The encyclopedia · Engineering & Operations · Operational decision · 2004–2009
Shermag cut modeled operating costs over 22% by optimizing its wood supply chain.
Losing to Asian imports, Shermag coordinated its wood supply chain in one optimization, cutting modeled total operations costs more than 22%.
Shermag Inc.
The solution
Shermag, a vertically integrated Canadian furniture company, spans the chain from forest to final customer, and wood is a major component of total furniture cost. Over the decade before 2009 it was losing market share to low-cost Asian manufacturers.
Researchers from the FORAC Consortium built a tool for tactical planning of Shermag's wood supply chain, optimizing operations at each echelon—procurement, transformation, distribution—as one coordinated problem. Full-size instances crashed and ran too long, so they used decomposition to make the model solvable.
Using Shermag data from 2004 and 2005, the optimized plans reduced total operations costs by more than 22% versus traditional decision making, and the tool could always generate a good feasible solution for any parameter set.
Why it worked
- Wood cost is spread across procurement and processing, so only a chain-wide model captures the savings.
- Decomposition turned an unsolvable instance into a tool that runs in practice.
- The comparison against real 2004–05 decisions made the 22% figure credible.
What can be applied
When a cost lives across many stages of a chain, optimizing each stage separately leaves money on the table—but you need decomposition to make the whole-chain model actually solve.
Aftermath
Shermag adopted the tool for future configurations of its supply chain network, and the study appeared in Interfaces in 2009.
Sources
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