Should feed mills go beyond traditional least cost formulation?

Abstract

Due to the pressure to become more competitive, feed mills coordinate closely with their suppliers and customers by forward purchasing raw materials and integrating with downstream units such as animal producers. To integrate downstream units and forward purchase raw materials, the mill must explore new paradigms for managing integrated information. The close relationship between customers, suppliers and the feed mill allows the feed manager to access information that was not previously available, such as the price of raw materials and the demand for feed products, which creates a more deterministic environment. In the present study, to exploit information from the integration of production units, an extended planning horizon was evaluated by developing a mathematical model and a heuristic algorithm for multiple period planning. The simulated results indicated that feed mills are likely to benefit from expanding the planning horizon. On average, the costs obtained from multiple-period planning were approximately 2.55% lower than those of single-period planning. Moreover, because recipe costs fluctuate dramatically, mills benefit from multiple-period planning by accounting for variations in recipe costs. However, the savings of multiple period planning are limited by other factors such as inventory holding costs and the warehouse inventory of the feed mill.