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# International Journal of Management (IJM), OF ISSN MANAGEMENT 0976 6502(Print), ISSN (IJM 0976 ) INTERNATIONAL JOURNAL 6510(Online), Volume

me 4, Issue 2, March- April (2013) ISSN 0976-6502 (Print) ISSN 0976-6510 (Online) Volume 4, Issue 2, March- April (2013), pp. 31-43 IAEME: www.iaeme.com/ijm.asp Journal Impact Factor (2013): 6.9071 (Calculated by GISI) www.jifactor.com

IJM
IAEME

LINEAR PROGRAMMING OF BASIC ECONOMIC PARAMETERS USED AT REENGINEERING IN SMALL AND MEDIUM ENTERPRISES
Prof. Dr Slobodan Stefanovi High School of Applied Professional Studies, Vranje, Serbia Prof. Dr Radoje Cveji Faculty for strategic and operational management Belgrade, Serbia

ABSTRACT In economic terms, linear programming is a mathematical technique used for selecting one among more possible economic decisions that will have the greatest efficiency. Most production issues have been solved by a linear programming method, also performed here, and a model of linear programming of economic parameters in reengineering of small and medium enterprises, for their greater efficiency, is presented. Key words: linear programming, re-engineering, economic parameters, model. 1.0. INTRODUCTION Linear programming is a mathematical method for selecting an optimal solution among larger number of possible solutions. In mathematical terms, linear programming is a mathematical analysis of optimum problem. These are mathematical methods used for seeking the maximum (or minimum) value of a linear function, with previously given limits expressed by a system of linear equations and inequalities.

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013) 2.0. A MODEL OF LINEAR PROGRAMMING OF ECONOMIC PARAMETERS OF RE-ENGINEERING Before we consider theoretical basis of linear programming through an example of forming a mathematical model for problems of linear programming of economic parameters of re-engineering. For using linear programming, we shall present the basic groups of economic parameters of re-engineering comprising ratios of production, labor in its organization and capital. GROUP 1 PARAMETERS GENERAL HOLDERS OF ECONOMIC EFFECTS OF REENGINEERING AND ANALYSIS OF NECESSARY ORGANIZATIONAL CHANGES IN SMALL AND MEDIUM ENTERPRISES AND HYPOTHESES (parameter X1) GENERAL HOLDERS OF ECONOMIC EFFECTS OF RE-ENGINEERING:

UKN
5 i =1

pred .troskovi

## Cartesian product of integration rules of computer integrated manufacture CIM:

R PP

INTCIM

P + T + I + C
n n n n i j k i =1 i =1 i =1 i =1

(2)

HYPOTHESES OF A RE-ENGINEERING MODEL AUXILIARY HYPOTHESES: PARAMETERS - NEE FS , NEE KP , NEESK , NEE CP . MAIN HYPOTHESIS: An initial frame for implementation of procedures of logic system reengineering: PHASE I: Establishing initial values of logic performances NEE FS IFAZA , PHASE II: Measuring logic
system performances NEE FS IIFAZA . Economic parameters for providing functioning of entrepreneurship for implementation of reengineering NEE KP . Economic parameters for providing functioning of all structures and quality systems in small and medium enterprises in re-engineering management:

NEESK = NEEIM + NEE IS + NEE TO + NEE D + NEE DUR + NEE PPP + NEE DI . Economic parameters for providing competitiveness of a product price on the market NEE CP created in manufacturing conditions by applying re-engineering: NEE CP = NEE CP (i = 1...7) .
7 i =1
i

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013) GROUP 2 PARAMETERS FORMING PRICES OF THE PRODUCTS FROM SMALL AND MEDIUM ENTERPRISES THROUGH THE PRODUCTION FACTOR
1. 2. 3. 4. Manufacture costs, i.e. value of goods to be expressed in money TR P , Value of money material used for calculating the value of goods VNM , Size of price measure used as a unit of value measurement CN , Supply and demand ratio PT .

GROUP 3 PARAMETERS NON-ECONOMIC FACTORS VEF GENERAL FINANCIAL PARAMETERS OF A SMALL OR MEDIUM ENTERPRISE FUNCTION, CAUSATIVELY INFLUENCING IMPLEMENTATION OF REENGINEERING
1. Marketing function (R M ) , 2. Scientific research function (R NR ) , 4. 5. 6. 7.

## 3. Management approach in production planning function R Md| ,

Function of financial planning for developing an enterprise (R P ), Function of planning and business control (R PKP ) , Economic financial function (R EFF ) , Function of connecting incomes with performance (R VZP ) .

