Your company probably need to invest in IT capabilities, modern handling equipment or additional warehouse space to improve the efficiency of their operations.
In some logistics companies, Regional Operational Directors receive budget applications from their local teams for mid-term projects.
How can we use data to support this decision-making process?
Because of budget constraints, they must decide which projects the organization will allocate resources.
Spending money is much more difficult than making money. — Jack Ma, Co-founder of Alibaba Group
In this article, we will design a simple linear programming model with Python to automate this decision-making process considering the
- Return on investment of each project after three years (€)
- Total costs and budget limits per year (€/Year)
We will also include the company’s top management guidelines for…
- Sustainable Development (CO2 Reduction)
- Digital Transformation (IoT, Automation and Analytics)
- Operational Excellence (Productivity, Quality and Continuous Improvement)
Budget Planning Process
Problem Statement: Operational Budget Planning
You support the Regional Director of an international logistics company.
He is responsible for logistics operations in four countries.
His teams manage operations for 48 customers grouped in over 8 market verticals (Luxury, Cosmetics …).
For each of the 17 warehouses, the Warehouse Manager (reporting to him) lists all the projects that need Capital Expenditure (CAPEX).
What parameters you have on hand to select projects?
In an application form, he puts all the information that can help to justify (financially) this investment.
- To which customer will this project benefit?
- What are the estimated costs per year (M€)?
- What is the estimated return on investment after three years (M€)?
He also can add all the non-financial outcomes linked to the company’s long-term strategy.
For instance, a project can contribute to initiatives for sustainable development, corporate social responsibility (CSR) or digital transformation.
What do we want to achieve?
Maximize the Return on Investments
Find the proper budget allocation that maximizes your profits (ROI) and respects the guidelines of the top management.
Because there are 58 projects under his responsibility, we built a simple tool to automate this decision-making process.
Build your model of linear optimization
Let us use this hypothetical case study to illustrate how the tool can support this exercise.
Exploratory Data Analysis
For this year, you have 58 projects covering nine vertical markets.
Automotive and Luxury markets represent a large part of the budget allocations because of the warehouse extension projects.
A majority of the projects are related to Business Development i.e bringing additional turnover (and profit) for the company.
What is the objective?
Linear Programming Problem
Let us build a model using the analogy with this process and the definition of a linear programming model.
a. Decision Variables
For each Project [i], the variable P[i] define if we invest in it or not.
b. Objective Function
Your objective is to maximize the total return on investment of the portfolio of projects you selected
c. Budget Limitations (Constraints)
You have a budget of 4.5 M€ that you split into three years (1.25M€, 1.5M€, 1.75M€).
d. Strategic Objectives (Constraints)
We want to fix a minimum budget for
- Operational Excellence: improve productivity and effiency of the operations
- Sustainability: reduce the environmental impact of the operations
- Digital Transformation: modernizing IT and tech tools
Initial Solution: Maximize the ROI
To understand the added value of this model, let‘s examine the allocation if we remove strategic objectives constraints.
Return of Investment = 1,050,976 Euros
36/58 Projects Accepted with a Budget Allocation of 4.07/4.5 M€
The results are satisfying, with a good ROI and over 80% of the budget allocated.
What about the allocation by strategic objectives?
When you ask the model to focus on profitability, you do not reach the management targets.
Final Solution
If we have the requirements of minimum budget allocation for the key pillars of the company’s long-term strategy:
Return of Investment = 909,989 Euros
34/58 Projects Accepted with a Budget Allocation of 4.15/4.5 M€
The return on investment is slightly impacted.
What about the management targets?
The management guidelines are respected.
Do you want to try yourself?
Budget Planning App
A prototype of this model has been deployed on a web app: LogiGreen App
This prototype, currently in development, is already available for test.
How to test it?
You can test the model without uploading data by just following the steps below
Step 1: Go to the business planning page
- 🔗Link: Business Planning Page
Step 2: Select 'Automate Budget Planning' on the left side bar
You will arrive in the presentation page of the module where you can find a brief presentation of the model with the inputs parameters and the results provided.
Step 3: Go to the 'Analysis' tab
You can select
- Maximum Budget Allocation per Year
- Option to set a minimum for a specific management objective (Boolean)Yecific management objective (Boolean)
- Select the management objective and the minimum %
Step 4: Launch the Analysis
You can visualize the results.
Do not hesitate to refresh if you face a problem.
Any question?
For any inquiries, please contact us at contact@logi-green.com
This blog post is based on articles originally published on Medium
- Automate Budget Planning with Python by Samir Saci