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Shermag Inc. is a vertically integrated furniture company with business units across the supply chain from the forest to the final customer. During the last decade, Shermag has been losing market share to low-cost Asian manufacturers. To reduce the procurement and other significant costs of Shermag's raw material (wood), which constitute a major component of its total furniture cost, we developed a tool to optimize the tactical planning of the company's wood supply chain. We propose an optimization-based approach for coordinating operations at each echelon of the wood supply chain. However, the problem size caused computer-related issues, such as long processing times and computer crashes. In our proposed solution approach, we use decomposition to overcome these issues. Our implementation uses C++, CPLEX (optimization software), and Microsoft Access. In this paper, we present a comparative study of traditional decision making versus optimal decision making. Using Shermag data for 2004 and 2005, we show that our solution reduces total operations costs by more than 22 percent. For any set of parameters, the tool can generate a good, feasible solution. These results convinced Shermag to use our tool for future configurations of its supply chain network.
Key words: wood household furniture; supply chain optimization; tactical planning; mixed-integer program.
Shermag Inc., with revenues of $170 million (2007), is one of the largest Canadian producers of hardwood household furniture and is among the leaders in this market in North America. The American market makes up more than 70 percent of its sales revenue. It is a vertically integrated furniture company with business units across the supply chain from wood production to retail stores. The company was facing fierce competition from Asian manufacturers whose comparatively cheaper labor costs, mass production capacity, and worldwide bulk orders give them an advantage over Canadian manufacturers.
In the early 2000s, Shermag initiated an ambitious program to review its business practices to improve the efficiency of its entire supply chain and reduce its logistics costs. This reorganization affected its three decision levels (strategic, tactical, and operational) and all functions of its supply chain (procurement, production, distribution, and sales). In the first phase, redesigning its supply chain network, Shermag closed some facilities and opened others, including plants and distribution centers. This paper presents the second phase...