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News - Profitable to Promise
Order processing is a crucial stage in supply
chain management, and within that a key issue is order acceptance.
This is effectively a promise to deliver a certain order on
agreed terms, including price and delivery. Available-to-Promise
(ATP) and Capable-to-Promise (CTP) are fairly well known and
implemented technologies.
Profitable-to-Promise (PTP) is the logical evolution of ATP
and CTP. In simple terms:
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ATP answers the question "Can
we fulfill the order from stock - i.e., do we have it now?" |
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CTP answers the question "Can
we fulfill the order from production - i.e., can we make
it in time?" |
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PTP answers the question "Will
we make money by taking the order?" or "On what
terms should we accept the order?" |
While the first two are necessary for profitability,
they are not sufficient. For enterprises to survive in a competitive
environment, profit optimization is a vital technology. Wherever
an end user, or solution provider, is on the evolution path
at the moment, it is obvious that their competitors will not
stand still. While ATP and CTP may give competitive advantage
now, sooner or later they will be necessary for survival and
PTP will be the tool for real competitive advantage.
This is not just about pricing, it is about the integration
of pricing, production and distribution in the wider sense.
For example, suppose we have to choose between two different
orders from two customers. We cannot base our decision on
either an accounting or marginal basis. While the cost of
bought-in materials (the variable cost) might be fixed and
easy to determine, the contribution to overheads (fixed cost)
is a function of capacity utilization. If we have the capacity,
it may be better to make a large order for a low gross margin
product than a small order for a high gross margin product
because the former makes a greater contribution to fixed costs
than the latter. In reality the real problem is much more
complicated with a plethora of orders and the added complication
of production scheduling.
We are enthusiastic about PTP because we know it can be done
(many of our customers are doing it) and we know that only
optimization technology can solve the problem. Other technologies
cannot deliver the seamless, integrated, precise solution
that can be achieved with numerical optimization.
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A solution (or solutions) with
the profit precisely calculated |
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Marginal Prices (i.e., the
extra profit that results from a relaxation of a constraint) |
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Cost sensitivities of the
decision variables, i.e., which decision variable has
what impact on the bottom line |
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The ability to simultaneously
look at sourcing, production and distribution |
It is interesting to note that in a recent ARC
Strategy Report (dated December 2001), Steve Banker discusses
the ATP - CTP - PTP evolution and the importance of PTP. It
is fair to say that enterprises who implement PTP, and solution
providers that offer PTP, will be able to outperform their
competitors that do not.
Dash Optimization is in the forefront or providing components
that enable end users and OEMs offer this capability. Our
customers do not need to understand how to solve the optimization
problem; we do that for them. All they need to do is recognize
when they have one.
We welcome the opportunity to discuss this in more detail.
Please email (Americas) or
(Rest of World).
To contact ARC go to www.arcweb.com
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