Caso Kellogg

The Kellogg Company Optimizes Production, Inventory, and Distribution
Gerald Brown
gbrown@nps.navy.mil Operations Research Department Naval Postgraduate School Monterey, California 93943 Kellogg Company, P.O. Box 3599 Battle Creek, Michigan 49017–3599 Kellogg Company, P.O. Box 3423 Battle Creek, Michigan 49016–3423 Operations Research Department Naval Postgraduate School

Joseph Keeganjoe.keegan@kellogg.com

Brian Vigus
brian.vigus@kellogg.com

Kevin Wood
kwood@nps.navy.mil

For over a decade, the Kellogg Company has used its planning system (KPS), a large-scale, multiperiod linear program, to guide production and distribution decisions for its cereal and convenience foods business. An operational version of KPS, at a weekly level of detail, helps determine where productsare produced and how finished products and in-process products are shipped between plants and distribution centers. A tactical version of KPS, at a monthly level of detail, helps to establish plant budgets and make capacity-expansion and consolidation decisions. Operational KPS reduced production, inventory, and distribution costs by an estimated $4.5 million in 1995. Tactical KPS recently guided aconsolidation of production capacity with a projected savings of $35 to $40 million per year.

T

he Kellogg Company has been using a large-scale linear program, the Kellogg Planning System (KPS), for more than a decade to guide its operational (weekly), production, inventory, and distribution decisions for breakfast cereal and other foods. In addition, KPS helps Kellogg to make tacticaldecisions on budget-

ing, capacity expansion, capacity reassignment, and other similar issues. KPS models Kellogg’s operations in the United States and Canada, with global operations under study. These operations include the production, inventory, and distribution of hundreds of items from Kellogg-owned and contracted plants out
INDUSTRIES—AGRICULTURE, FOOD PROGRAMMING—LINEAR, APPLICATIONSCopyright 2001 INFORMS 0092-2102/01/3106/0001/$05.00 1526–551X electronic ISSN This paper was refereed.

INTERFACES 31: 6 November–December 2001 (pp. 1–15)

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to distribution centers (DCs) and to customers. Many large companies like Kellogg employ some sort of enterprise resource planning system (ERP) to coordinate rawmaterial purchases, production, distribution, orders, and forecasteddemand. Kellogg’s ERP is largely a custom, in-house product, and KPS is a custom tool to complement that system. Models like KPS are also attractive within the commercially available ERPs of SAP, Oracle, JD Edwards, and others. Indeed, these ERP systems offer plug-in features for planning production, distribution, and inventory, for example, SAP’s Advanced Planner and Optimizer [SAP 2001].However, even these features may be inadequate [Hsiang 2001]. For instance, they may use rule-based heuristics to attempt to meet demand while ignoring capacity constraints and then iteratively refine the solution, using heuristics, to attempt to meet capacity constraints. These heuristics take costs into account in their rules but do not minimize costs or maximize profits. In current vernacular, KPS is apoint solution because it is tailored to solve problems for particular functional areas of the business. KPS uses optimization to find the best long-term, cost-minimizing, integrated production, inventory, and distribution plan—within the limits of modeling assumptions and data accuracy. ERPs account for the low-level influence of individual near-term transactions; in contrast, KPS is ahigh-fidelity, prescriptive model that is ideally suited to evaluating alternate systemwide scenarios. The Kellogg Company is the largest cereal producer in the world and is a leading producer of convenience foods. In 1999, worldwide sales totaled nearly $7 billion. Kellogg began with a single product, Kellogg’s Corn Flakes, in 1906 and developed a product line of well-known, ready-to-eat cereals over the...