Introduction To or - Judy Pastor

5/2/2012 Operations Research Group
Continental
Airlines
Introduction to Operations
Research
Judy Pastor
Steven Coy
Statistical Concepts, Optimization,
Heuristics, Simulation,
and Forecasting
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Sum and Product Notation
n
i
i
x

m
j
j
n
i
i
y x
A sum of a row or column of n numbers
Ex. X = (1, 3, 4, 9)
= 13 4 9 = 16
An iterated sum: Sums a matrix of
numbers having n rows and j columns
A sequential product of n numbers
Ex. X = (1, 3, 4, 9)
= 13 4 9 = 108
[
n
i
i
x
[
4
i
i
x
4
i
i
x
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Convex Set
The set of all the points that are bounded by this curve

Concave Set
The set of all points that are bound by this curve

Convex and concave sets
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Probability Concepts
Experiment
A repeatable procedure
Has a well defined set of possible outcomes
Sample outcome
Potential result of an experiment, denoted e
Sample space
The set of all possible outcomes, denoted S
Event
A subset of the sample space corresponding to the definition of the
event, denoted E
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Probability of an Event
Probability is the degree of chance or likelihood that
and event will occur in an experiment
Calculating the probability for a discrete or countable
problem
1. Find the sum of possible outcomes that satisfy the definition of the
event
2. Find the sum of the total number of possible outcomes
3. Divide the result in 1 by the result in 2
In mathematical notation
P(E) = Ee e {E} / E e e {S}
P(E) s P(S) = 1
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P(FreqFlyer) = 1MM/5MM = .20 or 20%
Note: P(S) = 1

Example
Experiment: Pick a pax from the passenger database
Sample Space: 5 million total pax; 1 million pax are
frequent fliers
Event: Passenger is a frequent flier

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Union and Intersection of Two Events
Intersection
The sum of the sample outcomes of two or more events that are common
to all of these events
A

B

Typically identified by the word and as in A and B

Union
The sum of the sample outcomes of two or more events
AB

= A + B - A

B

Typically identified by the word or as in A or B

Probability of the Union of Two Events
P(AB)

= P(A) + P( B) - P( A

B

)

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Example
Experiment: Pick a pax at random from the passenger
database
frequent fliers; 2.7 million pax are female;
600 thousand frequent fliers are female
Event: Passenger is a female or a frequent flier

P(Female) = 2.7MM/5MM = 54%
P(FreqFlyer) = 20%
P(Female and FreqFlyer) = 0.6MM/5MM = 12%

P(Female or FreqFlyer) = 54% + 20% - 12% = 62%

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Conditional Probability
Conditional probability is the probability of an event, A,
given that a related event, B, has already occurred
P(A|B) = P(A B)/P(B)
Conditional probability effectively reduces the size of the
sample space
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Example

P(Female and FreqFlyer) = 0.6MM/5MM = 12%
P(Female) = 54%

P(FreqFlyer| Female) = 0.12/0.54 = 22.2%

Experiment: Pick a passenger at random from the passenger
database
frequent fliers; 2.7 million pax are female;
600 thousand frequent fliers are female
Event: Passenger is a frequent flier given that the
pax is female

