OPTIMIZATION OF SUPPLY CHAIN PLANNING UNDER UNCERTAINTY

Alexandre Dolgui and Mohamed-Aly Ould-Louly

Industrial Systems Optimization Lab. University of Technology of Troyes 12, rue Marie Curie, BP2060 - 10010 Troyes cedex, France Ph: +33 (0)3 25 71 56 29 Fax: +33 (0)3 25 71 56 49 E-mail: {dolgui, louly}@univ-troyes.fr

Abstract. In this paper, a survey of existing methods for supply planning optimization under uncertainty is given. The analysis shows that there are no global models taking into account all the principal factors (random lead time, random demand level, complex product structure,). The existing approaches (MRP and Operations research methods) have also several other disadvantages. In these conditions, the proposed solution is to create a toolsbox containing the partial models. Then, the planning model for each concrete industrial case will be composed of different models from this tools-box. A simulation environment will assure integration. Keywords: Production systems, Uncertainty, Planning, Inventory control, Optimization.

1. INTRODUCTION Various sources of uncertainties exist along the supply chain due to: supplying reliability; assembly and manufacturing random lead times; random level of customers demand, etc. To decrease the influence of these uncertainties, the companies use safety stocks, but stocks are expensive. So, the problem is to control stocks throughout the supply chain and to avoid stockout while keeping a high service level. Efforts to minimize the random factors are necessary, but another aspect of possible progress should not be neglected, namely: the development of new planning methods (Maloni and Belton, 1997). In a supply chain, the demand forecasts give information on the final needs; this information should go up from the distribution centers to the production sites and to the raw material suppliers by means of the planning activities (Ballou, 1999). Each

planning activity considers the precedent unit of the chain as the supplier of the current unit. In this planning chain the decisions are related to the following questions: Which are the optimal moments and the optimal quantities to supply? Which product to manufacture, when and how much? Which demands to satisfy, with which products and which quantities? In this paper, an overview of the supply planning methods is given and a framework for search of the solution of this problem is proposed. In Section 2, the Material Requirement Planning (MRP) method is analyzed, its disadvantages are shown. Section 3 deals with optimization models based on different mathematical methods. Section 4 proposes a concept of tools-box for planning optimization.

2. MATERIAL REQUIREMENT PLANNING The MRP method is based on the classification of the material requirements in two categories: independent needs (finished products) and dependent needs (raw materials and components) (Vollman et al., 1997). For the forecast of the independent needs, various methods were developed in the framework of "sales forecasting". The dependent needs can be calculated using Bill of Material and MRP parameters as lot sizes and planned lead times. The first disadvantage of the MRP method, which was confirmed by the industrial experiments, is its deterministic nature. The random demand variations, the random production and procurement lead times and the random delivery volumes are taken into account by their estimations. The common tendency to overestimate these values induces stockouts. The MRP method does not take into account the cost parameters. In the deterministic case, one does not need to calculate costs. If all the orders of components are launched at the latest, then the total cost is automatically minimal. But what is the meaning of "at the latest" if the random factors exist? In this case, for each value of random parameters, a backlogging probability and an inventory cost will correspond. In these conditions, it is necessary to determine the optimal parameters of MRP method. This optimization must take into account all the cost components. The optimization should, not only consider the current state of the system, but must use forecasts on its evolution (for example, the future backlogging could be more expensive than the cancellation of the current customer order). The second disadvantage of the MRP method is that it neglects the interdependence between various stocks. The assembly systems with many components are very sensitive to this interdependence. With MRP method, an order for a component could be made whereas it is useless because another component, which is used together with the first in the assembly of the various products, is late. The third disadvantage of the MRP method is the fact that the component needs for a period are calculated as the sum of all the needs for various products in this component. In presence of random factors, the parameter of planned lead time, for example, which is used in MRP, is an estimation of the random variable of the real lead time; the demand level is an estimation for the real demand, etc. When MRP uses the sum of the needs, it sums random variables, which are not really independent (for instance, the delay of a supplier affects all of its components). So, the solution is not optimal. All these disadvantages of the MRP method are

known in industry as the problem of the MRP software parameterization, i.e. choose the parameters which optimize the planning. There are important studies of the parameters affecting the effectiveness of MRP systems (Yeung et al., 1998). Several works to choice the parameters in stochastic environments exist. These works are classified into three groups as follows.

