Downsizing production/operations with multi-objective programming

Marc J. Schniederjans
University of Nebraska-Lincoln, Nebraska, USA, and

Downsizing production/ operations 79

James J. Hoffman
Florida State University, Tallahassee, Florida, USA
Keywords Downsizing, Goals, Methodology, Production planning Abstract One strategy that has been used extensively to cut operation costs is downsizing, a planned reduction in a firms work force. Downsizing must be based on a thorough analysis of the firms prioritized opportunities and their limited economic resources to achieve them. Some operations research techniques have appeared in the literature as practical aids in downsizing methodology. The purpose and significance of the research in this paper is to: provide the first demonstration of how a prioritized multi-objective programming-oriented methodology (i.e. goal programming) can be used for planning the downsizing of production/operations resources; and demonstrate a new methodological approach that can be used to determine previously hidden goals in a manufacturing linear programming model of the downsizing problem. Based on a problem reported in the literature, this paper will illustrate how an optimal allocation of production resources can be achieved while providing useful information in which to ensure other prioritized goals and their economic tradeoffs are considered in the downsizing analysis.

Introduction Some call it downsizing (Finkin, 1992), others call it rightsizing (Rachid and Mayo, 1994), but regardless of what it is called, this strategy involves a reduction in size of business organizations. When downsizing is done well it can substantially reduce operating costs, improve profits and help organizations to compete in the most mature of markets (Robins, 1991). On the other hand, the risks involved when downsizing is not done well are considerable (Elliott, 1994; Lind and Sulek, 1994). Poor morale, a loss of productivity, sabotage, and strikes are just some of the possible short-term effects of a downsizing strategy (Heenan, 1989; Rachid and Mayo, 1994). Brickley and Van Durnen (1990) examined over 100 firms worldwide to see what, if any, longer-term impact might result from downsizing. They found that downsized firms earnings performance measures declined during a three-year period following their restructuring. Another study reported by Boroughs (1992) indicated that a typical larger companys share price lagged behind its competition by 26 percent three years after an announced downsize. Research focused on the implementation of downsizing programs revealed both advantages and disadvantages of a downsizing strategy. Ciccotello and Green (1997) reported how downsizing by using outsourcing and leasing provided the advantage of making enterprises more nimble and better able to

International Journal of Operations & Production Management, Vol. 19 No. 1, 1999, pp.79-91, MCB University Press, 0144-3577

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adapt quickly to a rapidly changing sales environment. Ciccotello and Green also reported on some of the disadvantages of downsizing. These disadvantages included how cutbacks in the expertise of senior managers reduced efficiency in the US Defense Department and eventually could lead to hurting deterrence and their readiness. They also described how early termination of government service employees was very expensive, leading to increased severance payments, lawsuits, and large restructuring costs. Their research also described how outsourcing, caused by downsizing cuts in fixed costs (principally in reduced levels of plant, equipment, and experienced personnel), has led organizations to be less competitive when dependence on outsourcing becomes critical. Indeed, Friel (1997) found that 74 percent of the companies in a senior manager survey reported a decline in morale, trust, and productivity after downsizing. To help firms avoid the pitfalls of downsizing, when competitive reasons force them to adopt such a strategy, a substantial body of research has been presented in the literature. Most of this downsizing research falls into a category of general suggestions or how-to guidelines. Suggestions on the right way to do downsizing abound (Heenan, 1991; Neilson, 1990). There is even research on how to deal with specific areas that are affected by the downsizing, like human resource problems (Lind and Sulek, 1994; Rachid and Mayo, 1994) and other issues like employee morale (Brickley and Van Durnen, 1990) available in the literature. One problem with the use of these guidelines to operationalize a downsizing strategy concerns the inevitable conflict of equally important strategic organization objectives. In a case study by Niven and Ferrazzi (1993), downsizing had a direct and immediate negative effect on a corporations strategic total quality management (TQM) program. As a result, the corporation had to recommit the time and resources to re-adapt their TQM program for the downsized resources. While others have shown how two strategies (i.e. TQM and downsizing) can work together (Sullivan, 1994), no one has proposed a means by which multiple strategies can be considered at the same time. As pointed out by Kee and Turpin (1994), there is need to consider the impact of one strategy (like downsizing) with simultaneous considerations to other strategies (like TQM). Another problem with general guidelines is that they are not always as helpful in coping with the details of a downsizing. For example, when a decision at the departmental level of operations requires a cutback of resources, there is little in the way of methodological help specifically to implement downsizing at this more detailed level of the organization. Questions such as which department in an organization should be reduced or by how many hours of labor are not answered by general guidelines. One study by Kee and Turpin (1994) has sought to bring some operations research specificity to the decision making required in downsizing. Kee and Turpin utilized linear programming (LP) to model a downsizing case problem. They demonstrated how an LP model, duality and sensitivity analysis could be used to identify specific

