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Advanced Planning and Scheduling Is logistics everything? A research on the use(fulness) of advanced planning and scheduling systems. Marjolein van Eck BWI paper, April 2003 Advanced Planning and Scheduling Is logistics everything? A research on the use(fulness) of advanced planning and scheduling systems. Marjolein van Eck BWI paper, April 2003 Vrije Universiteit Amsterdam Faculty of Sciences Mathematics and Computer science departments Paper for Business mathematics and Informatics De Boelelaan 1801a 1081 HV Amsterdam Preface This paper is part of the doctoral programme of the study Business mathematics and Informatics (BWI) at the vrije Universiteit Amsterdam. This paper is based on a literature research into advanced planning and scheduling. This research is subtitled: Is logistics everything? which refers to a headline in the NRC Handelsblad on the 29th of November 1997: “Logistiek is alles.” (Logistics is everything). An article with the retiring chairman of the EVO, the organisation for logistics and transport. Since a decade the accent in the logistics sector has moved from inside the factories and warehouses to the outside world. The Supply-Chain paradigm has lead to new research areas and technologies in the search for an increased control of the total logistics chain of companies who co-operate to produce and sell products. One of the most remarkable results of the Supply Chain concept is the increase in the use of formal, scientific methods to support the logistical decision-making. With this research I hope to have given a critical and objective view on this new development. I would like to thank my supervisor Ger Koole for his critical view. Marjolein van Eck Amsterdam, The Netherlands, April 2003 Executive summary Supply chain management (SCM) is defined as a process for designing, developing, optimising and managing the internal and external components of the supply system, including material supply, the transformation of material and distribution of finished products or services to customers, that is consistent with overall objectives and strategies (Spekman, 1998). The essence of SCM is a strategic weapon to develop a sustainable competitive advantage by reducing investments without sacrificing customer satisfaction (Lee and Billington, 1992). Since each level of the supply chain focuses on a compatible set of objectives, redundant activities and duplicated efforts can be reduced (Spekman, 1998). All companies function as links in chains of entities that produce and distribute products. Many companies have viewed their participation in the supply chain from an independent perspective, and focused on the maximisation of its own profitability. In the traditional view each organisation aims to maximise its own profit, while in the new integrated view each organisation aims to maximise total supply chain success. Therefore a supply chain company in the new view must lose its external boundaries. Four forms of supply chain integration can be distinguished: Physical integration Information integration Management control integration Organisational integration Materials requirements planning (MRP) and capacity requirement planning (CRP) systems have been gradually developed towards closed loop systems entitled Manufacturing Resource Planning (MRP II), which integrate both materials and capacity requirements. Latest, Enterprise Resource Planning (ERP) and Advanced Planning and Scheduling (APS) systems have improved the integration of materials and capacity planning by use of constraint-based planning and optimisation. Further many ERP en APS systems make it possible to include supplier and customer in the planning procedure and thereby optimise a whole supply chain on a real-time basis. Instead of an ERP system that focuses on each individual link in the chain, an APS system is a system that suits like an umbrella over the entire chain, thus enabling it to extract real-time information from that chain, with which to calculate a feasible schedule, resulting in a fast, reliable response to the customer. APS is a new revolutionary step in enterprise and inter-enterprise planning. It is revolutionary, due to the technology and because APS utilises planning and scheduling techniques that consider a wide range of constraints to produce an optimised plan: Material availability Machine and labour capacity Customer service level requirements (due dates) Inventory safety stock levels Cost Distribution requirements Sequencing for set-up efficiency This paper also discusses the basic functionality of planning and scheduling in Advanced Planning and Scheduling systems (APS). Three basic planning options - concurrent planning (or unconstrained planning), constrained planning and optimisation - are analysed. The planning functionality is radically improved compared to MRP and MRP II. APS is relevant for production-organisations. Also distribution-organisations can benefit from implementing APS for supply chain management. The key success factors, which are necessary to implement an APS system successfully, are as follows: Supply chain management concept Experience Nervousness Human factor Complexity Financial resources Data accuracy Table of contents CHAPTER 1. INTRODUCTION1 CHAPTER 2. THE INTEGRATION OF THE SUPPLY CHAIN3 2.1 SUPPLY CHAIN3 2.2 SUPPLY CHAIN MANAGEMENT4 2.3 SUPPLY CHAIN INTEGRATION5 CHAPTER 3. PLANNING SYSTEMS9 3.1 PLANNING SYSTEMS9 3.1.1 STATISTICAL INVENTORY CONTROL9 3.1.2 MATERIAL REQUIREMENTS PLANNING9 3.1.3 MANUFACTURING RESOURCES PLANNING10 3.1.4 DISTRIBUTION RESOURCES PLANNING10 3.1.5 ENTERPRISE RESOURCES PLANNING10 3.1.6 ADVANCED PLANNING AND SCHEDULING11 3.2 PLANNING SYSTEMS VERSUS SUPPLY CHAIN INTEGRATION12 CHAPTER 4. ADVANCED PLANNING AND SCHEDULING15 4.1 APS SOLUTIONS15 4.2 DIFFERENCES IN PLANNING HORIZONS17 4.2.1 SUPPLY CHAIN PLANNING18 4.2.2 MANUFACTURING PLANNING18 4.2.3 PRODUCTION SCHEDULING18 4.3 PLANNING AND