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ILOG's acquisition of LogicTools is looking like a master stroke that will enable ILOG to bring real innovation to Supply Chain Management, especially in the area of Sales and Operations Planning.
LogicTools was founded in 1995 by David and Edith Simchi-Levi, who are well respected gurus at MIT. Logic Tools offered tools for supply chain network design and multi-tier inventory optimization. Supply chain design determines where and how many manufacturing plants and warehouses there should be, given expected demand and transport costs. Inventory optimization calculates the investment in safety stocks, given the demand variability. ILOG, which acquired LogicTools earlier this year, was best known for optimization tools, but had developed production and transport planning applications. The combined entity is now offering innovative supply chain solutions.
Optimizing Product Flow
Recently, LogicTools combined its network design and inventory optimization tools into a new application called "Product Flow". This determines the best path for a SKU through the supply chain - i.e. which plant and which DC supplies each customer. For instance, determining which SKUs could be delivered from a central DC, and which should be stored in a regional DC. Essentially this tool clarifies the trade-offs between the inventory reduction benefits from risk-pooling in a central DC, versus the costs of increased transportation.
The Green Supply Chain
The "Green" supply chain, i.e. the carbon footprint of the supply chain is becoming an important issue for many companies, especially retailers stung by questions about the value of transporting fruit and vegetables thousands of miles by air, when the product could be grown locally. ARC led a track on this issue at the recent CSCMP conference. Network design tools, in principle, have the ability to incorporate the carbon content in packaging, and carbon emissions in transportation as a constraint. Thus, ILOG has partnered with Accenture, who provides the background data on emissions and carbon use, to offer a solution that helps minimize the carbon footprint of a supply chain.
Network design, because it optimizes manufacturing and distribution costs, has value in the product design process; e.g. in understanding whether or not is better to manufacture lower cost regional variations of a product, or a generic product that meets all regional requirements. Other applications include optimizing the trade off between inventory savings and higher manufacturing costs enabled by a late customization manufacturing strategy, versus the lower manufacturing costs but higher inventory costs if a wide range of finished products were to be manufactured.
What-if Simulation Strengths
Both Ilog and LogicTools offer strong what-if simulation capabilities, valuable capabilities often lacking in SCM solutions. For instance, a large CPG manufacturer had a network of 40 plants across the world. The optimum solution suggested that about 23 plants would give the lowest total manufacturing cost, and a saving of about $66 million. The problem was that the optimum solution would mean no plants in Western Europe or North America, so the optimum solution was highly sensitive to supply chain disruptions. However, through analyzing the costs for a network of 23 to 40 plants, it was found that the costs of running with 30 plants would only cost $2.5 million more than the optimum, yet the supply chain would be far more robust with some plants in North America and Europe.
New Production Planning Capabilities for the Hybrid Industries
ILOG's PPO production planning tool is aimed at the hybrid industries, and offers neat features like tank scheduling, the ability to optimally schedule production of intermediates that are used by multiple other recipes, cleaning/sterilization steps, and maturation/shelf life. It will also gain LogicTools' inventory analyst tool.
It has been designed for ease of use, to support what-if simulation, and to support the way planners think about their production process. For instance, some hybrid manufacturers first plan production of finished products, and then plan production of intermediates. Other hybrid manufacturers do the opposite, and the tool supports both approaches. The tool also offers good support for late changes - for instance, if production orders for a batch of intermediates have already been launched and demand or equipment availability changes, the planner can still change the schedule for the mix of final products, using the existing orders for intermediate products as a constraint.
From S&OP to SIOPT - Sales, Inventory, Operations Planning, + Transportation process
Traditionally Sales and Operation Planning determines whether expected demand can be met by existing production capacity and many suppliers merely offer a tool to aid collaboration between sales and production. However, what if manufacturers have a network of plants, each capable of manufacturing a range of products. The question is to what extent plants should specialize in manufacturing a limited range of products, benefiting from reduced set-ups and larger batches, at the expense of increased transport costs. ILOG's existing plant power ops and transport planning can be used to accurately estimate these costs, although it is an iterative process. In addition, if a manufacturer faces seasonality or promotions driven sales, there is a trade off between manufacturing for stock in advance of peak sales, versus overtime working during the peak sales period, as well as calculating the optimum manufacturing batch size given the inventory holding cost.
One customer had seven business units, of which five agreed to use this tool, and 2 did not. Total costs for the five that used the system fell by 2.6 percent, - mainly due to a 9 percent reduction in transport costs, and a 0.6 percent reduction in manufacturing cost. The two non-using business plants suffered considerable expediting issues. Thus ILOG's suite of tools now bring considerable sophistication to a quarterly sales and operations planning process, which perhaps ought to be renamed the S&IOPT - sales, inventory, operations planning, + transportation process.
Few suppliers are offering innovation in supply chain planning and management these days. Most are reworking ideas that have been around for many years. However, the combination of ILOG and LogicTools is creating new, valuable developments in this area.
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