resources in various departments for downsizing considerations. Unfortunately, the Kee and Turpin study did not discuss simultaneous treatment of multiple strategies because their LP model focused only on a single goal of profit maximization. Their study did not deal with the equally important issue of the ranking of strategic goals or analyzing possible economic tradeoffs to eliminate deviation from conflicting goals. The purpose of the paper is to extend the Kee and Turpin (1994) modeling study into a multi-objective problem. This paper will provide the first demonstration of how goal programming (GP) can be used to solve and analyze downsizing problems. Using the case study problem from Kee and Turpin, this paper will also show how to find the hidden goal priorities that exist in single objective LP problem formulations of the downsizing problem. No one has ever suggested that GP-converted LP models possess hidden multiple priorities (Ignizio, 1982; Lee, 1972; Romero, 1991; Schniederjans, 1995), nor demonstrated a procedure on how to find them. This paper will also illustrate how these goals can be altered to support and explore tradeoffs with other strategic goals, such as TQM, by using GP duality and sensitivity analysis. Methodology Depending on the type of downsizing problem situation an organization is facing, any of the different GP models that appear in the literature can be applied. This being the first application of GP to downsizing, we will use the simpler unweighted, lexicographic GP model (Schniederjans, 1995, p. 7) for illustrative purposes. This model was selected to also avoid GP formulation problems, like naive weighting and incommesurability, commonly observed in the literature (Schniederjans, 1995, pp. 22-34). For an overview of the other GP methods (i.e. integer, nonlinear, fuzzy, weighted extensions and alternative versions of GP models) that may have application to other types of downsizing problems, see Romero (1991), Ringuest (1992) or Schniederjans (1995). The conic form of a goal programming model for downsizing can be stated as follows:
m+ n + 1

Downsizing production/ operations 81

minimize subject to:

k =1

+ Pk d k + d k

(1)

a ij x j + d i d i+
j =1

= bi for i = 1, 2, , m

(2) (3) (4)

+ x j + d m + j d m + j = u j for j = 1, 2, , n + c j x j + d m + n 1 d m + n 1 = Z j =1 n

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and
+ + d i , d i+ , d m + j , d m + j , d m + n 1 , d m + n 1 , x j 0 for all i; j; m; n.

82

where xj are the decision variables that represent the number of units of each j, j = 1, , n products that should be produced in the i = 1, , m number of different departments that comprise the downsizing organization, di (or di+) represents underachievement (or overachievement) of a targeted bi number of production hours necessary for quality production in each of the m departments, aij are the marginal per j production hourly usage of the respective bi, dj (or dj+) represents underachievement (or overachievement) of a targeted number of ui units of production to meet market demand for each of the j, j = 1, , n products that should be produced, cj is a per unit of xj of profit (or cost) to + an arbitrarily large (or small) value of Z we seek to optimize, d p (or d p ) represents underachievement (or overachievement) of a targeted Z profit (or cost), and Pk is one of P1, P2, , PK and P1 > P2 >>> PK. The values of bi in equation (2) and ui in equation (3) represent departmental quality production hourly usage and unit production market demand objectives or goals. The value of Z can be either a profit goal we seek to maximize or cost goal we seek to minimize. While other goal constraints can be included to cover a larger number of organization goals, we are limiting our model here to these three to remain consistent for comparative purposes with the model in Kee and Turpin (1994). As Kee and Turpin and other experts on downsizing have pointed to the fact that downsizing is chiefly focused on reduction of labor and its subsequent impact on unit production and profitability, we feel the proposed GP model is indicative of many of the real-world problems. The computer software used to run the models in this paper is AB:QM software system, version 4.0 (Lee, 1996), whose solution methodology is based on Lees classic modified simplex-based method (Lee, 1972). For the purposes of this paper it is important to remember that the modified simplex method for GP is based on the same iterative process as in the original Dantzig (1948) LP simplex algorithm. In addition to the GP model solutions, GP duality and GP sensitivity analysis will also be used to analyze tradeoffs. The formulation of the GP dual model is well documented in the literature (see Ignizio, 1982, pp. 436-42). The particular type of GP sensitivity analysis used in this study involves changes in resources or goal levels of bi (see Ignizio, 1982, pp. 458-60). Both the GP dual values for tradeoffs between goals and the GP sensitivity analysis boundary values were computed by using tableau information from the AB:QM system. These combined GP methodologies provide unique and exact information where downsizing opportunities exist to better achieve organization goals through an informed tradeoff-based compromise of conflicting goals. Illustrative application Kee and Turpin (1994) case problem LP model for downsizing is presented in equation (5) through equation (15):

