Joint Financial and Operating Scheduling/Planning in Industry

Transcription

1 Jont Fnancal and Operatng Schedulng/Plannng n Industry M.Badell, J.Romero, L.Puganer * Chemcal Engneerng Department Unverstat Poltècnca de Catalunya, Av. Dagonal 648, Span Abstract hs paper addresses the mplementaton of fnancal cross functonal lnks wth the supply chan operatons and nvestment actvtes at plant level when schedulng and budgetng n short term plannng n batch process ndustres. he target s to obtan trade-off solutons preservng at most the proft and lqudty whle satsfyng customers. he platform bult combnes a determnstc cash management model wth an advanced schedule algorthm by MILP formulaton. hs methodology heghtens the decson-makng capacty of the CEO (chef executve offcer) and CFO (chef fnancal offcer) n complex scenaros. he benefts of ths work are shown through a case study that llustrates the modellng framework and procedures necessary to mplement a fnancal/supply chan methodology to ad top-level staff when plannng and budgetng Keywords: Plannng, budgetng, cash management, batch ndustry, retrofttng 1. Introducton he am of ths work s to propose the use of advanced plannng and schedule (APS) tools to model and change the current poston of the fnancal and process managers durng complex nterconnected decson-makng n chemcal process ndustres (Badell and Puganer, 2001). he process systems engneerng communty commonly has been usng net present value (NPV), nternal rate of return (IRR) and/or payback rate (PR) to evaluate nvestments. However, when process managers propose plant retrofts usually do not pay attenton about the overall status and synchronzaton of enterprse fnances. 2. he fnancal problem formulaton he batch chemcal processes posses a great nherent flexblty. hs flexblty s transformed n complexty to ts cash flow management due to the large product portfolo, assortment of materal resources, equpment and manpower management. he engneerng communty has been usng dfferent metrcs for assessng the nvestment return of potental proects or assets. Whatever metrc used, t s possble the ntegrated proecton of future cash flows reduced to present values. he nvestment must earn more than the cost of captal to be worthwhle. On the other hand the fnancal communty uses dfferent economc ratos and performance metrcs durng sequental analyss by functons when dstrbutng fnancal * Author to whom correspondence should be adressed : lus.puganer@upc.es

2 resources n a company. However, these sequentally calculated cash flows and those regardng nvestments proposed by process engneers are not ntegrated n a model to balance and ft the nfluence of one n others. Even some now frequently metrcs, such as rsky value to nvestment rato (VIR), reman wth sequental approach. However, some sgns of change have appeared supportng cash flow management, budget and a more ntegrated approach. Plans are often beng substtuted by budgets when the overall performance s followed. In addton to the enterprse-wde ntegraton of decsons, enhancng drectly shareholder value wthout any ntermedate metrc s the top prorty today to look attractve to the nvestors at the stock market. Obvously what comes n and out cash nflows/outflows s unmstakable and consequently trends today gve more weght to treasury and budget than to accountng and plans. he budget measures, besdes the current assets, the real economc effectveness of the fnancng, leverng, plan fulfllment and fnancal operatons. he fracton of resources spent from the budget on strategc support actvtes s used as an ndcator of how well fnance and executors, manly cross-functonal process teams, are supportng ob obectves. hus takng nto account that net cash flow could only be determned accurately n retrospect, the expected future cash balance s the most relable performance measure avalable today to set an obectve to acheve. hs s what the budget s n fact dong and even more, f optmzaton s appled, flattens the net cash flow profle. 3. Prevous work n cash management models he cash balances normally fluctuate due to the lack of synchronzaton between cash nflows (recepts from accounts recevable and cash sales) and outflows (payments on accounts and notes payable). he cash management problem conssts of optmally fnancng net outflows through a lne of credt, pledgng accounts recevable, sellng marketable securtes or nvestng the net nflows n marketable securtes consderng yeld and transacton costs. Whle n the area of determnstc models of cash management most of them were developed focusng more n the ndvdual fnancal decson types, at the stochastc sde two basc approaches were developed. Baumol s model (1952) had an nventory approach assumng certanty. Cash was treated smlarly as holdng nventory and payments were assumed at a constant rate. On the contrary the Mller and Orr cash management model (1966), was based on the fact that perfect forecasts of cash were vrtually mpossble because the tmng of nflows depend on payments of customers. In consequence a lower and upper bound of cash were calculated to create a safety stock. On the determnstc sde, snce the sxtes lnear programmng was ntroduced to the area of fnance to consder the ntertemporal aspects n fnancal envronment. Orgler (1969) proposed a determnstc model based on keepng mnmum cash whle all excess s nvested n marketable securtes. 4. Budgetng modellng framework for optmal retrofttng. A four month tme horzon s chosen, dvded unequally nto four perods of 10,20,30 and 60 days, respectvely;.e. perod 1 has 10 days, perod 2 has 20 days, etc. Swtchover tmes and cost between products s of specal concern. In ths case study t s studed the plant retroft to mprove the swtch-over between products, reducng the cleanng tme requred, n order to be able to assume a hgher product demand. Frst,

