Post Graduate Programme in Management 2011 13

Course name: Decision Analysis

Case Analysis and Solution

Kamdhenu Dairy
Instructor - Professor Utpal Bhattacharya
Compiled by: Group 1, Section - A
Name

Roll no.

Aranya Choudhury

PGP2011567

Gaurav Gupta

PGP2011631

Manu Mohan M.

PGP2011715

Pranav Mehta

PGP2011787

Rohit Arvind

PGP2011828

Shakun Gupta

PGP2011868

Vivekanand

PGP2011947

KAMDHENU DAIRY
Kamdhenu Dairy started its operations in June 1948. It is run by union of milk producers a Sanad, who
collect milk from farmers, pasteurize it, and sell it the state government. Under a contractual agreement
with government, they have to supply 75000 liters of FA milk to the government everyday throughout
year without any delay and aberration from the quantity decided. In case of failure towards supplying
requisite quantity, they are exposed to penalty of 8paise/liter. The biggest problem they are facing is the
variation and uncertainty in collection of raw milk. The production of raw milk peaks in winters and is
the least during summers. In early 1964, Mr Shrivastava, Asst GM of Kamdhenu Dairies contacts
professors Prof S.Puranik and D.K. Mehta regarding the problem they are facing. The 2 professors
examine the cost structure and hence ascertain profitability of 6 milk products. They conclude that out
of 6 milk products, only FA milk and whole milk powder are earning them profit, rest are either breaking
even or incurring loss of varying degrees. Rather than looking at individual products, they are focusing
on product combinations which will fetch them maximum profits. Now, Mr. Srivastava does not want to
scrap out of production of loss making milk products like cheese, baby milk powder as of now, as there
is huge demand for them in the market. So the whole problem boils down to find optimum product mix,
keeping in mind various constraints like production capacities, availability of raw milk, and contractual
obligations of supplying FA milk to the state at the rate of 75000 liters a day throughout year.
The problem can be solved using a linear programming approach. We formulate the LPP and solve it
using Excel Solver and then perform sensitivity analysis on it to come to various decisions.
The main issues that have been discussed in this case analysis are as follows:
1. Should cheese be dropped from the optimal product mix of Kamdhenu Dairy.
2. Is FA milk supplied to the state milk scheme on a contractual basis of 75000 litres per day, really a
profitable deal. We have also found out if the product mix can be made more optimal by keeping
the FA milk supply out of the mix, thereby not entering into a contract with the state milk scheme
3. We have found out the optimal product mix in two cases, one where Kamdhenu dairy has a contract
with state milk scheme and another where it has no contractual obligations to supply FA milk to the
state milk scheme.
4. We have done sensitivity analysis in both cases and tried to come to a conclusion regarding what
kind of investment would be required if the dairy decide on expanding its powder drying and butter
churning capacity.

Assumptions for formulating Linear Programming Problem

1. In the objective function, we have ignored the allocated overhead costs as fixed costs.
2. The cost of Milk Powder is computed in terms of Skimmed milk powder units.
3. Whole milk powder units have been converted into Skimmed milk powder units by the ratio
7.38/5.09 for the same.

Formulating the Linear Programming Model

Let the decision variables be the quantities of each product to be produced
x1
Quantity of FA Milk and Butter to produce
x2
Quantity of FA Milk and Ghee to produce
x3
Quantity of SMP and Butter to produce
x4
Quantity of SMP and Ghee to produce
x5
Quantity of WMP and Butter to produce
x6
Quantity of WMP and Ghee to produce
x7
Quantity of Baby food and Butter to produce
x8
Quantity of Baby food and Ghee to produce
x9
Quantity of Cheese and Butter to produce
x10
Quantity of Cheese and Ghee to produce
x11
Quantity of Std Milk and Butter to produce
x12
Quantity of Std Milk and Ghee to produce
Objective function is to maximize the profit by choosing a product mix, for the given contributions
from each product. We have taken the allocated overhead costs to be NOT a part of relevant cost,
hence removed it from profit calculation.
Max z = 503x1 + 448x2 + 544x3 + 355x4 + 910x5 + 745x6 + 865x7 + 633x8 + 1833x9 + 1610x10 +
759x11 + 632x12
Subject to constraints
Butter capacity
Ghee capacity
Milk powder capacity
Baby food capacity
Cheese capacity
Raw milk (May-Aug)
Raw milk (Sep-Apr)
FA milk obligation
Non-negativity

