Linear Programming Applied to Production Planning -- A Case Study Author(s): W. G. Jones and C. M. Rope Source: OR, Vol.

15, No. 4 (Dec., 1964), pp. 293-302 Published by: Operational Research Society Stable URL: http://www.jstor.org/stable/3007116 Accessed: 09/11/2010 16:19
Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=ors. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Operational Research Society is collaborating with JSTOR to digitize, preserve and extend access to OR.

http://www.jstor.org

Linear ProgrammingApplied to Production Planning* A Case Study

W. G. JONES and C. M. ROPE
This paper describes the installation of a planning system in a food factory, based on the use of linear programming. Owing to the seasonal nature of many of the parameters, it is essential to use a multi-period model. The formulation of the L.P. model is discussed in some detail. This includes a considerable number of restrictions of a commercial rather than a physical nature. A particular aspect of the application is the way in which the model is used, in slightly different forms, at the three distinct stages of the planning process. Some of the practical difficulties encountered in implementing the solution are discussed. 1. INTRODUCTION

study concerns a factory which manufactures ten different food products from two basic raw materials, X and Y. These materials, which are obtained from a monopoly supplier, are perishable commodities requiring to be processed within a day or two of receipt. Availability of X and Y is strongly seasonal and supply is on a contract basis. Contracts are made to cover a 6-month period and are initiated 1 month prior to the start of this period. In the contract the total amount of raw material to be made available each month is agreed. The amount to be used in the manufacture of each type of product during the 6-month period is also fixed. Nine principal types of process are involved in the manufacture of the ten products. Figure 1 shows schematically the relationship of raw materials, processes and products. It will be seen that some products require the employment of more than one process, while in some operations raw material Y is produced as a by-product from X. The products are sold in three essentially different market categories: (a) Against a firm contract. (b) In a market which involves selling goods with brand names (some marketed by the firm's own sales force). (c) In a free commodity market where virtually any quantity can be sold at any time, subject to the prevailing market price. As with other activities in the food trade, profit margins tend to be low. In this case raw materials represent a very high proportion of the total cost of the manufactured article. This is particularly important since the yield of each product obtained from a given quantity of raw material is subject to a seasonal variation. These variations differ both in amplitude and phase as between one product and another.
THIS * Paper presented to the Society on 16 December 1963. 22 293

Operational Research Quarterly Vol. 15 No. 4 Additionally, the price paid for the raw material depends not only on what it is used to manufacture but also on the month in which it is used. These price Flow Process Chart PLANTS
B

PRODUCTS

Raw Material

A~~~~~~~~~~~~~~~~~~~
Raw Material D

-T
Rw

m-

me-

9n

10

FIG. 1.

variations, which are normally known in advance, are comparatively sharp. The magnitude of the combined effect of yield and price variation is considerable for some products, as is illustrated in Table 1.
TABLE 1

