OMGT 2087: Supply Chain Modelling and Design

Assignment 1

Title: Technical report based on Liner Programming and Excel modelling

Name: Ayush Prakash Chavan

Student ID: S3974679

Executive Summary

 Purpose: - The purpose of the report is finding and analysis an optimal solution using
Liner programming, network modelling and Microsoft Excel

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 Introduction: - The company produces broccoli through 3 of its plants and ships it
through its two warehouse to meet the customer’s demand. The production capacity
of the plants and cost of production is given in the tables in the report. The company
has capacity constraints, trans-shipment constrains, and demand constrains. The
company is concerned with the production and shipping cost while meeting the
customer’s demand and want to device a network flow to minimise the total cost.

 Findings: -
1. The company was able to find an optimal solution, meeting all the constrains and
limitations.
2. The minimum cost of transportation = $5,637,500
3. Minimum production cost = $1,296,625
4. Total minimum cost = $6,934,125
5. No effect on the optimal solution as the coefficient of allowable increase is high.
6. Plant 1 and Plant 3 are meeting highest production target. Plant 2 is producing 25 T
less than its capacity.
7. Products needs to be shipped from plant 2 and 3 to plant 1, increasing shipping cost.
8. Safety stock of 50T and 25T at warehouses 1 and 2 respectively maintained.

 Recommendations: -
1. As Plant 1 is reaching its production capacity, we need to increase its capacity to
reduce shipping cost.
2. We need to utilize full production capacity of Plant 2, for that demands need to be
increased.
3. There is evident slack in shipping. We need to optimise shipping by reducing the
slack, thus increasing profitability.
4. We have a shipping route constrain. Only 250T can be shipped between nodes. We
need to increase this capacity.
5. We can find alternate shipping and production options to reduce cost.

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 Table of Content
Sr No Topic Page No.
1 Problem Formulation 4
1.1 Decision Variables 5
1.2 Objective Functions 5
1.3 Constrains 6
2 ProblemSolving 8
2.1 Exel Modeling 8
2.2 Solver Solution 9
3 Discussion 11
4 Recommendation 12

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 List of Figures
Fig No. Name Pg no

1 Network modelling diagram 4

2 Spreadsheet Modelling 8

3 Solver Interface 9

4 Optimal solution by solver 10

5 Answer Report 11

List of Tables
Table No. Name Pg no

1 Transportation Cost between nodes 4

2 Plant capacity and cost of production 5

3 Customer Demand 5

4 Equations, Cells and functions 9

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 1. Problem Formulation

Plant Warehouse Customer

1 6
4

7
3

Fig 1 Network Modeling diagram

To Node
Plant 1 Plant 2 Plant 3 Warehouse 1 Warehouse 2 Customer 1 Customer 2
Plant 1 $ 500 $ 500 $ 2,000 $ 3,000
Plant 2 $ 500 $ 500 $ 2,500 $ 4,000
From Node

Plant 3 $ 500 $ 500 $ 4,000 $ 2,000

Warehouse 1 $ 1,000 $ 4,000 $ 5,000
Warehouse 2 $ 1,000 $ 6,000 $ 3,000
Customer 1 $ 2,000
Customer 2 $ 2,000

Table 1 Transportation Cost between nodes

Capacity In Production
Plant Customer Demand (Ton)
Tons Cost/T
2
Plant 1 275 $ 1,550
Customer 1 375
Plant 2 300 $ 1,415
Plant 3 350 $ 1,375 Customer 2 450
 Table 2. Plant capacity and cost of production Table 3. Customer Demand

1.1 Decision Variable:

 For shipping cost:
Let Xij = Tons of Broccoli shipped from origin i to destination j where,
i, j = {1,2,3,4,5,6,7}

 For production cost:

Let Pi = Tons of Broccoli produced by plant i, where,
i = {1,2,3}

And let’s consider,

Plant 1 = 1 Warehouse 1 = 4 Customer 1 = 6
Plant 2 = 2 Warehouse 2 = 5 Customer 2 = 7
Plant 3 = 3

1.2 Objective Function:

The main object of the problem is to find the total cost that can meet the demand.
The total cost is the sum of transportation cost and the production cost. If we
minimize the production and the shipping cost, we can get the minimum total cost.
Following are the objective functions to find the minimum transportation as well as
production cost.
 Minimum transportation cost,
Min Z = (0.5X12 + 0.5X13 + 2X14 + 3X15) + (0.5X21 + 0.5X23 + 2.5X24 + 4X25) + (0.5X31
+ 0.5X32 + 4X34 + 2X35) + (X45 + 4X46 + 5X47) + (X54 + 6X56 + 3X57) + 2X67 + 2X76
The function is the summation of the costs in thousand $ multiplied by tons of
broccoli shipped from origin node to destination node.

