Operations Research at IBM Corporation: Integrated Supply Chain Perspective

Integrated Supply Chain
Operations Research at IBM Corporation:

Integrated Supply Chain Perspective
Dr. Brian Thomas Eck

Director of Strategy, IT & Business Transformation,
IBM International Holdings, Inc. -- Singapore Branch
Integrated Supply Chain (ISC)
IBM Research, Delhi India | April 2006 © 2006 IBM Corporation

Today’s Discussion
Introduction: Supply Chain Management & IBM’s Integrated Supply Chain
Enablers of Successful OR Application:
Demand and Support for OR

Embedding in Operations
Differentiated Roles
Examples of OR at IBM:
Simulation / Inventory Optimization Example

Available to Sell: Resource Allocation
e-Auctions Analysis
Summary
Questions
2 Operations Research at IBM © 2006 IBM Corporation



e-Auctions Analysis
Summary
Questions

What is Supply Chain Management?

Partners Customer
Suppliers Supply Chain
Channels
Contract Mfg.
4 Flows: Product, Information, Work, Cash Retail
3PL’s
Direct
Supply Chain Managers
B2B
Exchanges Design Plan Source Make Deliver Sell Resellers
Return
What is ISC in IBM?

19,000 employees in 61 countries (200+ with Ph.D.s)
Responsible for USD$ 40 Billion of IBM cost and expense
Shipping 1 Billion kilograms of product annually
Part of the larger Integrated Operations team
Transformation credited with savings for IBM in excess of USD

$20 Billion over first three years (2002-2004)



e-Auctions Analysis
Summary
Questions

Enabling OR Application within Industry
Demand for OR Application

Competitive Pressures
Maturity in Organizational Improvement
Awareness of Methods, Skill Base of Employees
Business Improvement Process and Structure
Support for OR Application

Virtual Community
Application Domain Support
Center of Excellence Support
Effectiveness of OR Application
Business insights and OR expertise
Embedding in Business Processes

OR Community and Examples
Informal
Block Scheduling for Classrooms
Network and Instructors
•Improve utilization and decrease costs
•Penalty function, MIP (using OSL, C++)
•Used through 7 cycles (over 4+ years)
•Model size:
62,010 columns
Center
Center of
of Excellence
Excellence 90,002 rows (273,392 nonzeros)
(IBM
(IBM Research)
Research) •Well-accepted, will spread to Europe
MD Network Design
•Logic packaging vendor offered alternate locations
Integrated Supply Chain •Spreadsheet model, "What's Best" MIP
Advanced Planning Systems •$650K savings identified
Supply/Demand Process •Extensions to full logic network and other products
Network Optimization
Business Units SSD Sourcing

•Manufacturing Strategy group
•Assigning flows from multiple manufacturing
TG SG locations to multiple customer sites
PSG
•LP and MIP

Embedding tools within processes for decision support
Investment Matrix, FEAT

•Corporate-Wide Supply/Demand Process
•Interlock: Supply Support Decision
•Unbiased Forecast
•Alternative Perspectives
•Supply Support Decision
•Risk (lost sales versus inventory)
•Maximize Expected PTI
Design for Logistics

•Enable Designers At Decision Time
•Consider Total Product Cost
•Heuristics and Model
•Inventory Targeting in an Assemble-To-Order Environment
Simulation to Model S390 Supply Chain

•Express Targets as DOS by Commodity
•Weekly Review of Actuals versus Targets

Most OR Practice Successes in IBM Leveraged Multiple Roles
Very deep
Academia
IBM Research
Depth in OR ISC Technical

Thinking Leaders
ISC Practitioners
& Executives
Shallow
Little to General Deep and

None (broadly familiar) Broad
Literacy in IBM’s business

S390 Inventory Analysis

70% of business transacted on IBM servers
Cyclic demand production challenges
Inventory management: High $ parts by commodity
Ireland
Montpellier
Fabricated 46.5% 95% European
Parts Volume Suppliers
(Less MCM) Japan
North
Poughkeepsie CDCs
53.5% Volume
America Asia Fujisawa
CDCs
Pacific
Europe
95% NA Middle East
suppliers Africa
Brazil
20 CDCs
Sumare
Latin
America
Key Strategy: Fab/Fulfillment
Simulation modeling to explore
behavior of BTP/CTO supply chain
S390 Simulation Project: Inventory Study

Fabrication Fulfillment Center
MCMs
power Feature1
.
.
.
BOX
(MTM)
memory
FeatureK
When managing a measurement, we need to

know where we expect it to be...

