CHAPTER 4
LINEAR PROGRAMMING APPLICATIONS IN
MARKETING, FINANCE, AND OPERATIONS
MANAGEMENT
CONTENTS
OPERATIONS
MARKETING FINANCIAL
01 02 03 MANAGEMENT
APPLICATIONS APPLICATIONS
APPLICATIONS
LINEAR PROGRAMMING HAS PROVEN TO BE ONE OF
THE MOST SUCCESSFUL QUANTITATIVE
APPROACHES TO DECISION MAKING.
APPLICATIONS HAVE BEEN REPORTED IN ALMOST
EVERY INDUSTRY. THESE APPLICATIONS INCLUDE
PRODUCTION SCHEDULING, MEDIA SELECTION,
FINANCIAL PLANNING, CAPITAL BUDGETING,
TRANSPORTATION, DISTRIBUTION SYSTEM DESIGN,
PRODUCT MIX, STAFFING, AND BLENDING.
variety of applications from the traditional
business areas of marketing, finance, and
operations management.
emphasize modeling, computer solution, and
interpretation of output.
mathematical model is developed for each
problem studied, and solutions are presented
for most of the applications.
In the chapter appendix we illustrate the use
of Excel Solver by solving a financial planning
problem.
MARKETING APPLICATIONS
Applications of linear programming in marketing
are numerous.
MEDIA SELECTION
Media selection applications of linear
programming are designed to help
marketing managers allocate a fixed
advertising budget to various
advertising media.
What advertising media
selection plan should be
recommended?
The decision to be made is
how many times to use each
medium.
decision variables:
DTV = number of times daytime TV is used
ETV = number of times evening TV is used
DN = number of times daily newspaper is
used
SN= number of times Sunday newspaper is
used
R= number of times radio is used
THE SOLUTION FOR THE RELAX-AND-ENJOY LAKE DEVELOPMENT
CORPORATION PROBLEM
ADVERTISING PLAN FOR THE RELAX-AND-ENJOY LAKE
DEVELOPMENT CORPORATION
MARKET RESEARCH
An organization conducts marketing
research to learn about consumer
characteristics, attitudes, and
preferences. Marketing research firms
that specialize in providing such
information often do the actual research
for client organizations.
What is the household, time-
of-day interview plan that will
satisfy the contract
requirements at a minimum
total interviewing cost?
decision-variable notation:
DC = the number of daytime interviews of
households with children
EC = the number of evening interviews of
households with children
DNC = the number of daytime interviews
of households without children
ENC = the number of evening interviews
of households without children
THE SOLUTION FOR THE MARKET SURVEY PROBLEM
FINANCIAL APPLICATIONS
In finance, linear programming can be
applied in problem situations involving
capital budgeting, asset allocation,
portfolio selection, financial planning,
and many others. In this section, we
describe a portfolio selection problem
and a problem involving funding of an
early retirement program.
Portfolio Selection
Portfolio selection problems involve
situations in which a financial manager
must select specific investments
Example:
stocks and bonds from a variety of
investment alternatives.
Management of Welte imposed the
following investment guidelines:
1. Neither industry (oil or steel) should
receive more than $50,000.
2. Government bonds should be at least
25% of the steel industry investments.
3. The investment in Pacific Oil, the high-
return but high-risk investment, cannot be
more than 60% of the total oil industry
investment.
The solution will provide investment recommendations for the management
of Welte Mutual Funds.
A =dollars invested in Atlantic Oil
P =dollars invested in Pacific Oil
M =dollars invested in Midwest Steel
H =dollars invested in Huber Steel
G =dollars invested in government bonds
we write the objective function for
maximizing the total return for the portfolio as:
Max 0.073A + 0.103P + 0.064M + 0.075H + 0.045G
The constraint specifying investment of the available $100,000 is
A + P + M + H + G = 100,000
The requirements that neither the oil nor the steel industry should receive
more than
$50,000 are
A + P ≤ 50 000
M + H ≤ 50 000
The requirement that government bonds be at least 25% of the steel
industry investment is expressed as
G ≥ 0.25 (M + H)
Finally, the constraint that Pacific Oil cannot be more than 60% of the total
oil industry
investment is
P ≤ 0.60 (A + P)
By adding the nonnegativity restrictions, we obtain the complete linear
programming model for the Welte Mutual Funds investment problem:
Max 0.073A + 0.103P + 0.064M + 0.075H + 0.045G
s.t.
A + P + M + H + G = 100,000 Available funds
A + P ≤ 50,000 Oil industry maximum
M + H ≤ 50,000 Steel industry maximum
G ≥ 0.25 (M + H) Government bonds minimum
P ≤ 0.60 (A + P) Pacific Oil Restriction
A, P, M, H, G ≥ 0
Financial Planning
Linear programming has been used for a
variety of financial planning applications. The
Management Science in Action, General
Electric Uses Linear Programming for Solar
Energy Investment Decisions, describes how
linear programming is used to evaluate various
scenarios to guide capital investment strategy
over a long-term horizon.
