Optimization Supply Chain Strategy of Tire Manufacturing

using Goal Programming Method

Kartika N Alfina 1, M Dachyar1, and Farizal1

1
Department of Industrial Engineering, Faculty of Engineering,
University of Indonesia, Depok 16424, Indonesia

E-mail: kartika.alfina@yahoo.com, mdachyar@yahoo.com

Abstract. The pressure of the supply chain to reduce cost, manage shortened order-to-
delivery cycles, ensure a highly efficient logistics network to store, and distribute
finish products are some of the key challenges that the tire industry faces. Besides
those challenges, tire manufacturers still have to deal with raw material supply,
particularly natural rubber as the unique material. The natural rubber is common for
all products that produce by tire manufacturers such as commercial tires and consumer
tires. This paper focuses on creating the most efficient supply chain strategy in tire
manufacturing by managing all constraints, including the natural rubber supply. The
aims are to find the best scenario from a natural rubber that has been processed then
become the valuable products that bring gain for the company. In this paper, 11
scenarios are created to determine the combination of all products that fit with the
gaining profit and calculated using Goal Programming Method to find minimum
deviation between the target value and all constraints. The data source used in this
research based on last three years from one of largest tire manufacturing in southeast
Asia. The results show that the most effective strategy is to optimize the supply of
natural rubber to produce passenger car radial tires and truck & bus radial tires. This
strategy has the most significant gap between the net sales and the cost of goods sold,
as well as the smallest variation of inventory and transportation costs in the baseline
scenario.
Keywords – Supply chain management, Goal programming, Tire Manufacturing, Natural
rubber

1 Introduction
Supply chain management in the tire industry is getting more complex today. Variabilities of market
demand and supply add to the complexity. In Indonesia, Malaysia and Thailand demand for cars and
vehicles are expected to increase around 10 percent annually during this decade, fueled by a higher
rate of urbanization and more rapid development of infrastructures. The rise of the middle class and
increased domestic consumptions are also evident in these countries. This phenomenon will trigger
more demand in automotive-related industries including tire [1]. Likewise the America market
demand as one of the biggest consumer for the tire manufacturer. However, in the economic situation
that nowadays sometimes ups and down, also affected by government policy can give some impact for
industries not escape for the tire industry. For example, the anti-dumping duties from America that
give a big impact issue for Asia tire manufacturer [2]. The unpredictable condition that gives more
challenges for tire manufacturers to switch their strategy so the company can sustain and still have
competitiveness value among all competitors.

With more intense competition within the tire industry, the need to become more competitive becomes
more obvious than ever. Competitiveness definition from [3] is the ability to provide products and

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services more efficiently and effectively compared to other firms in the same business. One way to
improve the competitiveness of a company is having the most efficient strategy in supply chain
management. Those strategies include all the costs that may occur when the production of the products
has also been produced the target profit that the company need to be a focus [4].

2 Literature Review
2.1 Supply Chain Management
A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request.
Within each organization, such as a manufacturer, the supply chain includes all functions involved in
receiving also filling a customer request. Supply chain strategy or design decides what the chain’s
configuration will be, how resources allocated, and what processes each stage will perform. Strategic
decisions made by companies include whether to outsource or perform a supply chain function, the
location of production and capacities production also facility of warehouse , the products to be
manufactured or stored at various locations, the modes of transportation to make available along
different shipping legs, and the type of information system to be used [5].
The definition of Supply chain increasingly used by logistics professionals to include every effort
involved in producing and delivering the final product, from suppliers to customers [6].

2.2 Tire Manufacturing

The rubber tire manufacturing definition [7] is a source category includes any rubber tire facility or
any facility that manufactures rubber tire components directly associated with rubber tire production.
Tires distinguished by end use, type of construction, and performance characteristics. Tires are
produced for passenger cars, motorcycles, light-medium, and heavy-duty trucks, racing cars, industrial
rolling stock, buses, off-the-road and all-terrain vehicles, aircraft, mining/logging equipment, high
performance or agricultural and forestry. Tire construction consists of bias and radial tire which had
differences by ply set on one direction whether radial constructed use plies run radially [8].

