Linear Programming Applied to Production Planning -- A Case Study

Author(s): W. G. Jones and C. M. Rope

Source: OR , Dec., 1964, Vol. 15, No. 4 (Dec., 1964), pp. 293-302
Published by: Operational Research Society

Stable URL: https://www.jstor.org/stable/3007116

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 Linear Programming Applied 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

THIS 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 pro-
cessed 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 manu-
facture 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 employ-
ment 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 pro-
duct 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.

* Paper presented to the Society on 16 December 1963.

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 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 PRODUCTS

Raw
Material
x

A~~~~~~~~~~~~~~~~~~~

Raw Material D

-T

Rw

m- me- 9n

H 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 Product B

1 458 452
2 469 471
3 464 463
4 448 454
5 442 442
6 439 431
7 421 404
8 458 380
9 460 385
10 480 402
11 485 429
12 497 433

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 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".

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 Operational Research Quarterly Vol. 15 No. 4
RAW MATERIAL

COST /SUPPLY STRUCTURE

PLANNING
HORIZON

RAW MATERIAL
COST

RAW MATERIAL
AVAILABILITY

CONTRACT CONTRACT
A PERIOD B PEIsMoD
2 1

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, Ci mj (la)

where cj and /3, are measures of the pr
and j' on the plant and Cujj, is the time
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 restric-
tion 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

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 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:

a-j Pj + j13,P , > D1,j1,j (2)

where Dij j, is the minimum acceptable plant utilization

Stock availability and restrictions

Forecast sales must be met from production or stock. The general form of the
restriction is:

Si_,J - Sij + qi~j Pi~j = Fi~j (3)

where Sij is the stock of the jth product at the end of the
the conversion factors for raw material into finished pr
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:

Si~j ! Kij (4)

where Kij may be a functi

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 (3a)

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.

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 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 Pi~j - i T K 0 (5)

[kij Pij - Oi T;?> 0 (5a)

ij
jzij Pij - T = 0 ~~~~(6)
T? K. (7)

The 1kij represe

duction. Where no
T represents the total amount of product "X" to be used during the contract
period and Oi and Pi are the maximum and minimum percentages of the
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 po

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:
j=rl
E Iti ij Pi~j; > M?,? Ad, (10)
i j=r

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.

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 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 j=n

E pi Pi4i~j - E ri~
i j=1 i j=r+l i i

where pij represent materi

cirU and e represent margina
holding costs and X is the co
The -rij are weighted where
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 product-
period; equation (3) becomes:

Si-1,j-Si j + Tij'-Tj + hi,j Pij = Fij (3b)

where Tij is the amount taken from the outside warehouse and T*'1 is the
put into it.
The outside warehouse stock Usj is given by:

Ui,,i - Uij -Tij> Jr Ti~j = O(11)

while there will also be restrictions of the type
r

E Aj So j < Nr (4a)
j=1

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 discount-
ing 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

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 Operational Research Quarterly Vol. 15 No. 4

right-hand sides of the contract equations (10) now become effective. Again
parametric programming is 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 inter-
mediate 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 requirements to lie within the limits set by management.

Computer facilities

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 parametric runs 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.

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 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 considera-
tions. 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.

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 Operational Research Quarterly Vol. 15 No. 4

REFERENCES
1 GAVIN HAUGHTON (1963) The future of own brands. The Grocer, Vol. 184, No. 5281.
2 J. R. LAWRENCE and A. D. J. FLOWERDEW (1963) Economic models for production
planning. Operat. Res. Quart. 14, 11.
3 AARON GLICKSTEIN (1960) The Development of an Integrated Production Control System
Through Simulation Procedures. Purdue University Ph.D. Thesis.

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