maximize: Z = 36.5 0 x1 + 184 .8 0 x2 + 49.50x 3 + 45.50x4 + 31.60x 5 subject to: 4x 1 + 8x2 + 5x3 + 10 x4 +2x5 1, 000 , 000 2x 1 + 10x 2 + 4x 3 + 5x4 +2x5 700 , 000 0.5x1 + 0.4 x 2 + 0.9x3 + 1.5x 4 + 0.4x5 180 , 000 0.4x1 +2x2 + x 3 + 4x4 + 0.8x 5 200, 000 x1 + 0.2x2 + 0.5x3 +2x4 + 0.4x 5 180 , 000 x1 45, 000 x2 30, 000 x3 80, 000 x4 30, 000 x5 25, 000 (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (5)

Downsizing production/ operations 83

and xj 0 for all j. This model solves for the optimal number of units of each of five products (xj, j = 1, , 5) while maximizing their respective profit in equation (5). In equation (6) the first of five departments is represented in the model. The hours of labor required for each of the five xj products in Department 1 are; 4, 8, 5, 10, and 2 hours respectively with a total of 1,000,000 hours available. In equations (7) through (10) the other four departments labor requirements are represented. In equations (11) through (15) the unit production constraints are presented representing the marketing desire to produce a maximum number of units of product to meet expected demand. The expression in equation (11) sets unit production of Product 1 at 45,000, equation (12) sets unit production of Product 2 at 30,000, and so on. As reported by Kee and Turpin (1994) the resulting optimal solution to this problem is where we produce 45,000 units of Product 1, 30,000 units of Product 2, 65,000 units of Product 3, no units of Product 4 and 25,000 units of Product 5, resulting in a maximized profit (i.e. Z) of $11,194,000. Finding hidden goal priorities in LP models Kee and Turpin (1994) rightfully point out that the slack hours of labor not used for production are ideal targets for departmental downsizing. In Table I under the LP model column the slack hours from the solution are presented. What Kee and Turpin did not discuss was the existence of hidden goals in their LP model. Normally it is assumed that a single objective LP model has two implied goals:

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Goals

Dept 1 (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) P1 0 P1 0 0 0 15,000 30,000 0 806,000 0 0 0 0 (24) (25) (26) (27) (28) (29) 0 86,500 (23) 0 37,000 (22) 0 77,000 (21) P1 P1 P1 P1 P1 P1 P1 P1 P2 0 0 (20) P1

Dept 2

Dept 3

Dept 4

Dept 5

Prod. 1

Prod. 2

Prod. 3

Prod. 4

Prod. 5

Profit

Table I. Slack and goal deviation in LP and GP models LP/GP model GP model Eq. no. Pk d+ Pk Pk d d+ Eq. no. Pk d (6) 0 205,000 (19) P1 0 0 0 0 0 0 0 0 0 0 0 P3 P1 P3 P3 P3 P1 P1 P3 P3 P1 P2 205,000 0 77,000 37,000 86,500 0 0 15,000 30,000 0 806,000

LP model

Eq. no.

