IQDM

Session 1
Introduction to Quantitative
Decision Making
(IQDM)
• What is scheduled for discussion during
today’s session?
 Course Outline
• Course material and textbook

• Course Objectives

• Includes:
– Sharpening your thinking
– Sharpening your ability to intuitively see solutions

• CLO and PLO

• Session-wise plan
 Evaluation and Grading
• CP

• End-term

• Two Quizzes
– Usually open notebook (your own handwritten
notes), closed book

• Utmost honesty expected

 Additional References
1. Proceedings of the Advanced Workshop and
Tutorial on Operations Research (AWTOR) 2012,
Organized by and at IIM Indore, Sponsored by
ORSI Ahmedabad Chapter,
Edited by Nagarajan K, and N Ravichandran,
Allied Publishers, 2014.

2. Applied Mathematical Programming by Bradley,

Hax, and Magnanti, Addison-Wesley, 1977.
http://web.mit.edu/15.053/www/AMP.htm
• Your expectations from this course?
 Course modules
• First part:
– Module I and II:
LP (Linear Program)
or
LPP (Linear Programming Problem),
and applications
• Second part:
– Module III: ILP (Integer LP) and MILP (Mixed ILP)

• Third part:
– Module IV: Decision Trees
 Linear?
• Straight line (in 2D)

• Plane (in 3D)

• Examples:
z = x + 2y
3x − 4y = 8
x1 + 5x2 − 2x3 = 3
 Recall

y = mx + c is a straight line

where m = slope, y = c when x = 0

 Question

• Given that x and y are variables, is

(x/y) + (x2/y) = 10x

linear?
• Note that if the above equation is given to you
(as well-defined), then y cannot be 0.
• Provided x is never 0, this equation can be
written linearly, because:

(x/y) + (x2/y) = 10x

 (1/y) + (x/y) = 10

 1 + x = 10y
 LP Assumptions
• Proportionality

• Additivity

• Certainty

• Divisibility
 Example 1: LP Formulation
There are two types of travel bags company AAA
manufactures – big and small.

AAA sells big bags at Rs. 1000 per bag, and small
bags at Rs. 800 per bag.

The raw materials required to make a big bag

and a small bag cost Rs. 300 and Rs. 200
respectively.
A big bag requires 3 hours for cutting and
dyeing, 1 hour for stitching and 1 hour for
finishing, where as a small bag requires 2 hours,
2 hours and 1 hour, respectively, for these tasks.

The company cannot manufacture more than

1000 bags a month, cannot spend more than
500 hours a month.

Formulate as an LP.
• What is AAA’s decision question?

• To achieve what objective?

• Limitations or constraints?
 LP Formulation in general

• Decision variables

• Objective function

• Constraints
 In general…

• Objective is to maximize or minimize a linear

function, subject to linear constraints.

• Non-negativity
AAA has to

• decide the number of big bags and the

number of small bags to make, so as to

• maximize total contribution

• subject to the given constraints

Decision variables:
Number of big bags, x, and the number of small bags, y.

Objective function:
max z = 700x + 600y

Constraints:
x + y  1000
5x + 5y  500

x, y  0
 Notation

• Objective function: z, z1, z2, …

• Decision variables: x, y, u, v, x1, x2, …

• Constants: a, b, c, …
 Solving the LP

If feasible, then

• Find the optimal objective function value

• Find all possible optimal values of the decision

variables
• A feasible solution is one that satisfies all
constraints of the problem.

• An optimal solution is a feasible solution that

results in the optimal value of the objective
function.
(Optimal = max or min, as the case may be).
Decision variables:
Number of big bags, x, and the number of small bags, y.

Objective function:
max z = 700x + 600y

Constraints:
x + y  1000
5x + 5y  500

x, y  0
 Example 2

• Will be discussed in session 2.

 Example 3: Staffing Problem
The Clark County Sheriff’s department schedules police
officers for 8-hour shifts.

The beginning times for the shifts are 8AM, noon, 4PM,
8PM, midnight and 4AM.

An officer beginning a shift at any of these times works for

the next 8 hours.

During normal operations, the number of officers needed

varies depending on the time of the day.

Management Science/Operations Research: A Strategic Approach by David Bell

 The department staffing guidelines require the following
minimum number of officers on duty.