SCHEDULING19 4.3.1 ADVANCED PLANNING19 4.3.2 ADVANCED SCHEDULING19 4.4 FEATURES OF APS20 4.5 APS IN RELATION TO TRADITIONAL PLANNING SYSTEMS27 4.5.1 APS VERSUS MRP I/II27 4.5.2 APS VERSUS ERP28 4.6 APS FOR PRODUCTION ORGANISATIONS28 4.7 APS FOR DISTRIBUTION ORGANISATIONS29 CHAPTER 5. ANALYSIS OF THE PLANNING AND SCHEDULING FUNCTIONALITY31 5.1 APS FUNCTIONALITY31 5.2 UNCONSTRAINED PLANNING31 5.3 CONSTRAINT-BASED PLANNING32 5.4 OPTIMISATION34 5.4.1 A SUPPLY CHAIN OPTIMISATION PROBLEM36 5.4.2 OPTIMISATION FRAMEWORK39 5.4.2 OPTIMISATION SOLVERS39 5.4.3 A STANDARD LP-MODEL FOR OPTIMISATION41 5.4.4 OPTIMISATION USAGE GUIDELINES44 5.5 UNCERTAINTY44 CHAPTER 6. IMPLEMENTATION OF APS47 6.1 IMPLEMENTATION STRATEGY47 6.2 POINTS OF ATTENTION48 6.3 INTEGRATION WITH EXISTING SYSTEMS49 6.4 CONDITIONS FOR APS50 CHAPTER 7. CONCLUSIONS AND DISCUSSION51 APPENDIX A. REFERENCES55 APPENDIX B. ABBREVIATIONS57 APPENDIX C. SOFTWARE VENDORS59 RHYTHM SOLUTIONS OF I2 TECHNOLOGIES59 MANUGISTICS6 OF MANUGISTICS60 APO OF SAP61 Chapter 1. Introduction “The 1990s have seen a dramatic change in the way that we do business. Rapid advances in technology and increasing regulatory freedom have changed the rules of competition. Companies are now competing globally and traditional barriers between industries are breaking down. To cope with these changes and achieve superior performance, business leaders are moving towards new business paradigms that allow their companies to work more closely with their traditional and new business partners to adapt to the rapidly changing marketplace. This improved integration is the very essence of supply chain management. Supply chain leaders are reconsidering the linkages, not only between functions within their own company, but with other organisations up and down the supply chain.” (Gattorna, 1998) Supply chains are becoming more efficient and more responsive to the needs of increasingly demanding customers, driven by competitive pressures and supported by developments in information technology (IT). IT plays a major role in integrating supply chains and managing them more effectively. Almost every industrial company is now considering the implementation of an advanced system to manage their supply chain more effectively, improve customer service dramatically, and reduce costs as well. These systems are Advanced Planning and Scheduling systems (APS) with marvellous names such as i2/Rhythm, Red Pepper and Manugistics. With these systems it is possible to answer customer enquiries within seconds instead of hours or days. Speed is just one of the characteristics of APS. It promises that after implementation of APS, better throughput times, delivery times, inventory levels and utilisation rates result in higher levels of customer service and major reductions in costs. During the recent years system vendors have put much effort in improving the functionality of APS systems. But what is the true value of these concepts? Are they as revolutionary as they sound? Implementation of these kinds of systems have dramatic consequences for the organisation. Is it worth to implement these new software packages? The objective of this paper is to map the characteristics of advanced planning and scheduling systems and to find out the (use)fulness of these systems. Therefore the following problem has been formulated: “Why (and how) should organisations implement an Advanced Planning and Scheduling system?” To solve this problem several questions will be answered: What is supply chain management? What is supply chain integration? What is Advanced Planning and Scheduling? What is the difference between ASP and traditional planning systems? What are the current functionalitys of APS systems? What are the key success factors for implementation? To be able to answer these questions available literature on this subject has been studied. Chapter 2 will give insight in Supply Chain Management (SCM) and the four stages of supply chain integration. Chapter 3 will describe all the planning systems, which can be used, ending with APS and the relation between the planning systems and supply chain integration. Chapter 4 will continue on these planning systems with a profound description of APS. Chapter 5 focuses on the three basic planning options. Unconstrained planning, constrained planning and optimisation are analysed. Chapter 6 discusses the implementation and the conditions for a successful implementation. The final conclusions and discussion points will be stated in chapter 7. Appendix A contains the references and in appendix B the used abbreviations will be enumerated and explained. Finally, in appendix C the three main suppliers of APS software will be described. Chapter 2. The integration of the Supply Chain “Like the medieval lords who built moats and walls around their castles many organisations have constructed artificial boundaries between themselves and the outside world. While these boundaries do not consist of water and bricks, they are just as difficult to surmount. More importantly, just as social evolution made castle walls obsolete, the new success factors of speed, flexibility, integration, and innovation are making boundaries between organisations less relevant. In fact, hiding behind such boundaries today can be more dangerous than venturing outside.” (Ashkenas et al., 1995) 2.1 Supply chain World class companies are now accelerating their efforts to align processes and information flows through their entire value-adding network to meet the rising expectations of a demanding marketplace (Quinn, 1993). Some of the drivers for change, that forces companies to overhaul their logistical structure are (Holmes, 1995): Increased regional and global competition The most potent force driving companies to overhaul their supply chains is increased cross border competition, regional and global. For many companies the competitive arena has become worldwide, rather than national or regional. The role of the single market in