Production Variability in

Sales & Operations Planning:

A Data-Driven Approach

Bruno A. Calfa, Ignacio E. Grossmann

Department of Chemical Engineering
Carnegie Mellon University
Pittsburgh, PA 15213

Anshul Agarwal, Scott J. Bury, John M. Wassick

The Dow Chemical Company
Midland, MI 48674

March 11th, 2015

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 Motivation
• Sales & Operations Planning (S&OP)
– Business and decision-making process.
– Tactical plans in every business area.
– Goal: balance demand and supply for products.
• Stages in the S&OP process
Monthly Process
This work
1. 2. 3. 4.
S&OP
Sales Operations Reconciliation
Implementation
Planning Planning of Plans
and Evaluation

Gather data on Assess ability to meet Match supply and Distribute and
past sales, demand, account for demand with financial execute plan
demand production variability considerations (scheduling level),
forecasting evaluate performance
Adapted from Ling & Goddard (1988) 2
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 Problem Statement
• Production planning of a network of chemical plants
• Given
– Deterministic monthly product demand,
– Maximum installed capacity of each plant,
– Transportation, production, and inventory costs.
– Optional: current production plan (production targets)
• Goals
① Propose a new production plan by incorporating historical production variability,
② Evaluate the performance of the proposed plan using tradeoff average return vs. risk.
• Schematic of proposed approach

Statistical Optimization/Si
Analysis mulation

S&OP Data Quantile Regression Return vs. Risk Tradeoff

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 Deviation from Plan
• Given historical operational data (planned and actual production rates).
• Define deviation: Δ = Plan – Actual  Production Variability
• Use quantile regression to model distribution of Δ conditional on a
particular Plan value.
• Example: 3.00 w.u.: weight units
2.00
1.00
∆ (w.u.)

0.00
-1.00
-2.00
0.00 5.00 10.00 15.00 20.00 25.00 30.00

Less variability Plan (w.u.) More variability

Plan = 1.5 w.u. Plan = 10 w.u.

[-1.5, 2.0]
[-0.6, 0.4]

∆ (w.u.)
∆ (w.u.)

Probability Probability
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 Motivating Example
• Process network structure
B

D
A
E

G
↑ Reliability* ↑ Margin
*↑ Spread of Δ around 0  ↑ Variability  ↓ Reliability
• Main objective
– Demonstrate the different allocation schemes as a function of financial risk
tolerated.
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 Efficient Frontier
321.00 94.25%

Average Overall Service Level

Average Profit (m.u.)

Region I P3 94.20%
316.00
94.15%

94.10%
311.00 P2
Region II 94.05%
P1
306.00 94.00%
7.00 11.00 15.00 19.00 23.00 27.00
Standard Deviation of Profit (m.u.)

Margin
Profit Service Level

• Average overall service level does not increase after point P2.
• Increase in overall expected margin is accompanied by increase in financial risk
– More A is allocated to less reliable, high-margin plants (next slide).

m.u.: money units

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 Allocation
• Total average allocation of A to highest-margin and lowest-margin plants.
206.00 120.00

Allocation of A to G (w.u.)
Allocation of A to B (w.u.)

204.00 118.00

116.00
202.00
114.00 B
200.00 G
112.00
198.00 110.00

196.00 108.00
Point 120 180 240 Point 360 420 480 540 600 Point
P1 P2 P3
ε Value (m.u.)2

• Overall allocation of A from Region I (less risk) to Region II (more risk)

– ↓ low-margin plants
– ↑ high-margin plants

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 Contributions and Conclusions
• General framework to model production variability conditional on
production Plan.
o Historical deviation from plan: Δ = Plan − Actual.
o Quantile regression to generate scenarios.
• Trade-off analysis for different material allocation schemes.
• Optimization-based approach
+ Simultaneously minimizes risk and accounts for production variability,
+ Directly accounts for constraint violations,
− Difficult or impossible to use explicit model for Δ given Plan.
• Implementation considerations
o Data analysis framework can be used to profile Plan-Actual mismatches.
o Possible memory limitation for larger instances (more scenarios).

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 References
• Birge, J. R., and Louveaux, F. 2011. Introduction to Stochastic Programming. Springer
Science+Business Media, LLC., second edition. New York, NY. USA.
• Conn, A. R.; Scheinberg, K.; and Vicente, L. N. 2009. Introduction to Derivative-Free
Optimization. Society for Industrial and Applied Mathematics (SIAM) and the Mathematical
Programming Society (MPS). Philadelphia, PA. USA.
• Koenker, R. 2005. Quantile Regression. Cambridge University Press. New York, NY. USA.
• Li, Q., and Racine, J. S. 2007. Nonparametric Econometrics: Theory and Practice. Themes in
Modern Econometrics. Princeton University Press. New Jersey, NJ. USA.
• Ling, R. C., and Goddard, W. E. 1988. Orchestrating Success: Improve Control of the Business
with Sales & Operations Planning. John Willey & Sons, Inc. New York, NY. USA.
• Miettinen, K. 1999. Nonlinear Multiobjective Optimization, volume 12 of International Series
in Operations Research & Management Science. Kluwer Academic Publishers. Boston, MA.
USA.
• Montgomery, D. C., and Runger, G. C. 2003. Applied Statistics and Probability for Engineers.
John Wiley & Sons, Inc., third edition. New York, NY. USA.
• Roelofs, M., and Bisschop, J. 2013. Advanced Interactive Multidimensional Modeling System
(AIMMS). http://www.aimms.com/.

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