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Optimization of Supply Chain

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Neev 2012, ROLL OUT

The Voyager Tyre Company is stuck with the problem of selection of new plant. Options available to them for opening new factory are Tamil Nadu, Karnataka and Kerala. Three key factors for managements decision on the location of the new factory are: 1. The cost of transporting the Natural Rubber from its sources to all the factories, including the new one. 2. The cost of transporting finished product from all the factories, including the new one, to the distribution centers. 3. Operating costs for the new factory, including labor costs, taxes, energy costs, the cost of insurance, the effect of financial incentives provided by the state or city, and so forth.

DELIVERABLES
DELIVERABLE 1 Total shipping cost for raw materials with each potential choice of a site for the new factory. Solution: We derived a solution so as to minimize the total cost for raw material shipment. All the possible options of setting new factory were considered and the transportation cost of Natural rubber was optimised in each case. All the three options were optimised with the help of Linear Programming. COST MATRIX table1 Capacity of supplier 80 60 100 120 Rubberville Carbon nagar Treadpur Thailand Cost of shipping from supplier to factory West Tamil New Delhi Maharashtra Bengal nadu 2 4 5 3 5 5 2 5 7 3 3 3 5 1 4 4

Karnataka 1 3 5 3

Kerala 1 4 7 4

NEW FACTORY AT TAMIL NADU Quantity supplied Capacity of supplier 80 60 100 120 Cost Rubberville Carbon nagar Treadpur Thailand New Delhi 40 0 0 60 100 = 100 Maharashtra 0 0 0 60 60 = 60 West Bengal 0 0 80 0 80 = 80

table 2 1 Tamil nadu 40 60 20 0 120 = 120 0 Karnataka 0 0 0 0 0 = 0 0 Kerala 0 0 0 0 0 = 0

880

Total shipping cost for raw materials for Tamil Nadu as new location, most optimised cost through Linear Programming : 880 currencies

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NEW FACTORY AT KARNATAKA Quantity supplied Capacity of supplier 80 60 100 120 Cost Rubberville Carbon nagar Treadpur Thailand New Delhi 0 0 20 80 100 = 100 Maharashtra 0 20 0 40 60 = 60 West Bengal 0 0 80 0 80 = 80

0 Tamil Nadu 0 0 0 0 0 = 0

table 3 0 Kerala 0 0 0 0 0 = 0

Karnataka 80 40 0 0 120 = 120

920

Total shipping cost for raw materials for Karnataka as new location, most optimised cost through Linear Programming : 920 currencies
NEW FACTORY AT KERALA Quantity supplied Capacity of supplier 80 60 100 120 Cost Rubberville Carbon nagar Treadpur Thailand New Delhi 0 0 20 80 100 = 100 Maharashtra 0 20 0 40 60 = 60 West Bengal 0 0 80 0 80 = 80 table 4 1 Kerala 80 40 0 0 120 = 120

0 Tamil Nadu 0 0 0 0 0 = 0

Karnataka 0 0 0 0 0 = 0

960

Total shipping cost for raw materials for Kerala as new location, most optimised cost through Linear Programming: 960 currencies
Methodology for Linear programming: Objective: Minimization of transportation cost of raw material Natural Rubber from 4 suppliers to three existing and one new factory. Objective function =Min [ supplies from a supplier to a particular factory * cost of shipping from supplier to factory] Decision Variables: Decision variables are the quantities that will be procured from each supplier to respective factory location, so there is a total of 4* 4 = 16 decision variables for every new proposed factory location. Constraints: 1. The sum of all the supplies from the supplier = supply capacity of the supplier. 2. Sum of all the supplies to a particular factory = demand of the factory. Four such constraints were possible, three for existing factories and one for new location. 3. All the decision variable i.e. supplies from supplier to factory will be non negative (>=0) Similarly Cost of raw material shipping from supplier to factory for case of new plant at Karnataka and Kerala were calculated. Kerala has the highest cost of raw material, Tamil nadu being the least. Roll Out Case Study Solution Page 3

Neev 2012, ROLL OUT

DELIVERABLE 2 Total shipping cost for finished products with each potential choice of new factory site. Shipment to all the four distribution centres from the three existing factories and a new factory. As there can be three possible options for factory so there were three options considering each location (Tamil nadu, Kerala, Karnataka)? Linear programming was used to optimise the cost of finished goods transport to four distribution centres. DISTRIBUTION COST MATRIX table 5

Cost per Unit Shipped Current Factory Potential Factory

Factory
New Delhi Maharashtra West Bengal Tamil Nadu Karnataka Kerala

Tyrpur
6.5 7 7 8 5 4 100

Radialnagar Rubedgang
5.5 5 8 6 4 3 80 6 4 4 3 3 1 80

Wheelpur
8 7 3 2 6 5 100 table 6 COST = 100 = 60 = 80 = 120 = 0 = 0

No of Units Needed

SHIPPING COST WITH NEW FACTORY AT TAMIL NADU Factory Tyrpur Radialnagar Rubedgang Wheelpur New Delhi 80 20 0 0 Current Maharashtra 0 60 0 0 Factory West Bengal 20 0 0 60 Tamil Nadu 0 0 80 40 Potential Karnataka 0 0 0 0 Factory Kerala 0 0 0 0 No of Units Needed 100 80 80 100 = = = = 100 80 80 100 Total shipping cost for finished product with Tamil nadu as a site for the new

100 60 80 120 0 0

1570
factory, most

optimised cost through Linear Programming: 1570 currency

SHIPPING COST WITH NEW FACTORY AT KARNATAKA table 7 Factory Tyrpur Radialnagar Rubedgang Wheelpur COST New Delhi 100 0 0 0 100 = 100 Current Maharashtra 0 60 0 0 60 = 60 Factory West Bengal 0 0 0 80 80 = 80 Tamil Nadu 0 0 0 0 0 = 0 Potential Karnataka 0 20 80 20 120 = 120 Factory Kerala 0 0 0 0 0 = 0 No of Units Needed 100 80 80 100 = = = = 1630 100 80 80 100 Total shipping cost for finished product with Karnataka as a site for the new factory, most

optimised cost through Linear Programming: 1630 currency

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Neev 2012, ROLL OUT

SHIPPING COST WITH NEW FACTORY AT KERALA Factory Tyrpur Radialnagar Rubedgang Wheelpur New Delhi 100 0 0 0 Current Maharashtra 0 60 0 0 Factory West Bengal 0 0 0 80 Tamil Nadu 0 0 0 0 Karnataka 0 0 0 0 Potential Factory Kerala 0 20 80 20 100 80 80 100 No of Units Needed = = = = 100 80 80 100 Total shipping cost for finished product with Kerala as a site for the new factory, table 8 COST = 100 = 60 = 80 = 0 = 0 = 120

100 60 80 0 0 120

1430
most optimised

cost through Linear Programming : 1430 currency

New factory at Kerala gives the least cost of transportation of finished goods to Distribution centres

Methodology for the Solution

Objective: Minimization of transportation cost of finished goods from 4 factories to four distribution centers. Objective function =Min [ supplies from a particular factory to a particular distribution centre * cost of shipping from that particular factory to that distribution centre] Decision Variables: Decision variables were the quantity that will be supplied from each factory to respective distribution centre location, so there were a total of 4* 4 = 16 decision variables for every new proposed factory location. Constraints: 1. The sum of all supplies from a particular factory = capacity of the factory. 2. Sum of all the supplies to a particular Distribution centre = demand of the distribution centre. 3. Four such constraints were possible, three for existing factories and one for new location. All the decision variable i.e. supplies from factory to Distribution centre will be non negative (>=0) Similarly Cost of finish good shipping from factory to Distribution centre for case of new plant at Karnataka and Kerala were calculated

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DELIVERABLE 3

Site Tamil Nadu Karnataka Kerala

Total Cost of Total Cost of Shipping Shipping Raw Finished Material(A) Product(B) 880 920 960 1570 1630 1430

Operating Cost For Total New Variable Factory(C ) Cost(A+B+C) 620 570 530 3070 3120 2920

Kerala has the least total variable cost. Karnataka has the highest

DELIVERABLE 4

Site selection
With help of the given data, we propose Kerala to be the best location. Total variable cost is lowest among all the proposed sites. Qualitatively: Kerala has better access to Natural Rubber and is centrally located for distribution centres same as the benefits from Tamil nadu but the saving at Kerala gives it an edge over Tamil nadu. Karnataka factory site is near Rubber ville, has ready access to import but we can see from above calculation that when new factory is at Karnataka it is cheaper to send imported material from Thailand to Delhi & Maharashtra rather than sending it to Karnataka hence no advantage (see table 3). Hence, for new factory location Kerala is best.

All demands are satisfied with minimal cost and thereby maximizing saving.
3500 3000 2500 2000 1500 1000 500 0 Total Cost of Shipping Raw Material(A) Total Cost of Operating Cost For Shipping Finished New Factory(C ) Product(B) Total Variable Cost(A+B+C) Tamil Nadu Karnataka Kerala

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