.062x1 + .992x3 + .606x5 + .696x7 + .56x9 + .681x11 <= 10

.048x2 + .756x4 + .448x6 + .529x8 + .426x10 + .519x12 <= 2.5
x3 + x4 + (7.38/5.09)(x5 + x6) <= 7.38 (Milk powder in terms of SMP)
x7 + x8 <= 5.36
x9 + x10 <= 1.83
x1 + x2 + x3 + x4 + x5 + x6 + x7 + x8 + x9 + x10 + x11 + x12 <= 11.9
x1 + x2 + x3 + x4 + x5 + x6 + x7 + x8 + x9 + x10 + x11 + x12 <= 19
x1 + x2 >= 7.5957
x1,x2,x3,x4,x5,x6,x7,x8,x9,x10,x11,x12 >= 0

Solving for this LPP in Excel Solver, we get the following table as the solution
Description of the solution The row corresponding to the objective function gives the co-efficient of the
decision variables in the objective function.
Total Margin is the maximized profit / day that we obtain once the LPP is solved.
The constraint section has the co efficient of the decision variables in the constraints. The resource limitation
is present on the other side of the <= sign. The Used column gives the amount of resource that has been
actually utilized for the solution of the LPP. Depending on this column, the slack is calculated.

Decision variables

Objective function
Constraints
Butter
Ghee
Milk powder
Baby food
Cheese
Raw Milk (May - August)
FA Milk
baby food

Qty of
Qty of FA Qty of Qty of Qty of Qty of Baby food Qty of Qty of Qty of Qty of Std Qty of Std
Qty of FA Milk + SMP + SMP + WMP + WMP + + Butter Baby food Cheese + Cheese + Milk + Milk +
Milk + Butter Ghee to Butter to Ghee to Butter to Ghee to to
+ Ghee to Butter to Ghee to Butter to Ghee to
to produce produce produce produce produce produce produce produce produce produce produce produce
7.5957
0
0
0
0
0
3.9
0 0.4043
0
0
0
x1
x2
x3
x4
x5
x6
x7
x8
x9
x10
x11
x12
503

0.062
0
0
0
0
1
1
0

448

0
0.048
0
0
0
1
1
0

544

0.992
0
1
0
0
1
0
0

355

910

745

0 0.606
0
0.756
0 0.448
1 1.449902 1.449902
0
0
0
0
0
0
1
1
1
0
0
0
0
0
0

865

0.696
0
0
1
0
1
0
1

633

0
0.529
0
1
0
1
0
1

1833

0.56
0
0
0
1
1
0
0

1610

0
0.426
0
0
1
1
0
0

759

Total Margin
632 7935.219

0.681
0
0
0
0
1
0
0

Used
0 3.411741 <=
0.519
0 <=
0
0 <=
0
3.9 <=
0 0.4043 <=
1
11.9 <=
0 7.5957 >=
0
3.9 >=

10
2.5
7.38
5.36
1.83
11.9
7.5957
3.9

Sensitivity Report on this LPP Solution

Adjustable Cells
Cell
$B$4
$C$4
$D$4
$E$4
$F$4
$G$4
$H$4
$I$4
$J$4
$K$4
$L$4
$M$4

Name
Qty of FA Milk + Butter to produce
Qty of FA Milk + Ghee to produce
Qty of SMP + Butter to produce
Qty of SMP + Ghee to produce
Qty of WMP + Butter to produce
Qty of WMP + Ghee to produce
Qty of Baby food + Butter to produce
Qty of Baby food + Ghee to produce
Qty of Cheese + Butter to produce
Qty of Cheese + Ghee to produce
Qty of Std Milk + Butter to produce
Qty of Std Milk + Ghee to produce

