Post on 21-Dec-2015
Case: Procter & Gamble’s Supply Chain Redesign
Source – Blending ORIMS, Judgment, and GIS: Restructuring P&G's Supply Chain, by J.D. Camm ,T. Chorman, F. Dill, J. Evans, D. Sweeney, G. Wegryn, Interfaces 27: 1 January-February 1997 (pp. 128-142)
Snapshot of P&G,1990s• Worldwide market leader in laundry detergents,
diapers, feminine protection pads, shampoos, facial moisturizers, acne teen skin care products, and fabric softeners
• 300 brands of consumer goods • Sales in140 countries
• Operating units (plants, divisions, facilities) in 58 countries
• P&G had worldwide sales of $33.5 B in fiscal 1995 and earnings of $2.64 B.
Strengthening Global Effectiveness Initiative• Purposes
– streamline work processes
– drive out non-value-added costs
– eliminate duplication
– rationalize manufacturing and distribution
• Scope at outset– hundreds of suppliers
– over 50 product lines
– 60 plants
– 15 distribution centers
– hundreds of customer zones representing thousands of corporate customers
North American Product Supply Study
• Key part of SGE Initiative• Sought reengineering of
– Product sourcing
– Distribution network
• Principal tools– Business Analytics
– IT
– network optimization models
– geographical information system (GIS)
Five Factors Motivating Supply Chain Redesign
• Deregulation of the trucking industry had lowered transportation costs
• Product compaction (detergents in concentrated form, compact packaging of diapers) more product per truckload
• P&G's focus on TQM improved reliability and increased throughput at every plant
• decrease in product life cycles from 3-5 yr to 18-24 mo required plants to update equipment more frequently
• Corporate acquisitions gave P&G excess capacity
Scope of North American Product Supply Study
• Five Factors motivated update of product sourcing decisions, i.e. choosing best location for production, and scale of operations for each product
• Constraints and trade-offs– scope of production at any particular site is limited to products that
rely on similar technologies
– producing too many products at a site increases the complexity of operations
– large, single-product plants exposes a firm to risk
• Plant locations affect the costs of supplying raw materials and distributing finished products design of the distribution system must be considered
Planning and Organization
• 30 major multifunctional product-strategy teams for developing product sourcing options – aligned with P&G's major business categories: detergents, diapers, etc.
– composed of individuals from various functional areas: finance, manufacturing, distribution, purchasing, R&D, plant operations
– organized around product category groups that shared similar technology and could therefore be produced at the same manufacturing site
• One separate distribution and customer service team charged with developing options for DC locations, assigning customers to DCs, and making transportation decisions
3-8
p1 DC1 c1
50,000
c2
100,000
c3
50,000 candidate distribution centers
customers with demands shown
candidate plants with fixed costs shown
p2 DC2
p3 DC33
1
2
Sourcing Distribution
Business Analytics to the Rescue
• Business Analytics can identify a small set of the most promising alternative designs out of an astronomical number of possibilities– Enables product-strategy teams to collect and analyze
appropriate data in order to generate detailed risk-adjusted cash flows for a reasonable number of scenarios
– More important reason for sound analysis: potential impact of the project on people
• P&G Analytics group partnered with University of Cincinnati's Center for Productivity Improvement
Objectives of Business Analytics Team
• Sourcing: to provide mathematical models and decision support for the product-strategy teams
• Distribution: to provide support to a team of experts in transportation and distribution who were concentrating on warehousing, distribution, and customer allocation problems
• Putting the pieces together: to ensure that the composition of a complete-supply-chain solution across product-strategy and distribution teams was the best possible
Decision Support
• P&G’s legacy system: mainframe-based comprehensive logistics optimization model to support sourcing decisions for multiple product categories and multiple echelons, requiring long turnaround times for each model run
• New Target: simple interactive PC-based tool that would allow product-strategy teams to quickly evaluate options (choices of plant locations and capacities), make revisions, evaluate the new options, employ a GIS, and guide users to better options in an evolutionary fashion
Modeling Strategy
• To decompose the overall supply-chain problem into two easily solved subproblems:
– a distribution-location problem
– a product-sourcing problem for each product category
• Reasoning– Management's organization of the strategic-planning process into a distribution
team and product-category teams implied a natural decomposition across echelons of the supply chain and across product categories.
– Business Analytics team determined that manufacturing and raw-material costs dominated distribution costs by a very large margin, suggesting that product-sourcing decisions were not highly sensitive to the downstream distribution-system design.
– Direct plant-to-customer shipments accounted for the large majority of plant shipments, suggesting that sourcing decisions were more sensitive to customer locations than to DC locations.
Modeling Assumptions
• For each customer zone, the proportion of demand satisfied by direct shipments as well as the proportion satisfied by shipments through DC is a constant for each product category
• DC locations could be chosen independently of the plant locations, due to– relatively small volume (10 to 20 percent) shipped through DCs
– small number of DCs (five to eight) needed to support that volume
– fact that manufacturing costs dwarfed distribution costs
DC - Customer Optimization Model
• Aggregation of trade-customer demand into 150 customer zones, which provided sufficient granularity
• Major considerations on the choice of DC locations
– customer location
– customer services
– sole sourcing
– proximity to customer zones to maintain current levels of customer service
• Employed uncapacitated facility-location model to find optimal DC locations and to assign customers to DCs. For a fixed number of DCs, the model finds optimal locations, while ensuring that each customer zone is assigned to a single DC. The objective is to minimize the cost of all DC-customer zone assignments.
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DC - Customer Optimization ModelDC - Customer Optimization Model
Min CijXij
i Xij =1, j J
i Yi = k
Xij Yi, i I, j J
Xij = 1 if customer j assigned to DC i
Yi = 1 if DC i is chosen
Mixed Integer Linear Program
Product Sourcing Model
• Transportation model for each product category: product-strategy teams specify the plant location and capacity options to be evaluated
• Arc costs are the sum of manufacturing, warehousing at the plant, and transportation costs. – Manufacturing costs were the most important consideration in the
product-sourcing decision, so team made careful estimates.
– DC costs were composed of actual per-unit storage and handling costs at each of the company's existing DCs, and appropriate estimates at new DC locations
– Transportation costs estimates were based on• negotiated rates P&G was already paying for shipments between locations,
along with rate tables; or
• Fixed cost per linear function of distance between 2 points
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Product Sourcing ModelProduct Sourcing Model
Min CijXij
j Xij = ai, i I
i Xij =dj, j J
Xij 0, i I, j J
Xij = shipment from plant i to DC j
Linear Program
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Integration with GIS
• Used to display results of optimizations and manipulate data through a menu-driven system for sensitivity analysis and further model runs and evaluation
• Advantages– easy to understand - visualization provides insight
– query details by point-and-click
– facilitates acceptance of analytical techniques
– highlighted database errors
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Solution Composition and VerificationSolution Composition and Verification
DC Location and Customer
Assignment
Option Generation
Option Selection
Verification
Distribution Team: Facility Location Model
30 Sourcing Teams: Product Sourcing Model and
@RISK NPV Model
Steering Team: Logistics Modeling System
Project Results & Benefits
• Integrated solution called for plant consolidations: by mid-1996, P&G had closed 12 sites and written off over a billion dollars worth of assets and people transition costs
• Over 6,000 people impacted, but treated fairly through early retirement, relocation, or retraining and placement
• As of 1997, annual savings were well over $250 million (before tax) – largest portion is due to lower manufacturing expenses, operating fewer plants
with less staff
– some savings in packing materials and ingredients
– …but with fewer DCs delivery expenses actually increased
• Securities and Exchange Commission closely monitored and verified the savings