2.3 Linear Programming

A mathematical optimization problem is one for some function whether maximized or minimized
relative to a given set of alternatives [9]. The function that to be minimized or maximized is called the
objective function and set of alternatives is called the feasible or constraint region. An LP is an
optimization problem over wherein the objective function is a linear function which
shown in Equation 1 and 2 as follow:

a. Maximized function

(1)
∑

Where
: decision variable to –
: objective function coefficients to –
: capacity constraints–
: capacity constraints coefficients – for decision variable -

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 b. Minimized function
(2)
∑

Where
: decision variable to –
: objective function coefficients to –
: capacity constraints–
: capacity constraints coefficients – for decision variable -

2.4 Goal Programming

Goal Programming (GP) method is for multi-criteria decision making. It is traditionally seen as an
extension of linear programming to include multiple objectives, expressed by using attempted
achievement of goal target values for each objective [10]. Linear programming can be considered to be
a special case of goal programming with a single objective. All of these considerations place goal
programming within the paradigm of multiple objective programming [11]. A GP is an optimization
problem over ̅ = wherein the objective function is a Minimized function, which
shown in Equation 3 as follow:

̅ { [ ] [ ] [ ]} (3)

Where
: decision variable to –
: capacity constraint to –
: coefficients – for decision variable -
: the total number of priority levels that exist in the model
: decision variables to
: linear fa unction of decision variables

3 Methodology
Tire composition of tire consists of 8% of fabric, steel wire 3% and rubber compound 89% as [12].
The rubber compound is a mixture of chemicals and natural rubber, so natural rubber become main
and unique raw material to produce the tire. This study aims to find the optimization of natural rubber
consumption to become one of a fit strategy of the supply chain that meets of company objective like
reduce cost and efficiency inventory also transportation cost. Besides that, the productivity of
employee also one of the concerns in this paper. Total Productivity is the most comprehensive
productivity concept because it defined as the total output to total inputs used to produce that output
[13]. In table 1 we can find the variable from the kind of products that manufactured to date.

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 Table 1. Decision variable from product tire

Product Variables
Bias Tire
Motorcycle Tire
Passenger Car Radial Tire
Truck and Bus Radial Tire

We use nine constraints, which are the consumption of raw material of natural rubber, demand
forecast, net sales, cost of goods sold, number of employees, total production, inventory cost,
transportation cost and production schedule, so the model used in this research is shown in Equation 4
as follow:

(4)

Where the coefficient number of employees, E is the number of employees budget limitation.
the coefficient number of natural rubber consumption, R is the number of natural rubber consumption
budget limitation. the coefficient number of forecast demand, D is the number of forecast demand
budget limitation. the coefficient number of net sales, N is the number of net sales budget
limitation. the coefficient number of cost of goods sold, C is the number of cost of goods sold
budget limitation. the coefficient number of total production, P is the number of total production
target limitation. the coefficient number of inventory cost, I is the number of inventory cost budget
limitation. the coefficient number of transportation cost, T is the number of transportation cost

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budget limitation. the coefficient number of the production schedule, S is the number of production
schedule limitation.

We created eleven scenarios to be analyzed; each scenario has different constraints or limitations,
the scenarios represent the budget limitation of net sales and combine allocation formula among all of
natural rubber consumption products such for bias tire, motorcycle tire, passenger car radial tire, and
truck & bus radial tire. Table 2 described all of the scenarios that mentioned before as follow:

Table 2. Eleven scenarios of Tire manufacture

Net Sales The target of The target of The target of The target of
Target natural rubber natural rubber natural rubber natural rubber
consumption for consumption for consumption for consumption for
Bias tire Motorcycle tire Passenger car Truck & Bus
radial tire radial tire

Scenario 1 V

Scenario 2 V V

Scenario 3 V V

Scenario 4 V V

Scenario 5 V V

Scenario 6 V V V

Scenario 7 V V V

Scenario 8 V V V

Scenario 9 V V V

Scenario 10 V V V

Scenario 11 V V V

The eleven scenarios calculated used Goal Programming method with Lingo software. The
purposes of those scenarios are to find the minimum deviation from all constraints compares with the
baseline scenario that describes the actual condition in tire manufacturing cases.

