WHITEPAPER

Industrial flexibility :
How new mathematic optimisation
methods can contribute to better
manage Industrial Agility?

11 Argon & Co • Whitepaper

Introduction
Supply chain management consists of
finding the right balance between
conflicting objectives. They can be
classified into three categories: cost,
inventory and service. Even if inventory
has holding costs, its main characteris-
tic is that it is locked-in capital until it is
transformed or sold. Similarly, delays in
client service or the resulting loss of
reputation are hard to express as a cost.
The automotive and luxury industries are good
examples of these conflicting objectives. In the
automotive industry, high inventory is impossible
because of depreciation and the diversity of
products. However, the service level must be high
due to high competition. In the luxury industry,
availability of the right product in the right store is
more critical than production costs but high levels
of inventory are still impossible.
In general, industrial agility, which is the ability to
face variations in customer's demand is an
effi- cient way to be competitive if two conditions
are satisfied. First, the cost of agility should be
reaso- nable and second, agility should not be
achieved as a result of high inventory levels. For a
company, defining its agility is therefore finding a
balance between cost, inventory and service.
Working with the CERMICS (research center in
applied mathematics at Ecole des Ponts ParisTech),
we deal with this multi-objective problem at several
level of the supply chain.
• The first problem was to optimise the cycle
stock
• Secondly, we exposed how stochastic
planning can help to reduce stock in a highly
uncertain environment
• Lastly, we modeled and optimised
production sourcing
Optimisation of cycle stocks
The famous Economic Order Quantity
(also known as the Wilson Formula)
addresses the balance between cost
and inventory using setup costs, that is
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costs induced by the transition from one
product type to another.
The well-known drawback of this formulation is
the pricing of the setup costs. Among others, they
are linked to loss of capacity, loss of raw materials,
dedicated workforce to do the setup, etc. At Argon
& Co , discussions with our clients confirm that
the balance between costs and inventory must
be addressed by an upper bound on the number
of setups, which is a constraint, rather than setup
costs, which is part of the objective.
Working with the CERMICS, we address a new
model which aims at minimising the average
holding cost of the cycle stock subject to an upper
bound on the number of setups over all product.
We prove that the optimal covers (or setup
frequencies) are given by a closed-form formula
which can be easily used in Excel.
Figure 1 and 2 give an example with three products
and ten setups for all products.
Common sense makes us produce the higher
demand the more often. However, calculation
shows that using production frequencies
proportional to the demand is as bad as using
the same frequency for each product whereas
using the optimal frequencies calculation with our
formula leads to a decrease of 15% in cycle stock.
Besides the simplicity of this model and its ease
of use, we developed several extensions which
address some other practical cases while remaining
easy to use.
• It is easy to use the formula with a maximum
time for the whole setups if the setup times
does not depend on the scheduling. If not,
we also provide a slightly more complicated
model to deal with this specificity
• We also address an algorithm which
computes the optimal repartition of the
demand between lines or plants and then
computes the optimal frequencies
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Stochastic planning
Using cycle stock and safety stock is a
choice that helps to deal with uncertainty
(demand, reliability of means of
production, etc.).
It has a huge impact on solution and on the
limits of potential gains. Stochastic planning is
a new approach widely studied by academics
but not commonly used in industry. It uses
tools from stochastic optimisation which deal
with optimisation in an uncertain environment.
Production is a good example but other
sectors like energy, vehicle routing, finance, and
telecommunications also suffer uncertainty.
In the production application scenario, the
main advantage of stochastic planning consists
in optimising and computing the production
level optimising the whole inventory (without
decomposing it in breaking it down into several
parts). Because inventories are less constrained, it
enables a better optimisation. However, it can be
achieved only if two conditions are satisfied.
• First, means of production and planning
tools should be able to produce batches
with variables sizes
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• Second, the industry must be able to
address uncertainty. A common way of
representing it is to use a scenario tree.
A scenario represents a possible future.
Regardless of the way of getting the
scenarios (forecast, machine learning based
on data, expert opinion), it does not change
the optimisation method
Stochastic planning returns the production level for
the forthcoming days (or weeks depending of the
desired stability) and forecast on production for
the following days.
Production multi-sourcing
Production multi-sourcing’s objective is
to define the flexibility level of a means
of production by deciding if a plant
(or a line) should have the ability to
produce a product. This decision is made
between the strategic and tactical levels
— depending on the industry — typically
when companies expand their product
portfolio or when they have expanded
their productions capacities.
Livre Blanc-sourcing enables the company to face they need time to be fully efficient. Therefore,
variability of the product mix. When there are specialisation of plants also has advantages.
many products, there may be a cannibalisation
In industries where demand is close to production
between the products, i.e., demand for some
capacity, wisely choosing the new assignment
products may decrease while demand for others
is a critical problem since increasing the current
increases. In this case, a mono-sourced production
production multi-sourcing may decrease
(i.e., a product is produced by only one plant)
short-term production capacity and demand may
would mean that the full capacity of some plants
be hard to satisfy in theshort term. However, on a
was not used, while other plants would be unable
long- term horizon, it will help to satisfy demand.
to satisfy demand. On the other hand, a
Thus, multi-sourcing decisions must be made while
multi-sourced production strategy allows the
considering the long-term impact.
production of the exceeding demand in a plant
whose activity has decreased. Due to the characteristics of multi-sourcing, its
objective is to minimise cost and the time loss
Moreover, even if the production sourcing strategy
when giving plants the ability to produce new
currently in use by the company meets demand,
products, while satisfying demand on a long-term
a higher multi-sourcing may allow production
horizon. Since multi-sourcing decisions have a
to be balanced between plants. Indeed, to face
long-term impact, the worst potential demand
randomness at tactical and operational levels, it
can matter. Indeed, unlike production planning
is better to have two plants using 80% of their
decisions which have a mid-term impact and
capacities than one plant using 100% and the other
for which one bad outcome of demand can be
only 60%. Thus, multi-sourcing decisions have a
compensated by every next outcomes, there are
high impact on competitiveness once we get into
few multi-sourcing decisions. In this case, values
production planning (tactical and operational
of one bad outcome may have a huge impact on
decisions) and scheduling (very short-term
costs and must be controlled.
decisions).
In order to measure and control the service level,
Considering all the advantages of production
we use the Average-Value-at-Risk which is a widely
multi-sourcing, one could think than every plant
studied financial tool. The big picture of Average-
should be able to produce every product. Indeed,
Value-at-Risk is that it measures the mean over the
this complete flexibility of plants is the safest
worst cases. When computing the multi-sourcing,
solution to ensure the future satisfaction of
we use it to measure the risk of stock- out incurred
demand. However, multi-sourcing the production
by the assignment.
of every product leads to unnecessarily high
assignment costs. First, giving a plant the ability The strength of this tool in the production context
to produce a product would require buying new is to capture both cycle service level (i.e. the
means of production and paying for employee probability of delivering the whole demand in
training. It has a monetary cost. Moreover, there time) and the fill rate service level (i.e. the part of
is also a loss of time. Indeed, when employees are demand that is not delivered in time).
trained, they do not produce and after the training,