We define the decision variables as follows:
The objective function is to minimize the total dollars needed to meet the
retirement plan’s eight-year obligation, or
Min F
In general, each constraint takes the form:
(Funds available at the beginning of the year) - (Funds invested in bonds and
placed in savings) = (Cash obligation for the current year )
Using these results and the first-year obligation of 430, we obtain the constraint
for year 1:
F - 1.15B1 - 1B2 2 1.35B3 - S1 5 430 year 1
The new amount to be invested in savings for year 2 is S2. With an obligation
of 210, the constraint for year 2 is
0.08875B1 + 0.055B2 + 0.1175B3 + 1.04S1- S2 = 210 year 2
OPERATIONS
MANAGEMENT
APPLICATIONS
Linear programming applications
developed for production and operations
management include scheduling, staffing,
inventory control, and capacity planning. In
this section we describe examples with
make-or-buy decisions, production
scheduling, and workforce assignments.
A Make-or-Buy Decision
We illustrate the use of a linear
programming model to determine how
much of each of several component parts a
company should manufacture and how
much it should purchase from an outside
supplier.
We define the decision variables as follows:
BM = number of bases manufactured
BV = number of bases purchased
FCM =number of Financial cartridges manufactured
FCP =number of Financial cartridges purchased
TCM =number of Technician cartridges manufactured
TCP = number of Technician cartridges purchased
FTM =number of Financial tops manufactured
FTP =
number of Financial tops purchased
TTM =number of Technician tops manufactured
TTP =number of Technician tops purchased
The five demand constraints are:
BM + BP = 5000 Bases
FCM + FCP = 3000 Financial cartridges
TCM + TCP = 2000 Technician cartridges
FTM + FTP = 3000 Financial tops
TTM + TTP = 2000 Technician tops
Production Scheduling
One of the most important applications of
linear programming deals with multi period
planning such as production scheduling.
In arriving at the desired schedule, the
production manager will want to
identify the following:
1. Total production cost
2. Inventory holding cost
3. Change-in-production-level costs
Making this assumption, we write the inventory holding
cost portion of the objective function as
Inventory holding cost = 0.30s11 + 0.30s12 + 0.30s13 +
0.15s21 + 0.15s22 + 0.15s23
To incorporate the costs of fluctuations in production
levels from month to month, we
need to define two additional variables:
Im =increase in the total production level necessary during
month m
Dm = decrease in the total production level necessary
during month m
we write the third portion of the objective function
as:
Change-in-production-level costs = 0.50I1 + 0.50I2 +
0.50I3 + 0.20D1 + 0.20D2 + 0.20D3
Combining all three costs, the complete objective
function becomes
Min 20x11 + 20x12 + 20x13 + 10x21 + 10x22 + 10x23
+ 0.30s11+ 0.30s12 + 0.30s13 + 0.15s21 + 0.15s22 +
0.15s23 + 0.50I1+ 0.50I2 + 0.50I3 + 0.20D1 + 0.20D2 +
0.20D3
the demand requirement takes the form
(Ending inventory from previous month ) +
(Current production) - (Ending inventory for this
month ) = ( This month’s demand )
the constraints for meeting demand in the first
month become
500 + s11 - x11 = 1000
200 + s21 - x21 = 1000
Month 1
x11 - s11 = 500
x21 - s21 = 800
Month 2
s11 + x12 - s12 = 3000
s21 + x22 - s22 = 500
Month 3
s12 + x13 - s13 = 5000
s22 + x23 - s23 = 3000
we can add the constraints
s13 ≥ 400
s23 ≥ 200
To reflect these limitations, the following
constraints are necessary:
Machine Capacity
0.10x11 + 0.08x21 ≤ 400 month 1
0.10x12 + 0.08x22 ≤ 500 month 2
0.10x13 + 0.08x23 ≤ 600 month 3
Labor Capacity
0.05x11 + 0.07x21 ≤ 300 month 1
0.05x12 + 0.07x22 ≤ 300 month 2
0.05113 + 0.07x23 ≤ 300 month 3
Storage Capacity
2s11 + 3s21 = 10,000 month 1
2s12 + 3s22≤ 10,000 month 2
2s13 + 3s23= 10,000 month 3
Workforce Assignment
Workforce assignment problems frequently
occur when production managers must make
decisions involving staffing requirements for a
given planning period.
we can formulate McCormick’s problem as a
standard product-mix linear program with the
following decision variables:
P1 = units of product 1
P2 = units of product 2
The linear program is
Max 10P1 + 9P2
S.t.
