Structure and Mechanisms of the Supply Chain Planning Model

Outcome

The created SCP model is the basis for all supply chain planning activities.

The definition of the SCP model can be made in the M3 Business Engine (BE) and data can be extracted and transferred to SCP. But in this case there will only be changes in SCP-specific data in BE.

Before You Start

Before the SCP model can be defined and used, the following prerequisites must be met:

• The prerequisites listed in the Introducing M3 SCP document must be met
• Microsoft Access 97 or 2000 has to be installed in order to enter data in the Data Generator manually.

Description

Knowledge of the following issues is required in order to define the SCP model:

• Structure of the SCP model
• The mechanisms that control the supply chain flow

The structure of the SCP model holds the elements that determine the flow through the supply chain. The supply chain mechanisms determine how the flow is directed through the structure. The structure and mechanisms of the supply chain are deepened in the following sections.

Structure of the SCP Model

The SCP model is built upon the following elements:

• Buckets
• Startup inventory
• Network nodes
• Node distribution relations (transportation)
• SCP item groups
• Supply processes (production and purchase)
• Network capabilities
• Costs
• Resource capacities
• Penalties

The extent of the SCP model can be found by multiplying the number of buckets, nodes and item groups together. The total number of buckets, nodes and item groups has to be carefully considered when the model is being defined. This is because it has direct influence on how much time will be required to calculate supply chain plans and simulations.

Data can be established in two ways:

1. Some data is transferred from M3 BE and other data is created locally in the M3 SCP Data Generator or

2. All data is created in the M3 SCP Data Generator.

In both cases, all data is combined in the model database.

Buckets

Time Buckets are one of the basic building blocks defining the SCP model and they define the time frame in supply chain planning. The SCP model works with fixed bucket sizes. For example, buckets may be defined as one-week periods, 4-week periods or 8-week periods. As large a time buckets as possible is recommended, because too many small buckets scatter the long-term planning overview.

Startup Inventory

Start inventory is the only way to represent activities in progress considered from the start of the planning period. The start inventory is defined by the number of item group units on stock at network nodes at the beginning of the period for supply chain optimization.

The start inventory is used as the inventory at the beginning of the first bucket after the planning time fence. The planning time fence is defined for each SCP item group and determines the number of buckets where the SCP model should not plan anything for the item group at the network node.

Network Nodes

A Network Node represents a demand and/or supply point in the supply chain on an aggregated geographical level, e.g. a production plant in Copenhagen or a market in New York.

The following types of network nodes are applicable in M3 SCP:

• Purchase nodes
• Supply nodes
• Sales nodes

Purchase nodes

Purchase nodes represent the supply capacity of supplier, sub-supplier and sub-contractor sites. M3 SCP does not control the production and inventory capacity of purchase nodes. These nodes are only used when item input is entered into the SCP model. Each purchase node in SCP corresponds to exactly one supplier in the M3 BE. Relationships between supply nodes are created as node distribution relations (refer to section Node distribution relations below).

Supply nodes

Supply nodes represent global and/or local warehouses. In BE, a supply node can represent:

1. one production warehouse

2. a number of distribution warehouses

3. one production warehouse in connection with a number of distribution warehouses

Multiple levels can be handled at both production and distribution warehouses. Connected warehouses should, however, belong to the same facility. Thus, one supply node in M3 SCP can represent a number of warehouses within a demarcated area, but it can only represent one production warehouse. Connections between supply nodes (and other nodes) are created as node distribution relations (refer to section Node distribution relations below).

Sales nodes

Sales nodes represent customer, partner or retailer demands from the markets. A sales node can represent demands in the Master Demand Schedule (MDS) or a group of customers with demand in the sales budget. Sales nodes are only used for item output in the SCP model, and they are the only kind of output node. They cannot represent production, transport or stock resources. Connections from supply nodes to sales nodes can be created as node distribution relations (refer to section Node distribution relations below).

Relationships between Network Nodes

The relationships between the different kinds of network nodes in M3 SCP are shown in the following graphic:

Node Distribution Relations

Node distribution relations represent the possible movement of items from one network node to the next. The relations can be defined as transportation from a purchase node to a supply node, between supply nodes and from a supply node to a sales node. (In fact, relations can also be defined as transportation from a purchase node to a sales node, however, this is not very common.)

Different transportation alternatives can be assigned to different node distribution relations, i.e. there can be different transportation alternatives between the same two nodes. There are no restrictions to how relations can be created; however, one relation can only define transportation between the same two nodes. (M3 SCP is supplied with standard symbols for ship, truck, train and plane, but the user defines the transportation alternatives.)

