Modeling the Tradeoff between Inventory and Capacity to Optimize Return on Assets in Production Scheduling

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1 Modeling the Tradeoff between Inventory and Capacity to Optimize Return on Assets in Production Scheduling Authors: Advisor: Cindy Wu & Jose A Gonzalez Duhart Dr. Bruce Arntzen MIT SCM Research Fest May 22-23,

2 Introduction Introduction Methodology Modeling Findings May 22-23, 2013 MIT SCM Research Fest 2

3 Products We Are Dealing With X X Fertilizer Weed Killer 3

4 Problem Description Units Capacity Limit Capacity Inventory Time Demand Production Inventory 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

5 Methodology Introduction Methodology Modeling Findings May 22-23, 2013 MIT SCM Research Fest 5

6 Methodology Production Process Theory of Constraints Linear Programming Model 6

7 Production Process Pre-mix Formulation Storage Packaging Theory of Constraints 1 st Constraint 1 2 nd Constraint 2 3 rd Constraint 3 7

8 Linear Programming Model Objective Function Maximize NPV of Return on Operating Assets (ROOA) Maximize NPV of Operating Assets Value Add (OAVA) Revenue Cost Manufacturing Overtime Outsourcing Holding Depreciation Asset Value Equipment Inventory 8 May 22-23, 2013 MIT SCM Research Fest

9 Constraints Linear Programming Model Meet Demand Stage Dependence Capacity Limit Capacity Expansion Raw Materials PM&F Outsourcing Limit Intermediate 1 Intermediate 2 PCK FG1 FG2 Demand Non-Negativity May 22-23, 2013 MIT SCM Research Fest 9

10 Modeling Introduction Methodology Modeling Findings May 22-23, 2013 MIT SCM Research Fest 10

11 The Model s Outputs Master Production Schedule Capacity Increase Options and Timing 11

12 The Model s Outputs Master Production Schedule 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') Binary (PM&F'') Binary (PM&F''')

13 Validating the Model 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) 13

14 Validating the Model Inventory - Expensive vs. Cheap - 4 scenarios Raw Materials PM&F Intermediate 1 Intermediate 2 PCK FG1 FG2 Demand o o o o Baseline PM&F upgrade PCK upgrade Full upgrade 14

15 Model Demonstration May 22-23, 2013 MIT SCM Research Fest 15

16 Findings Introduction Methodology Modeling Findings May 22-23, 2013 MIT SCM Research Fest 16

17 Research Findings About Increasing Capacity Acquiring New Assets Overtime Outsourcing About Asset Utilization 17

18 PM&F Asset Value Production and Demand Thousands USD Increasing Capacity Options: Acquiring new assets Overtime (25% markup) Outsourcing (40% markup) 6,000 PM&F Capacity and Production Management in Year 5 4,000 kl 5,000 3,500 3,000 4,000 2,500 3,000 2,000 2,000 1,500 1,000 1, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec - Demand (prod 1) P&MF (prod 1) Demand (prod 2) OT (PM&F) (prod 1) Asset Value (PM&F) Outsourced (prod 1) P&MF (prod 2) OT (PM&F) (prod 2) Outsourced (prod 2) 18

19 PCK Asset Value Production and Demand Thousands USD Increasing Capacity Options: Acquiring new assets Overtime (25% markup) Outsourcing (40% markup) PCK Capacity and Production Management in Year 8 2,500 4,000 kl 2,000 Raw Materials PM&F Intermediate 1 Intermediate 2 PCK FG1 FG2 Demand 3,500 3,000 1,500 2,500 2,000 1,000 1, , Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec - Demand (prod 1) P&MF (prod 1) Demand (prod 2) OT (PM&F) (prod 1) Asset Value (PM&F) Outsourced (prod 1) P&MF (prod 2) OT (PM&F) (prod 2) Outsourced (prod 2) 19

20 About Asset Utilization Should we maximize asset utilization? May 22-23, 2013 MIT SCM Research Fest 20

21 Recommendations Combine resources strategically Communicate effectively across teams Set relevant success metrics Use the model wisely Revise continuously May 22-23, 2013 MIT SCM Research Fest 21

22 Thank you! 22

23 Backup Slides May 22-23, 2013 MIT SCM Research Fest 23

24 Methodology Setting Up a Linear Programming Model Objective Function MAX: (1-25%) (1+12%) (12%) May 22-23, 2013 MIT SCM Research Fest 24

25 Methodology Setting Up a Linear Programming Model Constraints Meet Demand Stage Dependence Capacity Limit Capacity Expansion Raw Materials PM&F Outsourcing Limit Intermediate 1 Intermediate 2 PCK FG1 FG2 Demand Non-Negativity May 22-23, 2013 MIT SCM Research Fest 25

26 PCK Asset Value Production and Demand PCK Asset Value Production and Demand Thousands USD Thousands USD Acquiring New Assets PCK Objective Function: Acquiring assets only after exploiting OT and outsourcing PCK Capacity and Production Management in Year 7 PCK Capacity and Production Management in Year 8 2,500 4,000 kl 2,500 4,000 kl 3,500 3,500 2,000 3,000 2,000 3,000 1,500 2,500 1,500 2,500 2,000 2,000 1,000 1,500 1,000 1, , , Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec - - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec - Demand (prod 1) P&MF (prod 1) P&MF (prod 2) Demand (prod 1) P&MF (prod 1) P&MF (prod 2) Demand (prod 2) Asset Value (PM&F) OT (PM&F) (prod 1) Outsourced (prod 1) OT (PM&F) (prod 2) Outsourced (prod 2) Demand (prod 2) Asset Value (PM&F) OT (PM&F) (prod 1) Outsourced (prod 1) OT (PM&F) (prod 2) 26 Outsourced (prod 2)

27 PCK Asset Value Production and Demand PCK Asset Value Production and Demand Thousands USD Thousands USD Acquiring New Assets PCK Objective Function: Acquiring assets only after exploiting OT and outsourcing PCK Capacity and Production Management in Year 9 PCK Capacity and Production Management in Year 10 2,500 4,000 kl 2,500 4,000 kl 3,500 3,500 2,000 3,000 2,000 3,000 1,500 2,500 1,500 2,500 2,000 2,000 1,000 1,500 1,000 1, , , Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec - - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec - Demand (prod 1) P&MF (prod 1) P&MF (prod 2) Demand (prod 1) P&MF (prod 1) P&MF (prod 2) Demand (prod 2) Asset Value (PM&F) OT (PM&F) (prod 1) Outsourced (prod 1) OT (PM&F) (prod 2) Outsourced (prod 2) Demand (prod 2) Asset Value (PM&F) OT (PM&F) (prod 1) Outsourced (prod 1) OT (PM&F) (prod 2) 27 Outsourced (prod 2)

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