18

th
European Symposium on Computer Aided Process Engineering ESCAPE 18
Bertrand Braunschweig and Xavier Joulia (Editors)
2008 Elsevier B.V./Ltd. All rights reserved.
Enterprise-wide Optimization under Tight Supply
Contracts and Purchase Agreements
Flavio Manenti and Davide Manca
CMIC Department, Politecnico di Milano, P.zza Leonardo da Vinci, 32
20133 MILANO ITALY davide.manca@polimi.it
Abstract
The manuscript presents and discusses the supply chain optimization of an industrial
enterprise characterized by a decentralized (multi-site) production structure. The study
concerns the enterprise-wide optimization (comprising production sites, interconnection
pipelines and a distribution network) and solves the multifaceted problem of monthly
production planning subject to legal limitations imposed on the mathematical model by
supply contracts and purchasing agreements, in addition to classical constraints. Take-
or-pay clauses and trade agreements, as well as specific services defined by binding
contracts, signed with the National Electric Energy Supplier (NEES), are modeled and
implemented as (in)equality constraints.
Keywords: Enterprise-wide optimization; Supply contracts; Trade agreements; Sales
and purchase clauses; MILP.
1. Introduction
The increasing market competition is pressing enterprises to consider carefully product
prices, raw material costs, and economic market fluctuations, while satisfying the
consumers demand as well as improving the net profit margin of the company [1, 2].
These multifaceted constraints are pushing the enterprises towards real-time market-
driven processes and just-in-time production, which are essential goals for industrial
activities characterized by large working capitals. This is the case of gas and oil plants
and oil refineries that require considerable storage volumes for raw materials,
intermediates, and end-products [3-6]. Also, those processes that involve smaller but
expensive inventories, such as cryogenic tanks and subcooled or gas-liquefied storages,
deal with the global supply chain objectives [7]. Moreover, some particular local
markets involve either enterprises or production sites that are constrained by supply
contracts and/or commercial agreements [8]. Usually, these economical and political
constraints comprise complex limitations, both non-smooth and nonlinear, and specific
economic penalties for each disregarded clause. Uncertainties must be taken into
account and modeled in the decision-making process of the enterprise operational
planning, where a moving horizon structure can be implemented to manage them [9-
12]. This uncertainties concern both the costumers demand fluctuations and process
shutdowns for either programmed or unexpected maintenances. Consequently, both
multi-site operability and process flexibility appear strongly limited. Trying to
transform the unexpected demand peaks and other market fluctuations into operative
margins is even more difficult. In this perspective, the supply chain approach can be
regarded as a useful tool, also in the unusual field of preliminary/feasibility studies of
single- and multi-site enterprises to improve the overall conceptual design. The
associated mixed-integer linear programming (MILP) problem is based on a
2 F. Manenti and D. Manca
mathematical model discussed in a previous work [12] and consists of a medium-scale
model of about one thousand decisional variables either integer or Boolean and about
ten thousands real variables.
Paragraph 2 discusses common business strategies that lead enterprises to sign trade
agreements. The detailed MILP model of some binding clauses of supply contracts as
well as sale and purchase agreements is presented in Paragraph 3. Finally, preliminary
results are discussed in Paragraph 4.
2. Strategic contracts and agreements
Large-scale enterprises are used to reach trade agreements for supplies, subcontracts,
sales, and purchases, to ensure a sufficient amount of raw materials, a lower price of
power energy, and a safe profit margin for incoming years. In this case, the enterprise
can sell a future production capacity, or in other terms, a certain amount of end-products
not yet produced, by offering a discount on the original price. The same approach is
frequently adopted to sign trade agreements with raw material suppliers and the
National Electric Energy Supplier (NEES). Actually, it is well known that the electrical