4 Results and Discussion

This research used 11 scenarios that contains the purposes to achieve the Net sales target for the
company combined with the variants of two products of natural rubber consumptions target that need
to optimize and will give the best result also has a minimum deviation between target and all
constraints. The thumbs of a role are to achieve Net sales target for company $1.9 Billion. The
affecting factors for all those scenarios based on historical data for the last three years such as total
consumption rubber, number of employees, costs of goods sold, forecast demand, total production,
inventory, and transportation cost. The baseline scenario is the actual condition of the company against
the Net sales target. The baseline scenario results not yet to achieve the target of net sales; then we run
the eleven scenarios that had a thumb of role to achieve the net sales target to gaining profit for the
company. After running the eleven scenarios than we compare with the baseline model that have total
net sales still under the budget limitation. Those eleven scenarios had first priority to achieve the

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budget of net sales than second priority is optimized combination consumption of natural rubber for
each product such bias tire, motorcycle tire, passenger car radial tire, and truck & bus radial tire.
In figure 1 we can see the comparison gap between the cost of goods sold against net sales budget.
The percentage gap of baseline model is 26% cost of goods sold against net sales budget. We compare
the result of all scenarios that have the gap of percentage number approaching or more from the
baseline model.

Figure 1. Result scenarios for the cost of goods sold against net sales budget

Some of the scenarios approached the gap between the cost of goods sold against net sales budget
from the baseline model such scenario 5 with 25% also scenario 8 and 9 with 24%. One scenario that
achieves beyond the target such as scenario 11 with 28%. The costs of goods sold of passenger car
radial tire and truck & bus radial tire give us the minimum gap from all constraints means that each of
those products can gain the best value compared with the other products like Bias tire and Motorcycle
tire. The penetration strategy for the company if putting those two products as main priority gives the
bigger chance to gain profit compared with the actual condition that doesn't have priority in order to
use the natural rubber consumption to become a goods product. In the actual demand market certainly
evolve to the radial tires therefore the passenger car radial tires still become first priority if the
company would succeed and win the market share, and this also happens for the commercial market
like truck & bus radial tire that start to grow and replace the Bias tire market from a long period. The
bigger percentage compared with the baseline target, we can find the significant growth profit margin
for the company.
After finding the result of percentage gap between the cost of goods sold against net sales budget
we also looked for another side of goal supply chain strategy that also needs to minimize the inventory
cost to give more efficient value for the company. So, we compare the eleven scenarios to the baseline
scenario of the current condition. Figure 2 describes the result of scenarios compares with the baseline
scenario, we must find the minimum result of inventory cost against the baseline model.

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 Figure 2. Result scenarios for inventory cost against the baseline scenario

Among all of eleven scenarios, we find the minimum of inventory cost. Compare with the baseline
scenario, scenario 10 had the minimum inventory cost. Not recommended scenario like scenario eight
that have huge inventory cost needs to be ignored.
Another aspect that needs to be concerned in supply chain strategy is the efficiency of
transportation cost. We analyze the result of those eleven scenarios for transportation cost. In figure 3
described baseline scenario of current condition compared with all eleven scenarios.

Figure 1. Result scenarios for transportation cost against the baseline scenario

In overall condition, the transportation cost beyond the result of transportation cost from baseline
scenario. We analyze this condition happens due to all scenario need to fulfill the net sales budget so
this impulse total quantity of sales increases to catch the target. Increased quantity pushed
transportation cost increased too. We search minimum deviation between transportation cost budget
against the result of eleven scenarios. Approached the number of transportation cost budget from the
baseline model is scenario 11.
5 Conclusion
Supply chain strategy need collaborate on all of the aspects of the company. The goals of supply chain
absolutely to minimize cost to the most efficient for the company. The company objective such net
profit need to be considered as the main value to compete so the company still have competitiveness.
Goal programming suitable to find the optimum result from all constraint that faced by supply chain
challenge. After combined all of the aspects that become constraint of tire manufacturing supply chain,

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this paper put the unique raw material as natural rubber to become the combination of the scenario for
optimization.
Among all the scenarios, this paper suggests the optimization result for scenario 11 that aim to
fulfill net sales target from an optimum supply in the natural rubber of product passenger car radial tire
and truck & bus radial tire. This scenario had a result to have the significant gap between the cost of
goods sold against net sales is 28% and had inventory also transportation cost approached the baseline
scenario. Tire manufacturers need to consider to optimize the sales of passenger car radial tire and
truck & bus radial tire to have efficient cost and significant growth of profit for the company.

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