Applications and opportunities for operations research in internet-enabled supply chains and electronic marketplaces.doc

applications and opportunities for operations research in internet-enabled supply chains and electronic marketplacesmanmohan s. sodhiscient303 e. wacker drivechicago, illinois 60601the internet is creating opportunities for applying optimization. firms can use operations research (or) to improve their supply-chain performance within the enterprise whether their supply chains are being internet-enabled or not. they can increase benefits by using or to improve planning and execution in internet-enabled supply chains with an expanded physical scope that includes vendors and customers and with an expanded functional scope that includes product design, marketing, and customer-relationship management.historically, euphoria over the use of or in industry petered out in the late 1970s partly because of the difficulty of gathering and maintaining data. the early 1990s saw large-scale (and protracted) erp implementations to improve supply chain and other operations, developed partly out of fears that legacy systems would collapse in 2000 and partly to coordinate transaction data pertaining to orders, inventory, and cash.erp implementations created opportunities for or in three ways. first, they dramatically improved the quantity and quality of data that could be used for or models. erp requirements are rigid, and implementations need good data for firms to operate these systems hiquet, kelley, and ccai 1998. as consulting companies gathered implementation experience, they learned where to look for data and how to populate the data fields. given good starting data, erp systems themselves ensured that the data across different systems remained coordinated. second, many businesses scrapped their existing or models when they implemented erp systems, erroneously believing that these systems would handle planning. since businesses and even their software vendors do not yet understand how to integrate erp and or models, businesses considered it easier to use the erp packages alone. third, despite claims, the planning aspect of erp software was limited or nonexistent even though erp software alleviated or pointed out immediate and near-term problems. as a result, planners shifted their attention to medium-term horizons and realized that they needed true planning systems.or professionals did not fully appreciate the changes in information technology (it) brought about by client-server technologies and erp and generally did not take advantage of these opportunities. advanced-planning-and-scheduling (aps) vendors filled the vacuum to some extent. they included chesapeake (acquired recently by aspentech), i2, manugistics, numetrix (recently acquired by jd edwards), and red pepper (acquired a few years ago by peoplesoft). these vendors relied largely on heuristics to improve supply chain processes, but they made the term optimization much more acceptable in business than it had been. (in fact, businesses are more aware of this term than of or.) aps vendors also forced erp vendors to recognize the importance of providing planning functionality and the tremendous benefits it could provide. this and the difficulty of integrating aps packages with erp software motivated erp vendors, such as sap, baan, peoplesoft, and jd edwards, to develop or acquire heuristics and or technology to supplement their software. their progress toward integrating supply-chain planning and or with erp software has been slower than they expected. while businesses initially used both erp and aps software to improve performance within their companies, they wanted to include other members of the supply chain, such as suppliers and large customers. transportation-planning-software vendors, such as manugistics, sold software that used electronic data interchange (edi) for carrier-shipper communication. the aps vendors were nimble in realizing the potential of the internet, and by early 1998, they announced collaborative planning, supply-chain planning by a firm using the internet to exchange forecasts and planned production with its customers and suppliers. the internet supplemented or replaced edi using a web-based messaging protocol, extensible markup language or xml. the erp vendors responded by announcing even broader sets of systems, including software for managing customer relationships. aps vendors followed with similar announcements.in 1999, electronic business-to-business marketplaces became big. such marketplaces as sciquest and chemdex started lowering procurement costs for buyers and increasing revenues for sellers, but these and other existing marketplaces are transaction based. the marketplaces announced by i2, manugistics, oracle, and sap promise planning and planning-related collaboration. despite the publicity around these marketplaces, providing planning functionality may take time because the current focus is on tackling the complexity of business-to-business transactions. according to phillips and meeker 2000, enabling these transactions over the internet is difficult because “many systems and business processes have to be restructured” and procurement and fulfillment processes are inherently complex. no wonder then that all of the marketplaces mentioned by kaplan and sawhney 2000 are transaction based. the next step for these marketplaces is to make orders visible from inception to fulfillment and allow tracking. only after that will we see marketplaces emphasizing planning capability. still, building blocks for planning-related applications do exist in marketplaces and marketplace technology announced by the aps and erp vendors: tradem (i2), bstreamz (manugistics), (oracle), and mysap.com (sap).as business use of the internet grows, opportunities for or to improve supply-chain performance will abound. firms can