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Calculating Expected Value
Expectation is a long-run weighted average
Example
What is the expected return from running a revenue integrity process?
The process, which searches for duplicate bookings and expired TTLs,
costs $0.1 for every record that the process scans.
For each duplicate reservation found, we receive $100 in incremental
revenue and for each expired TTL, we receive $25.
We know that the long-run probability that a reservation will have a dupe
is P(D) = 0.15% and that a TTL is expired is P(TE) = 0.1%
If we use the process to scan 100 K reservations, what is the expected
return?
This requires an expected value computation
E(R) = P(D) * $100 + P(TE) * $25 - $0.10
E(R) = 0.15% * $100 + 0.1% * 25 - $0.10 = $0.175
E(R/100 K) = $0.05 * 100 K = $5000
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Random Variables
Random Variables (RV) are characteristics or outcomes that
vary from observation to observation
Independence of two RVs
two RVs are independent if the outcome of one does not effect the
outcome of another => P(A|B) = P(A)
Correlation of two random variables
Two RVs are correlated if the knowledge of the outcome of one gives us
an indication of the outcome of the other
Positive: X moves with Y
Negative: as X increases, Y decreases
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Probability Distribution of a RV
Consider the unconstrained demand for a leisure class ticket on Flt 102:
Lets compile the
demand for each
departure of Flt 102
for a full year and
create a frequency
histogram.
Notice that the
histogram is
mound-shaped and
approximates a
familiar bell-
shaped curve.
4
7
4
4
4
1
3
9
3
6
3
3
3
0
2
7
2
5
2
2
1
9
1
6
1
3
1
1
8
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The bell-shaped curve that we saw on the last slide is a
normal density curve
Using this chart, we could argue that demand for this flight is
normally distributed
Probability calculations with a normal distribution
Example: What is the probability that demand will be less than or equal to
35 pax?
First, we standardize the curve--transform it so that the area under the
curve is equal to 1 (we use a z-transform)
We then find the area under the curve that satisfies the definition of our
event (the interval 0 to 35)
The area under the curve from 0 to 35 = P(D s 35) ~ .84
Probability Distribution of a Continuous RV
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To find the probability, we find the interval on
the horizontal axis and calculate the area under
the curve corrsponding to that interval
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
-
5
.
0
-
4
.
0
-
3
.
0
-
2
.
0
-
1
.
0
0
.
0
1
.
0
2
.
0
3
.
0
4
.
0
5
.
0
x
f

(
x
)
P(D<X)=A
Calculating a Normal Probability
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More About Distributions
Cumulative distribution
In our demand example, we found a probability for a single value of x
A cumulative distribution gives us the probability of D s x for any
value of x
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 5 1
0
1
5
2
0
2
5
3
0
3
5
4
0
4
5
5
0
x
p
r
o
b
a
b
i
l
i
t
y

D

<
=

x
Cumulative
Normal
distribution
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0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
-
5
.
0
-
4
.
0
-
3
.
0
-
2
.
0
-
1
.
0
0
.
0
1
.
0
2
.
0
3
.
0
4
.
0
5
.
0
x
f

(
x
)
Truncated Normal Distribution
Demand processes that are described by a normal
distribution are truncated at 0--demand cannot be negative
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Some Common Distributions
Poisson: used to describe the arrival pattern (or process) of
people to a system
For example, 5 people request a certain fair class product per hour
Mean = variance
Exponential: used to describe service times
If a process generates poisson arrivals, the generating process is
exponential
Has special properties that makes it a favorite for queueing systems
(waiting lines) and reliability
Uniform (a favorite, because it is easy): the probability is
the same throughout
ExampleU(10, 20): P(x > 15 ) = P(10 < x < 15)
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Statistical Measures
Central tendency
Mean = average
Median = middle value in a sorted list
Mode = largest value or highest portion of a probability
density curve
Error measures
e = x - prediction of x
MAD(MAE): Mean absolute deviation (error): E |e| / n
MAPE: Mean absolute percentage error E |e| /x / n
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More Measures
Variance: Measures the dispersion (spread) of the
observations
Standard deviation: The square root of the variance
Coefficient of variation: The standard deviation divided
by the mean--stated as a percentage
Skew: Measures the asymmetry of a distribution
mean > median: Positive or right-skewed

mean < median: Negative or left-skewed
Correlation: Statistical measure of the relationship
between two variables from -1, perfect negative
correlation to 1, perfect positive correlation
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Truncated Normal Distribution
In RM, the tails of the normal demand curve typically
extend beyond the capacity of the plane
This is why we use unconstraining (detruncation)
algorithms to approximate the tail of the curve

0.00
0.01
0.02
0 2
0
4
0
6
0
8
0
1
0
0
1
2
0
1
4
0
1
6
0
1
8
0
2
0
0
x
f

(
x
)
Cap = 125
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Operations Research
application of mathematical techniques, models, and tools to
a problem within a system to yield the optimal solution
Phases of an OR Project
formulate the problem
develop math model to represent the system
solve and derive solution from model
test/validate model and solution
establish controls over the solution
put the solution to work
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Linear Programs A Major Tool of OR
Linear Programs (LPs) are a special type of mathematical
model where all relationships between parts of the system
being modeled can be represented linearly (a straight line).
Not always realistic, but we know how to solve LPs.
May need to approximate a relationship that is slightly non-
linear with a linear one.
When to use: if a problem has too many dimensions and
alternative solutions to evaluate all manually, use an LP to
evaluate.
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Linear Programs A Major Tool of OR
LPs can evaluate thousands, millions, etc. of different
alternatives to find the one that best meets the objective of
the business problem.
Fleet Assignment Model - assign aircraft to flight legs to minimize cost
and maximize revenue
Revenue Management - set bid prices to maximize revenue and/or
minimize spill
Crew Scheduling - schedule crew members to minimize number of crew
needed and maximize utilization