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This model has already been tested on a client
dataset from the luxury industry and shows
Conclusion
promising results. First, the proportion of
Finding a good trade-off between cost, inventory
multi-sourced products can be reduced from
and flexibility will always be the challenge of
17% to 6% while ensuring the same service level.
supply chain decision-makers. Through these
Moreover, in current multi-sourcing, production of
examples, we show how mathematics and
some products is split between ten plants whereas
stochastic optimisation can be used to optimise
in the multi-sourcing calculated by our method, the
part of the supply chain. Advanced optimisation
production is never split into more than four plants.
techniques such as mathematic optimisation,
Finally, it shows that the money spent to reach
machine learning, data science will never replace
the current multi-sourcing is three time bigger
final human decisions, but we believe that they
that the money spent to reach the multi-sourcing
are incredibly helpful in terms of taking a rational
computed by our algorithm.
rather than an emotional decision.

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 About Argon & Co
Argon & Co is a global management consultancy that specialises in
operations strategy and transformation.
With expertise spanning the supply chain, procurement, finance and shared services, we
work together with clients to transform their businesses and generate real change. Our
people are engaging to work with and trusted by clients to get the job done. We have
offices in Paris, London, Abu Dhabi, Atlanta, Melbourne, Mumbai and Singapore.

www.argonandco.com

Authors

Etienne de Saint Germain, PhD

Etienne de Saint Germain is a senior consultant at Argon & Co, a graduate of the National
Bridges and Causeways (Department of Mathematics and Computer Science), with a
specialization in Operational Research at CNAM. Etienne has a Ph.D. thesis in Applied
Mathematics within Supply Chain through a partnership between Argon Consulting and
the National School of Bridges and Causeways on stock management and industrial
strategy issues.

Fabrice Bonneau

Fabrice Bonneau has more than 20 years’ experience in performance improvement (cost-
cutting, inventory reduction, service improvement), and supply chain transformation
projects, in the Manufacturing and Retail sectors. He has also managed operational
strategy (supply chain governance and organization, service strategy, manufacturing
and logistics blueprint) and IT blueprint projects. Prior to joining Argon & Co, Fabrice
was a board member at Capgemini Consulting, where he was head of the Manufacturing,
Distribution & Retail practice. Before that, he co-founded PEA Consulting. He is a graduate
of Ecole Nationale des Ponts et Chaussées, France, and holds an “Aggrégation“ in
Mathematics. He is also President of the Department of Industrial Engineering at Ecole
Nationale des Ponts et Chaussées, France.