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A PRODUCTION AND INVENTORY APPLICATION 321

MANAGEMENT SCIENCE IN ACTION

Product Sourcing Heuristic at Procter & Gamble
few years ago Procter & Gamble (P&G) The product strategy teams used the heuristic
A embarked on a major strategic planning initia- interactively to explore a variety of questions concern-
tive called the North American Product Sourcing ing product sourcing and distribution. For instance,
Study. P&G wanted to consolidate its product sour- the team might be interested in the impact of closing
ces and optimize its distribution system design two of five plants and consolidating production in the
throughout North America. A decision support sys- three remaining plants. The Product Sourcing Heu-
tem used to aid in this project was called the Product ristic would then delete the source nodes corre-
Sourcing Heuristic (PSH) and was based on a trans- sponding to the two closed plants, make any
shipment model much like the ones described in this capacity modifications necessary to the sources cor-
chapter. responding to the remaining three plants and resolve
In a preprocessing phase, the many P&G prod- the transshipment problem. The product strategy
ucts were aggregated into groups that shared the team could then examine the new solution, make
same technology and could be made at the same some more modifications, solve again and so on.
plant. The PSH employing the transshipment model The Product Sourcing Heuristic was viewed as
was then used by product strategy teams responsi- a valuable decision support system by all who
ble for developing product sourcing options for used it. When P&G implemented the results of
these product groups. The various plants that could the study, it realized annual savings in the $200
produce the product group were the source nodes, million range. The PSH proved so successful in
the company’s regional distribution centres were the North America that P&G used it in other markets
transshipment nodes and P&G’s customer zones around the world.
were the destinations. Direct shipments to customer
Based on information provided by Franz Dill and Tom Chorman of
zones as well as shipments through distribution
Procter & Gamble.
centres were employed.

this section we show how to use a transshipment model to solve a production
scheduling and inventory problem.
Contois Carpets is a small manufacturer of carpeting for home and office instal-
lations. Production capacity, demand, production cost per square metre and inven-
tory holding cost per square metre for the next four quarters are shown in Table
7.33. Note that production capacity, demand and production costs vary by quarter,
whereas the cost of carrying inventory from one quarter to the next is constant at
E0.25 per square metre. Contois wants to determine how many square metres of
carpeting to manufacture each quarter to minimize the total production and inven-
tory cost for the four-quarter period.
We begin by developing a network representation of the problem. First, we create
four nodes corresponding to the production in each quarter and four nodes corre-
sponding to the demand in each quarter. Each production node is connected by an
outgoing arc to the demand node for the same period. The flow on the arc
represents the number of square metres of carpet manufactured for the period.
For each demand node, an outgoing arc represents the amount of inventory (square
metres of carpet) carried over to the demand node for the next period. Figure 7.12
The fact that the network shows the network model. Note that nodes 1–4 represent the production for each
shows flows into and out quarter and that nodes 5–8 represent the demand for each quarter. The quarterly
of demand nodes is what
makes the model a production capacities are shown in the left margin, and the quarterly demands are
transshipment model. shown in the right margin.

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