Supply contract allocation
This presentation is the property of its rightful owner.
Sponsored Links
1 / 28

Supply Contract Allocation PowerPoint PPT Presentation


  • 119 Views
  • Uploaded on
  • Presentation posted in: General

Supply Contract Allocation. Gyana R. Parija Bala Ramachandran IBM T.J. Watson Research Center INFORMS Miami 2001. A Simple Supply Chain. Risk management Uncertain customer demand Long supply lead time Fixed quantity supply contracts

Download Presentation

Supply Contract Allocation

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Supply contract allocation

Supply Contract Allocation

Gyana R. Parija

Bala Ramachandran

IBM T.J. Watson Research Center

INFORMS Miami 2001


A simple supply chain

A Simple Supply Chain

  • Risk management

    • Uncertain customer demand

    • Long supply lead time

  • Fixed quantity supply contracts

    • Newsvendor solution: Manufacturer covers the risk of uncertain demand

  • Supply contracts with quantity flexibility

    • Supplier and manufacturer share the risk

    • Price premium required to cover supplier’s cost

    • Profit sharing on upside demand potential


Supply contract allocation

Business Issues in Managing Supply Contracts

  • Buyer can manage a portfolio of supply contracts to hedge against

    uncertainty and manage procurement costs

  • Different kinds of supply sources:

    - Contracts with different kinds of flexibility (quantity, time …)

    - Contracts with different Terms & Conditions

    - Spot Markets

  • Trade-offs between flexibility to postpone purchase commitment due to demand variability, supplier quantity discounts etc.

  • Possibility to mitigate inventory risk by optimizing contract quantities and

    purchasing excess requirements from spot market

  • Negotiation of competitive prices with component suppliers and

    contract manufacturers


Supply contract allocation

Drivers impacting Supply Contracts

  • Demand Forecast and Volatility

  • Supplier Price & Quantity Discounts

  • Spot Market Price Volatility

  • Inventory Carrying costs

  • Price Decline costs & Salvage value

  • Risk Tolerance

  • Industry Supply Demand Balance

  • Lead Times & Service levels

  • Capacity Reservation for Multi-product contracts


Related research activities

Related Research Activities

  • Research Issues

    • Analyzing the costs and benefits associated with supplier flexibility

      • Manufacturer/buyer: determining the amount of flexibility needed

      • Supplier: determining the price premium to be charged

      • Channel coordination

    • Developing optimized procurement strategy

      • utilize updated demand forecasts

      • rolling horizon flexibility (e.g., buyer commits to purchase a certain quantity every period)

    • Capacity reservation

      • allocation among multiple suppliers

      • utilizing spot market

  • Current work

    • Supplier-Manufacturer flexibility model

    • Procurement / inventory optimization model with supply flexibility


Supply contract allocation

Strategic Sourcing – Allocation between Suppliers and Marketplaces

  • Determines quantities for strategic supplier contracts

  • Mitigates inventory risk by optimizing the contract quantity and

    purchasing excess requirements from spot market

Minimize

  Q1,xi

Subject to: for i = 1,… I

for i = 1,… I


Supply contract allocation

Solution Methodology

1. Analytical Formulation with Grid Search

  • Normality assumptions for demand, spot market price

  • Analytical expressions derived for expected cost, variance of cost, risk of exceeding budget

  • Grid Search to identify optimum

  • Reasonable approach for small number of contracts

2. Stochastic Programming with OSL Stochastic Extensions

  • Discretized probability distributions for demand, spot market price

  • Linear, Mixed-integer Stochastic Programming Problem


Supply contract allocation

RISK OPTIMAL SOLUTION

Contract Quantity - 1200

Expected spot purchase - 17

Expected cost - $ 1163

Budget Risk – 3%

COST OPTIMAL SOLUTION

Contract Quantity – 900

Expected spot purchase - 140

Expected cost - $ 1154

Budget Risk – 27%

Strategic Sourcing – Allocation between Suppliers and Marketplaces

  • Supply sources – strategic supplier, spot market

  • Determine contract quantity with strategic supplier such that the

    risk of the procurement cost exceeding budget is < 5%

Eg. One strategic supplier, spot market, Budget constraint


Supply contract allocation

Contract Portfolio Management

  • Determines quantities to be procured under different supply contracts,

    given supplier price schedules

  • Trade-off between contract flexibility, quantity discounts, and

    spot market purchases

Minimize:

Qj,xij

Subject to:

for j = 1, …, J

for i = 1, …, I and j = 1, …, J


Supply contract allocation

Contract

Q<600

600 <= Q < 900

900 <= Q < 1300

Q>= 1300

Long Term Contract

1.2

1.16

1.12

1.07

20% Quantity Flexibility Contract

1.3

1.26

1.21

1.15

RISK OPTIMAL SOLUTION

Fixed Quantity Contract – 920

20% Flexibility Contract - 160

Expected cost - $ 1253

Budget Risk – 14 %

COST OPTIMAL SOLUTION

Fixed Quantity Contract – 920

20% Flexibility Contract - 0

Expected cost - $ 1203

Budget Risk – 22 %

Contract Portfolio Management

  • Determine contract quantities with strategic supplier such that the

    risk of the procurement cost exceeding budget is < 20%

Supplier Price Schedule


Supply contract allocation

Multi-product Contracts with Business Volume Discounts

  • Aggregate Capacity Reservation for multiple products

  • Supplier gives business volume discounts based on overall commitment

  • Trade-off between business volume discounts, inventory liabilities

Minimize:

