Production Planning via Integer Linear Programming

University of California, Berkeley: IEOR 162

Based on a ctitious Harvard Business Review case
Murray, Koirala, Ma, Fan
July 5, 2014
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Contents
1 Executive Summary 3
2 Company Background 4
3 Problem Statement 4
4 Linear Programming Model 6
4.1 Our Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2 The Mathematical Formulation . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2.1 Variable Denitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2.2 Parameter Denitions . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2.3 Objective Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.2.4 Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5 Results and Analysis 8
5.1 General Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.2 Optimal Basis and Basic Sensitivity Analysis . . . . . . . . . . . . . . . . . 10
5.3 Extended Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6 Limitations 14
7 Recommendations and Conclusions 15
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1 Executive Summary
J.P. Molasses manages a complex supply chain of raw sugar suppliers, major reneries,
and end customers. We were tasked with providing actionable information to optimize their
supply chain for maximum prot. In order to model the supply chain, we developed a linear
program that took into account all of the constraints (demand, nished good yields, renery
capacities, etc..) and produced an optimal solution and highlighted the conditions under
which the solution remains optimal.
After running our model, we determined the four most dening characteristics of the
current state of J.B. Molasses supply chain.
1. J.B. Molasses rening operations are capable of providing molasses to company owned
subsidiaries at no cost while simultaneously earning a prot ($69,026.33) as an inde-
pendent business operation.
2. The Charleston renery handles a much larger portion of the company business than
the Atlanta renery, but the Atlanta renery will perform a useful role as long as
Walsh remains a large customer.
3. The Charleston renery is producing rened sugar at maximum capacity. Upgrades
to the renery increasing this capacity an additional 302 K Lbs / month will make
for signicant protability and operational impact on the rening process.
4. Before the Charleston renery is upgraded, additional supplies for the rening process
must be sourced. Our analysis will remain accurate until an additional 72,000 Lbs is
added to the supply chain. Once more than 72,000 Lbs in additional raw sugar can
be reliably secured, the model will need to be modied and run again.
Perhaps most importantly, although our model guarantees mathematical optimality, our
assumptions should be well understood before its results are applied. Those tasked with
implementation will want to pay careful attention to Sections 6 and 5.2. Detailed results
are contained in Section 5.1.
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2 Company Background
J.P. Molasses was founded as a rum distillery in 1872. Because rum is made from
sugarcane and sugarcane byproducts (most notably molasses), the companys prots were
closely tied to the price of these commodities. In 1953, company leadership made the
decision to build and operate its own reneries in order to insulate J.P. molasses from
signicant price hikes occurring in the sugar rening industry. Building these reneries was
a nancial blessing and an operational curse. Although they allowed the company to better
control production and avoid middlemen, they also introduced three major questions.
1. From where should we source our raw sugarcane supplies?
2. In addition to cutting molasses costs, how will these new reneries generate revenue?
3. Given our two separate reneries, which renery will supply which customers?
The company managed reasonably well with these questions for some time, but even-
tually competition drove prots down and operational excellence was required. Optimizing
the system by hand was not feasible, and so manager Cyril Morel turned to our team to
design a linear programming model that would guarantee an optimal production plan.
3 Problem Statement
Cyril Morel provided us with the following directive,
Viewing the reneries as prot centers, maximize prot subject to constraints
given by renery managers, and revenue information supplied by accounting.
Meanwhile, renery managers explained that there were three types of constrains: demand
constraints, operational losses and yield constraints, and capacity constraints. Before pro-
ceeding with our mathematical model, our team conrmed that the following needed to be
satised.
4
Supply and Demand Constraints
The two reneries can purchase sugar from eight suppliers (see Appendix supply lim-
its). These suppliers are designated: Spectra, Larkin, Portia, Omega, Thistle, Milligan,
Harvester, and Coleridge. On the demand side, J.P. Molasses is obligated to provide a
specic amount of molasses to each of seven
1
customers (see Appendix for demands). Des-
ignated by city, these customers are Ashberry, Walsh, Casey, Market, Quentin, Wilksboro,
Shorewood, and St. Marys.
Operational Losses and Yield Constaints
2.7 percent of all raw sugar purchased from suppliers is lost in transportation. All of the
raw sugar received will be converted into one of three nished products: molasses, rened
sugar, and bagasse (a byproduct).
Capacity Constraints
If open, each renery must operate between 50 percent and 100 percent of its maximum
capacity. Additionally, the Charleston renery cannot produce any more than 2,250 K Lbs
of puried sugar.
The Revenue Stream
J.P. Molasses owns all molasses customers with the exception of Shorewood and St.
Marys. As such, Shorewood and St. Marys are the only customers that are charged for
molasses. Once the demand constraints have been met, reneries may sell all other products
on the open market (including excess molasses). The revenues per 1,000 Lbs of each nished
product are included in the Appendix. Note that Charleston sugar is more valuable than
Atlanta sugar.
J.P. Molasses pays for shipping to the reneries, and to all obligatory molasses customers.
J.P. Molasses does not pay for shipping for any nished product sold on the open market
(in our model, the open market constitutes an 8th customer).
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Our model includes an 8th customer. The 8th customer reects the open market and acts as limitless
source of demand.
5
Reneries incur both xed and marginal costs. Charleston costs $10,000 for every month
that it is open, while Atlanta costs $14,200 for every month that it is open. Charleston has
a marginal cost of $31 per 1,000 Lbs raw sugar, while Atlanta has a marginal cost of $30
per 1,000 Lbs of raw sugar.
4 Linear Programming Model
4.1 Our Approach
In order to model the problem, we developed a linear program (explained more in depth
in the next section) that took into account all of the individual factors (cost, percentage
loss, etc.) in order to maximize the prot for J.P. Molasses. First we dene variables for
each decision in the problem. Then we construct a maximizing function that takes into
account all of the costs (transportation, xed production, etc.) and subtracts it from the
gross revenue. Lastly, we developed constraints that covered all of the restrictions for each
part of the production process. Readers familiar with Operations Research should note that
our model has more constraints than is necessary to achieve the correct optimal solution.
This was done intentionally to increase the detail of the sensitivity analysis.
4.2 The Mathematical Formulation
4.2.1 Variable Denitions
X
i,j
= K Lbs of raw sugar bought from supplier i for renery j
R
j
= K Lbs of raw sugar to arrive at renery j
Y
j,k
= K Lbs of molasses shipped from renery j to customer k
W
j,l
= K Lbs of product l produced by renery j
Q
j
=

