Planning An End-to-End Logistics Chain: How Can The .

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Planning an End-to-End Logistics Chain:How can the experience of a leading miningcompany be applied?Kirill MakarovHead of the Planning team,Business Process Transformation Directorate,METINVEST HOLDING, LLCAlexander PilipenkoHead of the Planning unit,Corporate Systems Department,METINVEST HOLDING, LLC

Table of ContentsStructure of METINVEST – a vertically-integrated group of steeland mining companiesii. Business model of operational planning at Metinvestiii. Implementing business model planning in SAB APO Supply NetworkPlanning (SNP)iv. Ways to compensate for the functional deficiencies of SAP APO SNPv. Implementing local mini projects in SAP APO SNPi. 2015 SAP SE or an SAP affiliate company. All rights reserved.Public2

METINVEST – a vertically-integrated group of steel and mining companiesCOKING COAL11.39MILLIONTONSSEMI-FINISHED PRODUCTS3.12MILLIONTONSIRON ORE CONCENTRATE36.93 MILLIONTONSFLAT SECTION STEEL5.84MILLIONTONSCAST IRON11.50STEELMILLIONTONS12.39ROLLED SECTION S* Data for 2013 Coking coal self-sufficiency – 75% Blast-furnace coke self-sufficiency – 105% Iron ore self-sufficiency – 200% 2015 SAP SE or an SAP affiliate company. All rights reserved.Public3

Structure of METINVEST process chainMining Division:Metallurgical Division: Inguletskiy Iron Ore Enrichment Plant Azovstal Iron & Steel Works Northern Iron Ore Enrichment Plant Ilyich Iron & Steel Works Central Iron Ore Enrichment Plant Yenakiieve Iron & Steel Works Komsomolskoye Mining Company Khartsyzsk Pipe Plant Krasnodon Coal Promet Steel United Coal Company Ferriera Valsider Metinvest Trametal Spartan UK Metinvest Resource Avdiivka Coke Plant Inkor & Co. 2015 SAP SE or an SAP affiliate company. All rights reserved.Public4

Table of Contentsi.ii.iii.iv.v.Structure of METINVEST – a vertically-integrated group of steel andmining companiesBusiness model of operational planning at MetinvestImplementing business model planning in SAB APO SNPWays to compensate for the functional deficiencies of SAP APO SNPImplementing local mini projects in SAP APO SNP 2015 SAP SE or an SAP affiliate company. All rights reserved.Public5

Business model of operational planningSUPPLYPLANNING(MAKE)1. Sales forecast.2. Contracted volumes3. Distribution network orders.OutgoinginformationSTRATEGICSUPPLYStrategic goalsand objectivesLong-termoperationalplanning (MTP)Plan forcommissioning newfacilitiesSales and operations planning(S&OP)Planned repairs(scheduledmaintenance,overhaul repairs)OperationalplanBUDGETING(FINANСЕ)CAPEX PLANNING(beyond the project)DEMAND PLANNING(SALES)IncominginformationShort-term operational planning (OFP)SUPPLYPLANNING(SOURCE)Scheduling (MS)Projected prices for rawmaterials and materialsOperations coordination (OC)Scheduling (execution) (МАКЕ,SOURCЕ, DELIVER, SALES) 2015 SAP SE or an SAP affiliate company. All rights reserved.Public6

Elements of the operational planning business modelTarget planning levelsLong-term operationalplanning (MTP)Sales and operationsplanning (S&OP)TargetMap the strategic goals andobjectives onto the operationalplanning levelMonitor the progress of the mid-termoperational planHorizon (target)Horizon(transitional)Scheduling (MS)3 yearsAnnually15 months3 monthsMonthly/quarterly (rollingschedule)Product families, with abreakdown by monthsImplemented1 monthMonthly(rolling schedule)Product details at thelevel of material masterrecords with abreakdown by monthsImplementedNot implemented.Operations coordination(OC)3 monthsPrepare data to calculate theforecasted costPlace orders for production andensure customer services areprovided at the target levelStatus of implementationin SAP5 yearsOptimize the detailed functionalplansOptimize performance and primecostDetalizationProduct families, 1-2years with a breakdownby months, 3-5 yearswith a breakdown byquartersOptimize the supply chainShort-term operationalplanning (OFP)Frequency2 months1 monthMonthlyProduct details at thelevel of material masterrecords with abreakdown by days2 months1 monthWeeklyProduct details at thelevel of orders with abreakdown by daysNot implemented.Implemented in part oforder placement forproduction.Update the operations schedules 2015 SAP SE or an SAP affiliate company. All rights reserved.Public7