## 3.0. COMPREHENSIVE REVIEW OF BASIC ECONOMIC FACTORS IN FORMING A RE-ENGINEERING MODEL

For forming a re-engineering model in small and medium enterprises in view of economic factors, it is required to include all significant analysis comprising:

(1) ANALYSIS OF NECESSARY ORGANIZATIONAL CHANGES IN SMALL AND MEDIUM ENTERPRISES (ANOP)
This analysis includes Cartesian product of integration rules of computer integrated manufacture (CIM) of an enterprise and given set of components:

R PP

INTCIM

P + T + I + C
n n n n i j k i =1 i =1 i =1 i =1

(2) ANALYSIS IN VIEW OF A RESEARCH SUBJECT HOLDERS OF ECONOMIC EFFECTS OF RE-ENGINEERING (AAPI)
Analysis in view of research subject refers primarily to a method of implementation of re-engineering in small and medium enterprises and includes the following costs and savings comprising the following economic parameters: a parameter NEE NO = NEE NP , NEE NO - a parameter of economic effect holder referring to new organizational model and it exclusively depends on NEE NP - a parameter of economic effect holder referring to nature of new businesses in new organization of small and medium enterprise by applying reengineering; parameters created by implementation of systematic support to new organization of small or medium enterprise; /parameter NEE SP - a parameter of economic effect holder
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013)
referring to implementation of systematic support; parameter NEE PR - a parameter of economic effect holder referring to implementation of pilot solution; parameter NEE PP - a parameter of economic effect holder referring to invested time required for implementation of planned changes and application of plan in implementation of re-engineering in phases in an enterprise; parameters being general, but referring to training of employees for new process and new work system with planned changes and application of plan in implementation of reengineering in phases; /parameter NEE NSR - a parameter of economic effect holder referring to costs due to training of employees for new work system. In view of analysis, total costs

UKN
5 i =1

Previous .COSTS

## resulting from application of a research subject, and defined as economic

parameter holders in implementation of re-engineering, are expressed by adding all these listed parameters:

UKN
5 i =1

Previous. COSTS

## (3) ANALYSIS OF BASIC HYPOTHESES (AOH)

The analysis of basic hypotheses includes following economic parameters of costs resulting from implementation of re-engineering in business activities and staff revitalization, i.e. adjusting organizational structure in terms of ownership restructuring, and defines it as four economic parameters in defining auxiliary hypotheses, as follows: 1. parameters of financial recovery of small or medium enterprise NEE FS ; this parameter includes 2 phases: PHASE I: Establishing initial values of logic performances NEE FS IPHASE , PHASE II: Measuring logic system performances

NEE FS IIPHASE . 2. parameters for providing functioning of entrepreneurship for implementation of reengineering NEE KP . 3. parameters for providing functioning of all structures and quality systems in small and medium enterprises by implementation of re-engineering NEE SK ; NEE SK = NEE IM + NEE IS + NEE TO + NEE D + NEE DUR + NEE PPP + NEE DI . 4. parameters for providing competitiveness of a product price on the market NEE CP created in manufacturing conditions by applying re-engineering:
NEE CP = NEE CPi (i = 1...7) .
7 i =1

Analyzed economic parameters determine justification and prove the main hypothesis of a re-engineering model, i.e. By forming a basic model of re-engineering with financial analysis method production factors, we can classify all economic parameters actively influencing in a price of finished product being a result of manufacture in small and medium enterprises.

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013)
(4) ANALYSIS OF FORMING PRICES OF THE PRODUCTS FROM SMALL AND MEDIUM ENTERPRISES THROUGH THE PRODUCTION FACTOR (AFCP) I) Price rate of products from small or medium enterprises It depends on the following most significant economic parameters causatively influencing results of re-engineering, as follows: manufacture costs, i.e. value of goods to be expressed in money TR P , value of money material used for calculating the value of goods VNM , size of price measure used as a unit of value measurement CN , supply and demand ratio PT non-economic factors VEF . Depending on a method and conditions for forming product prices, we distinguish the following types of economic factors affecting value of the product price and contributing to monitoring re-engineering in the field of product price: 1. free market prices formed by action of supply and demand law onto free competitive market CN ST , 2. monopoly prices formed and determined by monopoly, i.e. one or few manufacturers that dictate the offer, and accordingly a price itself CN M , 3. administrative prices prices determined by the state CN A , 4. mixed prices prices formed under influence of market and administrative means CN M . II) Production function (P) , Production function is different from technology, being a technological efficiency, and defines the maximum of production range, resulting from every possible combination of production factors. P = f (x, y, z.....) , The simplest is possible, to express production function by Domars method:

P=

K , k

(4)

Walrase Leontiev production function includes several factors. According to this function, production sector product is: X ij , (5) Pj = a ij

## Douglas production function, expressed in general form as:

P = C Ra

Kb,

(6)

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013)
Therefore, in general case:

P1 = C P1 = p x

(p

X )x

Yy Yy P.