3 modfyng and expandng Orgler s budget model s analysed the maxmum retroft nvestment havng a fnancal capacty lmted by the lqudty requrements set by the CFO. Second, nteractng the budgetng wth the desgned APS tool, a retroft nvestment s proposed consderng the expected future plant fnancal behavour after the retroft. he obectve functon, to maxmse n tme horzon, s the sum of payments takng or not the prompt payment dscounts, X g,, and marketable securtes revenues, expresed by the dfference between net yeld and net lose when sold (y, z, ), deductng costs of the short term credt lne, w h,g and of the retroft loan, R g. echncal coeffcents C, D, E, and F adust quanttes dependng on the tmng of perods when actons ncur n: maturty,, payment, g, sales,, credt, h, etc. + 1 (1) REVENUE = C g, X g, + ( D, y, E, z, ) F h, g w h, g R g = 2 = 1 Producton expenses durng the week wll consder ntal zero stock and raw materal needs. he mnmum net cash flow allowed (M ), below whch a short-term fnancng source must be found, s determned by the CFO takng nto account the varablty of cash outflow (100 mu). he followng hard constrant s then ntroduced. b > M = 1,, (2) he portfolo of marketable securtes held by the frm at the begnnng of the frst perod ncludes several securtes wth known face values and maturty perods, only one maturng beyond the horzon (S1=250, S2=190, S3=1900, S4=1500, S5=2250). All marketable securtes can be sold pror to maturty at a dscount or loss for the frm. Revenues and costs assocated wth the transactons n marketable securtes are gven by techncal coeffcents d, and e, consderng D, (net yeld of nvestment n perod maturng n perod ; E, (net lose for sellng securtes n perod, maturng n perod ). t 1 (3) d, y, = 2,,, where d, = 1 + D, = 1 1 e, z, S = 2,, + 1, where e, = 1 + E, = 1 A short term fnancng source s represented by a constraned (850 mu) open lne of credt. Under an agreement wth the bank loans can be obtaned at the begnnng of any perod and are due after one year at a monthly nterest rate of 0.5%. Early repayments are not permtted. he costs of takng a loan relevant for measurng the performance of the cash management decsons are gven by techncal coeffcents F h,g where h are the alternatves consdered and g the fundng cost. g = 1 F w K h = 1,, v (5) h,g h,g h he payment decsons to be consdered correspond to accounts payable wth 2 percent 10 days, net 30 days terms of credt (2-10/N-30). All payments of raw materals must be fulflled wthn the horzon (L1=803, L2=2409, L3=3212, L4=7227). It s assumed that all blls are receved n the frst half of the respectve perods and that payments, ncludng sales of fnal products, are made at the begnnng of the perods. Any part of the blls can be pad ether at the frst ten days wth a 2% dscount or at face value after 30 days. It remans to be decded upon what part of the blls to pay n whch perod. he payments are constraned by the followng equaton: g = 1 g = 1 (4)