 Minimum production cost: 1550P1 + 1415P2 + 1375P3

The function is the summation of production cost per ton multiplied by total tons
produced by the plants.

1.3 Constrains:

9. Transportation Constraints:

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  Supply Constraint:
The supply capacity of Plant 1 is 275 tons, so the supply from Plant 1 should be less
than or equal to 275. We are also receiving the incoming flow of goods from Plant 2
and 3 as well, so the incoming flow of goods will be an addition to Plant 1’s capacity.
So, we write this constrains as:

Plant 1: X12 + X13 + X14 + X15 ≤ 275 + X21 + X31

We can also write this as:
Plant 1: (X12 + X13 + X14 + X15) – (X21 + X31) ≤ 275.
Similarly, for other plant:
Plant 2: (X21 + X23 + X24 + X25) – (X12 + X32) ≤ 300.
Plant 3: (X31 + X32 + X34 + X35) – (X13 + X23) ≤ 350

 Trans-shipment Constraint:
The warehouse is the point from where the supply comes in from plants 1,2 and 3
and goes out to customers 1 & 2. Warehouses 1 and 2 can also flow goods in and out
from each other and we need to maintain safety stock of 50 and 25 at warehouse 1
and 2 respectively. In this case the inflow is equal to outflow plus safety stock. So, we
can define the trans-shipment constrain as:

Warehouse 1: X14 + X24 + X34 + X54 = X45 + X46 + X47 + 50

We can also write it as:
Warehouse 1: (X14 + X24 + X34 + X54) – (X45 + X46 + X47) = 50
Similarly, for warehouse 2,
Warehouse 2: (X15 + X25 + X35 + X45) – (X54 + X56 + X57) = 25

 Customer demand Constrain:

For the demand constraint, we must ensure that all the demands of the customers
are met. There is also an outflow of goods from customer 1 to customer 2 and vice

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versa. After the out-flow, the demand of the customer should be fulfilled. So, we can
write the constrains as:

Customer 1: (X46 + X56 + X76) - X67 = 375

Customer 2: (X47 + X57 + X67) - X76 = 450

 Shipping routes constrain:

The maximum flow of broccoli allowed between each route should be less than or
equal to 250. We can write this as,

Xij ≤ 250, where i & j = {1,2,3,4,5,6,7}

 Non-negativity constraint:
Xij ≥ 0

10.Production Constraint:

 Capacity Constraint:
All the plants can only produce as per their capacity and not more than that. So,

Plant 1: P1 ≤ 275
Plant 2: P2 ≤ 300
Plant 3: P3 ≤ 350

 Total demand Constraint:

The customer demand of 825 tons should be fulfilled plus the total safety stock
of 75 should also be maintained at warehouses 1 and 2. So,
P1 + P2 + P3 = 900

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2. Problem Solving

Figure 2: Spreadsheet Modelling

2.1 Excel Modelling:

Figure 2 shows how I used Microsoft Excel to implement my model to find the
optimized solution. I have implemented the equations like objective functions,
shipping and transportation constraints, shipping route constrains and have used
appropriate excel function to find out the final solution.
For example, shipping cost function, represented in the cell M4, uses the function,
‘SUMPRODUCT.’ It is the sum of the product of shipping cost (Cell I2:I22) with total
quantity shipped (cell J2:J21) from node i to j. Similarly, minimum production cost
(cell M5) is ‘SUMPRODUCT’ of production cost per ton (cell B3:D3) and total quantity
produced (B4:D4).
I have implemented the shipping constraints in the spreadsheet, and they use the
function ‘SUMIF’. For example, the supply constraint, placed in cell H25 uses the
function ‘SUMIF’. It is a difference of the goods out from plant 1 and good flowing
into plant 1. Same goes for the other constraints as well.
I have added a table below to summarize the equations, the cells they are in and the
function used for that equation.

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 Equations Cells Function used
1 Minimum Shipping cost M4 SUMPRODUCT

2 Minimum Transportation cost M5 SUMPRODUCT

3 Shipping Constraints H25:H27 SUMIF

4 Trans-shipment Constraints H28:H29 SUMIF

5 Customer demand Constraints H30:H31 SUMIF

6 Capacity Constraints B4:D4 SUMIF

7 Total demand Constraints E4 SUM

Table 4 Equations, cells, and functions

2.2 Solver Solution:

Figure 3: Solver Interface

We will use solver to find the optimal solution for our problem. We start by setting
the objective of the total cost, which is placed in cell M7, and set it to a minimum.