Time of Day Minimum officers on Duty

8:00AM – Noon 5
Noon – 4:00PM 6
4:00PM – 8:00PM 10
8:00PM – Midnight 7
Midnight – 4:00AM 4
4:00AM – 8:00AM 6

The department wants to minimize the total number of officers

needed to meet all shift requirements. Formulate as an LP.
Decision Variables
x1= Number of officers that begin work at 8AM & work shifts (8AM - Noon) &
(Noon to 4PM)
x2= Number of officers that begin work at Noon & work shifts (Noon - 4PM) &
(4PM - 8PM)
x3= Number of officers that begin work at 4PM & work shifts (4PM – 8PM) & (8PM
to Midnight)
x4= Number of officers that begin work at 8PM & work shifts (8PM - Midnight) &
(Midnight – 4AM)
x5= Number of officers that begin work at Midnight & work shifts (Midnight –
4AM) & (4AM to 8AM)
x6= Number of officers that begin work at 4AM & work shifts (4AM – 8AM) &
(8AM - Noon)
Objective Function

Minimize the total number of officers needed to meet all shift

requirements.

That is:
min z = x1 + x2 + x3 + x4 + x5 + x6
 Constraints

Each shift must have at least the minimum number of

officers
• x6+x1 ≥ 5
• x1+x2 ≥ 6
• x2+x3 ≥ 10
• x3+x4 ≥ 7
• x4+x5 ≥ 4
• x5+x6 ≥ 6

Non-negativity constraints
x1 ≥ 0, x2 ≥ 0, x3 ≥ 0, x4 ≥ 0, x5 ≥ 0, x6 ≥ 0
 LP Formulation
DVs: x1 , x2 , x3 , x4 , x5 , x6
= The number of officers who begin work at 8AM, Noon,
4PM, 8PM, Midnight and 4AM, respectively.

min z = x1 + x2 + x3 + x4 + x5 + x6
s.t.
x6+x1 ≥ 5
x1+x2 ≥ 6
x2+x3 ≥ 10
x3+x4 ≥ 7
x4+x5 ≥ 4
x5+x6 ≥ 6
x1 ≥ 0, x2 ≥ 0, x3 ≥ 0, x4 ≥ 0, x5 ≥ 0, x6 ≥ 0
 Example 4: Investment Problem

A portfolio manager in charge of a bank

portfolio has $10 million to invest. The securities
available for purchase, as well as their respective
quality ratings, maturities, and yields, are shown
in the following table:

Bradley, Hax, Magnanti

Bond name Bond type Quality Years to Yield to After-tax
maturity maturity yield
A Municipal 2 9 4.3 4.3
Bond name Bond type Quality Years to Yield to After-tax
maturity maturity yield
A Municipal 2 9 4.3 4.3
B Agency 2 15 5.4 2.7
Bond name Bond type Quality Years to Yield to After-tax
maturity maturity yield
A Municipal 2 9 4.3 4.3
B Agency 2 15 5.4 2.7
C Government 1 4 5.0 2.5
Bond name Bond type Quality Years to Yield to After-tax
maturity maturity yield
A Municipal 2 9 4.3 4.3
B Agency 2 15 5.4 2.7
C Government 1 4 5.0 2.5
D Government 1 3 4.4 2.2
Bond name Bond type Quality Years to Yield to After-tax
maturity maturity yield
A Municipal 2 9 4.3 4.3
B Agency 2 15 5.4 2.7
C Government 1 4 5.0 2.5
D Government 1 3 4.4 2.2
E Municipal 5 2 4.5 4.5
The bank places the following policy limitations
on the portfolio manager’s actions:
1. Government and agency bonds must total at
least $4 million.
2. The average quality of the portfolio cannot
exceed 1.4 on the bank’s quality scale. (Note
that a low number on this scale means a
high-quality bond.)
3. The average years to maturity of the portfolio
must not exceed 5 years.
If you are the portfolio manager, what would
your objective be?

What all factors limit your objective?

(What are the constraints?)
 Decision Variables
Let xA , xB , xC , xD and xE

be the amounts (in millions of dollars)

to be invested in bonds A, B, C, D and E,

respectively.
 Objective
• Maximize the total after tax returns.

• That is:

max z =
Bond name Bond type Quality Years to Yield to After-tax
maturity maturity yield
A Municipal 2 9 4.3 4.3
B Agency 2 15 5.4 2.7
C Government 1 4 5.0 2.5
D Government 1 3 4.4 2.2
E Municipal 5 2 4.5 4.5
 Objective
• Maximize the total after tax returns.

• That is:

max z = 0.043 xA + 0.027 xB + 0.025 xC

+ 0.022 xD + 0.045 xE
 Constraints
1. Government and agency bonds must total at
least $4 million.

2. The average quality of the portfolio cannot

exceed 1.4 on the bank’s quality scale.

3. The average years to maturity of the portfolio

must not exceed 5 years.
Bond name Bond type Quality Years to Yield to After-tax
maturity maturity yield
A Municipal 2 9 4.3 4.3
B Agency 2 15 5.4 2.7
C Government 1 4 5.0 2.5
D Government 1 3 4.4 2.2
E Municipal 5 2 4.5 4.5
Government and agency bonds must
total at least $4 million

xB + xC + xD  4
The average quality of the portfolio
cannot exceed 1.4
Bond name Bond type Quality Years to Yield to After-tax
maturity maturity yield
A Municipal 2 9 4.3 4.3
B Agency 2 15 5.4 2.7
C Government 1 4 5.0 2.5
D Government 1 3 4.4 2.2
E Municipal 5 2 4.5 4.5
 The average quality of the portfolio
cannot exceed 1.4
2 xA + 2 xB + xC + xD + 5 xE
gives the “total” quality (points).

Average is
(2xA + 2xB + xC + xD + 5xE)/(xA + xB + xC + xD + xE ).

The constraint is “Average  1.4”.

That is,
2xA + 2xB + xC + xD + 5xE  1.4(xA + xB + xC + xD + xE )
The average years to maturity of the
portfolio must not exceed 5 years
Bond name Bond type Quality Years to Yield to After-tax
maturity maturity yield
A Municipal 2 9 4.3 4.3
B Agency 2 15 5.4 2.7
C Government 1 4 5.0 2.5
D Government 1 3 4.4 2.2
E Municipal 5 2 4.5 4.5
 The average years to maturity of the
portfolio must not exceed 5 years

(9xA + 15xB + 4xC + 3xD + 2xE)/

(xA + xB + xC + xD + xE)

5
Anything else?
xA + xB + xC + xD + xE

 10
 Non-negativity

xA , xB , xC , xD , xE  0
 Example 5
• A product is assembled with 4 units of component A
and 3 units of component B.

• The manufacturing shop runs three different

processes, each of which requires varying amounts
of raw materials and produce different amounts of
A and B.

• Two types of raw materials are used. 100 units of

raw material I (RM I) and 200 units of raw material II
(RM II) are available to the shop each day.
TTN, Proc. AWTOR
The following table gives the information on the
quantities of raw materials consumed by each
process and the yield of A and B from each of
them

Input per run Output per run

Shop (units) (units)

RM I RM II A B
I 7 5 6 4
II 4 8 5 8
III 2 7 7 3
Formulate as an LP to maximize the number of
completed assemblies produced each day.
 Decision Variables

Let x1, x2 and x3 be the number of runs of

processes I, II and III, respectively.
100 units of raw material I (RM I) and 200 units
of raw material II (RM II) are available to the
shop each day.

Input per run Output per run

Shop (units) (units)

RM I RM II A B
I 7 5 6 4
II 4 8 5 8
III 2 7 7 3
 Constraints

• 7x1 + 4x2 + 2x3 ≤ 100

• 5x1 + 8x2 + 7x3 ≤ 200

• x1, x2, x3 ≥ 0
Objective Function?
 Example 6
A senior executive of a company recently opted for
VRS with a hefty packet of Rs. 100 crores. A Chit
Fund Company has offered the following
investment scheme for the benefit of such retired
people:
• "Invest a certain sum at the beginning of any
month, invest half of that amount beginning of
the next month and end of the second month,
you will get twice the amount invested originally
in the first month".

TTN, Proc. AWTOR

• This scheme is available for the next six months.

• The returns received at the end of any month can

be used immediately for reinvesting either as a
fresh investment or as a follow-up investment.

If you are in his/ her position, what will your aim be?

How will you achieve your aim/ objective?

Questions?
Thank You