Post Graduate Programme in Management 2011 13

Course name: Decision Analysis

Case Analysis and Solution Kamdhenu Dairy

Instructor - Professor Utpal Bhattacharya
Compiled by: Group 1, Section - A
Name Aranya Choudhury Gaurav Gupta Manu Mohan M. Pranav Mehta Rohit Arvind Shakun Gupta Vivekanand Roll no. PGP2011567 PGP2011631 PGP2011715 PGP2011787 PGP2011828 PGP2011868 PGP2011947

KAMDHENU DAIRY
Kamdhenu Dairy started its operations in June 1948. It is run by union of milk producers a Sanad, who collect milk from farmers, pasteurize it, and sell it the state government. Under a contractual agreement with government, they have to supply 75000 liters of FA milk to the government everyday throughout year without any delay and aberration from the quantity decided. In case of failure towards supplying requisite quantity, they are exposed to penalty of 8paise/liter. The biggest problem they are facing is the variation and uncertainty in collection of raw milk. The production of raw milk peaks in winters and is the least during summers. In early 1964, Mr Shrivastava, Asst GM of Kamdhenu Dairies contacts professors Prof S.Puranik and D.K. Mehta regarding the problem they are facing. The 2 professors examine the cost structure and hence ascertain profitability of 6 milk products. They conclude that out of 6 milk products, only FA milk and whole milk powder are earning them profit, rest are either breaking even or incurring loss of varying degrees. Rather than looking at individual products, they are focusing on product combinations which will fetch them maximum profits. Now, Mr. Srivastava does not want to scrap out of production of loss making milk products like cheese, baby milk powder as of now, as there is huge demand for them in the market. So the whole problem boils down to find optimum product mix, keeping in mind various constraints like production capacities, availability of raw milk, and contractual obligations of supplying FA milk to the state at the rate of 75000 liters a day throughout year. The problem can be solved using a linear programming approach. We formulate the LPP and solve it using Excel Solver and then perform sensitivity analysis on it to come to various decisions. The main issues that have been discussed in this case analysis are as follows: 1. Should cheese be dropped from the optimal product mix of Kamdhenu Dairy. 2. Is FA milk supplied to the state milk scheme on a contractual basis of 75000 litres per day, really a profitable deal. We have also found out if the product mix can be made more optimal by keeping the FA milk supply out of the mix, thereby not entering into a contract with the state milk scheme 3. We have found out the optimal product mix in two cases, one where Kamdhenu dairy has a contract with state milk scheme and another where it has no contractual obligations to supply FA milk to the state milk scheme. 4. We have done sensitivity analysis in both cases and tried to come to a conclusion regarding what kind of investment would be required if the dairy decide on expanding its powder drying and butter churning capacity.

Assumptions for formulating Linear Programming Problem 1. In the objective function, we have ignored the allocated overhead costs as fixed costs. 2. The cost of Milk Powder is computed in terms of Skimmed milk powder units. 3. Whole milk powder units have been converted into Skimmed milk powder units by the ratio 7.38/5.09 for the same.

Formulating the Linear Programming Model Let the decision variables be the quantities of each product to be produced x1 Quantity of FA Milk and Butter to produce x2 Quantity of FA Milk and Ghee to produce x3 Quantity of SMP and Butter to produce x4 Quantity of SMP and Ghee to produce x5 Quantity of WMP and Butter to produce x6 Quantity of WMP and Ghee to produce x7 Quantity of Baby food and Butter to produce x8 Quantity of Baby food and Ghee to produce x9 Quantity of Cheese and Butter to produce x10 Quantity of Cheese and Ghee to produce x11 Quantity of Std Milk and Butter to produce x12 Quantity of Std Milk and Ghee to produce Objective function is to maximize the profit by choosing a product mix, for the given contributions from each product. We have taken the allocated overhead costs to be NOT a part of relevant cost, hence removed it from profit calculation. Max z = 503x1 + 448x2 + 544x3 + 355x4 + 910x5 + 745x6 + 865x7 + 633x8 + 1833x9 + 1610x10 + 759x11 + 632x12 Subject to constraints Butter capacity Ghee capacity Milk powder capacity Baby food capacity Cheese capacity Raw milk (May-Aug) Raw milk (Sep-Apr) FA milk obligation Non-negativity .062x1 + .992x3 + .606x5 + .696x7 + .56x9 + .681x11 <= 10 .048x2 + .756x4 + .448x6 + .529x8 + .426x10 + .519x12 <= 2.5 x3 + x4 + (7.38/5.09)(x5 + x6) <= 7.38 (Milk powder in terms of SMP) x7 + x8 <= 5.36 x9 + x10 <= 1.83 x1 + x2 + x3 + x4 + x5 + x6 + x7 + x8 + x9 + x10 + x11 + x12 <= 11.9 x1 + x2 + x3 + x4 + x5 + x6 + x7 + x8 + x9 + x10 + x11 + x12 <= 19 x1 + x2 >= 7.5957 x1,x2,x3,x4,x5,x6,x7,x8,x9,x10,x11,x12 >= 0

Solving for this LPP in Excel Solver, we get the following table as the solution Description of the solution The row corresponding to the objective function gives the co-efficient of the decision variables in the objective function. Total Margin is the maximized profit / day that we obtain once the LPP is solved. The constraint section has the co efficient of the decision variables in the constraints. The resource limitation is present on the other side of the <= sign. The Used column gives the amount of resource that has been actually utilized for the solution of the LPP. Depending on this column, the slack is calculated.