energy demand has an oscillating behavior and the national power supply trend is the
convolution of short-, medium-, and long-frequency fluctuations, strictly related to
common sources reported in Table 1.
Table 1: Uncertainty frequency, period, and fluctuation source.
Frequency Period Fluctuation source
Very short Minutes Noise concerning market volatility
Short Daily High electric energy demand during the day and low night-
time demand
Medium Weekly Low energy consumption during week-ends and holidays
Medium-long Yearly Seasonal (winter/summer) fluctuations in the national energy
demand
As an example, the mean value in 12 hours of the Italian power supply demand varies
between 41 GW day-time and 28 GW night-time. The seasonal gap for the daily
national-demand-peak is in the order of 10 GW (data of September 2007. Source:
TERNA S.p.A., www.terna.it). In this context, the NEES may sometimes need to
interrupt power supply to some industrial and energy-intensive clients, if the end-user
demand presents any instantaneous market peaks. This is due to the real-time demand
prediction methodology adopted by NEES. Actually, NEES continuously monitors the
national power demand and formulates both short- and long-term estimations related to
the future national demand. The predicted trajectories are re-estimated every 15
minutes. Again, this can be the situation of most European countries across midday in
summer. Therefore, some primary industries can offer a particular service that gives the
NEES the opportunity to temporarily suspend the power supply. This service is called
Breaking-Off clause (see Paragraph 3 for more details). Other supply contracts, not
considered here for space reasons, concern supply and/or production limitations: e.g. a
maximum constraint about the monthly energy consumption or, occasionally, a
minimum guaranteed production. On the other hand, to make the optimization problem
even more constrained and stiff, the manufacturing industry that has to fulfill the
request of the final customer (see also Figure 1), is in the habit of signing ad hoc
purchase agreements together with the upstream energy-intensive enterprises, which
supply chemicals and primary products.
Enterprise-wide Optimization under Tight Supply Contracts & Purchase Agreements 3
National Electric
Energy Supplier
Primary Industry
(Energy-intensive)
Manufacturing
Processes
SUPPLY
CONTRACTS
PURCHASE
AGREEMENTS
Final Users
(Market Demand)
USERS
SATISFACTION
Figure 1: Qualitative scheme for the horizontal hierarchy in the energy-intensive enterprise-wide
optimization constrained by binding contracts.
At the same time, primary industries want to ensure that the demand from final factories
is enough to absorb the large portion of the future production planning. In this
perspective, several contracts fix economic penalties for lacking supplies, whereas some
commercial strategies define a monthly or yearly minimum supply quantity of primary
products that is defined a priori and must be paid even if future demand will be lower.
In this second case, a sales price discount is usually granted. These sales and purchasing
agreements are called Take or Pay contracts.
3. MILP modeling of binding clauses
3.1. The Breaking-Off option
The Breaking-Off clause is a service that some primary industries offer to the NEES.
In fact, the NEES asks the opportunity to temporarily interrupt the power supply at any
time with either a short warning or without any advise. In exchange to the power supply
Breaking-Off offered by the primary industries, NEES recognizes a relatively large
discount in the monthly energetic bill of the single production site (in the order of 100-
500 k). Actually, the discount is granted only if particular conditions are respected: for
instance, by guaranteeing a minimum monthly consumption of electric energy, called
Breaking-Off Threshold. The system is even more complex since every production
site signs a customized supply contract with NEES, by involving costs and conditions
that significantly influence the enterprise-wide production planning and the end-product
distribution. In the following equations, BreakingOff is the Boolean variable describing
the possibility to achieve the price cut in the overall electric energy cost. The energy
consumption on the discretized time horizon (NP) is evaluated as follows:
( )
1
_ _ _
NP
t
t
ee BreakingOff ee ProcessUnits ee Utilities

