Optimization Helps Shermag Gain Competitive Edge

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.