1 if renery j is open for business

0 Otherwise
4.2.2 Parameter Denitions
L
i
= Maximum capacity of supplier i (K Lbs raw sugar)
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c
j
= Maximum capacity of renery j (K Lbs raw sugar)
y
j,l
= Percent yield of product l for renery j (K Lbs)
f
i,j
= Freight costs from supplier i to renery j ($ USD)
F
i,j
= Freight costs from renery j to customer k ($ USD per K Lbs)
p
i
= Price of raw sugar from supplier i ($ USD)
D
k
= Molasses demand for customer k (K Lbs)
4.2.3 Objective Function
max Prot =

iSuppliers
(f
i,Charleston
+ p
i
)X
i,Charleston
+ (f
i,Atlanta
+ p
i
)X
i,Atlanta

kCustomers
F
Charleston,k
Y
Charleston,k
+ F
Atlanta,k
Y
Atlanta,k

0.973

iSuppliers
31X
i,Charleston
+ 30X
i,Atlanta

[10000Q
Charleston
+ 14200Q
Atlanta
]
+ 36

kPaying Customers
Y
Charleston,k
+ Y
Atlanta

+ 200W
Charleston,sugar
+ 150W
Atlanta,sugar
+ 25W
Charleston,bagasse
+ 25W
Atlanta,bagasse
4.2.4 Constraints
Suppliers cannot be overdrawn.
X
i,Charleston
+ X
i,Atlanta
L
i
i Suppliers
Dene R
j
, a non-constraining helper variable that facilitates sensitivity analysis.
R
j
= 0.973

i Suppliers
X
i,j

If a renery is open, then it must operate at ecient levels.