Objectives
Steps
1. Determine Days of Supply (DOS)
levels/targets for high dollar parts, for the
"as is" CMOS supply chain. •Confirm objectives
•Build model
•Gather data
2. Assess how improvements to feature •Cleanse data
ratio forecasting accuracy would impact •Validate model
CMOS inventory turns. •Test hypotheses
•Draw conclusions
•Analytical
3. Establish the impact on required CMOS
inventory of fab/fulfillment versus
•Business implications
consumptive pull replenishment. •Present, convince, implement

Forecasts
Replenishment Fulfillment Center BOMs: Box/MES:
Lead Times: EMLS Extract Jim Curatolo
Fed by SAP Brian Kuhn
EMLS Extract Identifying Feature P/Ns Wendy Sell
Found incorrect Larry Fox Roger Tsai/Pete Weber
(empty system LTs)
Identifying FC P/Ns
Debby Carelli Fab BOMs: Don Gunvalsen
Denny Slocum
Jeff Benedict
SAP Testing Lead Times --
Pull vs Non-pull Danielle Fields
In Practice Dave Pearson (IE)
Debby Carelli
Monthly Forecasts
Nick Kulick (pwr)
Larry Fox's spreadsheets
Mike O'Dowd (DASD) Don Gunvalsen
SCE files (20-day process)
Sue Cozalino Jeff Benedict
Monthly Actuals
Ron Shields
COATS data extracts
Testing Yields/Usage --
(custom SQL)
Gisela Hetherington (MCMs)
Dave Pearson (general)
Mae Ling Chen (non MCM Logic) Serviceability:
Kai Wong (Memory)
Bethesda DB
Winston Ralph/Mark Coq (power)
CAD=CRAD for CRAD
within 3 weeks (80%)
Transportation Lead Times: 100% otherwise
Jeff Schmitt (custom SQL)

Validation against historical actuals, builds confidence in

the model
CMOS AVG High Dollar Inventory
70
60
Average Inventory
50
Millions $
PWR_SUPP
40 PWR_MECH
30 MEMORY
LOGIC
20
10
0 Validation of Simulation Model
04/20/98
05/04/98
05/18/98
06/02/98
06/23/98
Average
October
May to
11/02/98
11/09/98
11/16/98 CMOS: May through October 1998
Average Inventory of High Dollar IMPACT Parts
Date
$70
$60
LOGIC
LOGIC 97
97 %
%
MEMORY 96 $50
MEMORY 96 %
%
PWR_SUPP
PWR_MECH 86
86 %
Millions
PWR_MECH % $40 PWR_MECH

PWR_SUPP
PWR_SUPP 94
94 %
%
$30 MEMORY
LOGIC
OVERALL
OVERALL 95
95 %
% $20
$10
$0
Actuals Simulation

Multiple Replications, Demand Mix and Variation

To Test Effect of Fab/Fulfillment (BTP/CTO)
LOGIC DOS for

pDOS2QA
Three Replications
50
45
40
Days of Supply
35
30
25
20
15

Patterns emerged for each commodity

LOGIC DOS PWR_MECH DOS
50 60
45
50
40
35
40
DOS
DOS
30
25 30
20
20
15
10 10
1 3 5 7 9 11 13 1 2 3 4 5 6 7 8 9 10 11 12 13
Week of Quarter Week of Quarter
MEMORY DOS PWR_SUPP DOS

60 45
40
50
35
40 30
DOS
DOS
25
30
20
20
15
10 10
1 3 5 7 9 11 13 1 2 3 4 5 6 7 8 9 10 11 12 13
Week of Quarter Week of Quarter

LOGIC DOS
50
45
40
35
DOS
30
25
20
15
10
1 5 9 13
Week of Quarter

SQC charts are applied to the residuals to detect when to act

Additional Observations Inventory Cost of Fab/Fulfillment

$70
$60
Model
Model run
run with
with consumptive
consumptive pull,
pull, $50
Inventory
optimized
optimized reorder
reorder points
Millions
points $40
$30
No
No Capacity
Capacity Constraints
Constraints $20
Quantifies
Quantifies cost
cost of
of strategy/cost
strategy/cost $10
of
of skew
skew $0
As Is versus Consumptive Pull
29%
29% more
more expensive
expensive overall
overall PWR_SUPP MEMORY LOGIC
74%
74% savings
savings possible
possible for
for PWR_MECH
PWR_MECH
PWR_MECH
Lead Time Reduction: Consumptive Pull

