6.1 THE PLANNING APPROACHIndustrial logistics is concerned with the effective management of the total flow ofmaterials, from the acquisition of raw materials to the delivery of finished goods tothe final consumer. It is an important and complex field of management, whichencompasses a large number of decisions and affects several organizational echelons.Included in the logistics process are decisions determining the resources of the firm(number and location of plants, number and location of warehouses, transportationfacilities, communication equipment, data-processing facilities, and so forth) and theproper utilization of these resources (capacity planning, inventory control, productionscheduling, dispatching, and so forth). Commonly, the resource-acquisition decisionsare associated with the strategic-planning efforts of the firm, and the resource-utilization decisions are considered tactical-planning activities.These two types of decisions, resource acquisition and resource utilization ,differ in scope, level of management involvement, type of supporting information,and length of their planning horizons. If formal systems are to be designed to supportAs we have indicated several times before, problem formulation usually is notstraightforward; on the contrary, it requires a great deal of creativity on the part ofthe model builder. It also is often the case that a single model cannot provide all thesupport managers need in dealing with a complex set of decisions. This chapterdescribes a practical application to illustrate the complexities inherent in modeldesign when both strategic and tactical decisions are involved. The emphasis is onthe formulation and linking of two separate models representing distinct levels ofdecision making.269Integration of Strategic and TacticalPlanning in the Aluminum Industrythese two widely different types of logistics decisions, it is logical to develop twodistinct systems: one addressing the strategic-planning issues and one addressing thetactical-planning issues of the firm. However, the two systems should interactstrongly with one another, since strategic decisions provide constraints that tacticalplanning decisions have to meet, and the execution of tactical decisions determinesthe resource requirements to be supplied by the higher-level strategic decisions. Thissuggests the development of a hierarchical planning system that is responsive to theorganizational structure of the firm and defines a framework for the partitioning andlinking of the planning activities.I t is the purpose of this chapter to describe an actual study dealing with thedevelopment of an integrated system to support the strategic and tactical planningof an aluminum company. The production of aluminum is a continuous process;therefore, it does not introduce the problems associated with discontinuities in lot-size production required in batch-processing operations. Linear programmingbecomes a very appropriate model to use in connection with the production-planningactivities.The heart of the planning system to be described is formed by two linear-programming models that interact with each other. One of these models addressesthe long-range strategic issues associated with resource planning, while the other isan operational model oriented toward the tactical problems of short-range resourceutilization .We will first provide a brief background of the aluminum industry. Subsequently,we will describe the structure of both models and the way in which they are integratedto form a comprehensive planning system. Special attention should be paid to thedifferent characteristics of the models in terms of time horizon and number of timeperiods, level of aggregation of the information processed, and the scope and level ofmanagement interaction.270Integration of Strategic and Tactical Planning6.26.2 THE ALUMINUM INDUSTRY AND SMELTER OPERATIONSThe production of aluminum from raw materials to finished goods is a fairly involvedprocess but the smelting part of the process is straightforward (see Fig. 6.1). Calcinedalumina is reduced to aluminum metal in electrolytic cells or "pots." The passing ofelectric current through the molten electrolyte causes an electrolytic action thatreduces the alumina into two materials, molten aluminum and carbon dioxide.Periodically the aluminum is drawn off through a siphon into large crucibles, whichare then used to transfer the molten aluminum to a holding furnace, where theblending or alloying of the metal takes place. Next the aluminum is cast into ingotsof various sizes and shapes ranging from 5 lbs to 20,000 Ibs depending on the type ofequipment that will be used in processing the metal. The smelting operation is themajor point of the process that is of concern to us in the present study.The aluminum company where this project took place is one of the largest fullyintegrated aluminum companies in the world ; the company supplies its products toapproximately a hundred different countries. It has six smelters, all operating nearCryolite Petroleum ,/ coke,and pitchIL _ _ _ ",,_ %;;_w",~ L _;m~ :i!iaPot6.2The Aluminum Industry and Smelter Operations271AluminumfluorideHoldingfurnaceAluminumFig. 6.1 The aluminum production process.capacity , and the demand for ingot aluminum is expected to continue to grow . Ofthe six smelters, four are located in domestic locations and two are in foreign locations .In addition to its own facilities , the company also is able to procure aluminumfrom external sources through "swapping " contracts . Swapping is the term used forthe common practice in the aluminum industry of having a competitor produce oneof your orders for a particular type of aluminum alloy and deliver it directly to yourend-use customer under your label . The reason a company might want to do this mayvary but the most common one is to save on transportation costs of the finishedproduct by selecting a competitor 's smelter that is in production closer to yourcustomer area. These agreements generally are reciprocal in nature and are negotiatedprior to the start of a year. They are actually a trade of material , since usually nomoney is exchanged and the major part of the negotiation concerns the amount ofmaterial that one company will produce for the other . All