c
j
Q
j
2
R
j
c
j
Q
j
j Reneries
Dene W
j,l
a non-constraining helper variable that facilitates in sensitivity analysis.
W
j,l
= y
j,l
R
j
j Reneries l Products
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Charleston cannot exceed its maximum capacity for rened sugar production.
W
Charleston,sugar
2250
Reneries supply of molasses cannot be overdrawn.

kCustomers
Y
j,k
W
j,molasses
j Reneries
Demand for each molasses customer must be satised.
Y
Charleston,k
+ Y
Atlanta,k
D
k
k Customers
5 Results and Analysis
5.1 General Results
Table 2 gives an immediate picture of the expected nished products for both reneries.
Table 1 answers the more pressing question of which customers each renery will supply.
Table 3 describes how both reneries will be supplied. Note that in only one instance do two
reneries supply a single customer. Note also the fact that Charleston dominates Atlanta
in terms of how much of the raw sugar supply it consumes. This is because Charlestons
sugar (the primary source of revenue for the reneries) is signicantly more valuable than
Atlantas. Moreover, shipping costs from Charleston are, with few exceptions, less than
shipping costs from Atlanta.
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Table 1: Renery Production Plan: Satisfying Molasses Demand
Renery Customer K Lbs Molasses Revenue ($ USD)
Atlanta Ashberry 850 0.00
Casey 0 0.00
Market 0 0.00
Quentin 0 0.00
Shorewood 0 0.00
StMarys 0 0.00
Walsh 948.464 0.00
Wilksboro 0 0.00
Charleston Ashberry 0 0.00
Casey 575 0.00
Market 132.179 4758.44
Quentin 480 0.00
Shorewood 107 3852.00
StMarys 80 2880.00
Walsh 21.5355 0.00
Wilksboro 640 0.00
Total 3834.1785 8610.44
Table 2: Renery Production Plan: General
Renery Product K Lbs Revenue ($ USD)
Atlanta bagasse 1388.39 34709.75
molasses 1798.46 0.00
sugar 2671.33 400699.5
Charleston bagasse 2410.71 60267.75
molasses 2035.71 8610.44
sugar 2250.00 450000
Total 12554.60 954287.44
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Table 3: Renery Supply Plan
Supplier Renery K Lbs Raw Sugar
Coleridge Atlanta 1700
Charleston 0
Harvester Atlanta 1260
Charleston 0
Larkin Atlanta 0
Charleston 1583
Milligan Atlanta 920.751
Charleston 929.249
Omega Atlanta 0
Charleston 1370
Portia Atlanta 2140
Charleston 0
Spectra Atlanta 0
Charleston 1000
Thistle Atlanta 0
Charleston 2000
Total 12903
5.2 Optimal Basis and Basic Sensitivity Analysis
In linear programming, an optimal basis is the collection of all variables with value
greater than zero. A variable is said to be out of the basis when it is equal to zero. If the
exact solution of a problem changes, but the basis remains the same, then it is short work
to arrive at the new solution. However, when the basis changes, the linear programming
model must be re-evaluated to reect this new information. Below we give the conditions
for which our model would need to be re-evaluated. We do not speculate on the potential
causes of these changes in constraints or variables, as only the values of the variables will
determine whether the optimal basis has changed. If any of the following occur...
1. Maximum operating levels of the Charleston renery decrease by more than 1333.57
K Lbs, or 2921.81 K Lbs for the Atlanta renery.
2. Minimum operating levels of the Charleston renery increase by more than 2681.43
K Lbs, or 1468.19 K Lbs for the Atlanta renery.
3. More than 23.57 K Lbs of Charleston sugar becomes unavailable.
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4. More than 80 K Lbs of Charleston molasses becomes unavailable.
5. Total molasses production decreases by more than 132.17 K Lbs, or total demand
increases by 132.17 K Lbs.
6. Atlanta molasses production increases by more than 21.53 K Lbs.
7. More than 70.14 K Lbs of additional raw sugar arrives at J.P. Molasses reneries.
... then the model must be re-evaluated.
5.3 Extended Sensitivity Analysis
Before proceeding with sensitivity analysis, it is important to note that each course
of action described in this subsection is considered in isolation of all others. If multiple
