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ELSEVIER
Abstract
In 1993 the Operations Research group of CIBA Ltd. Basle was consulted by a company division to help in finding ways
to reduce production costs of their crop protection products. A subsequent study of the production and transportation
structure showed an opportunity to reduce the number of production lines dramatically and to reassign the products.
Furthermore, since transportation proved to cause a significant part of the overall costs, optimal distribution paths had to be
found in the same process. When the relevant cost factors were analyzed, the whole problem showed to be very well suited
for a linear approach, thus enabling us to use an established and powerful tool for the optimization task, Linear
Programming.
After building and refining the linear model, interactive sessions together with the customer resulted in an optimal future
European supply chain, reducing annual production costs by approximately 25%.
Keywords: Linear programming; Optimization; Facilities; Transportation; Location
1. Introduction
338
I
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xehouse
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F//I///////////////////r//('////////4
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factoryA
ac tiVelre(lie
[
[
customerX
~.I
livery its
V////A
formulation
kX\\\\l
== I==1
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/////////lJ~ ~\NXXN
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combined
formulatioW
packagiDg~//////////A
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factory B
1.2. Goal
The goal of our project was quite simple: to
choose an appropriate subset of the existing production plants and lines, and to optimize product allocation, transportation paths and central stock profiles,
such that the overall costs are minimal. All this has
to be achieved with respect to one basic requirement:
delivery must take place within some months (specified for each product) from the order.
2. Problem analysis
2.1. Technologies and subtechnologies
As the different products are numbered by the
hundreds, some sort of classification had to be intro-
duced to reduce the effort necessary for data acquisition. There already existed three major product
classes, called technologies according to the way of
their production, which, after further being subdivided, split up into 18 subtechnologies. All products
belonging to a subtechnology need the same equipment for formulation and packaging and thus behave
the same in the context of our problem. For the sake
of simplicity, we will use the word "technology"
instead of subtechnology in the rest of the paper.
costs
ed costs
Ivolume
I
independentC O S T S
I
~tmaximumcapacity
I
VOlUme
339
340
3000 -
demand
1000
JAN
FEB
MAR
APFI
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
and [3].
3. Mathematical model
3.1. Definitions
First we define the index sets used:
P
T
FL
FLp
PL
PLp
W
C
M
341
set of plants
set of technologies (or product classes)
all formulation lines
formulation lines in plant p
all packaging lines
packaging lines in plant p
set of warehouses
set of customers
the 12 months {JAN, FEB ....... DEC}.
s
FL, FL~,
d
PL, PLp
PL, PLp
PL, PL e
W
W
C
C
formulation site
to packaging site,
storing into warehouse,
direct delivery,
delivery from warehouse.
/mtPVDt +
I~FLuPL
+ ~
wEW
lwmtStw +
PVI,
IEFLUPL
Y'.
y'
p ~ P i~FLp
dEP j~PL a
p4=d
tij,~trij
342
+E
tiwtmtriw +
pEP iEPLp
wEW
E
wEW
cEC
twc..tr,.,c
Ira,=
IEFL
+ E
tictmtric)
(1)
pEP i~PLp
cEC
E t,c,m+ E twc,m=dc,m,
(2)
m~M.
VI~FLUPL,
(3)
lET
ltmtNClUh,
Vt~T,m~M.
(6)
sEPL
dEC
dEW
IEPL
(7)
To keep track of the currently available stock in
central warehouses, a new sum is formed after every
month's production, transfers to the warehouse and
deliveries from the warehouse to customers, for each
technology (inventory balance equation).
wEW
VcE C,m ~ M , t ~ T.
~Itrm<Cl,
lt,,,+l,t,
3.3. Constraints
p E P IEPL e
E
IEPL
VIEFLUPL,
m~M,t~T.
(4)
Elwmt<__Cw, V w ~ W , m ~ M .
(5)
tET
lwmt=lw,m-l,t
-I- E
ttwt,,- Y',
1EPL
twctm,
cEC
V w ~ W,m ~ M , t ~ T.
(8)
The remaining inequalities restrict material flow between production lines and warehouses. You can
only ship from a warehouse product that is on stock
there.
Y', tw~t~<lwmt, V w ~ W , t ~ r , m ~ M .
(9)
cEC
Y"
dEP IEPLa
d~p
IEFLp
(lo)
Y"
sEP IEFLs
sg~p
IEPLp
(ll)
All variables in the model are indexed and represented by two- or more-dimensional data matrices.
The seven index sets are:
1. PLANTS. The 10 existing plants, where formulation a n d / o r packaging can be carried through,
labeled as P I , P 2 ..... P10 (please notice that,
for confidentiality, all item designations have been
modified).
2. TECHS. The 18 technologies or product groups.
3. F _ L I N E S {PLANTS}. Formulation lines,
subindexed for each plant; a total of 48 lines were
included.
4. P_LINES {PLANTS}. Same for the 69 packaging
lines.
5. WAREHOUSES. The 3 central European warehouses to choose from.
6. CUSTOMERS. One representative major sales
point for each of the 14 European countries considered.
7. MONTHS. Production allocation has been cut
into monthly slices, therefore all variables are
indexed with time as well.
4.2. Solution space
343
344
GFO:
deprec:
Since central warehouses are shared between several company divisions, the expenses of storing a
palette of products for one month were calculated
from the sum of building depreciation and monthly
expenditures, divided by the number of palette places.
As one palette always weighs in the order of 500
kilograms regardless which product is packed on it,
computing palette spaces from tons is trivial.
Transportation costs were given in costs per ton
for each origin/destination pair that can be combined given the 14 customer locations and the union
of the sets of packaging sites and central warehouses,
and for each formulation/packaging sites combination.
4.6. Constraints
Writing down the constraints in AMPL notation
following Eqs. (2)-(11) is straightforward and not
explicitely shown here. It is to be noted, that the
language allows for any (in)equalities of the type
" = ", " < " and " > ", arbitrarily intermixed.
Instead of rewriting the model for each scenario, a
separate set containing only the used plants was
introduced. The constraints are simply indexed over
this set instead of all plants, as the following example of a constraint in AMPL notation shows:
subject to f_cap { p in USED_PLANTS,
f in F L I N E S [ p], m in MONTHS}:
sum{t in TECHS} f_load[1, p , f , m]
< f_capacity[ p, f ];
4.4. Parameters
The set of parameters mainly consists of cost
factors, as described above, and capacity limits. The
maximum throughput of a packaging or formulation
line can either be a product independent capacity or
0, if a certain product cannot be processed on this
unit. Modelling this has been accomplished by introducing two indexed parameters, one giving the maximum capacity of each line and for each technology,
the other simply holding a binary value, indicating
whether a certain product can be processed on the
unit or not.
The true capacity of a line for any technology can
now be given by f_capacity [p, f ] * fusable[ p, f,
t], where p means plant, f formulation line and t
technology, f c a p a c i t y and f__usable being the said
parameters c t and u~, for the formulation lines.
Similarly, the number of parameters can be obtained as roughly 5,800. This gives an impression
about the amount of data needed to run the model.
Fortunately, the biggest part of these were the demand figures for each customer, technology and
month, which were available in electronic form from
forecasts and past year's sales figures.
The number of single constraints is approximately
35,000. More than 70% of these stem from Eq. (4),
simply limiting the line loads by their maximum
capacity.
These figures, however, may not be interpreted as
a direct measure of the number of program variables
and constraints really used during the model run.
AMPL highly optimizes by eliminating trivial
(in)equalities, which results in a significantly smaller
LP problem.
345
complicated (Fig. 4), it was necessary to know exactly from which warehouses and packaging sites
this order is delivered.
Table 1 shows a typical output after optimizing a
scenario. These tables are sorted by plants and lines,
each containing the allocation of products (rows) to
the line over the months (columns). Line 1 in plant
2, as an example, formulates 183 tons of product P3
in September.
Similar lists can be obtained for warehouse stock
profiles, deliveries, transportation and more in any
desired level of aggregation or detail.
5.2. Results
An arrangement of 23 formulation lines and 30
packaging lines in 3 plants, and 1 central warehouse
gave the best results. Some of the lines in these
plants were not used in the optimal allocation scheme,
so the independent cost of these can be saved by
closing them down. The biggest savings originate
from cutting these costs down, consisting mainly of
depreciation and general factory overhead. It is difficult to determine exactly for how much of these
savings OR methods can take credit, because the
model first helped the experts to find feasible scenarios and then took over the fine tuning to reduce
production, transportation and storage costs of a
given scenario. It can be estimated, though, that the
allocation optimization contributed to the overall
savings with about 20%.
formula~onsite B,
line (]1
forrnulalJonsite C,
line C1
( ~
~ .
10 tons,
~Februa.=ry ~
/
18 tons, April /
12 tons, April
10 tons, March
\
J
~
packagingsite B, 30 tons, May
line B2
packagingsite A,
~50~
),,.._J
/
20 tons, May
(stockis ~ns of
P by end of Apnl)
/
ons of product P by end of May
customer
346
Table 1
Part of the monthly allocation scheme for formulation operations
f load[t, 'Plantl ', 'Linel ', m][ * ,* ]
:
JAN
FEB
MAR
P1
83
211
0
P2
998
2456
2415
P3
25
0
252
P4
101
0
0
APR
0
2 164
503
0
MAY
80
1 851
16
117
JUN
167
1 412
28
426
JUL
84
547
21
118
AUG
38
524
17
506
SEP
19
503
41
376
OCT
12
556
41
186
NOV
76
580
86
428
DEC: =
67
2 179
115
259
f_load[ t, 'Plant2',
:
JAN
P2
0
P3
286
P4
6
APR
292
0
0
MAY
195
80
17
JUN
40
199
53
JUL
204
59
29
AUG
243
0
49
SEP
82
183
27
OCT
0
292
0
NOV
158
130
4
DEC: =
251
0
41
f load[ t, 'Plant2',
:
JAN
P3
167
P4
0
P6
0
APR
70
96
1
MAY
167
0
0
JUN
167
0
0
JUL
167
0
0
AUG
17
150
0
SEP
167
0
0
OCT
147
20
0
NOV
111
0
0
DEC: =
167
0
0
f_load[ t, 'PianO',
:
JAN
P 12
62
P13
64
P14
0
APR
262
71
0
MAY
116
132
0
JUN
84
249
0
JUL
87
98
22
AUG
61
37
0
SEP
66
15
252
OCT
119
125
14
NOV
185
34
21
DEC: =
139
12
8
So both in the feasibility test and in the optimization process, the model made a significant contribution to the final result, saving annual production and
transportation costs in the order of 25%.
6. Conclusions
The combination of the customer's expertise and
OR methods was the major key to success in this
project. It clearly revealed the power of interdisciplinary work teams when it comes to the application
of otherwise academical methodologies to real life.
Data quality, the user's engagement in the modelling
process and the availability of people from production, logistics and marketing were crucial prerequisites to achieve results like the one presented here.
Acknowledgements
I would like to thank Dr. R.W. Lang, head of the
PUMA project and customer of the OR study, and
References
[1] Charnes, A. and Cooper, W.W. (1961), Management Models
and Industrial Applications of Linear Programming, John
Wiley and Sons.
[2] Fourer, R., Gay, D.M. and Kemighan, B.W. (1993), AMPL, A
[5] Martin, C.H., Dent, D.C. and Ec-ldaart, J.C. (1993), Integrated
production, distribution, and inventory planning at LibbeyOwens-Ford, Interfaces, 23(3), 68-78.
[6] Mehring, J.S. and Gutterman M.M. (1990), Supply and distribution planning support for Amoco (U.K.) Limited, Interfaces, 20(4), 95-104.
347
[7] Schmenner, R.W. (1993), Production~Operations Management: from the Inside Out, Macmillan Publishing Company.
[8] Van Roy, T.J. (1989), Multilevel production and distribution
planning with transportation fleet optimization, Management
Science 35(12), 1443-1453.