Slack

(6)

205,000

(7)

(8)

77,000

(9)

37,000

(10)

86,500

(11)

(12)

(13)

15,000

(14)

30,000

(16)

(1) the constraint requirements in the model that must first be satisfied; and then (2) the objective function is optimized. The single objective of the downsizing problem in the Kee and Turpin model is to maximize profit while first observing the resource constraints that make up the model. Converting an LP model to a GP model can permit a more detailed breakdown of individual constraints into individual goals. One approach to converting an LP model to a GP model is to simply take the objective function and make it a goal constraint as presented in equation (16). (Note equation (16) is the same as the earlier equation (4) where the right-hand-side of 12,000,000 is an arbitrarily high value to seek a maximized Z value.) 36. 50 x1 + 184. 80 x2 + 49. 50 x3 + 45. 50 x4
_ + + 31.60 x5 + d11 d11 = 12 , 000 , 000

Downsizing production/ operations 85

(16)

The other LP constraints can be treated as the same linear constraints in equations (6) to (15). That is, removing the d +, , d + from the model and 1 10 placing only one deviation variable, d 11 at the first priority. The objective function of this LP/GP model would have the single goal of minimizing the negative deviation variable, d 11, while first satisfying the limitations of the prior ten resource constraints. Solving this type of combined LP/GP model using the GP application in the AB:QM system results in the same solution as the original LP model. The deviation/slack results are presented in Table I under the LP/GP model column. Like the LP model, the LP/GP model does not consider the individual departmental labor hours usage goals separately from the marketing unit production goals. To obtain this type of more detailed information requires a more comprehensive GP model; specifically, a GP model that converts all of the linear constraints into goal programming constraints while achieving the same optimal LP solution. Romero (1991, pp. 29-31) suggested that minimizing deviation variables at the same priority for all goal constraints in a model is the logical way to formulate a GP equivalent LP model. In this LP model, this approach to formulating the model will lead to an inferior solution. To achieve the same optimal LP solution correctly, we must first determine the models hidden goal priorities. Hidden goal priorities are a necessary priority configuration of select constrained resources to achieve the same optimal LP solution while using a GP model. The hidden goal priorities are found by identifying the binding constraints in either the LP or the LP/GP model and placing them at the first priority in the GP model objective function. The rationale for these specially prioritized resource constraints can be found in the simplex methods pivoting logic. Since the modified simplex method for GP is based on the LP algorithm (Lee, 1972, p. 94), the GP algorithm must optimize the same set of constrained resources as the LP algorithm. (One exception to this rule is the

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case of multiple this solution can be accomplished for the downsizing problem is: (1) set all binding resource constraints deviation variables (both positive and negative deviation variables) at the first priority; (2) set all other LP resource constraints positive deviation variables (or negative deviation variables for LP constraints) also at the first priority; (3) set the profit (or cost) objective constraint deviation variables at the second priority (note: for profit the d+ is redundant); and (4) set the remaining deviation variables at the third priority. While differing priority structures can be configured from any particular GP model, a minimum number for the downsizing problem under study requires at least a three priority GP model. This revised GP model, based on equations (1) to (4) can be expressed as: minimize: d + + d + d + + d + + d + + d + + d + + d + d + + d + 2 2 3 4 5 6 6 7 7 Z = P1 1 + + + d8 + d9 + d10 + d10
+ + P2 d11 + d11 3 1

( + P (d

+ d3 + d4 + d5 + d8 + d9

)
(17) (18) (19) (20) (21) (22) (23) (24) (25) (26)

subject to:
+ 4x 1 + 8x2 + 5x3 + 10 x4 +2x5 + d 1 d 1 = 1, 000 , 000 + 2x 1 + 10x 2 + 4x 3 + 5x4 +2x5 + d 2 d 2 =700 , 000 + 0.5x1 + 0.4 x 2 + 0.9x3 + 1.5x 4 + 0.4x5 d 3 + d 3 = 180 , 000 + 0.4x1 +2x2 + x 3 + 4x4 + 0.8x 5 + d 4 d 4 =200, 000 + x1 + 0.2x2 + 0.5x3 +2x4 + 0.4x 5 + d 5 d 5 = 180 ,000 + x1 + d 6 d 6 = 45, 000 + x2 + d 7 d 7 = 30, 000 + x3 + d 8 d 8 = 80, 000 + x4 + d 9 d 9 = 30, 000 + x5 + d 10 d 10 =25, 000

