AN INTEGRATED PRODUCTION, DISTRIBUTION, AND …

1 INTERFACES Copyright 1979. The Institute of Management SciencesVol. 9. No. 5. November 1979 O092-2H)2/79/O9O5/O02l$O!.25AN INTEGRATED production , distribution , ANDINVENTORY PLANNING SYSTEMFred GloverUniversity of Colorado, Boulder, Colorado 80309 Gene JonesAgrico Chemical Company. Tulsa. Oklahoma 74103 David KarneyThe Williams Companies, Tutsa, Oklahoma 74103 Darwin KlingmanUniversity of Texas at Austin, Austin, Texas 78712 John MoteAnalysis, Research, and Computation, Inc., Austin. Texas 78765 ABSTRACT. The critical importance of integrating production , dis-tribution, and inventory (PDI) operations has long been recognized by topmanagement of many companies. Now. using (he laiest advances in Man-agemenl Science modeling and solution technology, an integruiedcomputer-based PDI system has saved approximately $18 million dollarsduring its first three years of implemenlalion for a major national Chemical Company.

2 According to ihe Vice-Presideni of AgricoSupply and Dislribulion. an addilional $25 million savings is anticipatedover the next two about by close cooperation between company officiais and anoutside staff of Management Science consultants, the PDI system has beenused extensively to evaluate the benefit/cost impact of alternative capitalinvestments in both shon-term and long-term planning decisions. The de-velopment of the system underscores the value of recent Management Sci-ence innovations that have made it possible to analyze interacting influencestoo numerous and complex to be analyzed adequately only a few years network methodology incorporated inio Ihe PDI system re-quired onl> one one-hundredth of the computer lime and cost ofmeihodologies previously used.

3 The power and flexibility of the new Man-agement Science tools have also brought about increased communicationand understanding of key company operations. This increased communica-tion and understanding stems from ihe inherent '"pictorial" nature ofnetwork-based models, which facilitates interpretation of these models andpolicy recommendations based upon their VENTORY/ production ; NETWORKS/GRAPHSINTERFACES November 1979 21 OverviewAgrico Chemical Company, with annual sales exceeding half a billion dollars, isone of the nation's largest chemical fertilizer companies. A subsidiary of TheWilliams Companies. Agrico mines, manufactures, and markets eight principalchemical products domestically and internationally. The company's success story,based on aggressive and forward-looking management, is typical of others in which arelatively small firm has been transformed into a leader in its field in less than the mid-1970's Agrico encountered unexpected difficulties.

4 The seasonaldemand characteristic of the chemical fertilizer industry was creating a chain ofintricate and far reaching effects that could not be responded to adequately. As aresult, the company's profit margins were being seriously eroded by steeply escalat-ing distribution costs. It became apparent that a multitude of interdependent factorsmade it impossible to find a remedy through customary metbods, such as studyingcost figures and charts. Tbe web of interacting ihfluences wbich spanned tbe com-pany's principal activities production , distribution , and inventory required anintegrated computer-based planning system to uncover the appropriate 1976. David Wilson. Vice-President of Agrico Supply and distribution , incoordination with Herb Beattie, Vice-President of The Williams Companies Informa-tion Services, created a project team to develop such a planning system.

5 The princi-pal objective of this team, headed by the authors, was to develop a computer-basedproduction, distribution , and inventory (PDI) planning system which INTEGRATED thethree major segments of Agrico's business decisions;(1) the Supply Segment, consisting of production , purchases, and product ex-changes with other chemical corporations (coproducers);(2) the Storage and Customer distribution Segment, involving sizing and locat-ing bulk distribution centers; and(3) tbe Demand Segment, involving customer demand tbroughout the easterntwo-tbirds of the United States, and locations wbere the product must be supplied tocoproducers due to product exchange project team designed and implemented a PDI system utilizing recent ad-vances in network modeling and solution technology [1], [2], [5 10], [12], [\4 16].

6 The .system was given the capability to provide planners with insight into tbesystem-wide ramifications of tbeir decisions, its INTEGRATED framework allows thesystem to consider the relevant environmental impacts of all decisions simultane-ously, thereby equipping it to provide analyses for long- and short-range planningand operational planning summaryIn long-range planning, the system is used primarily for decisions associatedwith the sizing and configuration of the distribution system. Tbis helps to answersuch questions as: Where should distribution centers be located and wbat should be their size? How much long-term inventory investment should be made?22 INTERFACES November 1979 How mucb transportation equipment is needed? What supply/purcbase/excbange opportunities should be exploited?

7 In tbe sbort time that the INTEGRATED network PDI planning system has been inuse at Agrico, it bas already proven to be an extremely valuable decision aid forlong-range planning and its effect in cutting the steeply rising distribution costs hasbeen dramatic. Further, the system bas uncovered several entirely unanticipatedareas of cost savings, primarily through the evaluation of capital investment of Agrico's long-range studies, using this system, showed tbat by locating adistribution center on the upper Ohio River. $100,000 could be saved on transporta-tion costs. Another study revealed that it was worth $175,000 to obtain the earlycompletion of a new distribution center . The PDI planning system was also used toevaluate tbe long-range impact of changing tbe distribution pattem of a particularnitrogen cbemical solution plant.

8 Prior to the analysis using the PDI system, Agricomanagement bad planned to build an additional 100,000 square foot storage facilityto accommodate tbe forecasted growth in demand over a five-year period. Tbe PDIplanning system revealed that the additional storage facility was not cost not expanding the storage capacity Agrico realized a capital savings of $800, addition, the distribution plan suggested by the PDI system reduced the annualtransportation costs for the plant by $12, long-range planning studies, using the PDI system, bave been carried outby Agrico management, but tbe financial impact of the resulting decisions is moredifficult to quantify. One such decision involved the closing of three small distribu-tion centers in the midwest. The resulting capital was reinvested in roiling transporta-tion equipment.

9 In light of tbe current freight car shortage and energy cost increases,it is virtually impossible to accurately gauge tbe long-range affect of this total quantifiable impact of Agrico's long-range planning studies using tbePDI system is a cost savings in excess of $1 million. However, tbe most substantialresults bave come from the usage of the PDI system for sbort-range planning andoperational planning summaryFor short-range operational decisions, Agrico uses the INTEGRATED network-basedPDI system to aid in answering questions dealing witb the allocation of a definedsupply of product through a specific distribution center configuration. For sucbdecisions, tbe system is used to avoid unnecessary production , distribution , andinventory costs by providing tbe capability to evaluate alternatives on a systemwidebasis.

10 To illustrate, tbe model is used to decide what, where, and how much productshould be produced as well as wben, wbere, and bow much product should 1976. Agrico bas used the PDI planning system for operational decisionsto supply its products to customers at the right time and at the least possible costconsistent with good customer service. During its first year of implementation, thePDI planning system enabled management to reduce Agrico's total distribution costsby $ million. But this is not the bottom November 1979 23 During the first year, Agrico was unable to adopt completely the decisionalternatives suggested by the PDI planning system. This partial implementation wasanticipated, and is natural, since tbe task of rescheduling production and distributionactivities is overall impact of the planning.