$70
PWR_SUPP MEMORY LOGIC
Sensitivity
Sensitivity Analysis
Analysis
$60
PWR_MECH Using
Using consumptive
consumptive pullpull model
model
$50 (max
(max savings)
savings)
Inventory
11% 6% 6% 6%
Millions
$40
13% Using
Using fab/fulfillment
fab/fulfillment model
model
30%
$30
(much
(much less
less sensitive)
sensitive)
$20
$10
$0
Base All MCM Logic MEM Mech Supp Actuals



e-Auctions Analysis
Summary
Questions

Available-to-Sell (AtS)
•Determining how excess parts inventory can be positioned with marketing / sales
as finished goods (saleable) product, to condition demand and consume the excess
•Optimization aspect appears as
a straightforward Linear
Programming application Sales: "What do we have in excess?"
Planning Items
•Production Planning LP tool (MTMs, Upgrades,
MES loose piece)
already developed in IBM
Features
Research (WIT/SCE)
Enterprise implosion problem:
380K resources, 185K operations,
84K demands, 800K flows, 52 periods MFI/FFBM
(and this doesn't include capacity)
LP formulation:
57 M variables, Manufacturing:
24 M constraints, "We have excess
118 M nonzeros
parts inventory."

Data Issues Dominate Industrial Problem Solving

ETIS relates planning
items to p/n via
history (ratios)
4. Inadequate history
causes artificial 'zero'
ETIS ratios
5. Which parts are

called out by which
features is
order-dependent
2. EC causing expired
effectivity dates (bill
present but no demand
on parts)
3. Bills missing
1.B) Card bills missing entirely for parts in
(outsourced) excess
1.A) Excess at a 6.“Penny parts”

component level unknown
to Manufacturing 6000 of these
7.C-source
(consigned)
SG ATS/ 03
rev7/22/01

Feature Translation: creating pseudo bills of material and appending

to existing structures
fc 1234 for fc 1234 for
model ABC all models
New bill
structures to
Parts unique be added...
to ABC
...connect to
existing bill
structures

Device Code to Bill Structure Example

EXAMPLE (d/c 0014)
9406;170;Q01;0014;00075G2720;***;(9401.R1)ESP -DOCS
9406;500;Q01;0014;00017G0071;***;(9406.R1)PRE-GA PUBS
9406;510;Q01;0014;00017G0071;***;(9406.R1)PRE-GA PUBS
9406;530;Q01;0014;00017G0071;***;(9406.R1)PRE-GA PUBS
9406;50S;Q01;0014;00017G0071;***;(9406.R1)PRE-GA PUBS
9406;53S;Q01;0014;00017G0071;***;(9406.R1)PRE-GA PUBS
9406;***;Q01;0014;00046G0063;***;(MILL.R1)PRE-GA PUBS
9406;***;Q01;0014;00017G0071;***;(CONH.R1)PRE-GA PUBS
On all models other than those listed, device code

0014 requires either one unit per of 46G0063 (for
models S1*,S20,60*,62*, and 720) or one unit per of
17G0071 (for models 840 and SB3).*
On model 170, 0014 requires only 1 per of 75G2720
On models 500, 510, 530, 50S, and 53S, only 1 per
0014_ML6
0014_510
0014_530
0014_50S
0014_500
0014_53S
of part 17G0071 is required.
This is expressed as follows in the SCE format: 0014_170 0014_M10
"0014_9406ML6";"0000017G0071";1
"0014_9406M10";"0000046G0063";1
"0014_9406170";"0000075G2720";1
"0014_9406500";"0000017G0071";1
"0014_9406510";"0000017G0071";1
"0014_9406530";"0000017G0071";1
"0014_940650S";"0000017G0071";1
"0014_940653S";"0000017G0071";1
75G2720 17G0071 46G0063