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Linear Program Formulation
Understand the system and environment to which the
problem belongs
Understand the problem and the objective to be achieved
State the model - clear idea of problem and what can and can
not be included in the model
Collect Data - get data/parameters/constraints and
boundaries of system and interrelationships
Determine decisions - define decision variables - what do we
need the model to tell us?
Formulate and solve model
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Example: RM Network LP
Problem - how many passengers of each itinerary and fare
class should be accepted on each flight to achieve the
maximum revenue for the flight network?
Statement - the model should tell us the above
Data - demand by itinerary/fare class, aircraft capacity,
overbooking levels, expected revenue by itinerary/fare class
Decisions - how many passengers of each itinerary/fare class
to accept on each flight leg
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Example: RM Network LP Data Collection
Two Flights: SFO-IAH, IAH-AUS
Two fare classes: Y-high fare, Q-low fare
Three itineraries: SFOIAH, IAHAUS, SFOAUS
Six fares:

Flight capacity: SFO-IAH 124, IAH-AUS 94
No overbooking

Fares
Market Y Q
SFOIAH 400 300
IAHAUS 250 100
SFOAUS 450 320
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Example: RM Network LP Data Collection
Demand
Market Y Q
SFOIAH 30 90
IAHAUS 50 30
SFOAUS 20 50
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Example: RM Network LP Formulation Model
Data Definition:
F set of flights = {SFOIAH, IAHAUS}
f index of F (1,2)
CAP
f
capacity of flight
f
= {124, 94 }

I set of itineraries {SFOIAH, IAHAUS, SFOAUS}
i index of I (1,2,3)
IF
f
set of itineraries over flight f
IF
1
={SFOIAH,SFOAUS} IF
2
={IAHAUS,SFOAUS}
C set of classes {Y, Q}
c index of C (1,2)
DMD
i,c
demand for itinerary i and class c
FARE
i,c
fare for itinerary i and class c
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Now that we have defined all the data that we know about
the model, we now must define what we want the model to
tell us.
Define decision variables:
X
i,c
# pax accepted for itinerary i and class c
There are 3 itineraries and 2 classes so there are a total of 6
decision variables.
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Many sets of values (collectively called solutions) for the six
X
i,c
variables exist which could satisfy the constraints
(formulation coming) of aircraft capacity and maximum
demand. These are feasible solutions.
Which solution do we want?
The feasible solution for this is optimal.
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Example: RM Network LP Objective Function
c i
i c
c i
X fare MAX
, ,
-

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Example: RM Network LP Obj. Function & Constraints
The Objective Function is an expression that defines the
optimal solution, out of the many feasible solutions. We can
either
MAXimize - usually used with revenue or profit or
MINimize - usually used with costs
Feasible solutions must satisfy the constraints of the problem.
LPs are used to allocate scarce resources in the best possible
manner. Constraints define the scarcity.
The scarcity in this problem involves a fixed number of seats
and scarce high paying customers.
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c class fare
i, itinerary each for
: s Constraint Demand
F in f each for
: s Constraint Capacity
, ,
,
c i c i
f
c IF i
c i
DMD X
CAP X
f
s
s
e
Example: RM Network LP Constraints
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Example: RM Network LP Constraints
Rules for Constraints
must be a linear expression
decision variables can be summed together but not multiplied or divided
by each other
have relational operators of =, <=, or >=
must be continuous
Constraints define the feasible region - all points within the
feasible region satisfy the constraints.
The feasible region is convex.
The optimal solution lies at an extreme point of the feasible
region.

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Example: RM Network LP Cplex Input File
MAX
400 X_SFOIAH_Y + 300 X_SFOIAH_Q +
250 X_IAHAUS_Y + 100 X_IAHAUS_Q +
450 X_SFOAUS_Y + 320 X_SFOAUS_Q
ST
CAPY_SFOIAH: X_SFOIAH_Y + X_SFOIAH_Q + X_SFOAUS_Y + X_SFOAUS_Q <= 124
CAPY_IAHAUS: X_SFOAUS_Y + X_SFOAUS_Q + X_IAHAUS_Y + X_IAHAUS_Q <=94
DMD_SFOIAH_Y: X_SFOIAH_Y <= 30
DMD_SFOIAH_Q: X_SFOIAH_Q <= 90
DMD_IAHAUS_Y: X_IAHAUS_Y <= 50
DMD_IAHAUS_Q: X_IAHAUS_Q <= 30
DMD_SFOAUS_Y: X_SFOAUS_Y <= 20
DMD_SFOAUS_Q: X_SFOAUS_Q <= 50
END

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Example: RM Network LPSolution - Constraints

SECTION 1 - ROWS

NUMBER ......ROW....... AT ...ACTIVITY... SLACK ACTIVITY ..LOWER LIMIT. ..UPPER LIMIT. .DUAL ACTIVITY

1 obj BS 58100 -58100 NONE NONE 1
2 CAPY_SFOIAH UL 124 0 NONE 124 -300
3 CAPY_IAHAUS UL 94 0 NONE 94 -100
4 DMD_SFOIAH_Y UL 30 0 NONE 30 -100
5 DMD_SFOIAH_Q BS 74 16 NONE 90 0
6 DMD_IAHAUS_Y UL 50 0 NONE 50 -150
7 DMD_IAHAUS_Q BS 24 6 NONE 30 0
8 DMD_SFOAUS_Y UL 20 0 NONE 20 -50
9 DMD_SFOAUS_Q BS 0 50 NONE 50 0

obj is the objective function value - total revenue from the small network of flights
CAPY_SFOIAH and CAPY_IAHAUS are the capacity constraints. Both are at UL -
upper limit with activities of 124 and 94, respectively (i.e. both flight legs are full).
Dual Activity on each capacity constraint is also known as the Shadow Price of the
flight. The SP of SFOIAH is 300 and the SP of IAHAUS is 100. In RM terms, this
means that the value of one more seat on SFOIAH is 300 and the value of one
more seat on IAHAUS is 100. Alternately, 300 and 100 also define the lowest fare
that should be accepted on each leg.
DMD_{SFOIAH,IAHAUS}_{Y,Q} are the demand constraints. SFOIAH_Y,
IAHAUS_Y, and SFOAUS_Y are at upper level (i.e. accept all Y passengers).
Reject some/all of Q.

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Example: RM Network LP Solution - Decision Variables
SECTION 2 - COLUMNS

NUMBER .....COLUMN..... AT ...ACTIVITY... ..INPUT COST.. ..LOWER LIMIT. ..UPPER LIMIT. .REDUCED COST.

10 X_SFOIAH_Y BS 30 400 0 NONE 0
11 X_SFOIAH_Q BS 74 300 0 NONE 0
12 X_IAHAUS_Y BS 50 250 0 NONE 0
13 X_IAHAUS_Q BS 24 100 0 NONE 0
14 X_SFOAUS_Y BS 20 450 0 NONE 0
15 X_SFOAUS_Q LL 0 320 0 NONE -80

This section of the solution report shows the values for the decision variables at
the optimal solution.
The LP tells us to accept 30 SFOIAH Y, 74 SFOIAH Q (reject 16), accept 50
IAHAUS Y, accept 24 IAHAUS Q (reject 6), accept 20 SFOAUS Y, and
accept no SFOAUS Q.
Note that the LP cut off all SFOAUS Q booking requests because their fare of
320 is less than the sum of the shadow prices of the two flights (300+100 =
400 > 320).
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Example: RM Network LP Solving LPs
A problem that sounds small, like our example, can balloon
out into many decision variables and constraints.
Computer software is available to solve linear programs.
Cost of programs depends on size of problems to be solved.
Excel has an Add-in to solve small LPs.
CPLEX is state of the art, but more expensive.
LPs with 100,000s row and columns can be solved.
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Example: RM Network LP Solving LPs
The first method of solving LPs was invented during WWII
by George Dantzig. The algorithm is called SIMPLEX. It is
based on convexity theory and that the optimal solution will
occur at an extreme point of the solution space
Newer state of the art algorithms are based on steepest
descent gradient methods and are called interior point
methods
Interior point methods can be extremely fast (much faster
than SIMPLEX) for certain structures of problems
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Degeneracy
When an LP has more than one unique way to reach an
optimal objective function value, we say that the problem is
degenerate
LP solvers can detect degeneracy but only report one solution
It would be nice to see all possible solutions
Different solvers can land on different solutions of a
degenerate problem, depending on solution strategy
The RM Network problem is usually degenerate
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Other Types of Linear Optimizations
MIP (Mixed Integer Programming)
is similar to LP but at least one decision variable is required to be a integer
value
violates the LP rule that decision variables be continuous
is solved by branch and bound - solving a series of LPs that fix the
integer decision variables to various integer values and comparing the
resulting objective function values
is done in a smart way to avoid enumerating all possibilities
is useful, since you can not have .3 of an aircraft

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Other Types of Linear Optimization
Network problem
is a special form of LP which turns out to be naturally integer
can be solved faster than an LP, using a special network optimization
algorithm
is very restrictive on types of constraints that can be present in the problem
Shortest Path
finds the shortest path from the source (start) to sink (end) nodes, along
connecting arcs, each having a cost associated with them
is used in many applications
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Other Optimization Models
Quadratic Program
has a quadratic objective function with linear constraints
can be applied to revenue management, because it allows fare to rise with
demand within a problem
price(OD) = 50 + [5*numpax(OD)]
max revenue = price * numpax

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Other Optimization Models
Non-linear Program (NLP)
can have either non-linear objective function or non-linear constraints or
both
feasible region is generally not convex
much more difficult to solve
but it is worth our time to learn to solve them since world is actually non-
linear most of the time
some non-linear programs can be solved with LPs or MIPs using
piecewise linear functions
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Deterministic versus Stochastic
Two broad categories of optimization models exist
deterministic
parameters/data known with certainty
stochastic
parameters/data know with uncertainty
Deterministic models are easier to solve. Our RM LP is
deterministic (we pretend we know the demand with
certainty).
Stochastic model are difficult to solve. In reality, we know a
distribution about our demand. We get around this in real
life by re-optimizing.
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Deterministic versus Stochastic
Deterministic optimization ignores risk of being wrong about
parameter/data estimates.
No commercial software packages are currently available to
do generalized, stochastic optimization.

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Heuristics
Definition - educated guess
When you use a heuristic to solve a problem, you have a gut
feeling that it is a pretty good solution, but can not prove it
mathematically
You can not prove that there is not a better solution out there
To qualify as an optimal solution, there must be a
mathematical proof to say that no better solution exists

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Types of Heuristics
Greedy Algorithms - also called myopic - nearsighted
solutions.
Example: in our RM Network LP, the greedy solution would
be to take the highest fare passengers possible on each leg,
without looking at the consequences of doing so on the
connecting leg. So the greedy solution is to take the SFOAUS
Q passengers at a fare of $320. But the optimal solution
looks at displacement and says do not take any SFOAUS Q
passengers.
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Heuristics
Combinatorial problems can grow exponentially when the
number of decisions needed to be made grows linearly.
Heuristics can be used in these cases to get a good solution in
a reasonable amount of time.
TSP - Travelling Salesman Problem is a good example of this.
EMSR is a heuristic. It is provably optimal for two fare
classes, but not more. However, it gives a good answer in a
finite amount of time and takes probability into account.
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Simulation
When a problem is too complicated to be put into an LP or a
solvable non-linear optimization, one way to study the
problem is to simulate it under different conditions.
PODS (Passenger O & D Simulation) is one example.
Simulation can tell us something about a set of parameters
(i.e. total revenue, load factor), but does not point us in the
direction of an improvement.

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Forecasting
Types of forecasting techniques used in RM:
pick-up
booking regression
exponential smoothing
Pick-up - adds average future bookings from historical
observations to bookings on hand.
Booking Regression - computes best fit for history of
bookings on hand (independent) to final booked (dependent)
final booked = a + b*(bookings on hand)
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Forecasting
Exponential Smoothing - similar to pick-up except the
average is weighted. The most recent historical observations
are weighted most heavily, decreasing for earlier
observations.
recursive relationship
Avg Pick Up = a * (pick up
t-1
) + (1-a)
2
* (pick up
t-2
) + ...
boils down to
Avg Pick Up = a * (pick up
t-1
) + (1-a) * (last fcst pick up)
Problem is how to estimate a. 0<=a<=1
How much weight should be on most recent observation?

= AvgPU
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Questions?

Introduction To or - Judy Pastor

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