Zz , Zz ,

## (7) (8) (9)

C Xx P1 = p x

II.1. Production possibility frontier ( G Pr M II.2. Law of diminishing returns ZO Pr II.3. Marginal productivity of production factors II. 3.1. Total, mean and marginal product (marginal analysis) Mean product is obtained by dividing total product of a factor and the amount of consumption of that factor, as in formula: U prxi Pprxi = . (10) xi Marginal product is increase in total product at unit change in the amount of consumption of a factor: U Prxi Uprxi 1 U Prx G Prx = = . (11) xi xi 1 x II. 3.2. Total, mean and marginal costs Total costs UTr are neither homogeneous nor increase at all production levels proportionally with the increase of the output. Total production costs are divided into fixed UFTr ; variable UVTr costs, and therefore total production costs may be expressed by the formula:

## UTr = UFTr + UVTr .

Marginal costs are expressed with the following pattern: GTr = UVTr . If there are no unit changes in the production range: GTr =

(12)

## UVTr , Q production range. Q

The enterprise will engage all production factors until there is equalization between marginal physical product at last money unit spent for each production factor:

## CFPx CFPy CPFz = = .... = . Cx Cy Cz

(13)

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013)
III) Demand for production factors
Marginal revenue is a change in total enterprise revenues, when production range changes by unit. On this basis, we have: -

UPd , R

## UTr , R UTr . GTr (marginal cost) = Q

GPd (marginal revenue) =

IV) Production factor offer V) Production factor market VI) Production factor procurement and product sale on the perfectly competitive market VII) Perfect competitiveness in product factor procurement, but monopoly in product sales VIII) Bilateral monopoly IX) Price production factor incomes (gain, rent, interest and profit) 4.0. AN EXAMPLE OF THE LINEAR PROGRAMMING ECONOMIC EFFECTS OF REENGINEERING BY USING THE PROPOSED MODEL
Let us suppose that a small or medium enterprise manufactures two products, P1 and P2 . For manufacturing these products, it is required to understand general economic parameters of reengineering with using group parameters M 1 , M 2 and M 3 for their production. For manufacturing one unit of the product P1 , it takes 2 hours for machine work with using general economic parameters of re-engineering M 1 , e.g. 1 hour of machine work with using general economic parameters of re-engineering M 2 and e.g. 2 hours of machine work M 3 with using general economic parameters of re-engineering. Machine capacities are expressed in available hours of each machine in observed time period and they amount: 100 hours for machine 1, 120 hours for machine 2 and 120 hours for machine 3. A small or medium enterprise realizes income of 6 dinars per product unit P1 , and 4 dinars per product unit P2 . All these data are shown in Table 1. The problem is the following: which quantities of P1 and P2 products should be manufactured in small and medium enterprises by using economic parameters of re-engineering to realize maximum income by using economic parameters of an enterprise in re-engineering function at given limiting conditions (capacities). From the problem set like this, we can see that quantities of P1 and P2 products that should be manufactured according to optimal production program by using economic parameters of re-engineering are unknown. We shall mark general economic parameters of re-engineering and parameters of analysis of necessary organizational changes affecting manufacture of a product P1 , produced in a small or medium enterprise with X 1 , and the amount of P2 product produced by using the same economic parameters and analysis as in previous case with X 2 , and form a mathematical model for this problem. The income that will be realized on P1 product will be 6 X 1 , and on P2 product 4 X 2 , for a total

Z0 = 6X1 + 4X 2,
where z 0 is total income, and entire formula will be called a criteria function, or optimality criterion of economic parameters of reengineering. 37

International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013)
According to the defined problem, we seek for the maximum value of total revenue, so we have the following criterion function:

(max); z0 = 6 x1 + 4 x2 .
In a similar way, we shall formulate limiting factors, for each group of parameters individually. It takes 2 hours for the machine 1 to produce one unit of a product P1 with using above mentioned economic parameters of re-engineering, i.e. 2 x1 hours to produce total amount of this product. This machine also produces the product P2 , and it takes 1 x 2 hours for a machine 1 to produce x 2 units of this product. Total time for manufacturing whole quantity of products P1 and P2 amounts 2 x1 + x 2 . Certainly, total used hours for the machine 1 for manufacturing products P1 and P2 cannot be more than total available amount being 100 hours for the observed time period. In that way we get an inequality:

