Linear optimization problem

China had many retailers who bought fertilizers from large wholesalers or producers and sold them to farmers. Being a large fertilizer company, Sinofert distributed urea and other fertilizers to different township and county level dealers through its local distribution centres and logistics facilities.

The urea market was volatile, with price variations over time as well as from province to province resulting from fluctuations in supply and demand. In order to plan and monitor the new year’s sales and production, Sinofert would set a yearly sales budget for each province according to market size and sales ability (see Exhibit 1).

China had a total of 190 urea plants based in 14 agricultural provinces. The supply and demand situation was different from province to province, with some provinces unable to balance their own supply and demand. In many cases, urea had to be shipped from an over-supplied province to the under-supplied provinces, resulting in long transportation times and high freight costs.

Sinofert had its own production plants (with a total capacity of two million tons) as well as outsourcing partners who could supply four million tons of urea from 70 plants in China. Among these 70 suppliers, 13 plants were key large-capacity suppliers who were willing to supply and transport their products outside their own provinces. Sinofert had established long-term relationships with these key suppliers through contracts (see Exhibit 2).

Every year, Sinofert set an annual (one-year) quantity contract with these suppliers, but the contract quantities were just estimates and not guaranteed amounts. However, Sinofert had to purchase at least a certain minimum quantity in order to sustain its strong relationship with its key suppliers. Sinofert also had to purchase the exact contract quantity from its owned production plants regardless of market demand. Historically, Sinofert Changshan had supplied a minimum 250,000 tons to Jilin province, and Jiangsu Linggu had supplied a minimum of 200,000 tons to Jiangsu province annually. The 2009 realized supply quantities are summarized in Exhibit 3.

THE CHALLENGES

The market share of Sinofert in the urea business was increasing as a result of its efforts and investment in the business over the last 10 years, but it had not seen the expected financial results. In 2007 and 2009, Sinofert lost money in the urea business, and in 2008 it made a negligible profit. Lee Jun thought that stiff competition, market volatility, high transportation costs (see Exhibit 4), seasonality of urea consumption and a lack of appropriate production and inventory policies were the reasons why Sinofert had not made the profits it had hoped for from urea.

GAME PLAN

Lee Jun sat down at her desk to prepare a game plan to tackle Sinofert’s challenges in the urea business. Her current ideas were to increase sales budgets, evaluate strategic planning for production and transportation and perform a scenario analysis to determine the best future course of action. She hoped that all this would be clearer after a cup of jasmine tea.

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EXHIBIT 1: MARKET CAPACITY AND SINOFERT'S BUDGET IN CHINA OF MAJOR AGRICULTURE PROVINCES

Data in all exhibits from company records.

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EXHIBIT 2: 2010 YEARLY CONTRACT WITH KEY SUPPLIERS (INCLUDING SINOFERT FACTORY PRODUCTION)

* Sinofert owned plants.

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EXHIBIT 3: PLANNED SHIPMENT QUANTITIES 2009

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