The aim of optimization is to minimize the total cost of the supply plan. The Sales and Operations optimizer achieves this by minimizing costs, such as:
Production, procurement, and transportation.
Non-delivery or late delivery of products to satisfy demands.
Falling below the target inventory level or going over the maximum inventory level.
Violation of manually adjusted values (for example, adjusted customer demand) or minimum values (for example, minimum production receipts).
Inventory holding.
Optimization is performed by transforming the supply planning problem into a mathematical model (a mixed integer linear program (MILP)). The output is a feasible, cost-optimized production, distribution, and procurement plan for the entire supply chain network taking into account constraints.
The optimizer can create plans that are optimized according to the following criteria:
Profit maximization
Delivery maximization
Optimizer: Delivery vs. Profit
The following details are relevant for Profit Maximization:
The optimizer maximizes profit, where profit is the difference between total revenue and overall cost. Total revenue is calculated as the sum of the revenue of all products sold to market. The revenue of each product is calculated by multiplying its sales price (that is, non-delivery costs) by the quantity shipped to the customer.
If the total cost of a finished product (comprising production, inventory holding, and transportation costs, and the cost of all components) is higher than its sales price, the optimizer chooses not to deliver and therefore not to produce or transport this product.