This case analysis examines the optimal product mix and supply obligations for Kamdhenu Dairy. A linear programming model is formulated to maximize profits subject to capacity and supply constraints. The optimal solution has the dairy producing FA milk, milk powder, baby food, and a small amount of cheese. Sensitivity analysis shows cheese should not be dropped. If not obligated to supply a minimum of FA milk, the optimal mix would produce more milk powder and baby food instead of FA milk.
This case analysis examines the optimal product mix and supply obligations for Kamdhenu Dairy. A linear programming model is formulated to maximize profits subject to capacity and supply constraints. The optimal solution has the dairy producing FA milk, milk powder, baby food, and a small amount of cheese. Sensitivity analysis shows cheese should not be dropped. If not obligated to supply a minimum of FA milk, the optimal mix would produce more milk powder and baby food instead of FA milk.
This case analysis examines the optimal product mix and supply obligations for Kamdhenu Dairy. A linear programming model is formulated to maximize profits subject to capacity and supply constraints. The optimal solution has the dairy producing FA milk, milk powder, baby food, and a small amount of cheese. Sensitivity analysis shows cheese should not be dropped. If not obligated to supply a minimum of FA milk, the optimal mix would produce more milk powder and baby food instead of FA milk.
This case analysis examines the optimal product mix and supply obligations for Kamdhenu Dairy. A linear programming model is formulated to maximize profits subject to capacity and supply constraints. The optimal solution has the dairy producing FA milk, milk powder, baby food, and a small amount of cheese. Sensitivity analysis shows cheese should not be dropped. If not obligated to supply a minimum of FA milk, the optimal mix would produce more milk powder and baby food instead of FA milk.
Kamdhenu Dairy Instructor - Professor Utpal Bhattacharya Compiled by: Group 1, Section - A Name
Roll no.
Aranya Choudhury
PGP2011567
Gaurav Gupta
PGP2011631
Manu Mohan M.
PGP2011715
Pranav Mehta
PGP2011787
Rohit Arvind
PGP2011828
Shakun Gupta
PGP2011868
Vivekanand
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
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
Objective function Constraints Butter Ghee Milk powder Baby food Cheese Raw Milk (May - August) FA Milk baby food
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
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
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
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 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
Objective function Constraints Butter Ghee Milk powder Baby food Cheese Raw Milk (May - August) FA Milk baby food
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
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