Table of ContentsStructure of METINVEST – a vertically-integrated group of steel andmining companiesii. Business model of operational planning at Metinvestiii. Implementing business model planning in SAB APO SNPiv. Ways to compensate for the functional deficiencies of SAP APO SNPv. Implementing local mini projects in SAP APO SNPi. 2015 SAP SE or an SAP affiliate company. All rights reserved.Public8

Data flow in operational planning processesOperational planning processes are cross-functional and require close cooperation between Sales, Production, Procurement, Logistics andPlanning. The chart below shows the data flow for the operational planning processes.Incoming informationSalesAPO DPERP SDProcurementERPLogisticsAPO DPProductionERP Sales forecast at the level ofmaterial master records Price forecast on the basis ofsales terms Price forecast for commodities Logistics costs Primary equipment available forproduction Specifications and flow charts Production optionsPlanning modelResultsAPO SNPSales planCalculation of operational plan with aspecific optimality criterionAutomatic generation of system objectsbased on the calculation results.Production planMain raw materials and other materialsrequiredTransportation planImplementing the operational planning processes in SAP requires integrating the SAP modules into one master module. This makes itpossible to create sales forecasts, update the logistics, forecast prices for raw materials, and maintain the master production data 2015 SAP SE or an SAP affiliate company. All rights reserved.Public9

Technical architecture of the operational planning solution (I)SAP MDGSAP APO/DPSAP APO BWMaterials Sales forecast at the level of productgroupsSales plan Price forecast on the basis of sales termsProduction planSAP ERPSpecifications, process flowchartsWork placesTransportation planSAP APO/SNPRequirement of basic rawmaterialsSupply chain planningMaterialsSAP ERPRepair schedulePlanned ordersPrice forecast for rawmaterialsSAP APO/DPPurchase orderLogistic componentLogistics restrictions 2015 SAP SE or an SAP affiliate company. All rights reserved.Public10

Technical architecture of the operational planning solution (II)Stage 1SAP ERPCIFCIFSAP APOSAP APO 2015 SAP SE or an SAP affiliate company. All rights reserved.xlsxlscompanies)SAP ERPExternal systems (data for allSOP systemsExternal systems (data for thecompanies only) without SAPSAP productionsystemsStage 2xlsSOP systemsSAP productionsystemsSAP ERPSAP ERPCIFxlsSAP APOCIFSAP APOPublic11

Structure of the supply chain planning model (I)At the level of the Company's logistics chainSuppliersof raw materialsProduction companiesOreenrichment CokechemicalGraph verticesSteelservicecenterMetallurgicalCoalMetal rstationsThe key link in the architecture of the planningprocesses implementation in SAP is the supplychain planning model. The supply chain planningmodel is a graph where the vertices are thesuppliers, manufacturers, terminals and demandlocations. The graph edges are transport relationsshowing the traffic flow routesThe capacity of graph vertices representing theproduction companies is planned using theproduction planning models.LoadingportsGraph edges 2015 SAP SE or an SAP affiliate company. All rights reserved.Public12

Structure of the supply chain planning model (II)Reflection of the model in SAP APOThe structure of the Metinvest supplychain planning model is rathercomplicated.The supply routes are numerous andlong and the cooperation between thecompanies is very complex.Model scale: 2015 SAP SE or an SAP affiliate company. All rights reserved. 14 assets of both divisions 394 demand locations 1,116 transport routesPublic13

