Archive for the ‘Gene Ramsay’ Category

When making infrastructure planning decisions regarding adding new facilities, or adding capacity to existing facilities, you will want to take into account a variety of facility costs to ensure you make the right decisions.  These costs include…

• variable cost, dependent on the volume through the facility
• operating fixed cost, to cover costs such as taxes, security, leases, etc.
• depreciation,  based on the life of the equipment, and
• cost of the capital used to construct / purchase the facility

In an optimization model you can capture all of these costs separately, or perhaps you will want to consider the fixed costs as a “lump sum”.

Here are two ways that you could build the cost of capital into the decision-making process:

• Add a Capital Recovery Cost to the objective function, to reflect the cost of the capital required to build or expand a facility.  One way to do this is the approach used in the Microsoft Excel PMT function, which asks for four inputs to the calculation of recovery cost for a time period:
  • capital cost of the asset to be added, e.g. a plant, production line, distribution facility, waste water treatment facility, etc.
  • useful life of the asset  - the entry here for the number of time periods should be consistent with the frequency of time in your model
  • salvage value at the end of the asset’s used useful life, if any
  • capital cost charge (interest) rate to be charged in each time period – again, the entry here should be consistent with the frequency of time in your model.  (This number could be annual, monthly, or based on another frequency, depending on how you have defined your model.)

The Capital Recovery Charge can be thought of as a loan repayment for the amount of capital required in purchase and install the facility.  Excel has help files describing the details of the PMT function, so we will go into more detail here.

• Use Economic Profit as the objective of the model, or as a measure that you use to compare alternative solutions.  Economic Profit is your standard accounting profit, less the opportunity cost of capital invested in the business.  The opportunity cost is the return that the company would have been able earn if it had invested in the next best alternative project.  For instance, if you consider a future alternative where
  • the accounting profit for the time period (say, year) is 100, with the additional asset, but
  • the asset has a capital cost of 1000, and
  • the opportunity cost for capital is 15% per year (the company could have received a 15% return by investing the capital elsewhere) , then
  • the Economic Profit for the year is 100 – .15*1000 = -50.

If you are minimizing cost rather than maximizing profit in your model, then you can calculate Impact on Economic Profit for a given alternative, adjusting the operating costs from the model for the effective tax rate, and subtracting the capital charge.

Including the cost of capital appropriately will allow you to present a more complete analysis.

“Going Green” is becoming a higher priority for companies large and small, as regulatory bodies and consumers around the world push for more readily-available information on corporate carbon footprints and companies’ plans to control / reduce their carbon emissions.  But how do you do this most cost-effectively?  Optimization is a tool that can lead to better “green” decision-making.

First, let’s review of the types of decisions that companies are making today.  Here are some real world examples from recent press reports…

Dole Food Company,  the world’s largest producer of fruits and vegetables, has committed to make its banana and pineapple business in Costa Rica carbon neutral over the next decade.  Dole social responsibility officials Sylvain Cuperlier and Rudy Amador recently highlighted their priorities in achieving this in an interview :

• measurement of current carbon footprint and activities, such as the use of fertilizers,
• research into and collaboration on mitigation and sequestration projects, and
• improved  operations, including increased use of rail transportation on land and more energy-efficient refrigerated containers for maritime shipments.

Tyco Waterworks, a worldwide supplier of water system equipment based in the UK, has documented its consolidation of multiple manufacturing plants into a single Manufacturing Centre of Excellence for meter boxes, plastic injection molding and gunmetal products in Bridgend, South Wales.  Having all its manufacturing under one roof results in a reduction in the company’s overall energy consumption and transport, with a resulting positive impact on its carbon footprint (as well as giving operational efficiency benefits.)

Xerox Corporation, which provides document services and equipment around the world, maintains a fleet of 5,000 vehicles used by its technicians in the United States as they respond to customer requests for service.   Tony Rossi, Xerox’s manager of programs and operational support, said in an interview that his programs, which have reduced fuel consumption over the last several years by 10%, and have a goal of a 25% reduction, can be grouped into four categories:

• pairing each driver with the best-sized vehicle for his / her needs,
• improving the fleet’s fuel efficiency as vehicles are replaced,
• tracking driver routes and distances traveled on a daily basis, and
• using GPS systems to match available technicians against pending requests as they are dispatched during the day.

The common thread?  These companies have made progress towards their cost and carbon goals by

• understanding their current situation, and what their options include,
• implementing more efficient operations over their existing supply chain (thus generally using less energy and lowering their footprint), and
• making the most effective capital additions to their supply chain systems when justified.

Optimization techniques can allow you to identify the best solutions that are possible in improving efficiency and implementing capital projects.  Thus you can make the best choices for meeting your goals from the options that you have at hand.

In making decisions for a manufacturing-oriented supply chain like the one described for Tyco Waterworks above, a network design tool like Profit Network can help you evaluate the benefits of:

• keeping or consolidating existing facilities, as well as,
• opening potential manufacturing sites, taking into account
• capital costs,
• shutdown charges,
• manufacturing rates and costs,
• freight costs, and
• and a host of other costs and constraints on operations.

Profit Network uses a combination of linear and mixed integer programming and related optimization techniques to guarantee that you evaluate a range of solutions and identify those that are best for your particular needs.  Potential decisions that can be evaluated include both operational changes and choices among proposed capital projects that will lead to greater efficiency.

Xerox and Dole have scheduling problems that can be solved by both optimization and heuristic means.  The Xerox technician dispatching problem is a variation on the mathematically well-studied Assignment Problem, which can be solved using “greedy” algorithms (which pick off the “low hanging fruit” but are not guaranteed to give the absolute best solution) or more comprehensive methods that can give the best solution, at perhaps a longer solve time.  Transportation scheduling problems again can be solved through these methods. Using the technology of the 21st century will be critical for businesses to meet their “green” objectives.  Optimization technology is one of these new technologies that will help you reach these goals.

This article was written by Dr. Gene Ramsay, Profit Point’s Infrastructure Planning Practice Leader. To learn more about Profit Point’s Supply Chain Sustainability services, please call (866) 347-1130 or contact us here.

Image courtesy of Gavin Schaefer.

Climate change – or global warming – and the effort to curb the impact of human activities thought to contribute to it – are continuously becoming a higher priority on the agendas of governments, commercial and non-governmental organizations and individuals around the world. In the United States of America the Environmental Protection Agency, the main federal government environmental watchdog and regulator, recently issued a report finding that projected future levels of greenhouse gases (GHGs) “endanger the public health and welfare of current and future generations”, setting the stage for a more intense GHG regulatory regime in the future in a country that has lagged behind imposing the regulatory restraints now in place in many other parts of the world.

A combination of internal and external factors have motivated many companies to work towards better measurement, and control, of their impact on the environment, whether in the areas generation of greenhouse gasses, emission of waste water and other effluents or consumption of renewable and non-renewable resources. But as always, companies need to ensure that they make changes in their activities in a cost-effective, as well as environmentally-effective, manner. We at Profit Point recognize the need to do this, and are working with our clients to help them make the best decisions in this regard.

Our Profit Network supply chain planning software has helped various clients make such decisions as:

• how do we consolidate separate distribution systems after a merger of two organizations, or
• where to produce and how to ship new products coming into the marketplace?

However, Profit Network is capable of taking into account not only the cost of such plans, but also the environmental impact. We recently worked with a client who had significant environmental constraints at both the entrance to and exit from their factories – they had significant limits on the amount of source water (a key raw material required for their manufacturing) that they could draw from surface and underground sources, and also had constraints at many facilities regarding the amount for waste water they could dispose of. Both of these constraints varied over the course of the year and geographically over the service territory. Using Profit Network they were able to see the cost and production location impact of the environmental constraints, and make choices regarding how to respond to their situation.

Another major concern of companies is their levels of emissions of greenhouse gasses. A major corporation in the United States of America recently announced that it was working to reduce its GHG impact through

• Retiring less efficient and higher-emitting production facilities;
• Reducing leakage of GHGs from its production and distribution systems;
• Increasing energy efficiency in its buildings;
• Increasing the fuel efficiency of its vehicle fleet.

Profit Network will allow you to evaluate the effectiveness of these types of activities. You can define the environmental impact of your own activities (such as your production and distribution, and fleet delivery to customers), and those of your suppliers (such as when you purchase electricity). For instance, you could use Profit Network to determine the impact on your carbon footprint (and cost) of switching to a source of electricity that had a lower GHG emissions rate (such as company-produced solar, or purchased nuclear), or moving towards a transportation fleet that had lower emissions per unit of distance traveled.

Profit Point is here to help our clients make better decisions – this includes making better decisions regarding the many environmental choices that companies have in today’s increasingly regulated environment.

This article was written by Dr. Gene Ramsay, Profit Point’s Infrastructure Planning Practice Leader. To learn more about designing a sustainable supply, contact us here.

Author’s Notes:
1. Reference for the company mentioned in the text above: http://www.eponline.com/articles/71680/.

2. Reference for the EPA announcement: http://www.mercurynews.com/politics/ci_12168524.

Profit Point will present at the Spring INFORMS Conference on OR/MS Practice, Applying Science to the Art of Business, Cambridge, MA, April 25-27. Dr. Gene Ramsay will speak on “Using MS/OR Techniques in Supply-Chain Management” on Sunday, April 25, as part of Maximal Software’s Pre-Conference Workshop titled: “Integrating Optimization in Real-World Business Applications” We hope to see you there!