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Demystifying Optimization

November 17th, 2016

Demystifying Optimization  

 

As with any complex business that is driven by tight margins and a complex operating environment, wood procurement planning could stand to use a little help.

Managers and procurement planners are great at what they do. They know the business inside and out, but they will be the first to tell you that making decisions in a dynamic market environment, balancing inventories and grade schedules, and continually feeding their mills in a timely and cost effective manner is no small feat. Optimization is a tool widely used in forestry, manufacturing, and supply chain planning to help wade through the complexity of the business problem, to provide managers with smart, transparent, and financially optimal solutions to their business problems.

 

What is optimization?

 

Great question.

The term optimization gets over used. It is applied loosely in many contexts that do not actually use optimization, ex. optimizing your work/life balance, optimizing your vitamin D levels or optimizing your free time.

These expressions are quantitatively meaningless, and obscure the meaning and power of true optimization. True optimization is a computational mathematical analysis often used in business to help solve complex problems.

 

The specific definition is:

Optimization: noun  op·ti·mi·za·tion ˌäp-tə-mə-ˈzā-shən

:  an act, process, or methodology of making something (as a design, system, or decision) as fully perfect, functional, or effective as possible; specifically :  the mathematical procedures (as finding the maximum of a function) involved in this.

 


In the business context, optimization involves finding a plan or making a decision with the most cost effective or highest achievable performance under the given constraints, by maximizing desired factors and minimizing undesired ones. In computer modeling of business problems, optimization is achieved usually by using linear programming techniques of operations research. Simulation is another modeling method that can be applied in business planning to forecast options. For many companies, even a simple simulation modeling process can be highly valuable in allowing management to forecast plans and predict future outcomes under a variety of different management decision scenarios.

 

So what does optimization mean for wood procurement planning?

 

You have a solution for planning your wood procurement today. Of course you do, because you’re business is running, and you are getting wood to the mill.

But, could it be better?

How robust is your planning method? How agile? How transparent? How “optimal” are your purchase schedules? (And just a hunch, but are you using Excel?)

Optimization unlocks the potential of your business environment and allows you to consider all possible decisions that can be made in a given business context and choose the decisions (purchasing plan) that make the most financial sense given your operating constraints.

 

Crunching the Math – Millions of Choices

Consider this forestry example:

There are 200 units, with 30 different species/grade types, and we are forecasting over 120 months (10 years).

The business objective: Maximize net present value at 7% discount rate.

Good old Excel does alright. You can come up with about 20,000 different potential management schedules to maximize net present value. But when you model the problem out using optimization the computer can consider all 2.5 MILLION potential management schedules that can be applied to that land base.

And so the question is:

in those extra 2.3 million decisions options is there a management schedule that produces a higher NPV objective than Excel?

Answer: Of course there is (there is also about 30 hours of your life you can reclaim).

 

Want Optimization? Think Remsoft.

Think your procurement planning process could benefit from optimization? Remsoft has over 22 years of experience serving the forestry market in optimal forest management planning, supply chain optimization, and strategic to operational planning. We now offer solutions specifically designed for wood procurement planning. Contact us to learn more or set up a demonstration of the technology.


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