Business Data Analysis &

Decision Making

Module #1
Optimization
Introduction
Optimization

Optimization means determining the best way to accomplish an

objective given the limited resources under your control

• A boat manufacturer with limited raw materials must specify

production quantities for several types of small craft to maximize
profit
• A municipality must schedule its police force for maximum
effectiveness while meeting work rules such as shift length,
number of work breaks, and overtime hours
• Managers of a pension fund want to invest their assets to
achieve 8% growth while minimizing risk
• A steel mill must determine how to ship its product to meet
demand at minimum cost
 Farm Management

• Dwight and Hattie are currently planning the mix of crops to plant on their 120-acre farm
for the upcoming season.

• The table below gives the labor hours and fertilizer required per acre, as well as the total
expected profit per acre for each of the potential crops under consideration.

Crop Labor Required Fertilizer Required Expected Profit

(hours per acre) (tons per acre) (per acre)
Oats 50 1.5 $500

Wheat 60 2 $600

Corn 105 4 $950

• Dwight, Hattie, and their children can work at most 6,500 total hours during the upcoming
season.

• They have 200 tons of fertilizer available.

Question: What mix of crops should be planted to maximize the family’s total profit.
 Scheduling Problem

An airline reservations office is open to take reservations by telephone 24

hours per day, Monday through Friday. The number of reservation agents
needed for each time period is shown below. A union contract requires
that all employees work 8 consecutive hours.

Number of
Time Period Agents Needed
12am – 4am 11
4am – 8am 15
8am – 12pm 31
12pm – 4pm 17
4pm – 8pm 25
8pm – 12am 19

Question: How many reservation agents should work each 8-hour shift?
 Diet Problem

• The kitchen manager for Sing Sing prison is trying to decide what to feed its
prisoners.

• She would like to offer some combination of milk, beans, and oranges.

• The goal is to minimize cost, subject to meeting the minimum nutritional

requirements imposed by law.

• The cost and nutritional content of each food, along with the minimum
nutritional requirements, are shown below.

Milk Navy Beans Oranges Minimum

(gallons) (cups) (large Calif. Daily
Valencia) Requirement
Niacin (mg) 3.2 4.9 0.8 13.0

Thiamin (mg) 1.12 1.3 0.19 1.5

Vitamin C (mg) 32.0 0.0 93.0 45.0

Cost ($) 2.00 0.20 0.25

Question: What diet should be fed to each prisoner?

 Transportation Problem

A company has two plants producing a certain product that is to be

shipped to three distribution centers. The unit production costs are the
same at the two plants, and the shipping cost per unit is shown below.
Shipments are made once per week. During each week, each plant
produces at most 60 units and each distribution center needs at least 40
units.
Distribution Center
1 2 3
A $4 $6 $4
Plant
B $6 $5 $2

Question: How many units should be shipped from each plant

to each distribution center?
Academic Societies and Journals
Academic Articles on OR Applications in Real World

• Lancaster, L. M. (1992), The Evolution of the Diet Model in Managing

Food Systems, Interfaces 22(5), pp. 59-68.
• Holloran, T. J., Byrn, J. E. (1986), United Airlines Station Manpower
Planning System, Interfaces 16(1), pp. 39-50.
• Camm, J. D., Chorman, T. E., Dill, F. A., Evans, J. R., Sweeney, D. J.,
Wegryn, G. W. (1997), Blending OR/MS, Judgement, and GIS:
Restructuring P&G’s Supply Chain, Interfaces 27(1), pp. 128-142.
Linear Optimization Models
The ABC’s of Optimization

A simple checklist that can help you optimize a given situation

A. What can you adjust? (Decision variables)

 What is under your direct managerial control?
 Ex. The number of people to hire, the amount of money to invest
B. What do you mean by best? (Objective function)
 Is the best solution the one that maximizes profit, minimizes cost, or
maximizes the chance that you keep your job?
 The desired objective depending on management’s preferences
C. What constraints must be obeyed? (Constraints)
 In taking managerial steps to optimize your objectives, certain things are
simply impossible, and these are known as constraints
 Ex. Any plan you devise must stay within your budget and not use more
raw materials than you have at your disposal (limited resources). Meeting
performance criteria may be involved
Classes of Optimization Problems and Algorithms

• Linear Problems
 All the formulas defining the model must be linear
 There exist very powerful LP solution techniques
 Many problems in manufacturing, transportation, scheduling, finance, and
other areas have been formulated to be solved with LP
• Linear Integer
 Some of the answers to a linear problem are restricted to integer variables
 There exist powerful techniques
• Nonlinear
 Any of the formulas are not linear
 Often arise in the fields of engineering and finance
 More difficult to solve than linear ones
• None of the above
 George B. Dantzig

• The father of linear programming

• The inventor of the simplex method (1947)
 Moving to Indiana (Knapsack Problem)

I am moving from New Jersey to Indiana and have rented a truck that can
haul up to 1100 cubic feet of furniture. The volume and value of each item
I am considering moving on the truck are given in the following.

