Optimization model for product mix and capacity management with activity-based information

Abstract

A new modeling approach to product mix problem and capacity management decisions has been proposed. This new model is based upon the information that is available in an activity-based environment. Activity-based management is one of the latest industrial management concepts based upon Activity-Based Costing (ABC) and Concurrent Engineering principles. ABC has lead to the availability of new cost information which had otherwise been 'hidden' in the form of common overhead cost calculated as a fIxed percentage of the direct cost (e.g. labor cost or material cost).

An investigation has been made on the effect of the new information available from ABC on product mix, make versus buy, and capacity expansion decisions. The results of conventional mathematical programming formulations based upon the traditional cost information has been compared with the results of proposed formulations based upon the ABC information. A significant difference in the results has been found. Further, the information on idle capacity that emerge from the proposed formulation has been investigated.

The proposed model resulted into an integer programming problem which posed a serious limitation on the computational aspect of the problem. An efficient algorithmic scheme to get a heuristic solution for the proposed formulation has been developed. Also, a method has been proposed to determine the optimal allocation of an additional investment because the sensitivity analyses applicable to linear programming could not be applied in the proposed model due to the discrete nature of the resulting problem. Finally, some computational aspects have been discussed