Notice that the costs for both storage and safety stock penalty are declared as a daily value right in the Location Product Master interface.
Background
A common need is to setup production costs in the system for production so they can be picked up by the optimizer. In this example I will be using the PPM or Production Process Model.
How Costs Are Used by the Optimizer
Both fixed and variable costs can be setup in the PPM. Secondly, these same costs can be setup for either single level or multi level. The single level applies to SNP and the multi level applies to PP/DS. Different PPMs can be setup with different costs which are then selected by the optimizer. Most companies that I have worked with set a single cost per line in their factory, which is then represented by the PPM. So if there are 4 lines in a factory, and 10 products made per line, then there would be 40 PPMs, each with their own cost. However, this is just one way to perform the setup, there are many ways to perform a setup.
What the Costs Mean
The majority of costs that are used by the optimizer to calculate a plan output are variable costs. This applies to the cost of a missed demand, the costs of violating safety stock, storage costs and transportation costs. Therefore the cost is set per the basic unit of measure in the planning system, and the costs are incurred per day outcome occurs. So for instance, storage costs in SNP are incurred per unit of measure (case, drum, etc..) per day. So if the storage costs are 50 cents per day per drum, and there are 100 drums stored for 10 days, then the storage costs incurred would be $500. This applies to almost all the costs used by the optimizer.
Fixed and Variable Costs
However, production costs offer the exception to this rule. A PPM offers both a fixed and variable cost. So if the variable cost is $40 per barrel and the fixed costs (which could be the setup costs combined with the down time costs) was $1000 and 100 barrels were produced than the cost would be $1000 + (40 x $100 = $4000) or $5000. If I wanted to setup the PPM this way, I would set it up as the following:
The optimizer can compare the storage costs against the production costs, as well as the other three major costs in the SNP (transportation, safety stock, cost of missed demand). For PP/DS these are not the relevant costs for the optimization. Also, there is an overlap with the fixed costs and the Setup Matrix, which is a more sophisticated way of setting the costs and time of moving from one product to another. However, given the long running problems with the Setup Matix, this can be a way of getting around Setup Matrix. However, the functionality of a variable cost per production, which does not consider the next item to be run, is far lower than the hypothetical functionality of the Setup Matrix. But the Setup Matrix functionality is just hypothetical.
How it is Frequently Done in Practice
While most clients I have seen only populate one cost, either variable or fixed, in fact it makes a lot more sense to enter values in both fields. The fixed costs provide a predisposition against making a production order, which is traded off against the storage costs. In fact both the fixed costs and the minimum lot size predisposition the system against creating production orders, so the fixed cost in the PPM and the lot size should be seen as working in conjunction with one another.
Conclusion
The production costs settings are very important and generally not well setup or well thought through. One obvious improvement is to populate both fixed and variable values. They should also be somewhat realistic. There is a strong tendency in cost optimization is to enter completely phony costs, and when this happens the costs become divorced from reality which leads to negative long term implications for advancing the solution. However, attempting to get them to be perfect is also not a very good use of time. This topic is described in this post.
http://www.scmfocus.com/supplyplanning/2011/07/09/what-is-your-supply-planning-optimizer-optimizing/
