PRODUCTION PLANNING PROBLEM

A production firm estimates that the demand for a certain product will be equal to 30 units, 40 units
and 50 units in the three successive months. Monthly inventory costs per unit are expected to be equal
to $5 and production cost per unit $10. Inventory at the beginning of month 1 is 20 units and the
required inventory at the end of month 3 must be equal to 10 units. Storage capacity is equal to 60
units.
Production level cannot change by more than 5 units from month to month.
a) Build a model whose optimal solution allows to find production levels which minimises total
cost, i.e. production and inventory cost. Use the following decision variables:
- xj –production level in month j,
- yj –inventory at the end of month j,
Inventory at the beginning of month I and at the end of month III are given as variables.
b) Find an optimal solution to the problem. .
c) Does it make sense to increase storage capacity?
d) Find an optimal solution when greater fluctuations in production levels are allowed.
e) Assume that all the variables must be integer. How will it affect solution?

Objective function
Production costs: 10x1  10x2  10x1
Inventory cost s in succeeding months are equal to:
5 y0  5 y1
Month I :
2
5 y  5 y2
Month II : 1
2
5 y2  5 y3
Month III : ,
2
where y0 - inventory at the beginning of month I.

The objective function is : 10x1  10x2  10x1  2,5 y0  5 y1  5 y2  2,5 y3 .

Constraints
Equations relating production levels and inventory to demand in succeeding months:
Month I y0  x1  30  y1
Month II y1  x2  40  y2
Month III y2  x3  50  y3 .

Allowed changes in production levels:

between month I and II x1  x2  5
between month II and III x2  x3  5 .

The constraints may be rewritten as follows :

x1  x2  5
x2  x1  5
x2  x3  5
x3  x2  5 .
Constraints being the result of storage capacity available:
y1  60 i y2  60 .

Initial and end inventories:

y0  20 , y3  10 .

The variables must be non-negative.