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May 31, 2007 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Supply Chain Optimization versus Simulation

Perhaps no word gets tossed around more in supply chain than “optimization.”

In a general layman’s sense, it tends to mean “make it a lot better,” or “as good as we can achieve under the present circumstances.” As in, “We’re going to optimize our safety stock levels,” or “We optimized the layout in our distribution center.”

But there is also a mathematical notion of “optimization,” and whether the above examples really qualify under that concept depends on the tool sets used. This mathematical notion of optimization is at the heart of many – but not all – of the supply chain software applications that profess to “optimize” some process or decision, from supply chain network design to pick face slotting and a lot of situations in between.

On top of all that, there is renewed interest in supply chain “simulation” at multiple levels; and new concepts (for the supply chain) that straddle optimization and simulation approaches, such as “stochastic optimization" that add to the confusion for most of us.

So, we thought we’d try to sort out what’s what here. We won’t get it all finished this week, but think we can make some headway. Look for a longer report in a few weeks.

Improving Decisions

There are hundreds of places where supply chain software goes beyond automation of processes to helping users make better decisions. The most basic approach to this is the use of “heuristics,” in which business rules or algorithms are executed by the system to make or recommend a decision.

In a distribution center, for example, the decision about where to put a product in a storage location is made based on some algorithms that factor in the product type, velocity category, and other attributes. “Mathematical” optimality is not used, and is not required or likely even feasible. Optimization almost always takes at least some minutes to process (and in some cases hours), and hence isn’t generally usable in an execution environment. There can be gray areas, however. To use another distribution center example, “slotting” systems sometimes use heuristics, while a few use true optimization technology. There is no right and wrong, just make sure you understand the vendor’s approach. Each has its own trade-offs.

Relatedly, heuristics are often used as a pre-process, even in a true optimization-based program, to break the problem down a bit to make it easier for the optimizer to find a solution. Optimization-base programs, such as those usually found in supply chain network planning, transportation planning, inventory optimization, factory scheduling, etc. use well-known mathematical techniques such as linear programming and its cousin constraint-based optimization to scientifically determine the “best” result.

That “best solution” is usually defined as minimizing or maximizing a single, specific variable, such as cost or profit. Other factors, such as customer service, can be included, but as a “constraint” to the optimization run, eliminating certain answers from the potential solution set (e.g., if the highest profit design results in fill rates averaging below 95%, don’t include it).

When using optimization processing over a very large data set, such as a complex global supply chain network or huge transportation plan, heuristics are often used (as noted above) to reduce the size of the problem that the optimizer is working against. This enables it to complete faster, or to ensure it doesn’t produce theoretically optimal, but practically impossible solutions.

Software vendors will sometimes quibble about this, with one side claiming the other is using too much heuristics up front and not truly optimizing the solution. Operations research types recognize there are always trade-offs, and that there is no universal right or wrong, just what makes the most sense for the specific problem/decision that a company is trying to improve.

Supply Chain optimization technologies are in use in thousands of companies, and we’ve actually noted a bit of an upsurge in interest over the past year or so (more on that soon). But there are some things optimization isn’t so good at.

Optimization is generally based on some fixed estimate of demand over a given time frame. You can alter that demand estimate and run a different scenario to compare the impact on the recommended solution, but optimization in general is not good at handling highly variable demand or system inputs.

Optimization also tends to be a “black box” approach, taking inputs, crunching the numbers, and presenting a solution. It’s often hard for the user to really understand the interplay of various factors, and how the supply chain “system” (whether that’s a network or a factory) works as a whole.

That is where “simulation” can come into play. In simulation, a model of the system is built (again, whether it’s a conveyor system in a DC or a supply chain network). Rules are created (often still through programming, but increasingly with at least some level of system configuration) that describe how the system should work.

The key is that demand (or other key inputs) aren’t static, but are more dynamic. Demand can be estimated (or based on actual history) at a daily level. For individual plants or DCs, it could be on an almost minute- by-minute basis. It is also possible to use techniques such as “Monte Carlo” analysis to have demand or other variable populated more or less randomly over some period.

Running the simulation then allows the analyst to see the behavior of the supply chain system over time, as these inputs change. It may allow bottlenecks to be identified that would be missed in an optimization program that gives the best total answer but misses supply chain or operational glitches along the way. But to find the “optimal” answer, the analyst has to observe what has occurred, make some hypotheses about the dynamics of the “system,” change a factor (for example, add some more inventory, or another packing station), and see what happens.

The benefits: better ability to understand the impact of dynamic events, better total system understanding, and (increasingly important today) risk mitigation. But these benefits come at some cost, as we’ll explore next time.

Optimization and simulation can be used together, as is increasingly common in supply chain network design. In the next few weeks, we’ll also get into the pros and cons in more detail, and provide some additional examples of use cases and vendors.

Hope this clarified things a bit, and I would welcome your thoughts or improvement.

What are your thoughts on optimization versus simulation? Is this whole area something only for the Operations Research Experts, or should supply chain practitioners and execs get knowledgeable? How much so? Let us know your thoughts.

Let us know your thoughts.

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Dan Gilmore


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This Week’s Supply Chain News Bites – Only from SCDigest

May 31, 2007
Procurement and Sourcing News: Is Vietnam the Next Hotbed for Offshoring?

May 29, 2007
How Many Supply Chains Does Dell Need Now?


It was a mostly down week for our Supply Chain and Logistics stock index last week.  In the software group, only SAP managed an upward move (2.5%).

The hardware group bucked the downward trend with respectable gains, while in the transport and logistics stocks, CSX recorded last week’s biggest loss at 3.9%. 

See stock report.


Retail Supply Chain: Amazon Focuses on Delivering What Customers Need

Expert Opinion is Mixed on How Viable Potential Same-Day Delivery Strategy Really Is

Transportation News: Quarterly Bear Stearns Survey Shows Record Perceptions of Overcapacity in Truckload and LTL Markets

Very Modest Rate Expectations for All Modes Except Rail; Will Shippers Move Rail Volumes to Truck in Response?


by Mark Fralick

SOA: Walking the Walk, or Just the Talk?

If Supply Chain Software Vendors Use Their Own SOA Tools to Build Functionality, That's a Good Sign


Have a supply chain or logistics related questions you need answered?

Ask our panel of experts. See our growing list of questions and answers - share your insight.

Reader Question: Can we implement WMS and Labor Management at the same time?

New reader response from Kurt Sholly... read and add your insight.


Q. What important supply chain event happened in the mid 1990's between Wal-Mart and Warner Lambert (now part of Pfizer)?

A. Click to find the answer below



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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We're publishing comments this week on various recent RFID pieces.

Our feedback of the week is from Dr. James A. Tompkins, who offers some excellent thoughts on our piece on The 10 Things Necessary for RFID/EPC to Thrive; more commentary from Nick Turner of Sterling Commerce on RFID, thoughts on RFID standards from a true expert in this area, Craig Harmon of QED Systems.

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week – On EPC/RFID Success Requirements

I agree with that the  “10 factors” are correct for retail compliance RFID. As you indicate, the RFID benefit is much clearer for other applications, such as shipping-container tracking or Big Pharma e-pedigree uses.

I had an interesting conversation with a friend recently about RFID.  He told me of a confidential client who saw a 250% sales uplift from promotional displays at Wal-Mart without RFID, and 400% uplift from promotional displays with RFID. The increased performance was because RFID allowed the client sales reps to immediately see which stores had the promotional displays out on the floor versus moldering on the receiving dock. So your assertion that retail RFID is showing documented supplier benefits for promotional displays is consistent with our experience.

The benefit of RFID for the over-all supply chain will be found in increased velocity of information. Barcodes require an active scan, so to use them at control points (such as receiving docks or the doors out of stock-rooms) requires an act of deliberate will. It’s a small effort, but nonetheless a discreet process step that must be planned, trained, and reinforced. Therefore a time-gap exists in providing logistics information about any given SKU. The information is accurate at the warehouse (in the WMS), and then it is accurate at the point-of-sale system. Without RFID, little-to-no information is available in-between these steps.

RFID tags (even with imperfect read-rates) make much better information-gathering tools at the control points between the warehouse and the cash register (or other point-of-sale). The case-studies about promotional displays and similar demand planning studies show that a positive ROI should indeed be possible. The problem is one of “the chicken and the egg.”  Good information will come from wide use of RFID tags supplying timely and ubiquitous data, which will make a positive ROI possible; but wide use of RFID tags will not happen until there is an immediate ROI to be captured for the “pioneer” projects.

Dr. James A. Tompkins
Tompkins Associates

More on EPC/RFID:

RFID standards do exist both within EPCglobal and within ISO.  There are also standards where profit is, today, being made, but these are not the identity-only, low-cost tag.  Such standards include battery-assisted passive (longer range), data rich, active tags (portable databases), and real time locating systems (value add to wireless communications).

Craig Harmon
President & CEO
QED Systems


I have been looking at the RFID debate with interest.

There are two factors that should be considered and that I don't feel are always factored in:   1) Can you consistently get 100% read rates - if not you will always need to be verifying something? So what advantage does this give you over what you do now? 2) Will the Tags be attached to all items that need to be received, moved, shipped etc?

If not you will always need a parallel solution and methodology to deal with tagged and non-tagged items. I saw a study done on shelf availability of tagged and non tagged items in stores at a major retailer. On shelf availability of tagged items - was much improved when compared to control items in the same store and with other stores.

However, the processes in these improved stores were different and did not necessarily rely on RFID itself. For example - the new process allowed a user to scan empty shelves and if RFID received items were in the back room a pick list to move them to the front of store was generated. None of this actually relies on RFID if you have RF receiving and scan receipts to the back room or shelf as appropriate. 

RFID sensors between back room and front of store can help determine where the items are and ease training issues - but again this is just another method of data input not a revolutionary change. There are systems that will take T-LOGS from POS scans, downdate inventory on the shelf in real time and trigger shelf replenishment from the back room without the need for RFID. So I do not view this study as proof of the benefits of RFID.  

When RF devices and bar codes were first adopted in the warehouse they replaced paper pick lists and increased accuracy but generally processes were the same. The real leap came when processes and procedures in the warehouse were changed as businesses realized that with real time communication with the user in the warehouse you could really drive up productivity and service levels (think interleaving/dual cycling, hot picks, opportunistic cross docks, tag swapping etc). A lot of us are still wondering where the process step change comes from with RFID, because that is where the ROI will come from.  

Furthermore can we get this step change without 100% reads and all items tagged?

Nick Turner
Sterling Commerce


Q.  What important supply chain event happened in the mid 1990's between Wal-Mart and Warner Lambert (now part of Pfizer)?

A. In 1995, the two companies piloted the first Collaborative Forecasting and Replenishment (CFAR) process. The CFAR concept has subsequently been expanded to Collaborative Planning, Forecasting and Replenishment (CPFR).

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