Real life Case- Joint Sales and

Operations Planning
 Operations Planning Model

Problem Instance
• Model run for 6 months demand data 40 products,
15 production plants.
– 576 discrete variables
– 5974 continuous variables
– 3016 constraints
• GAMS with CPLEX Solver
 Results

Scenario 1: Savings due to Improved Operations Planning

Scenario 2: Savings due to improved operations planning while

maintaining supply of end products at par with actual
production

Cost Difference (%)

(Actual Production Plan – Production
Plan Proposed by the Model)
Cost Sce nario 1 Sce nario 2
Inventory Carrying Cost of 61.2 60.9
Intermediates and End Products.
Setup Cost of Intermediates and End 38.46 24.79
Products.
Fresh Raw Materials Cost 20.5 6.38
Inventory Carrying Cost of By- 8.58 6.69
Products and Reusable Raw
Materials
Total Cost 33.87 24.65
 Contribution Maximization Model
• Additional Market Constraint:
– Minimum and Maximum Demand
• Maximize Contribution
Parameters
RMi: Revenue Net of Material Cost (Rs/unit) of product i, i Î E
DMINi,t: Minimum Demand of product i in period t, i Î E
DMAXi,t: Maximum Demand of product i in period t, i Î E

Variable
SDit: Amount of product i sold in period t, i Î E

max z = åå RMi.SDit -åå hi. Iit - å å å S .O åå h I åå h . I åå f .F

ij ijt - s . st - m mt - s st
i t i t i j t s t m t s t

subject to
Iit = Iit - 1 + å Xijt - SDit " i,t. iÎ E
j

SDit ³ DMINit " i,t. iÎ E

SDit £ DMAXit " i,t. iÎ E

 Results

Savings due to Sales and Production Plan

Percentage Increase in Revenue Net of Material Cost in Sales and

Production plan proposed by Contribution Maximization Model as
compared to the actual sales and production plan.

Percentage Increase in Sales . 11.45

Percentage Increase in Materials Cost of 5.44

Goods Sold
Percentage Increase in Revenue Net of 24.82
Material Cost
Production Costs Difference (in Percentage)
(Actual Production plan–Production plan proposed by model)

Inventory Carrying Cost of Intermediates 60.90

and End Products.
Set-up Cost of Intermediates and End 24.79
Products.
Fresh Raw Material cost 6.38
Inventory Carrying Cost of By-Products and 6.69
Raw Materials

Percentage Increase in Contribution 42.54

It can be seen that with only 11.45 percent increase in model sales plan
as compared to actual sales, reduction in production costs
due to improved production-planning, results in
42.54 percent increase in contribution.
Session 8: Inventory
Management
 Big Picture
• Matching Supply and Demand

Minimize Inventory
while
Maintaining Service Levels

• How fast does Apple turn over its inventory?

• How Zara’s inventory policy contributes to its
success?
• Look at Top 25 global firms’ inventory data!
 Why Inventory?
• Spreading the fixed costs of procurement or
setups
• Decoupling of production
• Smoothing and stabilizing production
• Quick customer response
• Risk reduction
– Uncertainties in lead times, production, demand,
transportation
 Relevant Costs
• Holding (carrying) costs
– Opportunity cost of capital invested in inventory
– Depreciation, obsolescence and other overheads
– Expressed as a percentage of item cost
i = annual inventory carrying rate (%)
C = item cost (Rs)
h = i C (Rs/unit/year) = inventory carrying cost

Example: An item of value Rs. 100 spends one year in the system.
The firm incurs an inventory annual carrying rate of 30%.
Hence, the inventory holding cost of the item is:
0.30 x 100 = Rs. 30/unit/year.
 Relevant Costs
• Ordering costs
– Fixed cost of placing an order (Rs/order)
– Independent of order size
• Shortage costs
– Cost of not satisfying the demand (demand exceeds
supply)
– Usually intangible, opportunity cost of losing a
customer, goodwill loss
– Lost sales (margin, good will loss)
– Backorders (Rs/unit/time)
 Trade-offs in inventory
• Order too much
– Less number of orders
– Save on fixed ordering costs
– Incur more inventory costs
• Order too little
– More number of orders
– Save on inventory costs
– Incur more fixed ordering costs

• What is the optimal inventory policy?

 Measuring inventory
• Cash units
200 units of $100 each and 100 units of $150
each = (200 x 100) + (100 x 150) = $35000

Is it small or large?
 Measuring inventory
• Cash units
200 units of $100 each and 100 units of $150 each = (200
x 100) + (100 x 150) = $35000
Is it small or large?

• Days of supply [T = I/R]

The average amount of time (in days) it takes for a unit to
flow through the system
A manufacturer sells $1000 of inventory each day. If there
is $65,000 worth of average inventory, the days-of-supply
= 65 days ~ 9.2 weeks
 Measuring inventory

• Inventory Turns [1/T = R/I]

A manufacturer reports annual COGS = $120
million, inventory of $20 million, has 120/20 = 6
inventory turns,
Flow rate of 120/12 = $10 mn per month -à
20/10 = 2 months of supply = 60 days of supply
Will D-Mart live up to the Street's expectations?
The Wire, March 2017
The Wire, March 2017
Inventory – Ordering Trade-offs