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We want our desired result by changing the decision variables placed in cell J2:J21.
Our result is subject to the shipping and production constraints. We select the
constraint cells on the left-hand side, select the appropriate sign and the
supply/demand value on the right-hand side. For example, the capacity of plant 1
should be less than or equal to 275, so we select the target cell with the equation on
left hand side, select ≤ sign from the drop down and then select the target cell for
capacity for plant 1. If the sign is the same for a few constraints, we can select them
together both on LHS and RHS.
Similarly, we add all the constraints accordingly, to get the optimal solution, select
the solving method to Simplex LP and click solve. If all the constraints are feasible,
the solver will give you the optimal solution.

Figure 4 Optimal solution by solver

Figure 4 shows that all the constraints were feasible, and the solver gave us an
optimal solution for our problem. The result we got is:
1. Minimum shipping cost = $5,637,500
2. Minimum production cost = $1,296,625
3. Total minimum cost = $6,934,125
It also gives us the optimal amount of broccoli to be produced by each plant, optimal
shipping routes and quantity to be shipped between each route.

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3. Discussion
Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$D$2 Shipped 0 1000 635 1E+30 1000
$D$3 Shipped 0 1000 675 1E+30 1000
$D$4 Shipped 250 -1500 3550 1500 1E+30
$D$5 Shipped 150 0 4550 500 500
$D$6 Shipped 25 0 365 500 40
$D$7 Shipped 0 500 540 1E+30 500
$D$8 Shipped 250 -1500 3915 1500 1E+30
$D$9 Shipped 0 500 5415 1E+30 500
$D$10 Shipped 100 0 325 40 500
$D$11 Shipped 0 500 460 1E+30 500
$D$12 Shipped 0 0 5375 500 1500
$D$13 Shipped 250 -1500 3375 1500 1E+30
$D$14 Shipped 0 1500 1000 1E+30 1500
$D$15 Shipped 250 -1500 4000 1500 1E+30
$D$16 Shipped 200 0 5000 2500 1500
$D$17 Shipped 0 500 1000 1E+30 500
$D$18 Shipped 125 0 6000 1500 1500
$D$19 Shipped 250 -2500 3000 2500 1E+30
$D$20 Shipped 0 2500 2000 1E+30 2500
$D$21 Shipped 0 1500 2000 1E+30 1500

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$G$4 Produced (T) Plant 1 275 0 275 1E+30 0
$H$4 Produced (T) Plant 2 275 0 300 1E+30 25
$I$4 Produced (T) Plant 3 350 0 350 1E+30 0
$J$4 Produced (T) Total 900 0 900 0 1E+30
$M$2 Total Capacity (T) Netflow 275 -365 275 0 25
$M$3 Production Cost/T in $ Netflow 275 0 300 1E+30 25
$M$4 Produced (T) Netflow 350 -40 350 0 25
$M$5 Total Production Cost Netflow 50 5415 50 0 0
$M$6 Netflow 25 4915 25 0 25
$M$7 Netflow 375 10915 375 0 25
$M$8 Netflow 450 10415 450 0 0

Figure 5: Answer report

 The model shows that production and shipping of goods is limited by the
maximum production capacity of the plants and the limitation to the
transportation network.
 The sensitivity report shows that objectivity function has a coefficient of
1E+30 for allowable increase for variables D2 & D3, which means that even if
we increase their value, it will not affect our optimal solution and cost will
remain the same. Similarly, for variables D4, we have an allowable decrease
of 1E+30, indicating that decrease in their value will not affect our optimal
solution.

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  The sensitivity report indicates that we have an optimal solution with no
binding slacks. All the resources are used. Allowable increase is very high, and
it will not affect our optimal solution.

4. Recommendation

 Plant 2 is producing 25 T less than its capacity. We can increase the demand
for the product and thus increase the production capacity of plant 2. It can be
profitable.
 Plant 1 produces goods at maximum capacity and must get goods shipped
from other plants to meet the demand. If we increase the capacity of plant 1,
we can reduce the shipping cost.
 Many cells have slack value, which means there is room for more profitability
without violating any constraints.
 Many shipping routes have high slack value. We can optimize shipping of
goods to reduce the shipping cost.
 We can consider alternate options for production and shipping to reduce our
costs.