Structure of the supply chain planning model (III)At the asset production levelagglo-Productionof agglomeratemeratescrapcokeProductionof cast ironworkpieceferr.Productionof steelcastironProductionof cast sectionsteelPFstripProduction of railfasteningsrailfasteningRod naceworkshopAM No.1DP No. 1AM No. 3AM No. 4EMZ rolling-mill shopsOxygen-converter plantKK No. 1posbarsMill 550MNLZ No. 2KK No. 3DP No. 5ingotsEM ZThe key elements of the productionplanning models are: the company's basic production units(work places) the list of materials produced(material master records) for eachproduction unit master production data(specifications, process flow charts)for each material.rodstripMill 150sortUPRSMill 390Rolling-mill shopsPFsortMill 360MNLZ No. 1KK No. 2DP No. 3agglomerateAM No. 2raw materialssteelrawmaterialscast ironraw terialsRolled metalsquare lomerateSintering orerailfasteningsortEMZGP 2015 SAP SE or an SAP affiliate company. All rights reserved.Public14

Table of ContentsStructure of METINVEST – a vertically-integrated group of steel andmining companiesii. Business model of operational planning at Metinvestiii. Implementing business model planning in SAB APO SNPiv. Ways to compensate for the functional deficienciesof SAP APO SNPv. Implementing local mini projects in SAP APO SNPi. 2015 SAP SE or an SAP affiliate company. All rights reserved.Public15

Using developments to compensate for the functional deficienciesof SAP (I)Adapting the standardfunctions to the company'sspecific business processesCompensating for thefunctional GAP of standardfunctionsDeveloping SAP standardfunctionality 2015 SAP SE or an SAP affiliate company. All rights reserved.In addition to setting standard functionalities, the project team also made25 developments, investing over 400 total workdays.DevelopmentsSAPstandardfunctionalityThe primary purpose of the developments is to adapt the standardfunctions to the specifics of Metinvest business processes.Public16

Using developments to compensate for the functional deficienciesof SAP (II)The operational plans are calculated using SAP APO SNP functionality with a criterion of maximum marginal profits. There are two possibleoptions for implementing this criterion:Option No. 1(Sale Price - Specific Variable s/s)* Production Volume Marginal ProfitWith this option, the variable cost must be calculated outside the system and then the results are uploaded directly to the planning model.Option No. 2Gross Income - Gross Variable Costs Marginal ProfitThis option is based on consumption indices across the entire process chain that are in the companies' ERP system and the projected prices forthe basic raw materials and other materials. The advantage of this option is that costs can be planned for the long-term taking into account theproduction options and the price forecast.To implement SAP APO SNP, the project team chose Option No. 2, because the key requirement for implementing SAP into the operationalplanning was to take into account the price forecast for basic raw materials in the optimization procedures with an appropriate cost differentiationsubject to a particular production process chart. During the implementation process, the project team realized a serious drawback of SAPAPO/SNP was that it lacked standard functionality that could be used for Option No. 2 to calculate the prime cost based on the operational planand to create reports describing the economic component of the target indicators. This made it impossible to interpret the planning results. 2015 SAP SE or an SAP affiliate company. All rights reserved.Public17

Using developments to compensate for the functional deficienciesof SAP (III)To compensate for theidentified functionaldeficiencies in calculating thevariable prime cost in SAPAPO/SNP, the project teamexperts developed an add-in toSAP standard functionality.With this development, thevariable part of the prime costcould be calculated with abreakdown by cost elements. 2015 SAP SE or an SAP affiliate company. All rights reserved.Public18

Integrating SAP with alternative software to compensate for thefunctional deficiencies of SAP (I)Production planning in standard SAP functionality involves choosing the most suitable production option from among the variety ofalternatives in the system. A production option is a combination of the specification and the process flow chart. The specification is a list ofmaterials required to manufacture a product, and the process flow chart specifies the time needed to make a given product.As the practice of using SAP shows, this mechanism: is efficient for planning steelmaking and rolling capacities of iron andsteel companies; has significant limitations for planning agglomeration and blast-furnaceprocess stages of iron and steel companies is not applicable for planning the production of coke companiesTo cover the functional deficiencies in terms of coke production planning, the SAP project team developed an optimization model that can beused to calculate the optimum coal charge for coking with a charge/coke cost minimization criterion. 2015 SAP SE or an SAP affiliate company. All rights reserved.Public19