4 g = - h + 1,, = a g h,g, xh,g, L (6) h, g h = 1,, s he net cash flows expected n perods 1,2,3 and 4 are varable decsons decded dependng on the schedulng soluton. he mnmum cash balance requrement for all four perods was assumed 100 mu. Other recepts and dsbursements as payroll, loan repayment or sales (6863 mu per month) are entered as tme fxed net cash flows. A requrement that the average daly cash balance be at least a known fgure s n ncorporated. he monthly retroft credt cost s calculated as n (1 + ) loan, where 1 n (1 + ) 1 12 n s the medum term loan nterest and n the years of loan repayment. Several possbltes to "balance" the cash budget n perods n terms of ther respectve cost can be obtaned. 5. A Case Study n Batch Chemcal Industry he case study conssts of a batch specalty chemcal plant wth two dfferent batch reactors (R1 and R2), excerpted from a real ndustral scenaro. Each producton recpe bascally conssts of the reacton phase. Hence, raw materals are transferred from stock to the reactor, where several substances react, and, at the end of the reacton phase, products are drectly transferred to lorres to be transported to dfferent customers. Plant product portfolo s around 60 dfferent products usng up to 15 dfferent substances. Producton tmes range from 3 to 34 hours. Product swtch-over bascally depends on the nature of both substances nvolved n the precedent and followng batch. Cleanng tme ranges from 0 up to 6 hours. Here, plant retroft to mprove product swtch-over s envsaged. he obectve of the schedulng algorthm s to maxmse n a week horzon (168 h) the beneft obtaned from producng a number of products of the demand portfolo consderng each product hourly contrbuton to proft (as rough-cut dfference between prce and cost of materals) (B ) mnus the cleanng cost (CC, ), equaton (7). Obectve_Functon (7) max BY CC,' x,k,e x, k 1, e e k ' where x,k,e s the assgnment bnary varable of batch at poston k n the sequence at equpment unt e. hs obectve functon s maxmsed subect to constrants of tmng and batch sequence as follows, Schedule _ mng F = I + OPx + C x x k 1 e ke, ke, ke,,, ',k,e k, 1, e ' (8) F = I + OPx k = 1; I F k 1;I = 0 k = 1 ke, ke, ke,, k,e k 1, e k,e Batch _ sequencng x = Y ; x 1 ; xke,, xk, 1, e k 1 k ke,, ke,, where OP s the processng tme of batch, C, the cleanng tme when swtchngover from product to, F k,e and I k,e the endng and ntal tmes of ob k n the sequence at equpment unt e. hs formulaton, ntroducng aggregated varables for x, k, e x, k - 1, e, gves a MILP formulaton that s solved usng GAMS-CPLEX. In order to (9)

