Petro Refinery: Product Mix Optimization

by: Izak Duenyas

Publication Date: April 7, 2010
Length: 12 pages
Product ID#: 1-428-999

Core Disciplines: Operations Management/Supply Chain

Partner Collection:

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Teaching Note

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Petro Refinery LLC, a crude oil refinery, faces an issue common in many production and service industries: finding the optimal product mix or input mix. A central difficulty is that each product consumes different amounts of the firm’s shared resources, but contributes different revenues toward the firm’s fixed costs. Managers do not necessarily want to sacrifice the production of one product for another just because one has a higher contribution. Even so, the best utilization of the firm’s resources toward a good product mix should drive the firm’s marketing strategy—what mix of products will result in the most profit? Petro Refinery is a simple but realistic exercise to illustrate product mix decisions.

Teaching Objectives

After reading and discussing the material, students should:

  • Explain how a firm’s capacity will often depend on its product mix.
  • Illustrate the importance of linear programming for determining the optimal product mix.
  • Conduct a capacity expansion analysis by optimizing an objective function that is subject to constraints.
  • Set up and solve a linear program using Microsoft Excel.
  • Explain the significance of sensitivity reports and shadow prices.