2 x1 + x2 100.
In the similar way, we obtain the corresponding inequalities through which capacities of machines 2 and 3 are expressed:

x1 + 3x 2 120, 2 x1 +2 x 2 120.
In its nature, production range cannot be negative, and the previous conditions should be complemented by a condition that x1 and x 2 variables cannot be negative, i.e. x1 0, x 2 0. In this way, we obtained a mathematical model from certain expressions for previously formulated problem of determining the amount of products produced in small or medium enterprises by using economic effects of re-engineering. It consists of a function for optimality criterion of economic parameters of re-engineering.

z 0 = 6 x1 + 4 x2 ,
whose maximum value should be find with the following limitation system:

## 2 x1 + x 2 100, x1 + 3x 2 120, (1,4) 2 x1 + 2 x 2 120, x1 0, x 2 0.

NOTE 1: Lines with arrows indicate connection between economic parameters of reengineering, i.e. that they affect all products and their production values and revenues equally. NOTE 2: For smooth operation of technical systems (machines) M 1 , M 2 and M 3 , all production conditions with limiting factor systems have been met: a) production issues, b) transport issues, c) location issues, d) distribution issues, e) establishing plans for foreign trade, f) various structural problems solved. Our task is to define such values for variables x1 and x 2 that will satisfy the system of inequalities and ensure that criterion function reaches its maximum value. We simplified the problem because there are only two variables, and therefore it can be solved graphically. This method of solving enables presentation of the problem essence, and before we start its analytical solving. The graphical method for solving linear problems may be applied only if a problem has no more than two variables.
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013) Table 1. Parameters influencing on optimality criterion of economic parameters of reengineering
Time required for producing a unit of a product by using economic parameters of reengineering P1 - product P2 - product Capacity of amounts in hours by using capacities

PARAMETER

(P1 =

f ( M1, M 2 , M P2 = f ( M1 , M 2 , M

M 1 = X 1 = X I 1 + X I 2. -

GROUPE M1 PARAMETERS:

GENERAL

HOLDERS OF ECONOMIC EFFECTS OF RE-ENGINEERING AND ANALYSIS OF NECESSARY ORGANIZATIONAL CHANGES IN SMALL AND MEDIUM ENTERPRISES AND HYPOTHES 1.
5

OF

ECONOMIC
X 11

EFFECTS
X 12

OF
X 13

RE-

i =1

X 14

X 15

X 16

100

+ of

computer

integrated

RPP

## X 1.10 X 1.11 nX 18 n X 19 n n X 17 INTCIM Pi + T j + I k + Cl . i =1 i =1 i =1 i =1

X 1.12

X 1.13

X 1.14

HYPOTHESES PARAMETERS -

## X I 2 , NEE FS , NEE KP , NEE SK k.

GROUP M2 PARAMETERS FORMING

M 2 = X 2 = X II 1 + X II 2.

PRICES OF PRODUCTS PRODUCED IN SMALL AND MEDIUM ENTERPRISES THROUGH PRODUCTION FACTOR and Production factor offer, Production factor market, Production factor procurement and product sales on the perfectly competitive market, Perfectly competitiveness in procurement of production factors, Monopoly in product sales, Bilateral monopoly, Price production factors incomes (gain, rent, interest and profit) PARAMETRI SU:

TR P ,
U prxi xi
xi

VNM

CN

PT

P = f ( x, y, z.....) , Ppr =

,,

U Pr xi Uprxi 1 U Prx UTr = UFTr + UVTr , VGP (marginal revenue of G Prx = = , xi xi 1 x factors) = Uod/R GPd (marginal revenue) = Utr/R, Marginal cost = Utr/Q.