36. 50 x1 + 184. 80 x2 + 49. 50 x3 + 45. 50 x4

+ + 31. 60 x5 + d11 d11 = 12 , 000 , 000

(27)

and xj, d, d+ 0 for all j, i. i i The solution for this GP model of the downsizing problem is presented in Table I under the GP model column. The resulting solution for the GP model is the same as the other LP and LP/GP models. It should be noted that simply reconfiguring all of the positive deviation variables at the second priority generates an inferior solution to the optimal LP solution (this is not shown and is left to the reader to confirm). No fewer than three priorities can achieve the same optimal LP solution. Hence, there is hidden a select set of binding resource constraints that must be found and their deviation variables positioned at a new first priority in the GP model as stated in the procedure above to obtain the same optimal LP solution. The ramifications of hidden prioritized goals are significant in the downsizing problem. From Table I we can infer that Department 2s labor hours (at P1) are more important than the other departments labor hours. Yet in this or any downsizing problem that may not be the case. The other departments may be implementing TQM programs that will need the extra hours that have been identified as slack and expendable. In the Kee and Turpin (1994) LP model there is little adjustment that can be made except to reformulate the model with additional constraints and through trial-and-error experiments try to achieve a desired compromise in differing department hourly reallocations. In the GP model for downsizing, only a single reordering of the priority structure will achieve any type of reallocation of labor hours, units of production or profit. The GP model allows the decision maker the specificity to single out individual goals and reorder their utilization or optimization. Analyzing goal tradeoffs Kee and Turpin (1994) also suggested that the LP dual value or marginal contribution and sensitivity analysis be used to examine where slack resources might be reallocated to improve profitability. The downsizing LP dual values or marginal contributions are in terms of possible profit contributed to Z. In Table II under the column Marginal change in total $ profit, the dual values for a reduction in profit of one unit of production are presented. While these coefficients are valuable for assessing the single goal of profit opportunity loss, other conflicting tradeoff values (i.e. marginal changes in units of product and labor hours) are only available by using the GP model duality. For example, in Table II, a one unit reduction in Product 1 (i.e. from 45,000 units to 44,999) will not only reduce profits by $11.75, but the GP model dual values reveal that Department 1 will reduce their labor hours by 1.50, Department 3 reduces theirs by 0.05 hours, Department 4 will increase theirs by 0.10 hours and Department 5 will reduce theirs by 0.75 hours. Since the major focus of downsizing is usually on decreasing labor resources, this GP dual information is more specific in

Downsizing production/ operations 87

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88

denoting the exact impact on labor hours of a downsizing strategy involving a reduction in unit production. While not previously discussed by Kee and Turpin (1994), it is interesting to note in this example that if the case study company chooses to downsize by reducing production of Product 2 (note Table II), then in four of the five departments (i.e. Departments 1, 3, 4 and 5) there would actually be a need to increase labor hours. This case clearly provides an example where the goal of downsizing unit production can actually have a reverse impact on the goal of downsizing labor requirements. In Table III another set of unique GP dual values presented illustrating how a resource goal that has a set of multiple items (e.g. five different products) can affect the other items in the set. For example, if one unit of Product 2 is reduced, 2.50 units of Product 3 will be produced in its place in order to minimize the loss of profit. Again in light of a downsizing strategy this type of tradeoff might be illogically more costly (e.g. inventory costs might increase as unit production increases) for some companies. Tables IV and V provide the GP dual values for tradeoffs between department labor hours and products. In Table IV we can see that a reduction in one hour of Department 2 labor will reduce 0.25 units of Product 1 and reduce profit by $12.375. More importantly for the downsizing considerations, a review of Table V shows there are hourly reductions in the other departments (i.e. 1.25 hours in Department 1, 0.225 in Department 3, etc.) because of the one hour