Total cost of raw material X Month Product A

1 458

Product B
452

2 3
4

469 464
448

471 463
454

5 6 7
8

442 439 421

458

442 431 404

380

9 10 11 12

460 480 485 497

385 402 429 433

294

Jones and Rope - Linear Programming Applied to Production Planning 2. MANAGEMENT APPROACH As a consequence of yield variability, price variations and low profit margins the phasing of production is a matter of considerable importance to management. A number of years ago the factory made only two products and the problem was a comparatively simple one. The gradual increase in the complexity of the operation eventually brought the factory manager to a stage where he began to feel a lack of confidence in his existing planning system. Basically the steps in the planning process were as follows: (1) Fix contracts for products in category (a). (2) Obtain a sales forecast for "branded" products of category (b). (3) Estimate the monthly quantities of raw materials "X" and " Y" that are likely to be obtainable. (4) Make a production programme for the period including products in category (c) so as to make use of as much of the available raw material as possible. (5) Apply for raw materials on this basis. (6) If the contract eventually agreed is for a different total amount or different phasing of the raw material supply the plan must be amended. It may also be necessary to revise the plan during the contract period should sales deviate very substantially from the sales forecast. After preliminary studies it was decided to construct a linear programming model of the problem. Besides allowing the calculation of an optimum plan under any given conditions, this would allow the effect of a number of strategies to be studied at the various stages of the planning process. 3. MODEL FORMULATION Since planning of production was of the essence of the problem it was essential for this model to be a multi-period one. Investigation confirmed management's view that it is optimal policy to hold minimum stocks of all products at a particular time of year. This is because a large price fall for raw material in several categories immediately follows a considerable period of low supplies. Fortunately this date for minimum stocks coincides with the end of one of the semi-annual contract periods and thus forms a planning horizon. This is illustrated in qualitative form in Figure 2. It was therefore decided that planning could best be achieved by having two models: (1) For one contract period only, split into 6 individual months. This model is used for planning at time "A". (2) For the first and second periods (i.e. a full year) with 6 individual months followed by 2 quarters. This decision reduced the size of the model and could be justified since the sales information for the remote period was less accurate. This second model is used for planning at time "B". 295

Operational Research Quarterly Vol. 15 No. 4

RAW COST /SUPPLY MATERIAL STRUCTURE

PLANNING HORIZON

RAW COST

MATERIAL

RAW MATERIAL AVAILABILITY

CONTRACT PERIOD

CONTRACT PEIsMoD

FIG. 2.

Production restrictions

The production in the ith period of the jth product is limited by capacity:
PiEj ! Cij (1)

or

0jPij +31jPi,j,

Cimj

(la)

where cj and /3, are measures of the production time requirements of products ] and j' on the plant and Cujj, is the time available on this plant in period i in the case of products sharing a process. For convenience in manipulating the data, production is in units of total of raw materials (X and Y) used and not in units of product. There are various reasons why a minimum level of production must be set for a process or combination of processes. In some cases a certain amount of freshly made product is required each month. Another is that the disposal of waste products can only be carried out economically if they are produced at a fairly constant rate. Finally, a particular section of the labour force may have to be maintained at a minimum level of occupation. Where this type of restriction concerns a single product only, this activity can be removed from the model, by making the necessary adjustments to all the restrictions concerned, and adding back to the optimum result. While somewhat inconvenient in 296

Jones and Rope - Linear Programming Applied to Production Planning practice this method has the virtue of saving computer time. Where more than one product or process is concerned it is necessary to pose the restriction explicitly: (2) a-j + j13,P, > D1,j1,j Pj where Dij j, is the minimum acceptable plant utilization in period i. Stock availability and restrictions Forecast sales must be met from production or stock. The general form of the restriction is: (3) Si_,J - Sij + qi~j = Fi~j Pi~j where Sij is the stock of the jth product at the end of the ith period and qi j are the conversion factors for raw material into finished products and Fij are the sales forecasts. Stock levels are subject to minimum and maximum limits for a number of reasons. Maximum stock levels are normally laid down either for commercial reasons or because there is a definite maximum on the permissible age of the product at the time of sale. In some cases this may apply to only part of the demand for a product: (4) Si~j! Kij where Kij may be a function of Fi+1j; Fi+2,j ; Fi+3,j. Where the minimum level of stock is constant, this has been removed from the problem and added back to the optimum solution as in the case of a minimum production level. For products in category (c) no sales forecast is made. Where products in this category cannot be stored, only the production type restrictions apply (though these may in fact be imposed for marketing reasons). Where storage is possible, it may be necessary to include the condition that the amount available for sale is constant, thus: Si. i1-Sij + nij Pij-Z = O where Z represents the monthly quantity available for sale. Raw material availability As has been mentioned above, the availability of raw material is strongly seasonal. The total that is likely to be available for the year as a whole is approximately known. The percentage of this total likely to be obtained in any particular month can also be estimated. Since the amount of raw material that can be obtained at various times of the year has a considerable effect on profitability, it is important to allow variation of the monthly input amounts. 297 (3a)

Operational Research Quarterly Vol. 15 No. 4 However, it is known that the supplier will not agree to change the supply pattern by more than a limited amount. The availability of "X" is therefore represented as shown below:
Eki~j - i T K0 Pi~j

(5) (5a)

0 [kij Pij - OiT;?>

ij

- = jzij Pij T 0 T? K.

~~~~(6)
(7)

The 1kij represent the amount of raw material "X" required for unit proare, of course, unity. duction. Where no " Y" is required for production the juwj T represents the total amount of product "X" to be used during the contract period and Oiand Pi are the maximum and minimum percentages of the total expected to be available in the month in question. Finally, the availability of raw material " Y" must balance the usage in each period:
E7Tij Pij,-W = O

(8)

W L. (9) The -,i j are positive for products using " Y" in their manufacture and negative for those producing it. W is the amount of raw material " Y" available each month, subject to an upper limit L.
Contract restrictions

Once a contract has been agreed it is not allowable to downgrade raw material from a high price category to a lower one. Consequently restrictions are written in to ensure that the amount of raw material in each price category is at least equal to a certain figure, which is set equal to zero unless we are concerned with a period for which a contract has been settled:
i j=r

E Iti Pi~j;M?,? ij > Ad,

j=rl

(10)

Restrictions (5)-(10) have to be modified to some extent in the two-contract period model. Functional The variable costs of production consist almost entirely of raw material costs. The remaining variable element is made up of part of the labour and steam costs. These show no significant seasonal variation. Consequently for all products in categories (a) and (b) where there is a forecast sales requirement it is sufficient to take the raw material cost only. 298

Jones and Rope - Linear Programming Applied to Production Planning Products in category (c) must be treated differently, as they are essentially residual raw material users. For these the expected gross profit margins (contributions) are taken. Thus the function to be minimized is:
j=r i j=1 j=n i j=r+l

E piPi4i~j -

+ Pi~j+ ri~j EEi~j Si~j XW eZ

i i

where pij represent material costs for the r products in categories (a) and (b); cirU and e represent marginal profits for products in category (c); -rij are stock holding costs and X is the cost of raw material " Y" (all in the appropriate units). The -rij are weighted where necessary for time periods of variable length. Stocks are costed on the basis of the variable cost of production and an interest rate agreed with management. The physical limitations of total space available also have to be considered. It has not yet been necessary to incorporate additional costs for outside warehousing, though this may have to be done in the future. Unfortunately it increases the size of the problem considerably since three extra variables and one additional equality are required for each productperiod; equation (3) becomes: (3b) Si-1,j-Si j + Tij'-Tj + hi,j = Fij Pij where Tij is the amount taken from the outside warehouse and T*'1 the amount is put into it. The outside warehouse stock Usj is given by:

= Ui,,i - Uij -Tij> Ti~j O(11) while there will also be restrictions of the type
Jr

r
j=1

E AjSoj < Nr

(4a)

where A, is a measure of the storage space required for a ton of product j and Nr is the amount of storage available for products 1 to r. In a more recent model interest charges have been incorporated by discounting all costs instead of by an interest charge on the stock vectors themselves. 4. USE OF THE MODEL Some time before a contract for raw materials has to be agreed, the L.P. model is run using estimates of the total amount of raw materials expected to be available with the range for each month and sales estimates for products in categories (a) and (b). The resulting production/stock plan is discussed with management who may then suggest alterations, possibly necessitating a re-run (using parametric programming). Immediately after the contract has been agreed a further run is necessary to adjust the plan if the material allocated is different from that asked for. The 299

Operational Research Quarterly Vol. 15 No. 4 right-hand sides of the contract equations (10) now become effective. Again parametric programmingis used. During the course of the contract period it may become necessary to make further runs if any of the conditions of the problem change significantly. Once again parametric linear programming normally allows a quick solution to. be obtained, though this is the stage where unforeseen infeasibilities are most likely to occur. In its early stages the model included all processes thought to be relevant to the question of planning on a monthly basis. After a few runs, however, it was possible to show that certain possible procedures involving storage of intermediate materials would never appear in the optimum solution, so that these possibilities could be eliminated from the model. This elimination, and the consequent evolution of the model, is a feature that we have also found to be of importance in other L.P. applications. Another feature of the evolution of the model was the abandonment of attempts to incorporate