ADVANCED LINEAR PROGRAMMING APPLICATIONS

DATA ENVELOPMENT ANALYSIS

⮚ Data envelopment analysis (DEA) – is an application of linear programming used to measure the
relative efficiency of operating units with the same goals and objectives.
⮚ It has been applied in a large range of fields including international banking, economic
sustainability, police department operations and logistical applications.
⮚ It has been used to measure productive efficiency of decision making units.

✔ For example, DEA has been used within individual fast food outlets in the same chain.

✔ In this case, the goal of DEA was to identify the inefficient outlet that should be targeted
for further study and, if necessary, corrective action.

REVENUE MANAGEMENT

⮚ Revenue Management – involves managing of short term- demand for a fixed perishable
inventory
⮚ in order to maximize the revenue potential for an organization

✔ Revenue management systems often include pricing strategies, overlooking policies

short-term supply decisions, and the management of nonperishable assets.

PORTFOLIO MODEL AND ASSET ALLOCATION

⮚ Asset allocation refers to the process of determining how to allocate investment funds across a
variety of asset classes such as stocks, bonds, mutual funds, real estate and cash.
⮚ Portfolio models are used to determined the percentage of the investment funds that should be
made in each asset class.

PORTFOLIO MODELS:
 A portfolio models are used to determined the percentage of the investment funds that should
be made in each assets class.
 The goal is to provide portfolio that provides the best balance between risk and return.
GAME THEORY

- In game theory, two or more decision makers, called players, compete against each other.
- Each player selects one of several strategies without knowing in advance the strategy selected
by other player.
- Game theory applications have been developed for situation in which the competing players are
teams, companies, political candidate, or contract bidders.

- In this Model we describe the Two-person, Zero Sum Game.

- The Two Person – means that two players participate in the game.

- Zero sum games – means that the gain (or loss) for one player is equal to the loss (or gain) for
other player.

COMPETING FOR MARKET SHARE

What are the strategies to be the same for both companies to gain market share?

1. Increase Advertising
2. Quality Discounts
3. Extend Warranty

Increase in Quality Discounts Extend

Advertising Warranty
B1 B2 B3
Increase in Advertising a1 4 3 2
Quality Discounts a2 -1 4 1
Extend Warranty a3 5 -2 0

PAYOFF TABLE SHOWING THE PERCENTAGE GAIN IN MARKET SHARE FOR COMPANY A

IDENTIFYING PURE STRATEGY SOLUTION

- If it is optimal for both players to select one strategy and stay with that strategy regardless of
what the other player does, the game has a pure strategy solution.

MIXED STRATEGY – each player selects its strategy according to a probability distribution.

DISTRIBUTION AND NETWORK MODELS

 In a supply chain, a distribution network is an interconnected group of storage facilities and

transportation systems that receive inventories of goods and then deliver them to customers.

 It is an intermediate point to get products from the manufacturer to the end customer, either
directly or through a retail network. A fast and reliable distribution network is essential in
today's instant gratification society of consumers.
Understanding a Distribution Network
 Developing an efficient distribution network is one of the most critical aspects of the success of
a company. It is a component of strategic planning that allows a company's products to reach
customers quickly and efficiently while at the same time keeping costs low for the company so
that they may realize larger profit margins.

 The supply chain for goods can involve a far-reaching distribution network depending on the
product and where the end customers are located. A manufacturer may have a distribution
network to serve wholesalers, who in turn have their own network to ship to distribution
networks operated by retailers, who at the last link of the supply chain would sell the goods in
their retail stores.

 Alternatively, a simplified supply chain could involve a manufacturer shipping finished products
to its distribution network and then directly to end consumers.

 Location (proximity to the customer) and infrastructure quality are two important attributes of
a distribution network. Additionally, the storage, handling, and transportation functions at a
distribution site are set up to suit the particular needs of the company to serve its customer
base in a geographic area. There can be a high level of sophistication at a single site—and by
extension, the entire distribution network—to optimally process order flow of finished goods,
whether a handful of large items such as farm tractors or thousands of SKUs for a retail chain.

SUPPLY CHAIN MODEL

⮚ A supply chain model describes the set of all interconnected resources involved in producing
and distributing a product.
⮚ In general a supply chain are designed to satisfy customer demand for a product at a minimum
cost.

⮚ A supply chain is a network of individuals and companies who are involved in creating a
product and delivering it to the consumer. Links on the chain begin with the producers of the
raw materials and end when the van delivers the finished product to the end user.
Understanding a Supply Chain
 A supply chain includes every step that is involved in getting a finished product or service to the
customer. The steps may include sourcing raw materials, moving them to production, then
transporting the finished products to a distribution center or retail store where they may be
delivered to the consumer.

 The entities involved in the supply chain include producers, vendors, warehouses,
transportation companies, distribution centers, and retailers.