Decision variables

Qty of Qty of FA Qty of Qty of Qty of Qty of Baby food Qty of Qty of Qty of Qty of Std Qty of Std Qty of FA Milk + SMP + SMP + WMP + WMP + + Butter Baby food Cheese + Cheese + Milk + Milk + Milk + Butter Ghee to Butter to Ghee to Butter to Ghee to to + Ghee to Butter to Ghee to Butter to Ghee to to produce produce produce produce produce produce produce produce produce produce produce produce 7.5957 0 0 0 0 0 3.9 0 0.4043 0 0 0 x1 x2 x3 x4 x5 x6 x7 x8 x9 x10 x11 x12 503 448 544 355 910 745 865 633 1833 1610 759 Total Margin 632 7935.219 Used 0 3.411741 <= 0.519 0 <= 0 0 <= 0 3.9 <= 0 0.4043 <= 1 11.9 <= 0 7.5957 >= 0 3.9 >=

Objective function Constraints Butter Ghee Milk powder Baby food Cheese Raw Milk (May - August) FA Milk baby food

0.062 0 0 0 0 1 1 0

0 0.048 0 0 0 1 1 0

0.992 0 1 0 0 1 0 0

0 0.606 0 0.756 0 0.448 1 1.449902 1.449902 0 0 0 0 0 0 1 1 1 0 0 0 0 0 0

0.696 0 0 1 0 1 0 1

0 0.529 0 1 0 1 0 1

0.56 0 0 0 1 1 0 0

0 0.426 0 0 1 1 0 0

0.681 0 0 0 0 1 0 0

10 2.5 7.38 5.36 1.83 11.9 7.5957 3.9

Sensitivity Report on this LPP Solution

Adjustable Cells Cell $B$4 $C$4 $D$4 $E$4 $F$4 $G$4 $H$4 $I$4 $J$4 $K$4 $L$4 $M$4 Name Qty of FA Milk + Butter to produce Qty of FA Milk + Ghee to produce Qty of SMP + Butter to produce Qty of SMP + Ghee to produce Qty of WMP + Butter to produce Qty of WMP + Ghee to produce Qty of Baby food + Butter to produce Qty of Baby food + Ghee to produce Qty of Cheese + Butter to produce Qty of Cheese + Ghee to produce Qty of Std Milk + Butter to produce Qty of Std Milk + Ghee to produce Final Reduced Objective Allowable Allowable Value Cost Coefficient Increase Decrease 7.5957 0 503 1330 55.00000002 0 -55.00000002 448 55.00000002 1E+30 0 -1289 544.0000001 1289 1E+30 0 -1478 355.0000001 1478 1E+30 0 -923 910 923 1E+30 0 -1088 745.0000001 1088 1E+30 3.9 0 865 968 232 0 -232 633 232 1E+30 0.4043 0 1833 1E+30 222.9999999 0 -222.9999999 1610 222.9999999 1E+30 0 -1074 758.9999999 1074 1E+30 0 -1201 632 1201 1E+30

Constraints Cell $N$10 $N$11 $N$12 $N$13 $N$14 $N$15 $N$16 $N$17 Name Butter Used Ghee Used Milk powder Used Baby food Used Cheese Used Raw Milk (May - August) Used FA Milk Used baby food Used Final Value 3.4117414 0 0 3.9 0.4043 11.9 7.5957 3.9 Shadow Price 0 0 0 0 0 1833 -1330 -968 Constraint R.H. Side 10 2.5 7.38 5.36 1.83 11.9 7.5957 3.9 Allowable Increase 1E+30 1E+30 1E+30 1E+30 1E+30 1.4257 0.4043 0.4043 Allowable Decrease 6.5882586 2.5 7.38 1.46 1.4257 0.4043 1.4257 1.4257

The following questions help us in the case analysis

1. Should cheese be dropped from the product line? Cheese should not be dropped from the product line. The solver solution in this case is depicted above. It shows that we have to produce 0.4043 units of cheese with butter as the by-product. (referring to the LPP solution and sensitivity analysis) 2. a) If Kamdhenu dairy had no contractual obligation to supply FA milk to stat milk scheme, then the following should be the ideal product mix. Basically we solve the problem, with the FA milk constraint x1 + x2 >= 7.5957 changed to x1+x2>=0. Rest the entire LPP formulation is as before. The solution obtained from Excel Solver in this case is as follows (The calculations this time is on a yearly basis) Solution of LPP
Qty of Qty of FA Qty of Qty of Qty of Qty of Baby food Qty of Qty of Qty of Qty of Std Qty of FA Milk + SMP + SMP + WMP + WMP + + Butter Baby food Cheese + Cheese + Milk + Milk + Butter Ghee to Butter to Ghee to Butter to Ghee to to + Ghee to Butter to Ghee to Butter to to produce produce produce produce produce produce produce produce produce produce produce 0 0 0 0 5.09 0 5.36 0 1.83 0 3.171953 x1 x2 x3 x4 x5 x6 x7 x8 x9 x10 x11 503 448 544 355 910 745 865 633 1833 1610 759 Qty of Std Milk + Ghee to produce 0.038047 x12 Total Margin 632 15054.25 Used 0 10 <= 0.519 0.019746 <= 0 7.38 <= 0 5.36 <= 0 1.83 <= 1 15.49 <= 0 0 >= 0 5.36 >=

