Page 160 -

140 CHAPTER 4 LINEAR PROGRAMMING APPLICATIONS

MANAGEMENT SCIENCE IN ACTION

A Marketing Planning Model at Marathon Oil Company
arathon Oil Company has four refineries within The objective of the model is to minimize the cost of
M the United States, operates 50 light products meeting a given demand structure, taking into
terminals and has product demand at more than 95 account sales price, pipeline tariffs, exchange con-
locations. The Supply and Transportation Division tract costs, product demand, terminal operating
faces the problem of determining which refinery costs, refining costs and product purchases.
should supply which terminal and, at the same time, The marketing planning model is used to solve a
determining which products should be transported wide variety of planning problems that vary from
via pipeline, barge or tanker to minimize cost. Prod- evaluating gasoline blending economics to analyz-
uct demand must be satisfied, and the supply capa- ing the economics of a new terminal or pipeline. With
bility of each refinery must not be exceeded. To help daily sales of about ten million gallons of refined light
solve this difficult problem, Marathon Oil developed product, a saving of even one-thousandth of a cent
a marketing planning model. per gallon can result in significant long-term savings.
The marketing planning model is a large-scale At the same time, what may appear to be a saving in
linear programming model that takes into account one area, such as refining or transportation, may
sales not only at Marathon product terminals but actually add to overall costs when the effects are
also at all exchange locations. An exchange contract fully realized throughout the system. The marketing
is an agreement with other oil product marketers that planning model allows a simultaneous examination
involves exchanging or trading Marathon’s products of this total effect.
for theirs at different locations. All pipelines, barges
and tankers within Marathon’s marketing area are Based on information provided by Robert W. Wernert at Marathon Oil
Company, Findlay, Ohio.
also represented in the linear programming model.

4.2 Production Management Applications

We have already introduced and examined in detail applications that fall into this
general category (the GulfGolf problem in the previous chapters for example).
Typically such problems involve a range of available resources each of which is
available in only limited quantities. Demand for these resources typically arises from
the production of items, and the solution to the problem provides the ‘ideal’ product
mix in the sense that it optimizes the use of the available resources in the context of
some defined objective, typically expressed in terms of profit, of revenue or of cost.
This is one of the classic areas of LP applications. Given that in most business
organizations some resources will be in short supply and that such resources face
competing demands, then LP is an obvious method of determining an optimum
allocation of such scarce resources. However, production management applications
can go further than the standard ‘how much of each product shall we make’
problem. In this section we shall look at production management applications
looking at make-or-buy decisions, production scheduling and workforce planning.

Make-or-Buy Decisions
We illustrate the use of a linear programming model to determine how much of each
of several component parts a company should manufacture and how much it should
purchase from an outside supplier. Such a decision is referred to as a make-or-buy
decision.

Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has
deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.