restrictions specifically based on types of labour available. It was found that limitation of the allowable range of production rates on groups of related plants is, in this case, a far more effective way of controlling labour requirementsto lie within the limits set by management. facilities Computer After a few runs on the Ferranti Mercury, this problem has been solved on an IBM 7090. In both cases time has been hired. An early run on Mercury when the programme contained only 120 rows and 60 non-basis variables took 25 min machine time from an all-slack basis. More recent experience on the 7090 (using the L.P. 90 programme of C.E.I.R.) gives a typical time of 15 min for a problem with 200 rows and 80 non-basis variables starting from a partial basis. The time for parametricruns can be as low as 5 min. Results The results of the first runs were compared with the Works programme made by hand. They showed significant cost savings, but were not at first acceptable because of the fact that insufficient restrictions had been built in. At a later stage management became tempted to ask for restrictions that they would often violate in making their own programmes in order to see whether the computer could in fact reach a solution under these conditions. A considerable amount of work was necessary in order to establish a set of restrictions acceptable to management. Though the greater number of restrictions imposed has reduced the cost savings initially shown, these are still significant. Since then the model has proved effective in all stages of its use for planning. The only time it has not been used is when a very tight supply position brought about the situation in which a considerable number of restrictions had to be relaxed in order to find a feasible solution. 300

Jones and Rope - Linear Programming Applied to Production Planning Re-runs have shown that the optimum production pattern is reasonably stable to the magnitude of changes in the yield factors that occur in practice as well as to changes in the pattern of sales. Though we have worked on the validity of the yield factors, comparatively little has been done in improving methods for estimating sales of goods in category (b). This is in fact a particularly complicated problem in the present state of the grocery trade.1 Forecasting of product prices for products in category (c) is not of vital importance since the contract prices for raw materials for these are based on product selling prices and thus remove the main effect of price variability. Discussion of the model The model outlined above is a first step towards building a model of a small company for planning purposes. It was deliberately designed for use in short and medium term planning (as defined by Lawrence and Flowerdew2) and is fairly easily adapted to long term planning. Extension to very short term planning is not practicable with an L.P. model. Work on simulating a single product factory processing the same raw material (X) has in fact been carried out in the U.S.A.3 Any model for very short term planning in our case would have had to incorporate a great deal more detail than the present L.P. model and would not have helped management to solve their greatest problem. This particular problem is well suited to an L.P. approach since the resulting model is of reasonable size. Further, a definite time horizon is available for planning and the effect of errors in price and sales forecasting is not so great as to invalidate a non-stochastic approach. In the food industry marketing is a very important feature and a number of restrictions derive from marketing and, more generally, commercial considerations. The shadow prices allow management to appreciate the cost of satisfying these various sub-objectives. A number of minor features have had to be considered in some detail in order to decide how relevant they were. To include all would unduly complicate the problem without gaining any real advantage. On the other hand, some apparently minor features are vital. In particular neglect of the disposal of two waste products would entirely invalidate the solution. A computer programme for mixed integer programming would be a real step forward in keeping the model realistic if it did not take too much time to reach a solution.
ACKNOWLEDGEMENTS An exercise such as this is a team effort, and many contribute to the solution of the problem. We would like to express our thanks in particular to the factory manager, Mr. W. G. Procter, for his goodwill and patience and to Mr. 0. C. Webb who has contributed a number of the ideas contained in this paper and has assisted in installing the system.

301

Operational Research Quarterly Vol. 15 No. 4

REFERENCES
1 2

GAVIN HAUGHTON (1963) The future of own brands. The Grocer, Vol. 184, No. 5281. J. R. LAWRENCE and A. D. J. FLOWERDEW (1963) Economic models for production

3 AARON GLICKSTEIN (1960)

planning. Operat. Res. Quart. 14, 11. The Development of an Integrated Production Control System Through Simulation Procedures. Purdue University Ph.D. Thesis.

302