use or to improve supply-chain management in three ways: (1) to lengthen the decision horizon for planning within the enterprise over that offered by their erp systems regardless of their supply chains being internet enabled;(2) to extend the physical scope of their supply chains to include vendors and customers and improve planning for the near and medium term as well as execution for the immediate future; and(3) to extend the functional scope of their supply chains to improve product-design, sales, and customer-relationship management.with current business use of the internet largely limited to transactions, the internet offers opportunities for planning parallel to those that erp systems opened up for aps software. moreover, the internet increases the number of other businesses a firm can buy from or sell to and also enables the firm to change its relationships with these businesses in electronic marketplaces. the resulting complexity requires an expanded model that increases optimization opportunities for both planning and execution. supply-chain-related opportunities for or continue from the days before e-business became big, but the internet has opened up several new opportunities:- aps vendors and others have announced electronic marketplaces or marketplace technologies to support supply-chain planning to help firms plan effectively;- new business models for e-commerce, like that of webvan, will require new supply-chain models;- business-to-business relationships in electronic marketplaces typically involve more entities, thus creating or opportunities in marketplaces for both planning and execution;- businesses are more aware of the value of optimization than they were before aps implementations; and- the possibility of or and other applications being internet-hosted means businesses may have fewer it concerns about implementing or-based systems.an example of using aps with erp in an internet-enabled supply chainto understand the role of or in an internet-enabled supply chain, consider its surrogate, aps, in a global consumer-electronics firm that wants to automate its existing fulfillment process using erp, aps, and the internet. currently, its regional offices around the globe group orders from customers, typically consumer electronics chains, in their regions once a week for 26 weeks of a rolling horizon. they then send the grouped orders to headquarters. headquarters assigns current and planned inventory to these orders and then fills them directly from warehouses at the plant locations to customer warehouses around the globe. in the future, customers may order from headquarters directly, and external suppliers may fill orders. for the first four weeks of the planning horizon, the orders are firm, while later orders may change in time and therefore serve as forecasts. the headquarters, regional offices (or customers), and plants (or suppliers) can use the internet, erp, and aps systems as follows while maintaining the existing fulfillment process, with all steps except 6 and 7 to be run once a week in the following sequence:(1) regional offices (or customers) send orders through the internet to a database at headquarters and overwrite the orders for corresponding weeks placed a week earlier. unfilled orders from past weeks in the erp system also go to this database.(2) plants (or suppliers) use the internet to enter the planned replenishments by date and ship-from location in the same database. the erp system maintains records of current inventory at each plant (supplier) location as stocks are added or taken out.(3) the aps system takes all the orders and the planned replenishments for the entire time horizon of 26 weeks from the database and the current inventory from the erp system. it runs either a heuristic or a linear-programming-based model to allocate current and planned inventory among these orders, balancing delays and customers according to their importance. with either model, the system gives each order an allocated quantity, a target shipping date, and a target shipper location. the firm considers planned replenishments fixed for the first 12 weeks and flexible for weeks 13 through 26, so the aps system takes the first 12 weeks replenishment from suppliers as a constraint and the next 14 weeks replenishment as a decision variable. (the heuristic for a single shipping location works as follows: taking the time periods in sequence, for each time period, it sorts unfilled orders by due date and customer importance and then allocates the maximum possible inventory to orders starting from the top of the list. the linear-programming-based solution is a multi-time-period network model with current and planned inventory as source nodes, orders as demand nodes, and delay penalties per unit time based on customer importance.)(4) through internet-enabled collaboration, the aps system makes the forecast for weeks 13 through 26 available to the suppliers.(5) the erp system imports orders for the current week from the database and updates unfilled orders from previous weeks. all of these orders now have a shipping quantity and date as determined by the aps module in step 3.(6) every day, the erp system executes orders based on the shipping date and the inventory at the shipping location, issuing transportation orders and updating order statuses accordingly.