120

M 3 = X 3 = X III 1 + X III 2.
ECONOMIC FACTORS VEF

GROUP

M3

PARAMETERS

NON-

GENERAL FINANCIAL PARAMETERS OF A SMALL OR MEDIUM ENTERPRISE FUNCTION, CAUSATIVELY INFLUENCING IMPLEMENTATION OF RE-ENGINEERING:

120

## TOTAL REVENUE PER PRODUCT UNIT

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013)

The problem is solved by presenting graphically all inequalities from the system of limitation, in Descartes coordinate Oxy system. Since variables x1 and x 2 cannot be negative, we use only the first quadrant for graphical presentation of the limitation system and present each inequality separately. Let us present the first inequality related to the machine 1. By using common graphic presentation, we first draw equation 2 x1 + x 2 = 100. This is the line which intersects with axis x1 in a point M 1 (50.0), and axis x 2 in M ,1 (0.100). The line that goes through these two points, forms a triangle with tips O, M 1 , M ,1 with axes x1 and x 2 (in Figure 1). All triangle points meets the first limitation and meet the requirement of non-negativity of variables. In the same way, we can set the other limitation through the appropriate equations. The second limitation intersects with axis x1 in point M 2 (120.0) and with axis x 2 in point M , 2 (0.40) thus forming a triangle OM 2 M , 2 . Finally, the third limitation intersects the first axis in point M 3 (60.0), and the second axis in point M , 3 (0.60) and forms a triangle OM 3 M , 3 . The solution to the problem has to meet every limitation individually, but also all limitations taken together. Therefore, all limitations of the system (1,4) form common area OM 1CM , 2 , being patterned in Figure 1. Each point of common area meets set limitations, and therefore are the set of the possible solutions. It is required to determine the solution from the set of possible solutions, that will ensure that the criterion function (1,1) will reach its maximum value. It can be easily calculated that the extreme points M 1 , C and M , 2 of the common area correspond with the following criterion functions:
M 1 : x1 =50, B : x1 =40, C : x1 =30,
M 2 : x1 =0,
,

x 2 = 0, x 2 = 20, x 2 = 30,
x 2 = 40,

## z 0 = 300, z 0 = 320, z 0 = 300, z 0 = 160.

Point B, with coordinates x1 = 40 and x 2 = 20, meets the limitation system (1,4) and ensures maximum value of criterion function (1.4.), and therefore it is the optimal solution to the problem. It should be said that it is not necessary to determine the values of the criterion function for all extreme points to select the optimal solution. This can be achieved by graphical presentation of the criterion function z 0 and its parallel movements. Therefore, the maximum value of the criterion function will be reached when its graph is at the farthest point from the coordinate start while going through at least one point of the common area.

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013)
X2
M 1 '(0,100)

M 3 '(0,60)

M 2 '(0,30) X 2 =20

B (40,20)

40

50

60

100

120

## X 1 =40 2X 1 +X 2 =100 2X 1 +2X 2 =120

X1 X 1 +3X 2 =120

Figure 1. The area of optimal economic parameters of reengineering - the area of O50BM , 2 points
In the end, we can conclude that optimal solution, x1 = 40 and x 2 = 20 shows that a small or medium enterprise should produce 40 units of the product P 1 and 20 units of the product P2 to realize the maximum possible revenue under given conditions of 320 dinars with using all economic parameters of re-engineering. Every other production program will yield less income. This method can be successfully used as a basic method in programming the production in small and medium enterprises by using all economic parameters of reengineering.

5.0. CONCLUSION
Optimality criterion function of economic parameters of re-engineering my be analytically determined by using common area with common expression: A: x1 = 5 n, x 2 = 0 n, z 0 = 6 n ; B: x1 = 4 n, x 2 = 2 n, z 0 = 6,4 n ; C: x1 = 3 n, x 2 = 3 n, z 0 = 6 n ; D: x1 = 0 n, x 2 = 4 n, z 0 = 3,2 n ; This implies that by approximation, the mean value of the optimality criterion function for the presented case is: 6 + 6,4 + 6 + 3,2 x1 = (2 z + 1) n, x 2 = (2 z 1) n, z 0 = n = 5,4 n ; which applies for 4 z = 0,1,2,3. In Descartes coordinate system, this curve may be presented based on values entered in Table 2 (Figure 2):
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013) Table 2. Shadow Box field representing optimal area of economic parameters of reengineering Point

M1
50 20 300

B 40 20 320

C 30 30 300

M ,2

x1 x2
z0

0 40 160

Based on this, we can conclude that general expressions of optimality criterion are:
x1 = (2 z + 1) n, z = 0,1,2,3. x 2 = (2 z 1) n, z = 0,1,2,3. z0 = i n ,

## where i depends on optimality criterion of economic parameters of re-engineering.

X2
Tacka M1 X1 X2 Z0 50 20 B C M2' 0 40
30 40

40 30 20 30

## 300 320 300 160

M2'

20

30

40

50

C
160

X1

M1 B

300 320

Z0
Figure 2. Optimality criterion function of linear programming of economic parameters of programming spatial curve

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 4, Issue 2, March- April (2013) 5.0. REFERENCES