Decision variables

Objective function Constraints Butter Ghee Milk powder Baby food Cheese Raw Milk (May - August) FA Milk baby food

0.062 0 0 0 0 1 1 0

0 0.048 0 0 0 1 1 0

0.992 0 1 0 0 1 0 0

0 0.606 0 0.756 0 0.448 1 1.449902 1.449902 0 0 0 0 0 0 1 1 1 0 0 0 0 0 0

0.696 0 0 1 0 1 0 1

0 0.529 0 1 0 1 0 1

0.56 0 0 0 1 1 0 0

0 0.426 0 0 1 1 0 0

0.681 0 0 0 0 1 0 0

10 2.5 7.38 5.36 1.83 15.49 0 3.9

Sensitivity Analysis
Adjustable Cells Cell $B$4 $C$4 $D$4 $E$4 $F$4 $G$4 $H$4 $I$4 $J$4 $K$4 $L$4 $M$4 Name Qty of FA Milk + Butter to produce Qty of FA Milk + Ghee to produce Qty of SMP + Butter to produce Qty of SMP + Ghee to produce Qty of WMP + Butter to produce Qty of WMP + Ghee to produce Qty of Baby food + Butter to produce Qty of Baby food + Ghee to produce Qty of Cheese + Butter to produce Qty of Cheese + Ghee to produce Qty of Std Milk + Butter to produce Qty of Std Milk + Ghee to produce Final Value 0 0 0 0 5.09 0 5.36 0 1.83 0 3.17195301 0.03804699 Reduced Cost 0 -43.43759189 -386.7902294 -390.7916979 0 -51.98678408 0 -102.2026432 0 -118.565345 0 0 Objective Coefficient 503 448 544.0000001 355.0000001 910 745.0000001 865 633 1833 1610 759 632 Allowable Increase 140.5624082 43.43759189 386.7902294 390.7916979 1E+30 51.98678408 1E+30 102.2026432 1E+30 118.565345 58.42079202 126.9999999 Allowable Decrease 43.43759189 1E+30 1E+30 1E+30 51.98678409 1E+30 102.2026432 1E+30 118.565345 1E+30 126.9999999 58.42079202

Constraints Cell $N$10 $N$11 $N$12 $N$13 $N$14 $N$15 $N$16 $N$17 Name Butter Used Ghee Used Milk powder Used Baby food Used Cheese Used Raw Milk (May - August) Used FA Milk Used baby food Used Final Value 10 0.019746388 7.38 5.36 1.83 15.49 0 5.36 Shadow Price 186.4904551 0 113.791698 103.2026432 1096.565345 632.0000001 -140.5624082 0 Constraint R.H. Side 10 2.5 7.38 5.36 1.83 15.49 0 3.9 Allowable Allowable Increase Decrease 0.02591 2.1601 1E+30 2.480253612 0.500892731 7.38 3.103591954 1.46 0.214132231 1.83 4.778908694 0.03804699 0.041857835 0 1.46 1E+30

Thus, the optimal product mix is to produce Whole milk powder and butter for 5.09 units, babyfood + butter for 5.36 units, cheese+butter for 1.83 units, Std milk+butter for 3.17 units and std milk+cheese for 0.03 units per day. b) If we were negotiating a contract with the state milk scheme, we would ideally not commit to the contract at all, because as we see from the sensitivity analysis, the optimum value of FA Milk produced is zero. This means that FA milk is not the most profitable product for Kamdhenu Dairy. So if there is no contract or upper bound for the amount of FA milk to be supplied to state milk scheme, the ideal product mix says that Kamdhenu should not enter a contract at all, as they can earn more profit utilizing their resources in producing the other combinations of Milk products. c) If the dairy planned to expand its butter churning and powder drying capacity, then we can expand to the maximum limit given by the allowable increase against these constraints (as shown in the sensitivity analysis). The allowable increase of butter is 0.025 units. Since 1 unit of butter = 1000 kgs of butter, thus 0.025 units is 25 kgs of butter. Thus 25 kgs of butter can be produced extra daily. So in a year 9125 kgs of butter can be produced extra. Extra investment required = allocated overhead cost/unit of production for butter * extra production of butter = 0.5*0.025 * 100000 *365 = Rs. 456250 per year. Similarly for powder drying the maximum allowable increase is 0.5 units, which is equal to 406.5 kgs of milk powder daily. Thus yearly we can produce 148372.5 kgs of milk powder extra due to expansion. The cost of investment in this would be 0.25*0.5008*100000*365 = Rs. 4571625 per year