modications are made to the supply and production system, then the model would have to
be re-evaluated with this new information in mind. That said, we can move on to analysis.
In the following tables, RHS
Max
is the maximum amount that a constraints Right
Hand Side
2
can increase until the basic solution changes; RHS
Current
is the RHS at opti-
mality; RHS
Min
is the is most that an RHS can decrease until the basic solution changes.
A Shadow Price is the amount by which the objective function is changed for increasing
the RHS of a constraint by one unit (as long as we are within the bounds set by RHS
Max
and RHS
Min
).
As can be seen in Table 1 Atlanta currently has two customers. Our team suspected
that Atlanta may only have these customers because Charleston hit an upper bound on
production. As Table 4 shows, while Charleston did not hit its total capacity, it did hit
its capacity on raw sugar. Since raw sugar is such a big source of revenue for the rening
process, we suspected that Atlanta only takes on customers once Charleston can no longer
fulll demand. Although it is true that Charleston hitting its upper bound caused Atlanta
to pick up some remaining demand, this is not the whole story. Our team re-ran the
model without the upper bound on Charlestons sugar production. The eect was to shift
2
assume all variables are moved to the left, leaving only a constant on the right hand side of the constraint.
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responsibility for Ashberry from Atlanta to Charleston (taking away one customer), but
Atlanta did retain responsibility for Walsh.
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Table 4: Sensitivity Analysis on Operating Range Constraints
Constraint Shadow Price Slack RHS
Max
RHS
Current
RHS
Min
minimum Charleston 0 2681.43 2681.43 0
Atlanta 0 1468.19 1468.19 0
maximum Charleston 0 1333.57 0 -1333.57
Atlanta 0 2921.81 0 -2921.81
max sugar Charleston 2.20494 0 2551.02 2250 2226.43
One factor we are very interested in is how the yield proportions for dierent products
aects the optimal solution. In order to try to get a sense for this, our team included an
equality constraint that reected the relationship between the amount of a product after
rening (W
j,l
) and the amount of raw sugar coming into a renery (R
j
). Table 5 does
reect presence of these yields, but the changes to the RHS of an equality constraint are
not meaningful when both sides of the constraint are constrained by variables instead of
constants.
4
In fact, the only way to gain information on how dierent yields impact the
objective function is to solve the ILP
5
model with dierent yield proportions. Given that
sugar yields are so closely tied to the protability of the rening process, it may be wise
to run the model with dierent yield proportions. However, to focus too heavily on the
amount of sugar J.P. Molasses produces would be misguided. Our team may have been
tasked with optimizing a renery production plan, but we have done so without regard to
J.P. Molasses overall business model.
6
One of the more useful pieces of information from sensitivity analysis came from supply
constraints. Table 7 shows that each supply constraint has a slack of zero- that is- that J.P.
Molasses has exhausted all supply. By turning to shadow prices, we are able to identify
the suppliers most valuable to J.P. Molasses given these market conditions. The relative
3
Atlanta continues to supply Walsh (in the amount of 673.426 K Lbs). Note that Walsh is the single
largest customer and also the most dicult to supply.
4
We experienced similar problems when attempting the analyze the constraints the reected the retention
proportion of raw sugar shipped from supplies to reneries (see Table 6)
5
integer linear programming
6
And undoubtedly, the rening process is just one component of J.P. Molasses revenue generating activ-
ities.
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Table 5: Sensitivity Analysis on Finished Product Constaints