*using rel3.mfc (bld level) MTMODCNV.R file

Additional Observations
•Objective Function
•Dependent on sales price (to maximize profit) but prices unavailable
•Use a ‘scaling factor’ k and
maximize k *(excess consumed) – sum (cost of additional purchases)
k small k large
Minimize add’l payment Maximize using up excess
•Business process design/implementation equally key to success
•Results / Timeline
• Jan 2002: Identified problem, data challenges, modeling approach
• April 2002: programmed prototype; simple features only
• June 2002: production version including simple+1, simple+2 f/c parser
• Patent filing late 2002
• In 2002, component inventory moved = USD$ 72 million
• In 2003, component inventory moved = USD$ 40 million
•“Hardened” and offered commercially to clients (first sale 2005)


e-Auctions Analysis
Summary
Questions

e-Auctions to Exploit price/quantity Relationships
Fixed-Price versus Auctions Selling

quantity quantity
Q0
p0 price price
Reason Not to Auction New

Products quantity
quantity
forecasting
demand (BAU)
Q0 Q0
forecasting
price (auction)
p0 price price
p0
Auctioning Complements BAU

Investigation of Product Differences and Value of Auctions

Some Products are a Better Fit for Auctioning
Key Driver: How unique is the purchase across customers?
High unit
DRAMs
volumes
HDDs
Custom Logic
(ASICs)
PSG
Amenable
to Auction
AS/400
RS6000
SSD
PSD
Low unit
volumes
S390
Common function, Unique function,

product across product for each
many customers customer
Key Question: Is it more efficient to have inventory

and idle factory capacity, or to sell the product at
whatever price the market will bear?
Auctioning as an Additional Channel

Three Key Parameters Drive the Dynamics
Percentage of total revenue targeted through the auction channel
Percentage of current channel demand cannibalized by auction sales
Percentage auction price effectiveness
These Key Inputs Are Unknown
Able to be estimated from piloting
Cannibalization and auction price effectiveness are outcomes
% revenue targeted translates through the other parameters into resultant auction revenue
Brand- (product-) specific
Approach
Estimate reasonable average values for these parameters, and then test
sensitivity across a range of values by randomly simulating different
combinations.
10%
5% 15%
Auction Revenue = Targeted Auction Revenue

targeted revenue times 82.5%
price effectiveness 70% 95%
Cannibalized Price Effectiveness

Revenue
57.5%
25% 90%
% Cannibalization
Total Revenue

e-Auctions Appear to be an Attractive Channel
Although auction price effectiveness is less than 100% (70% to 95%),

profit margins improve by using free capacity (leveraging fixed cost
across more revenue) and from selling excess inventory.
The incremental profits and revenues are fairly robust across a wide
range of cannibalization and auction prices:
Revenue potential Net change in profit

million $
million $

Auctioning versus "Working Off" in Supply Chain

Decisions
Recognize an "Excess Supply" Situation
Determine Whether to Auction or Work Off After Before
Determine How to Auction Building Building
Timing Product Product
After
START ...OR
Missing
Relative to Building the Box HERE HERE
Forecast
Relative to Calling the Missed Demand Before

Missing
Factors: Forecast
Component part leadtime k periods

Price takedown Pk
Cost of inventory c
Cost of production
Selling expense: usual channel(s) s
Selling expense: auctions a
Waiting penalty wk
Price received through auctioning product (random variable) Pa
Auction if we can get at least Pa ,so that the margin is at least what we could
get by working it off through the supply chain
Pa - c - - a m Pk - c - - s - wk
Recognize Decide on Declare "on-hand"

"Excess" and/or Conduct and net out of After Missing Forecast and
Auctioning demand
Before Building Product
-1 0 1 2 3 k k+1
Demand Plans
booked (reforecast
and netted on-hand)
Requirements Passed Materials Received from

to Suppliers Suppliers (leadtime=k periods)
Auction at minimum opening bid of Pa = Pk - s + a - wk

where wk = cki if I have already purchased the component inventory
Dynamic Programming Approach to the Auctioning Decision
Difference Equation Approach

