Evaluation of three control concepts for the use of recipe flexibility in production planning

Process industries often obtain their raw materials from mining or agricultural industries. These raw materials usually have variations in quality which often lead to variations in the recipes used for manufacturing a product. Another reason for varying the recipe is to minimize production costs by using the cheapest materials that still lead to a satisfactory quality in the product. A third reason for using recipe flexibility is that it may occur that at the time of production not all materials for the standard recipe are available. In earlier research we showed under what conditions the use of this type of recipe flexibility should be preferred to the use of high materials stock to avoid materials shortages. We showed that the use of recipe flexibility to account for material shortages can be justified if the material replenishment leadtime is long, the demand uncertainty is high and the required service level is high. In this paper we assume that these conditions are satisfied and we investigate three different concepts for coping with the certainty and uncertainty in demand and supply. The first concept optimizes material use over the accepted customer orders (assuming that the customer order leadtime is small compared to the material replenishment leadtime); the second concept optimizes material use over the customers orders plus expected customer orders over the material replenishment leadtime; the third concept optimizes material use of the customers orders taking into account the effect of the remaining stock positions on the future recipe costs, based on knowledge of the distribution function of demand. These three concepts are investigated via an experimental design of computer simulations of an elementary small scale model of the production planning situation. The results show that the third concept outperforms the second and first concept. Furthermore, for a realistic cost structure in feed industry under certain circumstances the use of the third concept might lead to a 4% increase in profit. However, this improvement must be weighted against the cost incurred by the operational use of this complex concept. Based on this considerations and the numerical results in this paper, we may expect that for most situations in practice the use of the first simple myopic concept, optimizing material use only over the available customer orders, will be justified from an overall cost point of view.