Constraint Shadow Price Slack RHS
max
RHS
current
RHS
min
Charleston Sugar 197.795 0 23.5698 0 -301.019
Molasses 36 0 0 -132.179
Bagasse 25 0 0 -2410.71
Atlanta Sugar 150 0 0 -2671.33
Molasses 47.3 0 21.5355 0 -132.179
Bagasse 25 0 0 -1388.39
Table 6: Sensitivity Analysis on Transportation Losses Constaints
Constraint Shadow Price Slack RHS
Max
RHS
Current
RHS
Min
To Charleston 55.4031 0 70.1483 0 -430.55
To Atlanta 58.8461 0 70.1483 0 -430.55
importance of these suppliers is visualized in Figure 1.
Table 7: Sensitivity Analysis on Supply Limit Constaints
Supply Limits Shadow Price Slack RHS
Max
RHS
Current
RHS
Min
Thistle 25.5073 0 2072.09 2000 1557.5
Spectra 24.7073 0 1072.09 1000 557.503
Portia 20.2573 0 2212.09 2140 1697.5
Omega 26.6073 0 1442.09 1370 927.503
Milligan 22.9573 0 1922.09 1850 1407.5
Larkin 24.4073 0 1655.09 1583 1140.5
Harvester 29.1573 0 1332.09 1260 817.503
Coleridge 22.7573 0 1772.09 1700 1257.5
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Figure 1: Increase in prot per 1,000 Lbs additional raw sugar (up to 72,090 Lbs)
0 5 10 15 20 25 30 35
Harvester
Omega
Thistle
Spectra
Larkin
Milligan
Coleridge
Portia
Supply Limit Shadow Prices ($ USD per K Lbs)
6 Limitations
Signicant Limitations
1. In general, our model is static. We used xed prices for commodities and transporta-
tion costs.
2. We assumed that all products sold on the open market (including molasses) incur no
shipping costs.
3. Our model assumes that all steps of the rening process (from sourcing to rening to
delivery) occur with 100% reliability.
More subtle limitations.
1. Our model does not consider the possibility of alternative transportation routes.
2. Our model assumes one month inventory periods, while inventory management would
advise working in smaller timesteps.
3. Coordinating cross-state purchasing in any particular way may have tax ramications.
Our model assumed that these tax ramications are negligible.
4. Our model assumes that the amount of a commodity that J.P. Molasses sells on the
open market does not inuence the price of that commodity.
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7 Recommendations and Conclusions
If we were to consider the reneries completely independent of the rest of the company,
we would advocate a reduction in molasses production and perhaps even expansion into
sugar rening as a primary business. Because J.B. Molasses reneries sell each product
at market prices (at least, portions of those products), it can easily be seen that sugar
generates signicantly higher prot margins than molasses. We abstain from making such a
recommendation because it is important to not lose sight of the fact that the reneries are
a support business. J.B. Molasses is a long standing company with operations that seem
to exhibit a high degree of t.
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. The value of this t may or may not have a strategic
value that exceeds the lure of sugar rening as a primary business; this is left the corporate
leadership to determine.
With this critical fact in mind, we recommend the following course of action:
1. Begin searching for additional sources of raw sugar (whether from existing suppliers
or new suppliers, these will eventually need to be integrated into a new Integer Linear
Programming model).
2. While searching, implement the Production Plan given in Section 5.1, and monitor
the system for the conditions in Section 5.2. Expect to generate ($69026.33) in prot
if all prices and costs remain the same.
3. Once the search is complete, run various forms of Integer Linear Programming models
that consider both the new supply and candidate levels of upgrades to Charlestons
rened sugar capacity.
4. Using the results of these models, project cash ows for expected life of the upgrade,
and select the scenario with the highest Net Present Value.
7
See: Michael E. Porters 1996 article What is Strategy?
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