IBM Decision Optimization
From archive: June 2010 X
MichaelWatson 270002K5FS Tags:  inventory_optimization inventory_positioning inventory supply_chain ilog 4,203 Views
Correctly positioning and buffering inventory can help you create a more flexible supply chain with lower costs.
In the military, it is common practice to pay suppliers on a "cost plus" basis. Effectively, this makes all the suppliers a "make to order" location. That is, the suppliers can only make product when there is a firm order. There is no mechanism for the supplier to make product in advance, sit on safety stock, and provide faster service.
Keeping helicopters flying is not trivial. They are made up of many parts and operated in tough conditions. Many of the key parts(drive shafts, sycn shafts, blades) require many sub-components and must be made with specialized materials in a high-precision manufacturing environment.
The supply chain for these key parts can be very long (measured in many months), and it is expensive to keep enough of these items around as spare parts.
With the current system, each key part had to either be stored in inventory as safety stock (waiting to be needed) or the the military had to wait for the supply chain to produce another (creating a backlog of demand and a helicopter that was grounded). Neither alternative was great.
A better solution is to optimize the placement of strategic buffers in this supply chain. The chart below on the left shows the existing supply chain. The yellow box on the right represents the customer (the military) and a key part. The gray boxes to the left represent all the steps in the supply chain needed to make this particular part. You can see the complexity of the supply chain. In the baseline, the entire buffer is held by military, represented by the red bar.
In the optimal case, the suppliers hold buffers. These buffers are seen by the red bars. The inventory optimization identifies where and how big these buffers should be. Now, the military can keep the helicopters flying with much less money tied up in working capital (or worse, with many helicopters not being able to fly).
Of course, implementing this solution is not trivial. Contracts with the suppliers have to be re-worked to allow them to create and maintain the safety stock buffers.
MichaelWatson 270002K5FS Tags:  logicnetplus supply_chain network_optimization ilog 6,276 Views
If you want an educational demo of our network design solution using our LogicNet Plus XE product, check our video on YouTube.
The video gives you an introduction to the concepts of network design and takes you through a case study. The focus of this video is on traditional network design-- locating the optimal number, location, size, and territories of warehouses.
Be sure to watch both parts. [UPDATE: Click here for the new link]
If you would like a copy of the video, please contact us.
[UPDATE-- this post was updated to reflect the link to the video]
IBM released its 2010 Global CEO study, Capitalizing on Complexity. "Previously, CEOs have consistently identified change as their most pressing challenge. Today, CEOs are telling us that the complexity of operating in an increasingly volatile and uncertain world is their primary challenge. And, a surprising number of them told us that they feel ill-equipped to succeed in this drastically different world."
One of the key insights is the CEO's desire to build operational dexterity: "CEOs are mastering complexity in countless ways. They are redesigning operating strategies for ultimate speed and flexibility. They embed complexity that creates value in elegantly simple products, services and customer interactions."
This focus on "speed and flexibility" fits well with our recent work on flexibility and the ILOG Optimization and Supply Chain solutions. For example: