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THE PROBLEM
Improved productivity is a continuing effort at American Edwards Laboratories.
However, the porcine valve area was faced with diminishing returns on new produc-
tivity improvements. Employee skills and motivation were both at very high levels
and automation had limited application in a production process that used biological
components as raw materials. Additionally, previous efforts had indicated that low
production yields and high levels of biological component inventory were inherent
characteristics ofthe product. Nevertheless, yields and inventories appeared to be the
two areas where the greatest productivity gain could be attained. A small improve-
ment in yield could reduce cost significantly.
Due to the nature of the product and its use, product availability was of
paramount importance; a safety stock equivalent to six to twelve weeks of demand
was maintained on hand in the form of finished goods. This policy ruled out the
application of stockout cost/carrying cost optimization. Efforts to reduce the biologi-
cal component inventory were futile because shortages in some valve sizes necessi-
tated increased production on all sizes. The dilemma becomes apparent when the
reader recognizes that pig valves could not be procured by specific size. Actually,
sizes are not determined until the biological component is processed.
The size of a raw pig heart is highly variable. The breed of pig, age when
slaughtered, and feed mix, to name a few, all result in variations in the physiology of
the heart. The result is that each supplier may have a distinctly different size distribu-
tion of pig heart valves.
The immeasurability ofthe biological valve until the valve is totally processed is
perhaps the most vexing aspect ofthe problem. Raw heart vendors supply a distribu-
tion that usually results in six to eight valve sizes. Clearly, units of unwanted size are
procured and processed with units of desirable sizes. The result is a spiraling mis-
match between the size distribution of biological components in inventory and that of
market demand.
An early attempt to attain a better match of the size distributions of incoming
valves and the demand by tracking and adjusting the vendor base resulted in a very
marginal improvement. A subsequent attempt employed a two-pronged approach:
Computerization of vendor distributions and yield records
Utilization of porcine specialists to work with vendors to ensure distribution
stability and proper procedures.
INTERFACES December 1981 49
This attempt successfully cut the scrap rate in half.
Search for additional improvement continued. In early 1980, despite the giant
inroads made, inventory of biological components was still climbing at close to
$80,000 per month and shortage on two sizes was looming. Although excess was
accepted as part of the nature of the product, concern was mounting with regard to
the potential shortages.
Management intensified efforts to identify additional managerial tools in order
to:
Predict shortages over the next fifteen months if the current procurement
policies were maintained
Predict the annual excess inventory cost if the current procurement policies
were maintained
Develop a method to accurately predict shortages and excess inventory that
would result from new procurement policies
Develop a method to react more effectively to changes in either supply
availability or market demand.
In addition to the above, valve design changes scheduled for 1980 and 1981
were to change the demand size distribution. The Director of Manufacturing ex-
pressed concern about the impact of such changes on excess and shortage. Prelimi-
nary analyses indicated that there would be no additional shortages if existing pur-
chasing policies were continued, but excess inventory associated with the modified
designs would probably exceed $1,500,000. The director's concern was justifiable;
one manufacturer had already opted to pull out of the porcine valve market when
faced with the same problem.
THE SOLUTION
The solution to the problem utilizes a relatively simple linear programming
model to determine the optimum quantity of hearts to be ordered from selected
vendors. The output of the model provides a minimum cost procurement plan that
guides inventory toward the desired level for every valve size, thus reducing inven-
tory excess and shortage. The first step involves gathering and analyzing recent data
on procurement, processing and inventory ctsts, heart valve sales, raw heart supply
by vendor, and vendor heart valve size distributions and yields.
The early version of the model did not include the option of eliminating ven-
dors. Constraints were set to maintain a safety stock of at least three months' supply
of all sizes of biological components. Results indicated a slowdown in the rate of
increase in inventory levels. Net savinge from implementing the solution were esti-
mated at $500,000 per year. Results were presented to management and accepted
with cautious optimism. Approval was given for the implementation of the linear
programming model for procurement decisions beginning May 1, 1980.
The May results were very successful. Processed heart valves were within 6% of
the distribution projected by the model. Subsequent analysis indicated that much of
this deviation was caused by raw hearts that were procured prior to May 1, but were
still in process.
The success of the May run justified a more ambitious plan that reduced safety
stock to two months' supply. Further, the option of eliminating unfavorable vendors
was incorporated into the model.
This latter change was implemented by first setting the lower bounds to zero for
all vendors. The model was run and management decided which ofthe lowest volume
December 1981 51
Model Formulation
Successful applications of OR/MS in business frequently involve a compromise
between what is possible and what is useful. Too often, the formulation ofa problem
expands in complexity because each new feature helps to explain some element ofthe
situation being modeled. This process is reinforced by those who argue that a particu-
lar model is incorrect because it does not include some specific feature. The unfortu-
nate result is that there are too many problems that remain unsolved because the
"correct" formulation is too difficult to solve.
Some of the possible features, or models that might have been (but were not)
included:
Probabilistic models were not used, even though the basic problem involves the
matching of input and output distributions. Fortunately, in this problem, the nature of
the product caused the distributions to fall neatly into a histogram structure that could
be handled easily by the linear programming model.
Fuzzy constraints could probably have been applicable, since inventory goals
and valve sizes were not absolutely fixed, but no payoff could be seen for this
increase in complexity.
An integer programming model could have been used, but was not. This is
probably the item of greatest potential controversy, because this model commits the
sin of being run as a regular LP problem and the output is then rounded to obtain
integer results. This was believed to be justified because the constraint coefficient
and the right-hand-side values were not absolutely fixed. Further, the nature of the
vendor's size distributions made it unlikely that any strange-shaped feasible regions
would cause bothersome results. (It is possible, of course, to create a set of data to
prove this wrong, but no such problems have occurred in practice.)
0-1 variables could have been used to handle the vendors who might or might
not serve as suppliers in any given month. The problem is related to vendors'
unwillingness to deal with low volume orders. Inclusion of lower bound constraints
in all runs would force every supplier to be included every month. Naturally, this
distracts from the purpose ofthe effort. The approach taken was simple. The first run
was always made without the lower bounds. Lower bounds for the remaining
suppliers were then reinstated and the model was run again. The resultant optimal
solution was then used for the procurement plan.
The problem could also have been formulated as a multiperiodproblem, but was
not, because management wanted to make the final decision regarding time frames
for lowering inventory and phasing in new product configurations.
Results
Savings resulting from the optimization approach were outstanding. Excess that
formerly ran at $77,000 per month was limited to less than $10,000 per month during
each of the first three months of model application. Later adjustments to the model
eliminated new excess and depleted old excess at the rate of $11,000 per month. The
annual reduction in excess was slightly over a million dollars. In May, 1980, inven-
tory at the biological component level was $1,230,000 and was forecast to increase to
approximately $2,770,000 by the end of 1981. Upon implementation ofthe optimiza-
tion approach, the inventory started to decline and projections for the end of 1981
showed the biological component inventory level at approximately $849,000. This
constitutes an inventory reduction of $1,921,000. Annual savings on reduced excess
and carrying cost exceeds $1,476,000.
The above savings are expected to continue for at least three years, after which a
modified product may be introduced. The new product will still be of biological
origin and will continue to use the optimization program. The savings, however, may
be different.
OTHER APPLICATIONS
The authors see two broad areas where the results of this work might be of
benefit to others:
Problems that involve matching of probability distributions
Integer programming problems in general.
Matching of probability distributions is a relatively common problem in busi-
ness. The type of problem tackled at American Edwards exists whenever a supply
distribution has to match a demand distribution (and individual items cannot be
acquired separately). The approach applies to any process that uses biological or
organic items as raw material, but can also apply to more traditional manufacturing
situations. For example, boring of cylinders and machining of pistons in automotive
engine production results in two distributions that must be matched. The type of
54 INTERFACES December 1981
model used at American Edwards can be applied to any such problem.
Integer programming is almost always introduced to new students with an
example that has a sharply spiked feasible region. The result of rounding the linear
programming solution is then demonstrated as infeasible and far from the real integer
optimum. One result of this exercise is a growing army of OR/MS analysts who use
increasingly larger amounts of computer time to solve integer problems.
Another result is an even larger army of OR/MS analysts who will not attempt to
solve any problem that resembles an integer programming problem because of their
awareness of the great expenses of correct solutions and the great embarrassment that
results from rounding a regular LP solution.
The unfortunate aspect of this scenario is that in many situations the rounded LP
solution may not be only feasible, it may be optimal. Rounding is almost always
acceptable if either the constraint coefficients or the right-hand sides are not abso-
lutely fixed. Both of these situations existed in the American Edwards case. The
probabilistic nature of the valve sizes in each batch of hearts resulted in constraint
coefficients that are not fixed exactly. At the same time, management goals of having
inventory set at, say, a two-month supply, was not fixed exactly. Management
demonstrated no concern if a desired inventory level of 100 valves ended up at 98 or
103.
The only caution the authors suggest is the necessity of conducting a simple
sensitivity analysis to ensure that the acceptable variations in the coefficients or the
right-hand sides will permit at least one of those rounded solutions to be feasible.
Purists will also note that there may well be a global optimum that is better than
the rounded solution. If a problem is one where such a condition is significant, then
integer programming analysis is called for. For many applications, however, a quick
and easy improvement is more important than the ability to prove that an optimum
has been obtained.
ACKNOWLEDGEMENT
The authors and American Edwards Laboratories recognize and appreciate the
considerable contributitn of the xenograft production team to this effort. Special
thanks are due Robert Cooper, Marilyn Howell, Robert Larson, John Hendrick, Stan
Komatsu, and Chris Serocke. The authors wish to express their sincere appreciation
to Dr. Michael Estes, General Manager, for his support and interest.
Vendor Size
1 2 3
A .30 .50 .20
B .10 .60 .30
Assume also that the total purchasing and processing costs for size 1, 2, and 3 are
$10, $14, and $12, respectively. The objective function would be:
Minimize C = 12.4X,, + 13.0^6.
If the demands for the three sizes were, respectively, 100, 300, and 250 units, the
demand constraints would be as follows:
.3^^ + .1X6^ 100,
.5X,, + .6Xh ^ 300,
.2Xa + .3^6 250.
Since vendors have a maximum amount (//,) that cannot be exceeded and a minimum
amount (L,) below which they will not be bothered, upper and lower bounding
constraints are also needed: