1

Optimization The McGraw-Hill Companies,

Inc., 2003
4.1
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Chapter 4 (Linear Programming: Formulation and Applications)
Advertising-Mix Problem (Section 4.1)
Super Grain Corp | 4.24.5
Resource Allocation Problems (Section 4.2)
Think-Big Capital Budgeting | 4.64.10
Cost-Benefit-Trade-Off Problems (Section 4.3)
Union Airways | 4.114.15
Distribution-Network Problems (Section 4.4)
Big M Co. | 4.164.20
Student Exercises
Optimization The McGraw-Hill Companies,
Inc., 2003
4.2
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Super Grain Corp. Advertising-Mix Problem
Goal: Design the promotional campaign for Crunchy Start.
The three most effective advertising media for this product are
Television commercials on Saturday morning programs for children.
Advertisements in food and family-oriented magazines.
Advertisements in Sunday supplements of major newspapers.
The limited resources in the problem are
Advertising budget ($4 million).
Planning budget ($1 million).
TV commercial spots available (5).
The objective will be measured in terms of the expected number of exposures.
Question: At what level should they advertise Crunchy Start in each of the
three media?
Optimization The McGraw-Hill Companies,
Inc., 2003
4.3
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Cost and Exposure Data
500,000 600,000 1,300,000
Expected number of
exposures
40,000 30,000 90,000 Planning budget
$100,000 $150,000 $300,000 Ad Budget
Each
Sunday Ad
Each
Magazine Ad
Each
TV Commercial Cost Category
Costs
Optimization The McGraw-Hill Companies,
Inc., 2003
4.4
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Spreadsheet Formulation
3
4
5
6
7
8
9
10
11
12
13
14
15
B C D E F G H
TV Spots Magazine Ads SS Ads
Exposures per Ad 1,300 600 500
(thousands)
Budget Budget
Cost per Ad ($thousands) Spent Available
Ad Budget 300 150 100 4,000 <= 4,000
Planning Budget 90 30 40 1,000 <= 1,000
Total Exposures
TV Spots Magazine Ads SS Ads (thousands)
Number of Ads 0 20 10 17,000
<=
Max TV Spots 5
Optimization The McGraw-Hill Companies,
Inc., 2003
4.5
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Algebraic Formulation
Let TV = Number of commercials for separate spots on television
M = Number of advertisements in magazines.
SS = Number of advertisements in Sunday supplements.
Maximize Exposure = 1,300TV + 600M + 500SS
subject to
Ad Spending: 300TV + 150M + 100SS 4,000 ($thousand)
Planning Cost: 90TV + 30M + 30SS 1,000 ($thousand)
Number of TV Spots: TV 5
and
TV 0, M 0, SS 0.
Optimization The McGraw-Hill Companies,
Inc., 2003
4.6
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Think-Big Capital Budgeting Problem
Think-Big Development Co. is a major investor in commercial real-estate
development projects.
They are considering three large construction projects
Construct a high-rise office building.
Construct a hotel.
Construct a shopping center.
Each project requires each partner to make four investments: a down payment
now, and additional capital after one, two, and three years.
Question: At what fraction should Think-Big invest in each of the three
projects?
2
Optimization The McGraw-Hill Companies,
Inc., 2003
4.7
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Financial Data for the Projects
$50 million $70 million $45 million Net present value
60 million 70 million 10 million 3
20 million 80 million 90 million 2
50 million 80 million 60 million 1
$90 million $80 million $40 million 0
Shopping Center Hotel Office Building Year
Investment Capital Requirements
Optimization The McGraw-Hill Companies,
Inc., 2003
4.8
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Spreadsheet Formulation
3
4
5
6
7
8
9
10
11
12
13
14
15
16
B C D E F G H
Office Shopping
Building Hotel Center
Net Present Value 45 70 50
($millions) Cumulative Cumulative
Capital Capital
Cumulative Capital Required ($millions) Spent Available
Now 40 80 90 25 <= 25
End of Year 1 100 160 140 44.757 <= 45
End of Year 2 190 240 160 60.583 <= 65
End of Year 3 200 310 220 80 <= 80
Office Shopping Total NPV
Building Hotel Center ($millions)
Participation Share 0.00% 16.50% 13.11% 18.11
Optimization The McGraw-Hill Companies,
Inc., 2003
4.9
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Algebraic Formulation
Let OB = Participation share in the office building,
H = Participation share in the hotel,
SC = Participation share in the shopping center.