Final
Reduced
Objective
Allowable
Allowable
Value
Cost
Coefficient
Increase
Decrease
7.5957
0
503
1330 55.00000002
0 -55.00000002
448 55.00000002
1E+30
0
-1289 544.0000001
1289
1E+30
0
-1478 355.0000001
1478
1E+30
0
-923
910
923
1E+30
0
-1088 745.0000001
1088
1E+30
3.9
0
865
968
232
0
-232
633
232
1E+30
0.4043
0
1833
1E+30 222.9999999
0 -222.9999999
1610 222.9999999
1E+30
0
-1074 758.9999999
1074
1E+30
0
-1201
632
1201
1E+30

Constraints
Cell
$N$10
$N$11
$N$12
$N$13
$N$14
$N$15
$N$16
$N$17

Name
Butter Used
Ghee Used
Milk powder Used
Baby food Used
Cheese Used
Raw Milk (May - August) Used
FA Milk Used
baby food Used

Final
Value
3.4117414
0
0
3.9
0.4043
11.9
7.5957
3.9

The following questions help us in the case analysis

Shadow
Price
0
0
0
0
0
1833
-1330
-968

Constraint
R.H. Side
10
2.5
7.38
5.36
1.83
11.9
7.5957
3.9

Allowable
Increase
1E+30
1E+30
1E+30
1E+30
1E+30
1.4257
0.4043
0.4043

Allowable
Decrease
6.5882586
2.5
7.38
1.46
1.4257
0.4043
1.4257
1.4257

1. Should cheese be dropped from the product line?

Cheese should not be dropped from the product line. The solver solution in this case is depicted
above. It shows that we have to produce 0.4043 units of cheese with butter as the by-product. (referring to
the LPP solution and sensitivity analysis)
2. a) If Kamdhenu dairy had no contractual obligation to supply FA milk to stat milk scheme, then the
following should be the ideal product mix. Basically we solve the problem, with the FA milk constraint x1
+ x2 >= 7.5957 changed to x1+x2>=0. Rest the entire LPP formulation is as before. The solution obtained
from Excel Solver in this case is as follows (The calculations this time is on a yearly basis)
Solution of LPP

Decision variables

Qty of
Qty of FA Qty of
Qty of
Qty of
Qty of
Baby food Qty of
Qty of
Qty of
Qty of Std
Qty of FA
Milk +
SMP +
SMP +
WMP + WMP + + Butter Baby food Cheese + Cheese + Milk +
Milk + Butter Ghee to Butter to Ghee to Butter to Ghee to to
+ Ghee to Butter to Ghee to Butter to
to produce produce produce produce produce produce produce produce produce produce produce
0
0
0
0
5.09
0
5.36
0
1.83
0 3.171953
x1
x2
x3
x4
x5
x6
x7
x8
x9
x10
x11

Objective function
Constraints
Butter
Ghee
Milk powder
Baby food
Cheese
Raw Milk (May - August)
FA Milk
baby food

503

448

544

0.062
0
0
0
0
1
1
0

0
0.048
0
0
0
1
1
0

0.992
0
1
0
0
1
0
0

355

910

745

865

633

1833

1610

759

0
0.606
0
0.756
0
0.448
1 1.449902 1.449902
0
0
0
0
0
0
1
1
1
0
0
0
0
0
0

0.696
0
0
1
0
1
0
1

0
0.529
0
1
0
1
0
1

0.56
0
0
0
1
1
0
0

0
0.426
0
0
1
1
0
0

0.681
0
0
0
0
1
0
0

Qty of Std
Milk +
Ghee to
produce
0.038047
x12
Total Margin
632 15054.25
Used
0
10 <=
0.519 0.019746 <=
0
7.38 <=
0
5.36 <=
0
1.83 <=
1
15.49 <=
0
0 >=
0
5.36 >=