5 solve the problem n an effcent way, frstly the sx products wth more hourly contrbuton to proft are scheduled and then the rest. hs strategy, though mght lose some optmalty, mproves revenues, proft and permts to solve the combnatoral exploson problem n less than 20 CPU s at a 1 GHz machne. he procedure concludes that the optmal number of products to be contemplated at plant s 10 out of the Retrofttng modellng In order to ncrease plant capacty, producton managers of the company clam to mprove the product swtchover tmes. hs can be done nvestng on a new cleanng devce. If done, swtchover tmes can be reduced n a 60%. hs nvestment needs mu suppled by external funds, so a short or medum term loan must be requested. he CEO of the company agrees wth the new nvestment provded by the company fnances, but wth a hard constrant: durng the repayment perod monthly outputs must be not hgher than a 2% of the present frm earnngs. he CEO answer was based on the nfluence of cash flows of companes at stock market. A hgher drop on earnngs would show a bad look of the company. CFO takes note of the gudelnes and calculates that the repayments of the mu sought would be supported by the proft mprovement made by the new devces and a 2% of the obtanable earnngs calculated at the last budget, mu. It means 383 mu for repayments durng the 4 months (96 per month) and leavng mu durng the horzon tme consdered for the company. he CFO of the company needs to calculate what loan repayment span s best for ths stuaton. If the loan s repad very quckly, company charges are too hgh and would not fulfl the nvestors sought expectatve on earnngs that the CEO ordered to be preserved. If very slowly, the enterprse wll pay more nterests. Wth the purpose of makng an analyss of the nvestment capablty under the condtons of ths chemcal enterprse, t s used the budgetng model (equaton 1 to 6) for dfferent repayment spans and requred revenues. It can be observed the mpact on cash flows of the fundng polcy wth the revenues obtaned. he optmum repayment span s found where the enterprse net cash flow balances the least nterest expenses for a mu loan subect to CEO constrants (Fg.1). Lets consder that a medum-term loan s negotated at an 8% annual nterest. he optmal repayment span of the loan wll be 4 year to keep company earnngs at the level set by the CFO. he repayments of 273 mu per month are yearly. Notce that to repay s ncluded the proft mprovement post retrofttng, 5031 mu/year. he budget of retrofttng perod gves a net [equvalent] cash of mu, 2% less than pror retrofttng due to a tghten polcy and 4 repayments n the horzon, 1092 mu. As the producton engneers dd before demandng the retroft to the superorty, the CFO should use the net present value method to evaluate nvestments n the producton plant. Dscounted producton proft prevals over the nvestment n few years. NPV analyss concludes a 2 years repayment span, whch consumes a 6% of the present earnngs [a four years loan consumes a 2%], whle ts payback tme s fullfled at the begnnng of the 3 rd year [a four years loan payback tme s 4 years]. So for the two years loan the nvestment consumes an extra 4% of earnngs tghtenng more the company wth regard to possble benefts of opportunty costs, addtonally declnng attracton to nvestors at the stock market. hs effects were taken nto account when

6 decson makng was controlled by a ont budget and retroft (B&R) analyss and not consdered f the offcer only evaluates by the NPV analyss. Fgure 2 shows graphcally ths stuaton. A smoother cash profle causes less stress and lets more flexblty. Consequently, a sngle NPV analyss cannot satsfy the CEO condtons to nvest. loan sze budget revenues repayment perod, years Fgure 1. Enterprse fnancal capacty for retrofttng nvestment Earnngs (m.u.) Budgetng & Retroft recommendaton NPV-analyss recommendaton Year Fgure 2. Earnngs profle applyng B&R analyss and NPV analyss. 7. Conclusons and future work A complex decson makng scenaro of the routne practce n batch chemcal ndustres s smulated achevng optmal synchronzaton and cash flows balance. Not only synchronses nflows and outflows, t also ensures a safety cash stock solvng peaks so makng full use of the schedulng possbltes wth fnte resources. hus CFO could effectvely lead a proactve forward-lookng management wth computer budgetng systems. Armed wth up to the mnute nformaton on the overall budget status, costs and schedules, allocaton of resources, reschedules and cost of captal, the CFO s prepared and avalable to respond quckly to events as they arse. hs work consttutes an advance n the challenge to lnk fnance and lqudty wth enterprse functonalty. References Badell, M. and L. Puganer, 2001a, Hydrocarbon Processng, 80, 3, 160. Baumol, W. J., 1952, Quarterly Journal of Economcs, Vol. 66, No.4, pp Mller, M. H., and Orr, R., 1966, A Model of the Demand for Money by Frms, he Quarterly Journal of Economcs, Vol. 80, No.3, pp Orgler, Y. E., 1969, Unequal-perod Model for Cash Management, Manag. Scence, 16.