Marginal change in department hours caused by the reduction of one unit of each product Product 1 2 3 4 5 1 1.50 +4.50 0 0 +0.50 2 0 0 0 0 0 3 0.05 +1.85 0 0 +0.05 4 +0.10 +0.50 0 0 0.30 5 0.75 +1.05 0 0 0.15 Marginal change in total $ profit 11.75 61.05 0 0 6.85

Table II. GP dual tradeoff values: product units with department hours

Product 1 2 3 4 5

1 1 0 0 0 0

Marginal change in unit production caused by the reduction of one unit of each product 2 3 4 0 1 0 0 0 +0.50 +2.50 1 0 +4.50 0 0 0 1 0

5 0 0 0 0 1

Table III. GP dual tradeoff values: unit production with unit production

reduction in Department 2. These GP dual values are precise values on which the impact of a downsizing strategy can be more easily understood and considered in the final compromises that are implemented corporation wide. Extending the GP duality information, it is basic operational research practice to include GP sensitivity analysis to define the usable boundaries under which the dual values remain true. In Table VI the GP sensitivity analysis threshold boundary information for Department 2 labor hours is presented. A total reduction of 260,000 hours of Department 2 labor (i.e. 700,000 440,000) is possible without compromising the GP dual values. In a downsizing problem it may also be interesting to note the direction of net change in the dual values once

Downsizing production/ operations 89

Marginal change in unit production caused by the reduction of one hour of each department Department 1 2 3 4 5 1 0 0 0 0 0 2 0 0 0 0 0 3 0 0.25 0 0 0 4 0 0 0 0 0 5 0 0 0 0 0 Marginal change in total $ profit 0 12.375 0 0 0

Table IV. GP dual tradeoff values: department hours with unit production

Department 1 2 3 4 5

1 1.00 1.25 0 0 0

Marginal change in department hours caused by the reduction of one hour of each department 2 3 4 0 1.00 0 0 0 0 0.225 1.00 0 0 0 0.25 0 1.00 0

5 0 Table V. 0.125 GP dual tradeoff 0 values: department hours 0 with department hours 1.00

Goals Dept 1 Dept 2 Dept 3 Dept 4 Dept 5 Profit

Resulting marginal values for a one hour reduction in Department 2 labor hours At a boundary of Beyond boundary b2 = 440,000 hours at b2 = 439,999 hours 1.250 1.000 0.225 0.250 0.125 12.375 1.000 1.000 0.200 0.400 0.200 15.800

Net marginal change 0.250 hours decrease n/a 0.025 hours decrease 0.150 hours increase 0.075 hours increase $3.425 increase

Table VI. GP sensitivity analysis threshold boundary information

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the threshold is violated (i.e. column Beyond boundary at b2 = 439,999 hours.). For example, in Table VI we can see that the net change in dual values for Departments 4 and 5 increases after the threshold has been reached. If it is desirable to increasingly downsize these departments, then a tactic to implement the downsizing strategy would be to reduce the hours in Department 2 beyond the threshold. Unfortunately, the rate of profit loss also increases beyond the threshold and again some compromise may be called for. Fortunately, the GP model, duality and sensitivity analysis provide the detailed tradeoff information on which the exact impact of the downsizing strategy can be assessed for each goal and resource that an organization has at its command. Such unique information is not available without the use of the proposed GP model. Summary This paper has extended the Kee and Turpin (1994) LP model case study on downsizing and demonstrated how its reformulation as a GP model can provide new, unique and additional information not available when using a single objective methodology. In addition, this paper has introduced the methodological notion that contained in LP models, and particularly the downsizing problem in this study, hidden prioritized goals exist and can be recognized in order to convert LP models into GP models. GP duality and sensitivity analysis were also presented as additional methodology for analyzing the economic tradeoffs in goals and resources that existed in the downsizing problem. The implementation of a downsizing strategy for any organization is as risky as open heart surgery for an individual. Just as a medical doctor seeks to improve the efficacy and specificity in their treatment of patients, so must operational researchers guide their strategic planners in the downsizing surgery of their organizations. The GP model, duality and sensitivity analysis procedures presented in this paper provide informational efficacy and specificity that will improve the implementation of the downsizing strategy.
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