Maximize NPV = 45OB + 70H + 50SC
subject to
Total invested now: 40OB + 80H + 90SC 25 ($million)
Total invested within 1 year: 100OB + 160H + 140SC 45 ($million)
Total invested within 2 years: 190OB + 240H + 160SC 65 ($million)
Total invested within 3 years: 200OB + 310H + 220SC 80 ($million)
and
OB 0, H 0, SC 0.
Optimization The McGraw-Hill Companies,
Inc., 2003
4.10
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Summary of Formulation Procedure for Resource-
Allocation Problems
1. Identify the activities for the problem at hand.
2. Identify an appropriate overall measure of performance (commonly profit).
3. For each activity, estimate the contribution per unit of the activity to the
overall measure of performance.
4. Identify the resources that must be allocated.
5. For each resource, identify the amount available and then the amount used per
unit of each activity.
6. Enter the data in steps 3 and 5 into data cells.
7. Designate changing cells for displaying the decisions.
8. In the row for each resource, use SUMPRODUCT to calculate the total
amount used. Enter and the amount available in two adjacent cells.
9. Designate a target cell. Use SUMPRODUCT to calculate this measure of
performance.
Optimization The McGraw-Hill Companies,
Inc., 2003
4.11
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Union Airways Personnel Scheduling
Union Airways is adding more flights to and from its hub airport and so needs
to hire additional customer service agents.
The five authorized eight-hour shifts are
Shift 1: 6:00 AM to 2:00 PM
Shift 2: 8:00 AM to 4:00 PM
Shift 3: Noon to 8:00 PM
Shift 4: 4:00 PM to midnight
Shift 5: 10:00 PM to 6:00 AM
Question: How many agents should be assigned to each shift?
Optimization The McGraw-Hill Companies,
Inc., 2003
4.12
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Schedule Data
$195 $180 $175 $160 $170 Daily cost per agent
15 Midnight to 6 AM
52 10 PM to midnight
43 8 PM to 10 PM
82 6 PM to 8 PM
73 4 PM to 6 PM
64 2 PM to 4 PM
87 Noon to 2 PM
65 10 AM to noon
79 8 AM to 10 AM
48 6 AM to 8 AM
Minimum
Number of
Agents Needed 5 4 3 2 1 Time Period
Time Periods Covered by Shift
3
Optimization The McGraw-Hill Companies,
Inc., 2003
4.13
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Spreadsheet Formulation
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
B C D E F G H I J
6am-2pm 8am-4pm Noon-8pm 4pm-midnight 10pm-6am
Shift Shift Shift Shift Shift
Cost per Shift $170 $160 $175 $180 $195
Total Minimum
Time Period Shift Works Time Period? (1=yes, 0=no) Working Needed
6am-8am 1 0 0 0 0 48 >= 48
8am-10am 1 1 0 0 0 79 >= 79
10am- 12pm 1 1 0 0 0 79 >= 65
12pm-2pm 1 1 1 0 0 118 >= 87
2pm-4pm 0 1 1 0 0 70 >= 64
4pm-6pm 0 0 1 1 0 82 >= 73
6pm-8pm 0 0 1 1 0 82 >= 82
8pm-10pm 0 0 0 1 0 43 >= 43
10pm-12am 0 0 0 1 1 58 >= 52
12am-6am 0 0 0 0 1 15 >= 15
6am-2pm 8am-4pm Noon-8pm 4pm-midnight 10pm-6am
Shift Shift Shift Shift Shift Total Cost
Number Working 48 31 39 43 15 $30,610
Optimization The McGraw-Hill Companies,
Inc., 2003
4.14
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Algebraic Formulation
Let S
i
= Number working shift i (for i = 1 to 5),
Minimize Cost = $170S
1
+ $160S
2
+ $175S
3
+ $180S
4
+ $195S
5
subject to
Total agents 6AM8AM: S
1
48
Total agents 8AM10AM: S
1
+ S
2
79
Total agents 10AM12PM: S
1
+ S
2
65
Total agents 12PM2PM: S
1
+ S
2
+ S
3
87
Total agents 2PM4PM: S
2
+ S
3
64
Total agents 4PM6PM: S
3
+ S
4
73
Total agents 6PM8PM: S
3
+ S
4
82
Total agents 8PM10PM: S
4
43
Total agents 10PM12AM: S
4
+ S
5
52
Total agents 12AM6AM: S
5
15
and
S
i
0 (for i = 1 to 5)
Optimization The McGraw-Hill Companies,
Inc., 2003
4.15
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Summary of Formulation Procedure for
Cost-Benefit-Tradeoff Problems
1. Identify the activities for the problem at hand.
2. Identify an appropriate overall measure of performance (commonly cost).
3. For each activity, estimate the contribution per unit of the activity to the
overall measure of performance.
4. Identify the benefits that must be achieved.
5. For each benefit, identify the minimum acceptable level and then the
contribution of each activity to that benefit.
6. Enter the data in steps 3 and 5 into data cells.
7. Designate changing cells for displaying the decisions.
8. In the row for each benefit, use SUMPRODUCT to calculate the level
achieved. Enter and the minimum acceptable level in two adjacent cells.
9. Designate a target cell. Use SUMPRODUCT to calculate this measure of
performance.
Optimization The McGraw-Hill Companies,
Inc., 2003
4.16
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
The Big M Distribution-Network Problem
The Big M Company produces a variety of heavy duty machinery at two
factories. One of its products is a large turret lathe.
Orders have been received from three customers for the turret lathe.
Question: How many lathes should be shipped from each factory to each
customer?
Optimization The McGraw-Hill Companies,
Inc., 2003
4.17
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Some Data
9 lathes 8 lathes 10 lathes Order Size
15 lathes 700 900 800 Factory 2
12 lathes $800 $900 $700 Factory 1
Output From
Customer 3 Customer 2 Customer 1 To
Shipping Cost for Each Lathe
Optimization The McGraw-Hill Companies,
Inc., 2003
4.18
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
The Distribution Network
F1
C2
C3
C1
F2
12 lathe
produced
15 lathes
produced
10 lathes
needed
8 lathes
needed
9 lathes
needed
$700/lathe
$900/lathe
$800/lathe
$800/lathe $900/lathe
$700/lathe
4
Optimization The McGraw-Hill Companies,
Inc., 2003
4.19
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Spreadsheet Formulation
3
4
5
6
7
8
9
10
11
12
13
14
15
B C D E F G H
Shipping Cost
(per Lathe) Customer 1 Customer 2 Customer 3
Factory 1 $700 $900 $800
Factory 2 $800 $900 $700
Total
Shipped
Units Shipped Customer 1 Customer 2 Customer 3 Out Output
Factory 1 10 2 0 12 = 12
Factory 2 0 6 9 15 = 15
Total To Customer 10 8 9
= = = Total Cost
Order Size 10 8 9 $20,500
Optimization The McGraw-Hill Companies,
Inc., 2003
4.20
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Algebraic Formulation
Let S
ij
= Number of lathes to ship from i to j (i = F1, F2; j = C1, C2, C3).
Minimize Cost = $700S
F1-C1
+ $900S
F1-C2
+ $800S
F1-C3
+ $800S
F2-C1
+ $900S
F2-C2
+ $700S
F2-C3
subject to
Factory 1: S
F1-C1
+ S
F1-C2
+ S
F1-C3
= 12
Factory 2: S
F2-C1
+ S
F2-C2
+ S
F2-C3
= 15
Customer 1: S
F1-C1
+ S
F2-C1
= 10
Customer 2: S
F1-C2
+ S
F2-C2
= 8
Customer 3: S
F1-C3
+ S
F2-C3
= 9
and
S
ij
0 (i = F1, F2; j = C1, C2, C3).
Optimization The McGraw-Hill Companies,
Inc., 2003
4.21
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Types of Functional Constraints
* LHS = Left-hand side (a SUMPRODUCT function).
RHS = Right-hand side (a constant).
Resource-allocation
problems and mixed
problems
For some resource,
Amount used
Amount available
LHS RHS Resource constraint
Distribution-network
problems and mixed
problems
For some quantity,
Amount provided =
Required amount
LHS = RHS
Fixed-requirement
constraint
Cost-benefit-trade-off
problems and mixed
problems
For some benefit,
Level achieved
Minimum Acceptable
LHS RHS Benefit constraint
Main Usage Typical Interpretation Form* Type
Optimization The McGraw-Hill Companies,
Inc., 2003
4.22
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Formulating an LP Spreadsheet Model
Enter all of the data into the spreadsheet. Color code (blue).
What decisions need to be made? Set aside a cell in the spreadsheet for each
decision variable (changing cell). Color code (yellow with border).
Write an equation for the objective in a cell. Color code (orange with heavy
border).
Put all three components (LHS, /=/, RHS) of each constraint into three cells
on the spreadsheet.
Some Examples:
Production Planning
Diet / Blending
Workforce Scheduling
Transportation / Distribution
Assignment
Optimization The McGraw-Hill Companies,
Inc., 2003
4.23
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Product Mix Exercise
Blue Ridge Hot Tubs manufactures and sells two models of hot tubs: the Aqua-
Spa and the Hydro-Lux. Howie Jones, the owner and manager of the company
needs to decide how many of each type of hot tub to produce during his next
production cycle. Howie buys prefabricated fiberglass hot tub shells from a
local supplier and adds the pump and tubing to the shells to create his hot tubs.
(The supplier has the capacity to deliver as many hot tub shells as Howie
needs.) Howie installs the same type of pump into both hot tubs. He will have
only 200 pumps available during his next production cycle. From a
manufacturing standpoint, the main difference between the two models of hot
tubs is the amount of tubing and labor required. Each Aqua-Spa requires 9
hours of labor and 12 feet of tubing. Each Hydro-Lux requires 6 hours of
labor and 16 feet of tubing. Howie expects to have 1,566 production labor
hours and 2,880 feet of tubing available during the next production cycle.
Howie earns a profit of $350 on each Aqua-Spa he sells and $300 on each
Hydro-Lux he sells. He is confident that he can sell all the hot tubs he
produces. The question is, how many Aqua-Spas and Hydro-Luxes should
Howie produce if he wants to maximize his profits during the next production
cycle?
Source: Ragsdale, Spreadsheet Modeling and Decision Analysis.
Optimization The McGraw-Hill Companies,
Inc., 2003
4.24
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Elements Common to Every Problem
Decision variables:
number of aqua-spas (A) to produce and
number of hydro-luxes (H) to produce.