Node distribution relations can be defined in the following places in the SCP model:

SCP Item Groups

SCP item groups define the lowest level of item data in M3 SCP. An SCP item group is a collection of individual items with approximately the same characteristics, for example weight, volume, cost and production structure, production alternatives, supply options, etc. If the total number of single items is low, SCP item groups can also be defined as including only one item each.

Item group data is calculated as weighed average data for items within each group. These calculations reflect the relative quantities of materials that will flow through the supply chain. This way the individual item group reflects an average size of each item within the group.

SCP groups

Each SCP item group can be assigned to a SCP group. This is convenient when many SCP item groups are displayed at the same time. A variety of item groups can belong to the same SCP group, but each item group can only belong to one SCP group. This way SCP groups are used to provide a better overview of large numbers of SCP item groups. SCP groups are only used to display item groups in graphic reports and profiles and have no effect on the planning process. SCP groups are created and maintained locally in M3 SCP.

Supply Processes

In M3 SCP, supply processes represent the ways in which items "enter" the supply chain, either through purchase or production. Purchase processes represent the purchasing of items. "Running the process once" means buy one unit of the item group.

Production processes represent the ways in which a certain number of item groups are transformed into other item groups. A production process is the highest level in the product structure. Each process belongs to a specific node in the supply chain. A production process can transform any number and quantity of input items into any number and quantity of output items.

The resource requirements for each production process are connected to the process itself.

BoM and Routing

Production processes are used to define where and how SCP item groups can be produced. Each process consists of a BOM (Bill of Material) and a routing. You can use processes with

• simple structure (one output only, and no alternatives within each node)
• alternative BOM (similar output and routing but different input)
• reverse BOM (one input and multiple outputs)
• BOM with by-products (multiple inputs and outputs)
• alternative routing (similar input and output, but run on different resources)

The most common production process for SCP’s level of planning is the simple structure, with the simple BOM and a routing from RCCP (Rough Cut Capacity Planning).

Routings, i.e. the capacity requirements, can be defined for the production process as a whole. In the simple case this corresponds to a capacity requirement for producing the end item. The requirement is measured in hours and the production lead-time is calculated from the end of a production process and backward. This means the requirement must be fulfilled the lead-time before the process’ finish time. Refer to the next graphic.

As shown on the graphic above, materials and resources do not necessarily need to have corresponding offsets and lead-times. If they do, however, this is allowed.

Example of a production process based on a general BOM,

In the general type of BOM, there are no 'rules' for which or how many inputs and outputs the process can have. There can be one or more input materials and one or more output items (with coordinated quantities).

The next graphic illustrates the principle structure of a general BoM.

An example of a general BOM could be a bacon factory where a pig and some tools are input to the process, and different meat cuts are the output. All input/outputs are part of the same process, i.e. cutting the pig.

Example of a production process based on a simple BoM

Using the simple type of BoM, an SCP item group can only be produced in one way at each node, i.e. there are no alternatives. In a simple BOM there can be one or more input materials but only one output, the end item (quantity = 1). The next graphic illustrates the principle structure of the simple BoM.

An example of a special BoM could be a bicycle factory where a number of raw materials are input while only one item – the bicycle – is the output.

Network Capabilities

Network capabilities describe where it is possible to purchase, distribute, produce and stock items.

• Purchase capabilities (per purchase node). Specifies which and how many SCP item groups the purchase node can deliver.
• Distribution capabilities (per node distribution relation). Specifies which and how many SCP item groups the node distribution relation can transport.
• Production capabilities (per supply node). Specifies which and how many SCP item groups the supply node can produce.
• Stock capabilities (per supply node). Specifies which and how many SCP item groups the supply node can have on stock.

The next graphic shows how each network capability is related to each place in the SCP model:

Both production and stock capabilities can be defined for supply nodes that represent a production warehouse. This is the only situation where more than one type of capability can be defined for the same place in the SCP model.

Costs

In the SCP model, the following costs can be defined:

• Purchase. Purchase cost/price can be applied to purchase node/item group combinations.
• Transport. Transportation cost can be applied to node distribution relation/item group combinations.
• Handling. Handling cost can be applied to purchase, supply and sales node/item group combinations.
• Production. Production cost can be applied to production process/item group/supply node combinations.
• Inventory. Inventory cost can be applied to supply node/item group combinations. The inventory cost is based on the closing balance for buckets.

