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Capacity Planning in a General Supply Chain with Multiple Contract Types Stephen C. Graves and Xin Huang May 2008. Motivation. Prior research has developed algorithms and software for modeling and optimizing the inventory across a supply chain – “strategic inventory placement model”

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**Capacity Planning in a General Supply Chain with Multiple**Contract TypesStephen C. Graves and Xin HuangMay 2008**Motivation**• Prior research has developed algorithms and software for modeling and optimizing the inventory across a supply chain – “strategic inventory placement model” • Impetus for current research – develop and deploy a tactical model to provide decision support for determining capacity levels across a supply chain**Intent**• Develop a framework to support capacity planning decisions in a supply chain with • Multiple products • Each product requires multiple processes (or components) • Each resource provides capacity for one or more processes • Need to determine the right level and type of capacity investments • Need to account for network interrelationships, demand uncertainty, multiple time periods, & different capacity contracts.**Work to Date**• Developed framework for structuring models • Developed and tested algorithms for determining the amount, type and timing of capacity investments across a complex multi-product supply chain • Implementation of user-friendly software is underway**Model assumptions**• Given demand forecast and contract prices, we first make capacity decisions: • For each resource how much capacity to reserve and with what type of contract • Then we learn what the actual demand is and decide how to allocate capacity to meet demand as best as possible • Objective is to maximize revenue net of capacity costs**Example 1**Laptop A A & T Chip Set A Display A Foundry 1 Foundry 3 CM 1**Example 1: Sample Input Data**Table 1: Table of Product Information Table 2: Table of Resource Price Inputs**Example 1: Model Outputs**The Expected Total Profit:$601,623 Mean – Laptop A: 2200**Example 3**Laptop A Laptop B A & T Chip Set B Display B A & T Chip Set A Display A Foundry 1 Foundry 3 CM 1 Foundry 4 Foundry 3 CM 2 Foundry 2 CM 1 Foundry 3**Example 3: Sample Input Data**Table 5: Table of Product Information Table 6: Table of Resource Price Inputs**Questions of Interest**• Which suppliers should the manufacturer choose? • What types of contract should we use for each supplier? Only fixed-price contract? Only option contract? Or Both. • How much capacity should we buy?**Example 3: Model Outputs**The Expected Total Profit:$1,183,981 Mean – Laptop A: 2200 Mean – Laptop B: 1000**Example 4**S1 S2 S3 • Compare the following four strategies • Plan the capacity as given in the figure without option capacity • Use a common process to replace process 2a and 2b • Add option capacity to process 2a and 2b • Combine strategy S2 and S3 1 2 1 2 1 2 1 2a 2b 3 1 2 3 1 2a 2b 3 1 2a 2b 3 1 2 3 1 2a 2b 3 S4 1 2 1 2 3 1 2 3**Example 4: Data**• Both products have the same price: changes from 66 to 150 • Demand information: • E[D_1] = 500, STD(D_1) = 100, E[D_2] = 500, STD(D_2) = 100 • Fixed price contracts: • [p_1, p_2a, p_2b, p_3] = [10, 50, 50, 10] • Option contracts: • Reservation Price = 5, Exercise Price = 50**Example 4**(S2+S3)/S1 S4/S1 Extra Profit (%) S3/S1 S2/S1 Profit Margin**Example 5: Multi-period Planning**• A Supply Chain Network • 2 Products, 3 Processes, and 12 Periods. • Each process has 4 different types of contract • 1 period, 3 periods, 6 periods, and 12 periods • Each contract has 4 terms • Duration, Fixed-price, Option reservation price, and Option exercise price 1 2 1 3 2 1 3 2**[**[ ] ] E E D D 1 2 Sample Demands**Sample Prices**• Prices: • Product 1: 65; Product 2: 65. • Costs: • All processes have the same price structure.**Results (cont.)**Process 1 Process 2 Process 3**Summary**• Have developed a framework to support capacity planning decisions for supply chain • Have developed solution algorithms for single period and multi-period problems • To do • develop a case study to test and validate approach • finalize prototype software with user friendly interface**Collaboration Opportunities**• Need a test case(s) to validate and refine framework • Are we looking at problem in right way? • Does the data exist to test model? • Can our algorithms result in better decisions? • What’s critical/non-critical in how we are viewing problem? • Interest in internships for LFM or SDM students for “beta testing” • Contact Steve Graves (sgraves@mit.edu) or Xin Huang (xinhuang@mit.edu)**Example 2**Laptop B A & T Chip Set B Display B Foundry 4 Foundry 3 CM 2**Example 2: Sample Input Data**Table 3: Table of Product Information Table 4: Table of Resource Price Inputs**Example 2: Model Outputs**The Expected Total Profit:$556,320 Mean – Laptop B: 1000

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