0.65P1 + 0.95P2 ≤ 6500
0.45P1 + 0.85P2 ≤ 6000
1.00P1 + 0.70P2 ≤ 7000
0.15P1 + 0.30P2 ≤ 1400
P1, P2 ≥ 0
We need to add decision variables to the linear
programming model to account for such
changes.
bi =the labor-hours allocated to department i
for i = 1, 2, 3, and 4
tij = the labor-hours transferred from
department i to department j
With the addition of decision variables b1, b2,
b3, and b4, we write the capacity restrictions
for the four departments as follows:
0.65P1 + 0.95P2 ≤ b1
0.45P1 + 0.85P2 ≤ b2
1.00P1 + 0.70P2 ≤ b3
0.15P1 + 0.30P2 ≤ b4
Using department 1 as an example, We
determine the workforce allocation as follows:
b1 = (Hours initially in department 1) + (Hours
transferred into department 1) - (Hours
transferred out of department 1)
Thus, we can express the total workforce
allocation for department 1 as:
b1 = 6500 + t41 - t12 - t13
we have the labor balance equation or
constraint
b1 - t41 + t12 + t13 = 6500
Thus, the following labor balance constraints
for departments 2, 3, and 4 would be added to
the model:
b2 - t12 - t42 + t23 + t24 = 6000
b3 - t13 - t23 + t34 = 7000
b4 - t24 - t34 + t41 + t42 = 1400
The additional constraints are:
t12 + t13 ≤ 400
t23 + t24 ≤ 800
t34 ≤ 100
t41 + t42 ≤ 200
Blending Problems
Blending problems arise whenever a manager
must decide how to blend two or more
resources to produce one or more products.
In these situations, the resources contain one
or more essential ingredients that must be
blended into final products that will contain
specific percentages of each.
We define the decision variables as
xij + gallons of component i used in gasoline j,
where i = 1, 2, or 3 for components 1, 2, or 3,
and j = r if regular or j 5 p if premium
The six decision variables are:
x1r = gallons of component 1 in regular gasoline
x2r = gallons of component 2 in regular gasoline
x3r = gallons of component 3 in regular gasoline
x1p = gallons of component 1 in premium gasoline
x2p =gallons of component 2 in premium gasoline
x3p =gallons of component 3 in premium gasoline
The total number of gallons of each type of gasoline
produced is the sum of the number of gallons produced
using each of the three petroleum components.
Total Gallons Produced
Regular gasoline = x1r + x2r + x3r
Premium gasoline = x1p + x2p + x3p
The total gallons of each petroleum component are
computed in a similar fashion.
Total Petroleum Component Used
component 1 = x1r + x1p
component 2 = x2r + x2p
component 3 = x3r x3p
the total gallons of each component used,
we obtain the objective function:
Max 2.90(x1r + x2r + x3r) + 3.00s(1p + x2p + x3p)
- 2.50(x1r + x1p) - 2.60(x2r + x2p) - 2.84(x3r + x3p)
When we combine terms, the objective function becomes
Max 0.40x1r + 0.30x2r + 0.06x3r + 0.50x1p + 0.40x2p +
0.16x3p
The limitations on the availability of the three petroleum
components are
x1r + x1p ≤ 5,000 component 1
x2r + x2p ≤ 10,000 component 2
x3r + x3p ≤ 10,000 component 3
The first specification states that component 1 can account
for no more than 30% of the total gallons of regular
gasoline produced. That is,
x1r ≤ 0.30(x1r + x2r + x3r)
The second product specification listed in Table 4.14
becomes
x2r ≥ 0.40(x1r + x2r + x3r)
Similarly, we write the four remaining blending
specifications listed in Table 4.14 as
x3r ≤ 0.20(x1r + x2r 1 +3r)
x1p ≥ 0.25(x1p + x2p + x3p)
x2p ≤ 0.45(x1p + x2p + x3p)
x3p ≥ 0.30(x1p + x2p + x3p)
The constraint for at least 10,000 gallons of regular
gasoline is:
x1r + x2r + x3r ≥ 10,000
The complete linear programming model with six decision
variables and 10 constraints is:
Max 0.40x1r + 0.30x2r + 0.06x3r + 0.50x1p + 0.40x2p + 0.16x3p
s.t.
x1r + x1p ≤ 5,000
x2r + x2p ≤ 10,000
x3r + x3p ≤ 10,000
x1r ≤ 0.30(x1r + x2r + x3r)
x2r ≥ 0.40(x1r + x2r + x3r)
x3r ≤ 0.20(x1r + x2r + x3r)
x1p ≥ 0.25(x1p + x2p + x3p)
x2p ≤ 0.45(x1p + x2p + x3p)
x3p ≥ 0.30(x1p + x2p + x3p)
x1r + x2r + x2r ≥ 10,000
x1r, x2r, x3r, x1p, x2p, x3p ≥ 0
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