(1)
where t is the single sampling time and prefix ee_ means electric energy consumption.
Therefore, as defined by contract, the electrical consumption does account for neither
the programmed and failure maintenance periods h_maint (equation 2), nor for possible
Breaking-Off shut-downs. BreakingOff_eff is the effective monthly power
consumption of each single site of primary industries:
_
_ _
( _ / _ )
ee BreakingOff
BreakingOff eff h period
NP h maint h period
_

,
(2)
This parameter is multiplied by a minimum tolerance factor SelectedTolerance and
compared to the consumption limit P_BreakingOff, which is assigned a priori:
4 F. Manenti and D. Manca
_
_
_
BreakingOff eff
Ratio BreakingOff
SelectedTolerance P BreakingOff

(3)
The consumption limit is similar to the Breaking-Off Threshold. Note that the
discount is granted only if Ratio_BreakingOff is not lower than one:
_ BreakingOff Ratio BreakingOff (4)
Inequality constraint (4) is the necessary condition to achieve the Breaking-Off
discount, but it is not a sufficient condition. Actually, it may sometimes happen that
other scenarios with reduced productions (and not contemplating any discount) are
economically more attractive on the specific time horizon. In this case, the Boolean
variable BreakingOff is kept null even if the Ratio_BreakingOff value is greater than
one.
3.2. Take or Pay agreements
Take or Pay clauses, i.e. sale and purchase clauses, are generally offered to
manufacturing societies by primary industries. Aiming at a reduction in the primary
product price, the manufacturing industry assures to buy a minimum amount of goods
from the primary industry for a specified period and, in case of reduced purchase,
guarantees the minimum established payment. In this case, the solution of a nested
supply chain problem must be accounted for, since the business-wide optimization can
evaluate the optimal goods amount for each manufacturing process, whereas the
enterprise-wide algorithm investigates the best Take or Pay proposal. The binary
variable X_TOP is defined as follows:
( ) 1,
_
0,
t
if ManufacturingSample < MinimumLimit
X TOP
otherwise

'

(5)
It assumes a value of 1 if the goods amount is smaller than the assigned minimum one.
By considering the following generic objective function:
1
( )
NP
t t
t
PROFIT REVENUES COSTS

(6)
the enterprise-wide revenues, simplified for a single manufacturing site (equation 7), are
equal to the minimum negotiated payment if the manufacturing client requires a reduced
amount of goods, otherwise effective supplies are considered in the evaluation of the
overall profit.
]
1 1
( (1 _ )
_ _
NP NPD
y t t
t y
t
REVENUES SalesPrice ManufNeeds X TOP
Limit TOP X TOP

(7)
where y index represents the commodities produced by primary industries.
Enterprise-wide Optimization under Tight Supply Contracts & Purchase Agreements 5
4. Preliminary results
Due to space limitations, it is possible to show only a few trends related to an industrial
case in study, which has been already proposed in the literature [6]. It deals with the
field of air separation and industrial gases production and distribution. Figure 2 shows
the cumulative cost trend for the power consumption of an air separation unit. The
diagram presents a linear trend, characterized by negligible oscillations, except for the
last day of the month, where a discontinuity can be observed. It corresponds to the
discount applied by the NEES. Figure 3 shows the final product storage. Note that
during the week-end the final storage reaches the highest levels. It is especially due to
two reasons: firstly, the demand is generally low or null and the whole production is
stocked. Secondly, the electric energy has a reduced price and the production is pushed
to the maximum limit allowed by the air separation unit.
However, since storages are considered as costs, a minimum level at the end of the time
horizon is expected. Conversely, an overproduction can be noted during the last two
days, apparently against the basic principles of supply chain management. Actually, by
means of the final overproduction, the Breaking-Off Threshold is reached at the 29
th
day of the month, with a consequent large discount in the energetic bill.
5. Conclusions
The horizontal hierarchy (as reported in Figure 1) in the supply chain management is a
multifaceted problem. This manuscript investigated an aspect that has not yet got large
attention by the academic world, but it has a strong weight in the long-term enterprise
strategies. The paper illustrated also how it is possible to implement specific contract
clauses in a MILP model and how these clauses can systematically modify the
enterprise operational planning.
0
0,2
0,4
0,6
0,8
1
1,2
0 7 14 21 28
Cumulative cost of power
consumption [M

]
Time [days]
Figure 2: Monthly energetic costs.
6 F. Manenti and D. Manca
0
50
100
150
200
250
300
0 7 14 21 28
Volume [1000xNm3]
Time [days]
0
20
40
60
80
Figure 3: Storage volume (top) and market demand (bottom) of the final product.
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