2.1 The works focused on the demand uncertainty Note that in these works, the lead time is supposed be equal to zero. Three strategies for reducing nervousness in MRP systems are studied: freezing, end-item safety stock, and lot for lot scheduling (Kadipasaoglu and Sridharan, 1995). (Grubbstrm and Molinder, 1996; Grubbstrm and Tang, 1999; Grubbstrm, 1999) study the applicability of the Laplace transform and InputOutput Analysis to formulate a theoretical basis for MRP approach and to investigate the safety stock properties. (Kadipasaoglu and Sridharan, 1997) discuss the shortcoming of existing methods for measuring system nervousness, then propose a new metric for measuring schedule, and give simulation studies to evaluate the effectiveness of the suggested method. The MRP with demand uncertainty is also considered in (Bogataj and Horvat 1996; Kimms, 1998; Enns, 1999; Horvat and Bogataj, 1999; Zpfel, 1996).

2.2 The works focused on the lead time randomness (Bookbinder and akanyildirim, 99) consider inventory models of the order-quantity/order-point type. In a two-stage system with a constant demand rate, the authors develop two probabilistic models. For each model, the authors show that the expected cost per unit time is jointly convex in the decision variables and obtain the global minimum. Numerical examples are given, and sensitivity analyses are conducted with respect to the cost parameters. (Wilhelm and Som, 1998) study single-stage, singleproduct stochastic assembly system, operating according to an MRP philosophy. The inventory position process is identified as a Markov renewal process. An example is given, which demonstrates the type of analysis possible. The MRP with lead time uncertainty is also considered in (Nakagiri and Kuriyama, 1996; Sum et al., 1999).

2.3 The models with several random factors Molinder, (1997) proposes a simulation study of an MRP system affected by both demand and lead time uncertainties. Lot sizes, safety stock and planned lead time are optimized using simulated annealing. The effects of either using safety stocks or safety lead times are compared to each other with propose of finding the best method for protection against uncertainties. The MRP is not the only method of planning. The optimization models based on different mathematical approach can be also used for supply planning.

a priority heuristic. The inventory control model with lead time uncertainty is also considered in (Swaminathan and Shanthikumar, 1999). Random demand level. Lee and Billington (1993) propose a model for study the process of demand transmission from the downstream to the upstream of the supply chain. The decisions relate to the quantity to be produced by each unit and the demand, which will be transmitted to the upstream units. Graves et al. (1998) present a model of production planning with demand forecast. The feature of the model is that the authors propose correction of the forecasts methods keeping maximum stability of the production plan. It is a model with slipping horizon for only one product. Bollapragada et al. (1998) study a depot-warehouse distribution system with random demands. At the beginning of each period, the depot gives an order to an external supplier, which arrives in depot after a fixed lead time. The received order is then shipped to the warehouse. The depot itself does not hold any inventory. There are fixed shipment lead times from the depot to the warehouse. Linear holding and backlogging costs are considered at the warehouses. The authors propose an allocation policy and give an explicit expression for the optimal order quantity. The inventory control model with demand level uncertainty is also considered in (Gurnani, 1996; Anupindi and Tayur, 1998). Random demand and random lead time. Veatch and Wein (1996) propose a model for a machine, which treats several types of products. The costs to be minimized are the inventory cost and the backlogging cost. The demands follow independent Poisson distributions and production times independent exponential distributions. The demand and the production time have the same average. The model suggested allows to choose the products that have to be produced and the quantities of these products. Gurnani et al. (1996) study an assembly system with only one product and two components. The components procurement lead times are random. The components can be ordered either from one supplier only or from two different suppliers (each type of component has its supplier). The model takes into account the cost of purchase, the inventory cost and the backlogging cost. The ordered components are delivered either during the same time, with some probability, or one period later (lead time equal to two periods). The model gives the optimal quantity to order each component from each supplier.

3. OPTIMIZATION MODELS The general optimization model does not exist; the partial models are shared into two categories: non linear programming (NLP); mixed integer programming (MIP). The majority of these models are developed for assembly systems. It is not surprising because in these systems the disadvantages of MRP are the most sensitive. The encountered problems are sometimes so difficult that, in order to obtain an analytical solution, the authors often limit the problem to only one component or to only one product.

3.1. Non linear programming These models propose nonlinear cost functions, which are optimized by classical methods or by a heuristic procedure. Random lead time. Chu et al. (1993) propose a model for the management of assembly systems of one type of product; n components are needed to assemble a product. The demand level is constant. The lead times of the components are random variables. The considered cost is the sum of the holding costs for the components and the backlogging cost for the assembled product. The problem is to find the optimal ordering instants. The authors show the convexity of the expected average cost and propose an iterative algorithm to minimize it. Proth et al. (1997) propose a model for the components supply and assembly planning under the assumptions of the constant demand for finished products, but with random delivery times of the components. The authors take account of the component inventory cost and the backlogging costs. This is a heuristic model. The model allows to calculate the number of components of each type to be ordered from the beginning of each period; the products to be assembled are selected on the basis of

The inventory control models with yield uncertainties is considered in (Gerchak et al., 1994; Gll et al., 1999; Hung and Chang, 1999).

and to find parameters of these models optimizing some criteria (cost, customer service...).

4.1 Tools-box frame 3.2 Mixed integer programming The review of MIP models is given in (Vidal and Goetschalckx, 1997). The authors present summary table, describing the main characteristics of known MIP models. Pirkul and Jayaraman (1998) propose a model for the production-distribution level, which takes account of several production sites, which supply distribution centers. Each distribution center supplies the customers in its zones. The problem is: (i) to find the centers and the sites to be opened; (ii) to determine the sites which supply the centers and the customers zones who are assigned to these centers; (iii) to determine at each stage the quantities to deliver. A linear programming model is proposed, it takes into account the transport cost and the inventory cost; the criterion is the minimum of the total cost. The linear programming models for supply planning are also considered in (Escudero et al., 1999). The architecture of the proposed tools-box is given in Fig.1. The system core manages the information exchanges between the modules. User interface, flows simulation module, which integrate all the other modules, and a library of iterative optimization algorithms are principal elements of this tools-box. The use of simulation allows to check the results of each decision policy with realistic hypotheses. The coupling of simulation with iterative algorithms of optimization allows to find "good" parameters of all the tools-box models within reasonable computational time. Another principal element of the tools-box is the module of supply planning. This module manages the materials flows while deciding how many products of each type should be ordered. An integer programming model for supply planning was proposed in (Dolgui et al., 1996). It takes into account the inventory costs, the backlogging costs, the current components stocks level and the finished product demands. It gives the optimal supply volume for each product, which minimizes the total cost on the infinite horizon. The supply planning module contains also several alternative models based on MRP approach, in particular, the model proposed in (Dolgui and OuldLouly, 2000a). This model minimizes the holding cost while keeping a high customer service level. The approach is based on a Markov chain. The model gives the optimal value for "planned lead times" in single item and multi-items cases.

3.3 Other reviews Other studies of the state of the art exist. Aikens (1985) presents a review where there are few stochastic models. Bhatnagar et al. (1993) carry out a classification of the works by identifying coordination two by two per couple of functions, supply-production, production-distribution. Drexl and Kimms (1997) summarize recent works in the field of lot sizing and scheduling. Mathematical programming models where the planning horizon is subdivided into several discrete periods are given. Slats et al. (1995) introduce the concept of the "logistic laboratory" which is composed of submodels which can be inter-connected to build a total planning model .

supply planning iterative optimization demand forcasting user interface

4. OPTIMIZATION TOOL-BOX There is no global planning model, which takes into account all the principal factors. It would be difficult to imagine such a model, because the problem is very complex and very related to the specificity of each company. A promising approach is to create a decision-making tools-box (Dolgui, 1998; Dolgui and Ould-Louly, 1999). The models and the mechanism to choose and connect them will allow, for each specific supply planning problem, to compose the adequate models

flows simulation module

deliveries forcasting The system core

Fig.1 Tools-box for supply planning optimization.

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