Tactical Shipping and Scheduling at Polaroid with Dual Lead-Times Kermit THREATTE and Stephen C. GRAVES, MIT Abstract—We report on a project with Polaroid Corporation in which we developed a supply chain model to provide decision support for planning production and transportation. Production occurs in Asia to serve world-wide demand. Production planners must determine both the production quantities as well as whether to ship by sea or by air. We develop a model to optimize a static version of this problem and then show how to use this static model in a dynamic setting. We test the model with data from Polaroid and show its effectiveness. Index Terms—dual replenishment modes, inventory and transportation planning, supply chain application, supply chain modeling I. INTRODUCTION Many U.S. companies attempt to reduce labor costs by shifting production to overseas locations with lower wage rates. This decision greatly impacts supply chain performance, increasing the lead times for replenishing finished goods. One counter measure is to use priority shipping via air, instead of normal modes of transport (ocean, rail, truck) to reduce the lead times. This paper reports on a project undertaken with Polaroid Corporation, the world leader in instant photography. Polaroid had shifted the production of its consumer-branded cameras to Asia. To address the increasing transportation costs associated with frequent air shipments, the transportation group at Polaroid began an initiative to develop a shipping decision support model. The first co-author was hired as an intern during the summer of 2000, and conducted subsequent research during the 2000-2001 academic year to develop and test a model for Polaroid to use for tactical shipping and production decisions. October 2001. This work was supported in part by the MIT Leaders for Manufacturing Program, Polaroid Corporation and the Singapore-MIT Alliance. Kermit Threatte completed his S.M. at the MIT Operations Research Center, and is now with Analytics Operations Engineering, Inc., Boston MA. Stephen C. Graves is with the Sloan School of Management and the Engineering System Division at MIT, Cambridge MA 02139 US. This paper focuses on the development and validation of a tactical model that makes production-scheduling recommendations and specifies shipping options to reduce total supply chain cost. The paper describes Polaroid, reviews literature on inventory management with two replenishment modes, and develops a simple static network model that can be used for decision support. We exercise the model by simulation to determine the relationship between transportation costs, inventory costs, forecast error and manufacturing capacity in a typical framework where production and shipping decisions are made periodically. Finally the paper recommends a course of action for Polaroid regarding model implementation. II. BACKGROUND Polaroid is the leading instant imaging company in the world and is the only manufacturer of traditional instant cameras and film in the United States, with revenues in 2000 of $1.85 billion.1 The Company's principal products are instant film, instant and digital cameras, digital peripherals and secure identification systems with software and system solutions. The Company’s products divide into two segments, business solutions and consumer products. Business solutions include photo ID systems (primarily used by corporations and government agencies), digital peripherals (scanners, photo quality printers, high-end digital cameras and specialty digital camera), and high-end instant photo cameras and equipment. Consumer products include a broad line of hand held instant cameras, digital cameras, 35mm cameras and a wide assortment of media such as instant and 35mm film, videocassettes, and digital printing media.2 Because consumer products account for the majority of sales, Polaroid’s largest customers are major U.S retailers, supermarket chains and drug stores . Polaroid’s business products are sold through specialty channels and also direct channels within the company. The Company is organized into five segments: the Americas Region, the European Region, the Asia Pacific Region, Global Operations, and Research and Development. The regions focus on sales and marketing, while global operations 1 2000 Polaroid Corporation 10K, Income Statement 2 Polaroid Corporation 10Kcentralizes procurement, logistics and manufacturing. R&D provides engineering research and development for all the regions, as product functionality is not necessarily region specific. The Americas Region covers to the Western Hemisphere. The European Region is comprised of the United Kingdom, Continental Europe, Russia, Africa, and the Middle East. The Asia Pacific Region includes Japan, Australia and the majority of the Asian continent. Polaroid has not been a strong financial performer in the last 11 years, and filed for Chapter 11 bankruptcy protection in October 2001. Polaroid’s revenue tailed off in the late 1990’s as the market for Polaroid’s traditional consumer instant cameras became saturated. Polaroid responded by marketing new lines of small, trendy and relatively inexpensive cameras (Pop-shots, I-zone, Joycam) that would appeal to the youth market. Polaroid also shifted much of its focus to digital technology, focusing on the sale of high technology digital cameras. These two newer product categories account for nearly 25% of sales and have offset the decline in traditional products to some extent. However, sales of these new products have many disadvantages compared to Polaroid’s traditional instant camera lines. The higher-growth youth-focus instant cameras deliver smaller margins, have shorter life cycles and higher incidence of obsolescence, and typically use lower margin film. Though they have higher margins, the digital cameras do not give Polaroid the benefit of a steady stream of film revenue, and are also characterized by short product life cycles and high costs of obsolescence. This trend of poor performance and new product mix has forced Polaroid to reduce costs, streamline operations and find ways to increase supply chain flexibility. Polaroid shifted camera production to the Far East, and shut down U.S. manufacturing operations in an attempt to increase flexibility and reduce costs. Polaroid has also tried to improve its financial performance through corporate wide inventory reductions. A. Logistics