How does optimiser calculate profit for profit maximisation

[Former Member]

Hi Experts,

I have a basic question-

when we work on 'profit maximisation' how does the system calculate profits. As I understand the calculation is revenue- total cost. costs is what we define in the system. But how is the revenue calculated?

What it the logic where profit maximisation is selected over cost minimisation?

Regards

Manotosh

[former_member209769]

Hi Manotosh,

For answering the first part of your question, I am just copy pasting the F1 help for the field from Optimizer profile:

"Profit Maximization

Use

It is the optimizer's objective, when using either of the two possible options: cost minimization or profit maximization, to determine the most cost-effective solution based on the costs defined in Cost Maintenance.

If you choose Profit Maximization, the system interprets the Penalty for ND field (penalty costs for non-delivery) in the product master (tab page SNP 1) as lost profits. In this instance, the total profit achieved by a plan is calculated according to the following formula: Total of all delivered location products, multiplied by the penalty costs for non-delivery that have been defined for these location products, minus all the costs defined in the optimizer cost profile (such as production costs, storage costs and transportation costs). The total profit is displayed, when you run the optimizer in interactive planning within Supply Network Planning (on the Solutions tab page)."

For second part, someone who has worked on solution design in a project where Optimizer was used might possibly give a good answer. I am not very sure, though I can make a guess as follows:

You would go for cost minimization in a scenario where your requirement would be to minimize overall cost, even if it leads to non-fulfillment of requirement. Could be a scenario where e.g. lost sales are not very critical for you. e.g. products like generic bulbs, etc. On the other hand, where you want that the requirements fulfillment should also be one of the key objectives, you would go for profit maximization. This could be a case where brand plays a major role e.g. TV, costly gizmos, etc.

Hope someone else will correct me, or add to this.

Thanks - Pawan

[frank_horlacher]

totally correct. the optimzer does not maximize profit but minimize penalty costs. in doing so the effect is the same the profit is maximized.

[Former Member]

Closing this thread. Thanks to all who contributed to this thread.

Regards

Manotosh