Europe Europes single market has intensified competition by tearing down the last protective barriers. At the same time the single market is an important factor which enables supply chain integration across borders. The dismantling of frontier controls has led to the speed-up of road transport, which facilitates the switch from national to multi-country distribution centres. Shorter product life cycles The trend towards shrinking product life cycles force a change in logistic management as it augments the risk of being stuck with obsolete inventory. Changes in the market place National and crossborder mergers and acquisitions in recent years have led to greater concentration of purchasing power in most sectors of industry. In the wholesale and retail distribution the growth of powerful chains is squeezing out the independents. Pressure from smarter customers Major retailers and industrial end-users are becoming more sophisticated and more demanding. They are reducing their supplier base and are working more closely with the remaining suppliers. Service as a differentiator Products are more and more becoming commodities, forcing suppliers to search for new ways to differentiate themselves. Competitive edge will come from service differentiation. The ability of an organisation to distinguish itself is coming to lie increasingly in the area of customer service. This places heavy pressure on the logistical chain. Delivering goods to customers in the most economic way while providing first-class service and quality is the logistics strategy. This requires more and more integration of the supply chain, in which all parts of the supply chain are linked to each other. Suppliers and customers cannot be managed in isolation anymore, with each entity treated as an independent entity. More and more, there is a transformation in which suppliers and customers are inextricably linked throughout the entire sequence of events which brings raw material from its source of supply, through different value-adding activities to the ultimate customer. Success is no longer measured by a single transaction; competition is now evaluated as a network of co-operating companies competing with other firms along the entire supply chain (Spekman et al, 1994). Analytically, a supply chain is simply a network of material processing cells with the following characteristics: supply, transformation and demand (Davis, 1993). An example of a supply chain is shown in figure 2.1 Figure 2.1 An example of a supply chain 2.2 Supply Chain Management Supply chain management (SCM) is defined as a process for designing, developing, optimising and managing the internal and external components of the supply system, including material supply, the transformation of materials and distribution of finished products or services to customers, that is consistent with overall objectives and strategies (Spekman et al., 1998). The essence of SCM is to develop a sustainable competitive advantage by reducing investments without sacrificing customer satisfaction (Lee for example the factory, a central distribution centre (DC) and national sales warehouses. In a distribution network, co-ordination of the various activities (sales forecast, orders, transport and inventories) is essential. The principles of MRP I/II (dependent demand and scheduling) are also used in inventory management in distribution networks: DRP. DRP is an information system that supports co-ordination within the distribution network. The purpose of such a system is to record goods flows and it requires that information must be available on where stocks are held, which goods are in transit and what are the changes in inventories. DRP makes it possible to co-ordinate the decisions taken at various point in the distribution network. 3.1.5 Enterprise Resources Planning ERP is defined as a software architecture that facilitates the flow of information between all functions within a company such as manufacturing, logistics, finance and human resources (Hicks, 1997). It is an enterprise-wide information system solution (Lieber, 1995). An enterprise-wide database, operating on a common platform, interacts with an integrated set of applications, consolidating all business operations in a single computing environment (Peoplesoft, 1997). Ideally, the goal of an ERP system is to be able to have information entered into the computer system once and only once (Lieber, 1995). For example, a sales representative enters an order into the companys ERP system. When the factory begins assembling the order, shipping can check on the programs to date and estimate the expected transport date. The warehouse can check to see if the order can be filled from inventory and notify production of the number of products still needed. Once the order gets shipped, the information goes directly into the sales report for upper management. ERP provides a backbone for the enterprise. It allows a company to standardise its information systems. Depending on the applications, ERP can handle a range of tasks from keeping track of manufacturing levels to balancing the books in accounting. The result is an organisation that has streamlined the data flow between different parts of business (Lieber, 1995). In essence, ERP systems get the right information to the right people at the right time (Sheridan, 1995). As a result of island automation of individual parts of a company there are hardly, if any, links between those parts. However staff of one department need a better understanding of other departments processes. ERP systems are helpful in this context. These systems take care of the entire administrative process of the various units within a company. A company can use an ERP package to drive all processes, such a financial management, sales forecasting, purchasing, inventory management, production control, logistics, project management, service and maintenance. Examples of ERP systems are Baan, Oracle, JD Edwards and SAP. 3.1.6