(7) the regional offices (or customers) can use the internet any time after the aps run to view the shipping quantities and shipping dates for their planned orders. the erp system provides information for orders in the current or earlier weeks, while the database provides information on later orders._figure 1 goes about here._however, using the internet and aps technology only to automate an existing process limits the benefits. the electronics firm uses the internet only for communication and makes only limited use of or. if this firm were to join an electronic marketplace, it might have to change radically and use or to make improvements even before joining such a marketplace. one improvement would be to make the process more responsive to changes in demand. for instance, customers might want to change their orders scheduled for shipping within the first four weeks, which is not currently allowed. the firm could let customers enter changes and then rerun the lp model with the existing replenishment schedule taken as fixed and allowing the changes if that improved the overall solution. such a model could be run any time, so it would be useful to implement before the firm joins an electronic marketplace whose dynamic environment would not accommodate its sequential weekly process.the firm could make the supply chain even more responsive if it allowed changes to the suppliers replenishment schedule within the first 12 weeks. then, it could tie the suppliers production scheduling system(s) to its aps system. this would let a customer enter a tentative order through the web to get an immediate response as to whether or not the firm could fill the order by the specified date. one way the firm could provide this functionality in the present context would be to add this order to the demand and rerun the lp model in the aps system with the first 12 weeks replenishments as soft constraints. if no change were required to the existing replenishment schedule, the customers order could be met. otherwise, the aps system would then pass the changes to the suppliers production-scheduling system to check whether these changes were possible by juggling production. if the answer were yes, the customers order could be filled; otherwise the customer would be told that the order could not be met by the specified date. this computation too can be done at any time and would be useful with an electronic marketplace.this simplified example shows the complexity of both technology and business processes, whether a firm simply internet-enables its existing processes or redesigns them for electronic marketplaces. in either case, or can be useful.extending the decision horizon for planning within the enterpriseindependent of the internet, or (including aps) allows a firms planners to extend their decision horizon for planning supplies to meet forecasted demand from the immediate future provided by the erp system to the medium and long term. the actual time constituting short or long term depends on the industry long term in the electronics industry may be short term in the chemicals industry. the distinction is in the flexibility to change the supply-chain parameters during the period. the longer the term, the greater the flexibility. for instance, in the medium term, it may be hard to change the capacity of existing plants, but in the long term, the firm could acquire or build new plants. the existing and potential or applications deal with different supply-chain issues depending on the decision horizon sodhi 2000 just as business drivers vary by the horizon (table 1):- long-term decisions are affected by globalization leading to increased competition and expanded presence in other countries, by mergers and acquisitions, and by the costs of physical assets. since the 1960s, or has been used for long-term decisions, such as plant and distribution-center openings and closings. aps vendors offer tools that use true optimization with linear and integer programming.- medium-term decisions are affected by customer-service, inventory, and supply-chain costs, including procurement, manufacturing, and distribution costs. or can help firms to plan procurement, manufacturing, and transportation to minimize supply-chain costs. aps vendors typically support medium-term decisions by offering tools that use heuristics.- short-term decisions are affected by transportation costs, finished goods inventory levels, and equipment utilization. or can help firms to create or, on short notice, to modify their production schedules and inventory deployment. modification could be warranted by unplanned events, such as the arrival of a new high-priority order, with real-time data obtained using the internet. aps vendors use genetic algorithms, constraint-based programming, the so-called theory of constraints, business rules, or other heuristics for production scheduling, deployment of inventory, and transportation scheduling.- immediate decisions usually concern filling customer orders on time. businesses currently use the internet almost entirely for immediate transactions, and even problems with no planning element offer opportunities for or. for instance, in response to a customers request for immediate shipment, a firm could use or to determine the effects of rescheduling production to fill the order and respond quickly to the customer. firms can also use or to modify current orders by substituting components or manufacturing locations.-insert table 1 around here.-extending beyond the enterprise to customers and suppliersthe “beer game,” a supply-chain game developed by john sterman at mit and supported by the system dynamics society, demonstrates that having only local information at different nodes in any supply chain can amplify fluctuation of the customer demand signal as the signal moves upstream to warehouses and plants. thus, even a small customer demand fluctuation can result in huge inventories or shortages at upstream nodes. the game, played in many business workshops, convinced many businesses to coordinate the information between different nodes in their supply chains to prevent this amplification or bullwhip effect. recognition of this effect has motivated firms to track the operation of the entire supply chain and use this information to coordinate operations throughout the supply chain. indeed, erp systems can coordinate information across production, distribution,