10
2.5
7.38
5.36
1.83
15.49
0
3.9

Sensitivity Analysis
Adjustable Cells
Cell
$B$4
$C$4
$D$4
$E$4
$F$4
$G$4
$H$4
$I$4
$J$4
$K$4
$L$4
$M$4

Name
Qty of FA Milk + Butter to produce
Qty of FA Milk + Ghee to produce
Qty of SMP + Butter to produce
Qty of SMP + Ghee to produce
Qty of WMP + Butter to produce
Qty of WMP + Ghee to produce
Qty of Baby food + Butter to produce
Qty of Baby food + Ghee to produce
Qty of Cheese + Butter to produce
Qty of Cheese + Ghee to produce
Qty of Std Milk + Butter to produce
Qty of Std Milk + Ghee to produce

Final
Value
0
0
0
0
5.09
0
5.36
0
1.83
0
3.17195301
0.03804699

Reduced
Cost
0
-43.43759189
-386.7902294
-390.7916979
0
-51.98678408
0
-102.2026432
0
-118.565345
0
0

Objective
Coefficient
503
448
544.0000001
355.0000001
910
745.0000001
865
633
1833
1610
759
632

Shadow
Price
186.4904551
0
113.791698
103.2026432
1096.565345
632.0000001
-140.5624082
0

Constraint
R.H. Side
10
2.5
7.38
5.36
1.83
15.49
0
3.9

Allowable
Increase
140.5624082
43.43759189
386.7902294
390.7916979
1E+30
51.98678408
1E+30
102.2026432
1E+30
118.565345
58.42079202
126.9999999

Allowable
Decrease
43.43759189
1E+30
1E+30
1E+30
51.98678409
1E+30
102.2026432
1E+30
118.565345
1E+30
126.9999999
58.42079202

Constraints
Cell
$N$10
$N$11
$N$12
$N$13
$N$14
$N$15
$N$16
$N$17

Name
Butter Used
Ghee Used
Milk powder Used
Baby food Used
Cheese Used
Raw Milk (May - August) Used
FA Milk Used
baby food Used

Final
Value
10
0.019746388
7.38
5.36
1.83
15.49
0
5.36

Allowable
Allowable
Increase
Decrease
0.02591
2.1601
1E+30 2.480253612
0.500892731
7.38
3.103591954
1.46
0.214132231
1.83
4.778908694
0.03804699
0.041857835
0
1.46
1E+30

Thus, the optimal product mix is to produce Whole milk powder and butter for 5.09 units, babyfood + butter
for 5.36 units, cheese+butter for 1.83 units, Std milk+butter for 3.17 units and std milk+cheese for 0.03 units
per day.
b) If we were negotiating a contract with the state milk scheme, we would ideally not commit to the
contract at all, because as we see from the sensitivity analysis, the optimum value of FA Milk produced is
zero. This means that FA milk is not the most profitable product for Kamdhenu Dairy. So if there is no
contract or upper bound for the amount of FA milk to be supplied to state milk scheme, the ideal product
mix says that Kamdhenu should not enter a contract at all, as they can earn more profit utilizing their
resources in producing the other combinations of Milk products.
c) If the dairy planned to expand its butter churning and powder drying capacity, then we can expand to
the maximum limit given by the allowable increase against these constraints (as shown in the sensitivity
analysis).
The allowable increase of butter is 0.025 units. Since 1 unit of butter = 1000 kgs of butter, thus 0.025 units
is 25 kgs of butter. Thus 25 kgs of butter can be produced extra daily. So in a year 9125 kgs of butter can
be produced extra.
Extra investment required = allocated overhead cost/unit of production for butter * extra production of
butter = 0.5*0.025 * 100000 *365 = Rs. 456250 per year.
Similarly for powder drying the maximum allowable increase is 0.5 units, which is equal to 406.5 kgs of
milk powder daily. Thus yearly we can produce 148372.5 kgs of milk powder extra due to expansion.
The cost of investment in this would be
0.25*0.5008*100000*365 = Rs. 4571625 per year