Objective function: Max: Profit = 350 A + 300 H
Constraints:
Pump 1A + 1H <= 200
Labor 9A + 6H <= 1566
Tubing 12A + 16H <= 2880
5
Optimization The McGraw-Hill Companies,
Inc., 2003
4.25
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
0 1530456075 90 105120135150165180195210225240255270285300
0
15
30
45
60
75
90
105
120
135
150
165
180
195
210
225
240
255
270
HydroLux
Payoff: 300.0H
Optimal Decisions(HydroLux,AquaSpa): ( 0.0, 0.0)
Pump: 1.0HydroLux + 1.0AquaSpa <= 200.0
Graphical Solution Using Graphic LP Optimizer
Optimization The McGraw-Hill Companies,
Inc., 2003
4.26
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
0 1530 456075 90105120135150165180195210225240255270285300
0
15
30
45
60
75
90
105
120
135
150
165
180
195
210
225
240
255
270
285
300
AquaSpa
HydroLux
Payoff: 300.0HydroLux+ 350.0AquaSpa=
Optimal Decisions(HydroLux,AquaSpa): ( 0.0, 0.0)
Pump: 1.0HydroLux + 1.0AquaSpa <= 200.0
: 6.0HydroLux + 9.0AquaSpa <= 1566.0
Graphical Solution Using Graphic LP Optimizer
Optimization The McGraw-Hill Companies,
Inc., 2003
4.27
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
0 9 18 27 36 45 54 63 72 81 90 99 108 117 126 135 144 153 162 171 180
0
8
16
24
32
40
48
56
64
72
80
88
96
104
112
120
128
136
144
152
160
168
AquaSpa
HydroL
Payoff: 300.0H
Optimal Decisions(HydroLux,AquaSpa): ( 0.0, 0.0)
Pump: 1.0HydroLux+ 1.0AquaSpa<= 200.0
: 6.0HydroLux+ 9.0AquaSpa <= 1566.0
: 16.0HydroLux+ 12.0AquaSpa <= 2880.0
Graphical Solution Using Graphic LP Optimizer
Constraints
Optimization The McGraw-Hill Companies,
Inc., 2003
4.28
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
0 9 18 27 36 45 54 63 72 81 90 99 108 117 126 135 144 153 162 171 180
0
8
16
24
32
40
48
56
64
72
80
88
96
104
112
120
128
136
144
152
160
168
AquaSpa
HydroL
Payoff: 300.0 H
Optimal Decisions(HydroLux,AquaSpa): ( 0.0, 0.0)
Pump: 1.0HydroLux+ 1.0AquaSpa<= 200.0
: 6.0HydroLux + 9.0AquaSpa <= 1566.0
: 16.0HydroLux+ 12.0AquaSpa<= 2880.0
Graphical Solution Using Graphic LP Optimizer
Feasible Solution Space
Optimization The McGraw-Hill Companies,
Inc., 2003
4.29
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
0 9 18 27 36 45 54 63 72 81 90 99 108 117 126 135 144 153 162 171 180
0
8
16
24
32
40
48
56
64
72
80
88
96
104
112
120
128
136
144
152
160
168
AquaSpa
HydroL
Payoff: 300.0HydroLux+ 350.0AquaSpa= 66100.0
Optimal Decisions(HydroLux,AquaSpa): (78.0, 122.0)
Pump: 1.0HydroLux+ 1.0AquaSpa<= 200.0
: 6.0HydroLux+ 9.0AquaSpa<= 1566.0
: 16.0HydroLux+ 12.0AquaSpa<= 2880.0
Graphical Solution Using Graphic LP Optimizer
Optimal Solution
Optimization The McGraw-Hill Companies,
Inc., 2003
4.30
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Organizing Spreadsheet & Entering Formulas
D6. =SUMPRODUCT($B$5:$C$5,B6:C6)
D9. =SUMPRODUCT($B$5:$C$5,B9:C9)
D10. =SUMPRODUCT($B$5:$C$5,B10:C10)
D11. =SUMPRODUCT($B$5:$C$5,B11:C11)
Decision Variable Cells
Decision Variable Coefficients
Constraint Coefficients
Constraint RHS Formulas
Constraint RHS Limits
6
Optimization The McGraw-Hill Companies,
Inc., 2003
4.31
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Tools | Solver
Optimization The McGraw-Hill Companies,
Inc., 2003
4.32
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
Sensitivity Analysis
Optimization The McGraw-Hill Companies,
Inc., 2003
4.33
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
A Classic Problem
See In class handout.
First, identify the decision variables, objective
function and constraints.
Second, think about spreadsheet layout.
Third, implement and solve model.
Optimization The McGraw-Hill Companies,
Inc., 2003
4.34
McGraw-Hill/Irwin
Modified for Quan 6610 by Dr. Jim Grayson
In Class Exercise
End of chapter problem 4.6