Sell through the auction, and sell through working off, with certain
probabilities (< 1):
Let Ci = maximum return given one unit (box) of excess supply in
period i, then
Ci = max {max Pr(Pa m r){E(Pa | Pa m r) -

r c- - a } + Pr(Pa < r)(w1 + C i+1 ),
(Pk+i - c - - s - wk+i )Pr(sell it in period i+k for Pk) + ( C i+k - wk+i ) Pr(don't sell it) }
and Clast = scrap value (for some well-defined period in the future)
Then, solve for C0
Issues
Auction (market) price distributions may be poorly understood
Probabilities (of selling one item at price Pk in period i+k) unknown



e-Auctions Analysis
Summary
Questions

Enabling OR Application within Industry
Function
embedded in
S/W instantiation
Very deep
Academia
IBM Research “Wrapper” Concept:
OSL / WIT / SCE / AtS

Depth in OR ISC Technical
Thinking Leaders DES / BPMAT / AMT
ISC Practitioners
& Executives
Shallow
Little to General Deep and

None (broadly familiar) Broad
Literacy in IBM’s business

In Summary
Supply chain management is a dynamic, exciting, growing

application area
Data management (gathering, cleansing, workarounds) is a

critical success factor and often consumes most project resources
Ingredients for success include:

► Readiness (maturity, awareness, skill base, burning platform)
► Support community
► Combined OR expertise with business insight
– Differentiated roles helpful

Thank you!
Brian T. Eck
BrianEck@sg.ibm.com or
Drbteck@yahoo.com.sg

Operations Research at IBM Corporation: Integrated Supply Chain Perspective

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Integrated Supply Chain

Operations Research at IBM Corporation:

Dr. Brian Thomas Eck

IBM Research, Delhi India | April 2006 © 2006 IBM Corporation

Enablers of Successful OR Application:

Demand and Support for OR

Simulation / Inventory Optimization Example

2 Operations Research at IBM © 2006 IBM Corporation

Enablers of Successful OR Application:

Demand and Support for OR

Simulation / Inventory Optimization Example

3 Operations Research at IBM © 2006 IBM Corporation

What is Supply Chain Management?

What is ISC in IBM?

 Transformation credited with savings for IBM in excess of USD

4 Operations Research at IBM © 2006 IBM Corporation

Enablers of Successful OR Application:

Demand and Support for OR

Simulation / Inventory Optimization Example

5 Operations Research at IBM © 2006 IBM Corporation

Enabling OR Application within Industry

Demand for OR Application

Support for OR Application

6 Operations Research at IBM © 2006 IBM Corporation

OR Community and Examples

Business Units SSD Sourcing

7 Operations Research at IBM © 2006 IBM Corporation

Embedding tools within processes for decision support

Investment Matrix, FEAT

Design for Logistics

Simulation to Model S390 Supply Chain

8 Operations Research at IBM © 2006 IBM Corporation

Most OR Practice Successes in IBM Leveraged Multiple Roles

Depth in OR ISC Technical

Little to General Deep and

9 Operations Research at IBM © 2006 IBM Corporation

S390 Inventory Analysis

S390 Simulation Project: Inventory Study

When managing a measurement, we need to

11 Operations Research at IBM © 2006 IBM Corporation

12 Operations Research at IBM © 2006 IBM Corporation

13 Operations Research at IBM © 2006 IBM Corporation

Validation against historical actuals, builds confidence in

PWR_MECH % $40 PWR_MECH

14 Operations Research at IBM © 2006 IBM Corporation

Multiple Replications, Demand Mix and Variation

LOGIC DOS for

15 Operations Research at IBM © 2006 IBM Corporation

Patterns emerged for each commodity

MEMORY DOS PWR_SUPP DOS

16 Operations Research at IBM © 2006 IBM Corporation

17 Operations Research at IBM © 2006 IBM Corporation

SQC charts are applied to the residuals to detect when to act

18 Operations Research at IBM © 2006 IBM Corporation

Additional Observations Inventory Cost of Fab/Fulfillment

Lead Time Reduction: Consumptive Pull

19 Operations Research at IBM © 2006 IBM Corporation

Enablers of Successful OR Application:

Demand and Support for OR

Simulation / Inventory Optimization Example

20 Operations Research at IBM © 2006 IBM Corporation

21 Operations Research at IBM © 2006 IBM Corporation

Data Issues Dominate Industrial Problem Solving

Transformation credited with savings for IBM in excess of USD

Supply chain management is a dynamic, exciting, growing

Data management (gathering, cleansing, workarounds) is a

Ingredients for success include: