Decision Analysis IIM PGPMX 2018 - 20

Chandpur Enterprise Limited – Steel Division

Overview
Mr. Akshay Mittal, who has recently joined his family steel business after completing his engineering, is
all set to solve the major problem of optimizing the raw material procurement which in turn will
maximize the profit. Two things he should keep in mind one is minimum down time with lowest cost and
second is streamline supply chain and logistics.

Some Facts & Figures

 There are 7 different raw materials
 Raw materials constitute more than 75% of the cost
 Monthly profit is 1.5 million
 It takes max 3 weeks to get the raw material
 Grade with higher iron content and superior chemical properties were costlier
 Limit of min or max quantity of material used
 Maximum batch size is 4 tonnes

Calculation

Profit = Sales – Cost

Let’s find out Sales first for each batch

Sales will dependent on 2 variables

1. Contracting per ton i.e. Rs. 29000 / ton
2. The final end product recovery after the process

To get final end product recovery we need to know the optimize weight of each raw material and the
recovery % for each raw material as given

To find optimum weight of each material we have range given i.e. minimum and maximum which can be
used. The optimize weight which is sum of all raw material will be calculated by using solver.

Lets the combined weight of all raw material per batch = X

Let the Tasla weight required per batch be xt
Let the Rangeen weight required per batch be xr
Let the Sponge weight required per batch be xs
Let the Local Scrap weight required per batch be xl
Let the Imported Scrap weight required per batch be xi
Let the High Carbon weight required per batch be xc
Let the Pig Iron weight required per batch be xp

So the X = xt + xr + xs + xl + xi + xc + xp

The recoveries for each raw material are also given

So final recovery F = xt * 0.84 + xr * 0.74 + xs * 0.85 + xl * 0.94 + xi * 0.97 + xc * 0.25 + xp * 0.95

To find number of batches we need time required by one batch and total number of hours available

Submitted by: Vinod Kumar Singh Roll No - 2018B1PGPMX025

Decision Analysis IIM PGPMX 2018 - 20

Total number of hours available = 25 days X 24 hours = 600 hours

Time for one batch = 0.2 + (0.3 * X) X = total weight of raw material
So number of batches = 600 / 0.2 + (0.3 * X)

So Sales = F * 29000

Now let’s find out the cost per batch

Cost will dependent on 4 variables

1. Cost of the goods = Cost of each raw material * quantity for each material
2. Electricity cost = (1200 + (700 * X)) * Rs. 4.30 / kWh X = total weight of raw material
3. Variable cost = Rs 3000 given
4. Other expenses = Rs. 2000 * F (finished goods)

Now

Cost of goods = xt * 17000 + xr * 13600 + xs * 17800 + xl * 20000 + xi * 23000 + xc * 2500 + xp * 20400

Electricity cost = (1200 + (700 * X)) * Rs. 4.30
Consumable Cost = 2000 * F
Salary = 3000 per batch

So Total Cost per Batch = Raw material cost + Variable cost + other expense + Electricity cost

Now from above calculation the prime requirement for profit is optimal individual weight of each raw
material

Let’s use solver to solve this

Let’s take the case of Tasla

Given is
Cost of Tasla = Rs. 17000 / Ton
Recovery = 84% or 0.84

Min raw material ratio % = 0%

Max raw material ratio % = 50%
if xt is the optimum weight and X is the total optimum weight of all 7 material then
0% < xt/X < 50%

Similarly we can calculate for other raw material

Note: For all the above calculation we have to have optimal weight for each raw material and rest variable
can be found. Individual raw material weight is the basic variable rest all variable are derived variable.

Let’s put it in excel and apply solver to find out the optimal raw material weights

On solving we get

Tasla weight required per batch be xt = 1.39 tonnes

Rangeen weight required per batch be xr = 1.39 tonnes
Sponge weight required per batch be xs = 0.56 tonnes

Submitted by: Vinod Kumar Singh Roll No - 2018B1PGPMX025

Decision Analysis IIM PGPMX 2018 - 20

Local Scrap weight required per batch be xl = 0.84 tonnes

Imported Scrap weight required per batch be xi = 0 tonnes
High Carbon weight required per batch be xc = 1.11 tonnes
Pig Iron weight required per batch be xp = 0.28 tonnes

With this we find out

No of Batch = 320.83
Profit / batch = Rs. 5421 / batch
Now let’s put the constraint of monthly availability of raw material

Let’s take example of Tasla again

Maximum availability = 800 tonnes
Availability for batch = 800 tonnes / number of batches
xt should be less than equal to availability for the batch
xt <= 800/number of batch

Similarly for other raw material too and then putting in Solver

We get different set of values for the raw material and also the batch size and profit changes

On solving we get

Tasla weight required per batch be xt = 1.53 tonnes

Rangeen weight required per batch be xr = 1.36 tonnes
Sponge weight required per batch be xs = 0.54 tonnes
Local Scrap weight required per batch be xl = 0.81 tonnes
Imported Scrap weight required per batch be xi = 0 tonnes
High Carbon weight required per batch be xc = 9.1 tonnes
Pig Iron weight required per batch be xp = 0.27 tonnes

With this we find out

No of Batch = 328.24
Profit / batch = Rs. 5323 / batch

Submitted by: Vinod Kumar Singh Roll No - 2018B1PGPMX025