Automate Budget Planning Using Linear Programming
Select the projects that maximize the return on investment and follow the management guidelines while respecting budget constraints.
Make informed decisions for budget allocation in the logistics industry with linear programming.
Discover how to use Python to design a simple model that maximizes ROI and respects management guidelines in this article.
Objective
Automate the decision-making process for the yearly budget allocation of an International Logistics Company.
Introduction
In the Logistics industry, companies often need to invest in IT capabilities, modern handling equipment or additional warehouse space to improve the efficiency of their operations.
Regional Operational Directors receive budget applications from their local teams for mid-term projects.
Because of budget constraints, they need to decide for which projects the organization will allocate resources.
Spending money is much more difficult than making money. — Jack Ma, Co-founder of Alibaba Group
In this article, we will design a simple linear programming model with Python to automate this decision-making process considering the…
- Return on investment of each project after three years (€)
- Total costs and budget limits per year (€/Year)
We will also include the company’s top management guidelines for…
- Sustainable Development (CO2 Reduction)
- Digital Transformation (IoT, Automation and Analytics)
- Operational Excellence (Productivity, Quality and Continuous Improvement)
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SUMMARY
I. Scenario: Budget Planning Process
As a Regional Director you need to allocate your budget on projects
II. Build your Model
1. Exploratory Data Analysis
Analyze the budget applications received
2. Linear Programming Model
Decisions variables, objective function and constraints
3. Initial Solution: Maximum ROI
What would be the results if you focus only on ROI maximization?
4. Final Solution: Management Guidelines
III. Conclusion & Next Steps
1. Automate Decision Making
2. ESG-Friendly Budget Planning
3. Connect the model to GPT: Optimized User InterfaceIf you prefer watching, have a look at the YouTube tutorial
I. Budget Planning Process
Problem Statement: Operational Budget Planning
As a Regional Director of an international logistics company, you are responsible for logistics operations in four countries.
Your teams manage operations for 48 customers grouped in more than 8 market verticals (Luxury, Cosmetics …).
For each of the 17 warehouses, the Warehouse Manager (reporting to you) lists all the projects that need Capital Expenditure (CAPEX).
In an application form, he puts all the information that can help to justify (financially) this investment
- To which customer will this project benefit?
- What are the estimated costs per year (M€)?
- What is the estimated return on investment after 3 years (M€)?
He also can add all the non-financial outcomes linked to the company’s long-term strategy.
For instance, a project can contribute to initiatives for sustainable development, corporate social responsibility (CSR) or digital transformation.
Maximize the Return on Investments
Find the right budget allocation that maximizes your profits (ROI) and respects the guidelines of the top management.
Because you have 58 projects under your responsibility, let us build a simple tool to automate this decision-making process.
You can find the full code with dummy data in my Github (Follow me :D) repository: Link
💡 Follow me on Medium for more articles related to 🏭 Supply Chain Analytics, 🌳 Sustainability and 🕜 Productivity.
II. Build your model of linear optimization
We will use the PuLP library of Python, a modelling framework for Linear (LP) and Integer Programming (IP) problems.
Exploratory Data Analysis
For this year, you have a total of 58 projects covering 9 vertical markets.
Automotive and Luxury markets are representing a large part of the budget allocations because of the warehouse extension projects.
A majority of the projects are related to Business Development i.e bringing additional turnover (and profit) for the company
Linear Programming Problem
Let us build a model using the analogy with this process and the definition of a linear programming model.
a. Decision Variables
b. Objective Function
Your objective is to maximize the total return on investment of the portfolio of projects you selected
c. Budget Limitations (Constraints)
You have a budget of 4.5 M€ that you split into three years (1.25M€, 1.5M€, 1.75M€).
d. Strategic Objectives (Constraints)
We will fix the minimum budget at 1M€ for the three key pillars.
Initial Solution: Maximize the ROI
To understand the added value of this model, let‘s have a look at what would be the allocation if we remove strategic objectives constraints.
Return of Investment = 1,050,976 Euros
36/58 Projects Accepted with a Budget Allocation of 4.07/4.5 M€The results are satisfying, with a good ROI and more than 80% of the budget allocated.
What about the allocation by strategic objectives?
When you ask the model to focus on profitability, you do not reach the management targets.
Final Solution
If we have the requirements of minimum budget allocation for the key pillars of the company’s long-term strategy:
Return of Investment = 909,989 Euros
34/58 Projects Accepted with a Budget Allocation of 4.15/4.5 M€The return on investment is slightly impacted.
What about the management targets?
The management guidelines are respected.
💡 Follow me on Medium for more articles related to 🏭 Supply Chain Analytics, 🌳 Sustainability and 🕜 Productivity.
III. Conclusion and Next Steps
Automate Decision Making
This simple model provides the capacity to automate decision-making while ensuring compliance with the allocation.
It can be easily improved by adding constraints on
- Maximum budget allocation per country, market vertical or warehouse
- Budget allocation target (95% of the budget should be allocated)
ESG-Friendly Budget Planning
Environmental, Social and Governance (ESG) reporting can be defined as a method corporations use to disclose their governance structures, societal impacts and environmental footprint to shareholders.
We can assume that our director must decide which project(s) to allocate her budget based on the financial aspect (ROI) and ESG criterion.
How to maximize the Return On Investment while meeting ESG requirements?
With linear programming, we can automate selecting the projects that will maximize the ROI while respecting constraints on CSR, HSE or sustainability.
💡 For more information about ESG Reporting,
Connect the model to GPT: Optimized User Interface
With the recent adoption of Generative AI, we can enhance the user experience of any analytics products using Large Language Models.
You can then automate this fastidious process, help managers with additional visual insights and accelerate decision-making.
Users: What if we put 30% of sustainability invest?
Agent: We have to reduce to 7% of Business Dev invest
In this article, you can explore the potential of LMMs used to boost analytics products and improve user experience.
With custom GPTs, you can share your core model (Python script), sample data and prompt instructions to deploy a model on the UI of ChatGPT.
For more information,
References
- Computational Infrastructure for Operations Research, Optimization with PuLP (Documentation), Link
- 4 Impacting Projects to Start Your Data Science for Supply Chain Journey, Towards Data Science, Samir Saci
- What is ESG Reporting, Towards Data Science, Samir Saci