Integrating SAP with alternative software to compensate for thefunctional deficiencies of SAP (II)Model purpose: ensure that an optimum coal charge for coke production is automatically calculated that meets all formal restrictions with set optimality criteriaTarget model function:The model for planning the demand of coke companies for coal is a two-criteria task:Criterion 1: minimizing the cost of charge coal (or) minimizing the cost of blast-furnace cokeCriterion 2: minimizing the excessive stock balances of coalAddressed task classes:In the process of planning the optimum coal charge, the following classes of optimization tasks are addressed: "Mixing Task" – finding the optimum mixture of coal concentrates "Transport Task 1" – optimization of coal supplies from the suppliers to coke companies "Transport Task 2" – optimization of furnace coke supplies from сoke companies to iron and steel companiesMathematical methods used:Software used: linear programming method integer programming method model matrix generation: MS-Excel / Matlab finding an optimum solution: Matlab / TomlabBenefits of the mathematical model:Model dimension: number of variables:8120 number of restrictions:7808including: 100 coal suppliers/brands 2 brands of furnace coke for each coke company 6 coke companies (including the 4 coke sections of Avdiivka Coke Plant) 4 iron and steel companies 32 "coke companies iron and steel companies" transport routes 800 "coal suppliers coal companies" transport routesThe optimum solution can be obtainedA balanced plan can be calculated for all formal restrictions for one iterationMore than one optimality criterion can be taken into accountOnline calculation and re-calculation is fastWhat IF analysis can be usedModel is very flexible with regard to changes in input parametersThe interface is convenient and user-friendlyThe model can be further improved 2015 SAP SE or an SAP affiliate company. All rights reserved.Public20

Integrating SAP with alternative software to compensate for thefunctional deficiencies of SAP (III)SAP MDGSAP APO/DPMaterials Sales forecast at the level of product groups Price forecast on the basis of sales termsSAP ERP Logistic componentSpecifications, process flow charts Logistics restrictionsSAP BWSales planProduction planTransportation planRequirement of basic raw materialsWork placesMaterialsSAP APO/SNPRepair scheduleSupply chain planningSAP ERP Planned orders Purchase orderPrice forecast for raw materialsExternal optimizer (Matlab)Planning of coal charge for coking 2015 SAP SE or an SAP affiliate company. All rights reserved.Public21

Table of ContentsStructure of METINVEST – a vertically-integrated group of steel andmining companiesii. Business model of operational planning at Metinvestiii. Implementing business model planning in SAB APO SNPiv. Ways to compensate for the functional deficiencies of SAP APO SNPv. Implementing local mini projects in SAP APO SNPi. 2015 SAP SE or an SAP affiliate company. All rights reserved.Public22

Optimizing the costs of metal scrap transportationThe task is to satisfy the demand of iron and steel companies for metal scrap and to minimize the transportation costs.To solve the task, SAP APO SNP functionality is used.The structure of the metal scrap supply model in SAP includes: 685 Locations (Supplier / Shipment Stations) 74 Suppliers 300 Shipment stations 4 Consumers 4 Receipt stations Transport relations 685 х 4 2740The architecture of the SAP functionality integration with theMETINVEST-RESOURCE accounting system (1C) was determined: Scrap metal availability data was transferred from supplies from1C to SAP (the integration interface was developed and tested). Planning results were transferred from SAP to 1C (theintegration interface is being fine tuned)Using SAP functionality, the costs for metal scrap transportation were reduced by 3.7%. 2015 SAP SE or an SAP affiliate company. All rights reserved.Public23

raw materials raw materials Oxygen-converter plant EMZ rolling-mill shops sort stripingots rod sort sort AM No.1 AM No. 2 AM No. 3 DP No. 5 AM No. 4 EMZ Agglomeration workshop Blast-furnace workshop DP No. 3 KK No. 1 KK No. 2 KK No. 3 MNLZ No. 1 MNLZ No. 2 Production of agglomerate agglo- Production me

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