 The supply chain begins operating when a business receives an order from a customer. Thus, its
essential functions include product development, marketing, operations, distribution networks,
finance, and customer service.

 When supply chain management is effective, it can lower a company's overall costs and boost
its profitability. If one link breaks, it can affect the rest of the chain and can be costly.

What Are the Main Supply Chain Models?

Many types of supply chain models are available. The model a company selects will depend on how the
company is structured and what its specific needs are. Here are a few examples:

 Continuous Flow Model: This traditional supply chain model works well for companies that
produce the same products with little variation. The products should be in high demand and
require little to no redesign. This lack of fluctuation means managers can streamline
production times and keep tight control over inventory. In a continuous flow model, managers
will need to regularly replenish raw materials in order to prevent production bottlenecks.
 Fast Chain Model: This model works best for companies that sell products based on the latest
trends. Businesses that use this model need to get their products to market quickly to take
advantage of the prevailing trend. They need to rapidly move from idea to prototype to
production to consumer. Fast fashion is an example of an industry that uses this supply chain
model.
 Flexible Model: Companies that manufacture seasonal or holiday merchandise often use the
flexible model. These companies experience surges in demand for their products followed by
long periods of little to no demand. The flexible model ensures they are able to gear up quickly
to begin production and shut down efficiently as soon as demand tapers off. In order to be
profitable, they must be accurate in forecasting their need for raw materials, inventory, and
labor.
What Are Supply Chain Management Best Practices?
Here are some of the best practices that are seen in successful supply chain management systems:

 They support continuous improvement.

 They aim for increased velocity.
 They encourage collaboration among the individual businesses in the supply chain.
 They seek new technologies that improve their processes.
 They have metrics in place that allow employees to measure the success or failure of each step
in the supply chain.

TRANSPORTATION PROBLEM

⮚ The transportation problem arises frequently in planning for the distribution of goods and
services from the several supply locations to several demand locations.

⮚ The transportation problem refers to a unique linear programming problem. The aim is to find
the cheapest way to move a given good from several origins, such as a factory, to a number of
destinations like a store that includes a warehouse.`

EXAMPLE 1: A transportation problem faced by Foster Generators.

● This problem involves the transportation product from three plants to four distribution centers.

● Foster Generators operates plant in Cleveland, Ohio ; Bedford, Indiana and York, Pensylvannia.

● Production capacities over the next 3 month planning period for one particular type of generator
are as follows:
❖ The firm distributes its generator, through four regional distribution centers located in Boston
Chicago, St. Louis and Lexington; the 3-month forecast for the demand distribution centers is as
follows:
❖ Each origin and destination is represented by a nodes and each possible shipping route is
represented by an arc.
❖ The amount of the supply is written next to each origin node, and the amount of the demand is
written next to each destination node.
❖ The goods shipped from the origins to the destinations represent the flow in the network.

● The transportation problem is an extension of the transportation problem in which

intermediate nodes, referred to as transshipment nodes are added to account for location such
as warehouses.

ASSIGNMENT PROBLEM

● The assignment problem arise in a variety of decision-making situations; typically assignment

problems involve assigning jobs to machines, agents task, sales personnel to sales territories,
contracts to bidders and so on.

● An assignment problem is a particular case of transportation problem where the objective is to

assign a number of resources to an equal number of activities so as to minimize total cost or
maximize total profit of allocation.

● The problem of assignment arises because available resources such as men, machines etc.
have varying degrees of efficiency for performing different activities, therefore, cost, profit
or loss of performing the different activities is different.
PROBLEM VARIATIONS

● Because the assignment problem can be viewed as a special case for the transportation
problem, the problem variations that may arise in an assignment problem parallel those for the
transportation problem, Specifically we can handle:
1. Total number of agents
2. A maximization objective function
3. Unacceptable assignment

MAXIMAL FLOW PROBLEM

⮚ The objective in maximal flow problem is to determine the maximum amount of flow (example
vehicles, messages, fluid, etc) that can enter and exit a network system in a given period of time.
 ⮚ The amount of flow is limited due to capacity restrictions on the various arcs of the network.

● Example: highway types, limit vehicle flow in a transportation system. While the pipe sizes limit
oil flow in an oil distribution system.
⮚ The maximum or upper limit on the flow in an arc is referred to as the flow capacity.

KEY TAKEAWAYS

 In a supply chain, a distribution network is an interconnected group of storage facilities and

transportation systems that receive inventories of goods and then deliver them to customers.
 It is an intermediate point to get products from the manufacturer to the end customer, either
directly or through a retail network.
 A fast and reliable distribution network is essential in today's instant gratification society of
consumers.
 Location to the customer and infrastructure quality are two of the most important aspects of a
distribution network.
 There are many types of distribution networks, such as a hub-and-spoke or decentralized, that
work best for different types of products.