Qi

Subject to:

for j = 1, …, J

for j = 1, …, J


Supply contract allocation

Strategic Sourcing – Determining Contract Reservation Prices

  • Supply risk may be specified by a choice of contract quantity – Q1

  • Determine contract price for which Q1 is optimal

Eg. One strategic supplier, spot market, Budget constraint = 1300

Contract Quantity = 900  Risk Tolerance = 25%

Reservation Price = 1.04


Optimization solutions and library osl stochastic extensions

Optimization Solutions and Library(OSL) Stochastic Extensions

  • OSL Stochastic Extensions is a set of tools and functions used to obtain an optimal allocation decision

  • To apply here, we linearize the function

    • Generate a list of representative scenarios along with their probabilities

    • Create input SMPS files readable by OSL Stochastic Extensions

  • Solve using OSL Stochastic Extensions (C++ interface)

  • Special structured linear MIP amenable to fast preprocessing techniques in OSLSE


1 supplier 1 price class

1 Supplier, 1 price class

  • MinQ E[Cost] = E[c.Q + ĉ.(D-Q)+ – v.(Q-D)+ ]

    Q  0

    A nonlinear stochastic program in current state becomes:

  • MinQ E[Cost] = E[c.Q + ĉ.P – v.S]

    Q + P – S = D

    Q, P, S  0

    where P = (D-Q)+ and S = (Q-D)+


Supply contract allocation

Minimize

  Qj,xj

Subject to:

for j = 1,… J

Stochastic Programming Formulation- Single Sourcing

  • Single sourcing - Allocation between strategic supplier and spot market

  • Quantity discounts from strategic supplier


Input data

Input Data

  • Purchase price: $ 1.10/unit

  • Surplus selling price $ 0.55/unit

  • 1576 scenarios (demand, spot price)

    • Demand ~ normal (1000,200)

    • Spot price ~ normal (1.5,0.3)


Sample input

D c Probability of Pair

10151.440.001

10151.450.000577778

10161.450.002111111

10171.450.001866667

10181.450.001777778

10191.450.000644444

10191.460.001155556

10201.460.002022222

10211.460.002

10221.460.002266667

10231.460.000355556

10231.470.0018

10241.470.002

Sample Input


Oslse driver

OSLSE Driver

  • EKKContext *env=ekks_initializeContext();

  • EKKStoch *stoch=ekks_newStoch(env,"MyStoch",50000);

  • int type=ekks_readSMPSData(stoch,"supp.core","supp.time","supp.stoch");

  • ekks_describeFullModel(stoch,1);

  • ekks_bendersLSolve(stoch,0);

  • int numints=ekks_markIntegers(stoch);

  • EKKModel *model=ekkse_getCurrentModel(stoch);

  • EKKIntegerPresolve *info=(EKKIntegerPresolve *) malloc(sizeof(EKKIntegerPresolve));

  • ekk_integerPresolve(model,info,0,0);

  • ekk_branchAndCut(model,NULL,NULL,info,NULL,5,1);

  • ekks_printNodeSolution(stoch,1,1,COLUMNS);

  • ekks_printNodeSolution(stoch,1,2,COLUMNS);

  • ekks_printObjectiveDistribution(stoch);

  • ekks_deleteStoch(stoch);

  • ekks_endContext(env);


Output

Output

  • Optimal Quantity: 1087

  • Expected Cost: $ 1229


J suppliers k discount ranges

j suppliers, k discount ranges

  • MinQ E[Cost] = E[j k cjkQjk + ĉ.P–v.S]

    subject to k xjk = 1, all j

    akminxjk Qjkakmaxxjk

    jkQjk + P – S =D

    Qjk, P, S, xjk 0 , xjk is binary

    akmin ,akmax discount range constants


Input data1

Input Data

  • 10 suppliers

  • 5 discount types

    • (800,899), (900,999), …, (1200, 1299)

  • 50 price combinations


Output1

Output

  • Order Quantity = 1271

  • Supplier : 2

  • Discount Range : 5 ($0.89/unit)

  • Surplus of 944 units (scenario 10)

  • Optimal (Expected) Cost = $ 910.34


Conclusions

Conclusions

  • OSLSE Technology

    • Provides the right modeling environment for contract portfolio management problems

    • Optimization problem resolution in reasonable times

  • Deployment – solution based on this industrial strength solver technology can be easily deployed in any commercially available e-commerce suite


Further work

Further Work

  • Adding other realistic factors to the model such as

    • Budget constraints with allowable Risks

      • Knapsack constraint in 0-1 variables in the SP formulation – increase in computational work

    • Contract terms and service levels and their effects on the allocation decision


Acknowledgements

Acknowledgements

  • Steve Buckley – IBM Research

  • Kendra Taylor – Georgia Tech

  • Markus Ettl – IBM Research

  • Gelonia Dent - IBM Research


Supply contract allocation

Thank You !


Distribution of pairs

Distribution of Pairs


Supply contract allocation

Stochastic Programming Formulation – Multiple Sourcing

  • Multiple sourcing - Allocation between suppliers and spot market

  • Quantity discounts from suppliers

Minimize

  Qij,xij

Subject to: for i = 1,… I

for i = 1,… I & j = 1, … J


  • Login