x - Supply Chain Design Lesson: Production Planning 47


Key  Take  Aways  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 48


Key  Take  Aways  
•  Systems  to  manage  flow  of  informa)on  for  produc)on:  
n  Master  Planning  Schedule  (MPS)  
n  Material  Requirements  Plan  (MRP)  
n  Distribu)on  Requirements  Plan  (DRP)    
•  Manufacturing  strategy  influences  the  plan  
n  Chase  versus  Level  versus  Hybrid  
•  Fixed  Planning  Horizon  (FPH)  or  Lot  Sizing    
n  Heuris)cs  versus  Op)mal  Models  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 49


CTL.SC2x -Supply Chain Design
Questions, Comments, Suggestions?
Use the Discussion!

“Wilson – upon learning that the Silver-Meal algorithm has nothing to do with food”
Yankee Golden Retriever Rescued Dog (www.ygrr.org)

MIT Center for


Transportation & Logistics caplice@mit.edu
Images  
•  Slide  16    
n  "Gyroscope  opera)on".  Licensed  under  Public  Domain  via  Wikimedia  Commons  -­‐  htps://
commons.wikimedia.org/wiki/File:Gyroscope_opera)on.gif#/media/File:Gyroscope_opera)on.gif  

CTL.SC2x - Supply Chain Design Lesson: Production Planning 51

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