All costs are defined as the cost per SCP item group unit and they may vary over time. Costs relate to the following places in the SCP model:

Resource Capacities

The definition of resource capacities forms the basis for conducting realistic supply chain planning. If no resource capacities are defined it is comparable to conducting planning based on infinite capacities only.

The following types of resource capacities can be defined in the SCP model:

• Supplier capacity. Supplier capacities are always measured in item group units per bucket.
• Transport capacity. Transport capacities are defined per resource and measured in weight or volume units. The units can not be combined on the same resource.
• Production capacity. Production resources are connected to supply nodes where the capacity is critical. The capacity of production resources is measured in hours per bucket over the entire planning horizon.
• Ship-in capacity. A ship-in resource represents equipment or personnel used to handle incoming items at a node, for example, when receiving goods from a train or a ship. One ship-in resource can be defined per supply node. Ship-in capacities are defined per resource and measured in weight or volume units. The units can not be combined on the same resource.
• Ship-out capacity. A ship-out resource represents equipment or personnel used to ship outgoing items from a node, for example, when dispatching goods by ship or train. One ship-out resource can be defined per purchase or supply node. Ship-out capacities are defined per resource and measured in weight or volume units. The units can not be combined on the same resource.
• Stock area capacity. A stock area is a physical location used to store goods or semi-manufactured items. Stock area capacities are used to define critical stock areas at specific network nodes. The point here is to account for stock areas within the supply chain that have a limited capacity (within the tactical horizon), for example, freezer capacity and in-door areas. Each stock area's capacity is measured in either volume or weight. The units can not be combined on the same stock area. (The capacity for stock areas is not defined per day, because stock is taken at a specific point in time.) Each SCP item group belonging to a network node can only be assigned to one stock area.

Resource capacities relate to the following places in the SCP model:

Additional actions can be taken to further control/constrain the supply chain flow. Refer to the next section on Penalties.

Penalties

Using penalties is one of many ways used to control how SCP prioritizes market demands when calculating the flow through the supply chain. There are two basic penalties that can be used:

• Missed Delivery Penalty (MDP). The use of MDP’s will make the supply chain flow be driven by penalties for not meeting demands. The focus will be to meet the demands at any cost in order to avoid the even higher penalties that are applied for not delivering. This means that MDP’s are used to ensure that as many demands as possible are met even when meeting these demands do not result in any profit. The size of MDP’s indicate the prioritization, that is, the demand applying the highest penalty is met first and the demand applying the lowest penalty is met last.
• Bucket Production Penalty (BPP). The use of BPP’s will instruct the optimizer to reduce small productions in order to reduce the penalties for starting new productions. It is based on the introduction of a fixed price (a penalty) which is related to running a production process in a bucket. The BPP value can be multiplied by a factor chosen by the user. A higher BPP-factor will make it more attractive for the Optimizer to reduce small productions, while a lower factor will have the opposite effect.

Refer to Optimization Strategies for more information on how penalties can be used.

The Mechanisms that Control the Supply Chain Flow

When the SCP model is defined it is important to know how the mechanisms of the model work. The mechanisms of the SCP model are characterized by four keywords: Structure, Demand, Cost and Constraint.

• Structure – defines the possible flow. The structure of the SCP model (as defined in the preceding section) defines the capabilities of the supply chain network, in terms of nodes and distribution relations and their possible item flows.
• Demand – pulls items through the supply chain. The demand initiates the flow in the SCP model. Demand from the markets is the only reason for pulling material through the supply chain (in order to gain a certain profit or to avoid penalties for not delivering), and pull is the keyword to how the SCP model works. In supply chain planning, no materials are pushed through the supply chain. There is no reason for producing items or put them on stock if there is no demand for them (except in cases with safety stock).
• Cost – directs the flow of items in the supply chain. When and where materials are pulled through the supply chain, is directed by Costs. Costs are applied to the flow in the supply chain in terms of purchase, stock, production and transportation. If only costs are taken into account (resources not included) the ideal supply chain flow can be shown.
• Constraint – resources constrain the flow of items in the supply chain. How many materials that can be pulled through the supply chain is controlled by Constraints in the sense of different kinds of resources. Resources are applied to different points in the SCP model where items are handled (for example, stock, transportation and production activities).

The basic mechanisms of the SCP model are illustrated in the next graphic:

To summarize how the SCP model works: the supply chain structure defines the possible flow, demands pull the flow, costs direct the flow and resources constrain the flow.