Integrated production and safety stock planning in high-tech manufacturing: a comparative study at ASML

Abstract

This paper studies integrated production and safety stock planning in high-tech low-volume manufacturing supply chains facing various complexities. Multiple end items assembled from a large number of materials, with intricate production processes and component commonality, result in a general-structure multi-echelon network subject to uncertain lead times and capacity constraints. Furthermore, extensive overall lead times necessitate planning based on forecasts of highly uncertain demand, which exhibits non-stationarity due to business cycles. We introduce a data-driven rolling horizon framework that combines a dynamic tactical production-inventory planning model, incorporating demand forecast and supply progress updates, and a strategic safety stock placement heuristic. A distinctive feature of our integer programming-based production planning model is the inclusion of safety stock replenishment decisions following a given safety stock policy, thereby acknowledging the crucial interplay between production and safety stock planning in capacitated systems. Our heuristic effectively exploits the production planning outcomes to derive efficient safety stock policies, trading off inventory investment and customer service. We provide a comparative study with planning practices at our industry partner, ASML. Our findings show that existing hedging, based on safety stocks derived from classical stochastic inventory models, results in service levels 13 percentage points below target due to limiting assumptions regarding demand uncertainty and capacity constraints. Moreover, we highlight the importance of an integrated approach towards multiple uncertainties to benefit from risk pooling, where current separated strategies require a 9% increase in inventory investment when additionally including lead time uncertainty, while our methodology maintains delivery performance with minimal extra cost.