Bedroom set Dining set Stereo Sofa TV

Value $60 $48 $14 $31 $10

800 600 300 400 200

Volume (cubic feet)

Question: Which items should I bring to Indiana?

15-14
Spreadsheet Optimization Software

• The Ex cel Solver

 Ships with Excel
 Added to Excel under Tools Add-Ins

• Other com m ercial/ academ ic solvers are also available

How Many Boats to Produce? (Product Mix Model)

A manufacturer of fiberglass boats must produce during the winter

in preparation for the spring selling season

• The product line includes four models

 Each model gives different unit profit
 Each model requires different amounts of raw materials

• The manufacturer wants to maximize its profit given its limited

raw materials

• Try experimenting with the production quantities to maximize the

total profit
The ABC’s of Optimization Applied to the Example

A. What can you adjust?

 In the example model, . . .
 Such controls are known as the decision variables of the model
 Referred to as changing cells in the Excel Solver

B. What do you mean by best?

 In the example model, . . .
 Objective function
 Known as the target cell in the Excel Solver

C. What constraints must be obeyed?

 In the example model, . . .
Interacting with the Model: What’s Best If

Once an optimization model has been created, you can explore it

from various points of view

• Hierarchical Objectives
 Suppose the remaining engines become obsolete after the current
production run
 You might consider maximizing the usage of engines instead of
profit
 Constraints may be imposed on the old objectives

• Market Limitations
 Suppose the demand for the various boat types is limited
 Try to solve EXERCISE 7.1
The D’s of Optimization: Dual Values

The economic value of limited resources . . .

• How much would you profit from additional units of each

resource?

• The answer lies in what are known as dual values , or shadow

prices

• In Excel, Sensitivity report displays the economic value of additional

units of each resource

• Very valuable information if you are planning to purchase additional

resources
Exercise 7.2

Determining the profitability of a new boat type . . .

• The manufacturer can sell as many as 100 sailing dinghies at

$850 profit per unit, where each sailing dinghy requires two units
of each of sailcloth, glass fiber, and epoxy resin

• Would it be profitable to add the sailing dinghy to the product

line? Why or why not?

• Add the sailing dinghy to the lineup and find the new optimal
production

• Now what are the dual values of the resources?

Basic Optimization Models

There are thousands of applications to which linear programming

can be applied . . .

• Product M ix : Allocating limited raw materials into various

products for maximum profit
• Blending : Mixing ingredients to meet blend requirements at
minimum costs
• Staff Scheduling : Meeting staff needs at minimum cost
• Transportation : Shipping goods from sources to demand
points at minimum cost
• Netw ork Flow M odels : A generalization of the transportation
model in which material flows through complex networks or
pipelines
Product Mix

A single set of raw materials could be combined into many different

types of products . . .

• The objective of optimization is to find a most profitable

allocation of a set of limited resources over a set of desired
products or activities

• The BOATS model discussed earlier is an example of this

problem type

• See EXERCISE 7.3

Blending

A single type of product can be produced from many different

combinations of raw materials . . .

• The objective is generally to minimize cost per unit of final

product

• The constraints are to enforce correct proportions of ingredients

• Used extensively in the petroleum and chemical industry, and

also in the production of fertilizers and animal feeds . . .
Blending: A Metal Ally Example

Various constituents are blended to form a metal alloy . . .

• The chemical requirements are that the alloy must contain at

least 9% of element A and between 6.5% and 11% of element B
• The raw materials that can be used in this alloy are three ores
and the element A in its pure form
Element A Element B

Ore 1 Ore 2 Ore 3 Element A

in its pure form
8% 12%
Chemical Analysis 1.8% 2.4% 3.6%
5.6%
100% Element A

Cost per ton $50 $60 $40 $8,000

How to blend the raw materials to produce one ton of the metal alloy
at the minimum cost while meeting the chemical requirements?
The ABC’s of the Blending Model

A. The adjustable cells , C3:F3 represent the percentage of each

raw material used in the alloy

B. The best solution is what minimizes total cost per ton in cell
F10

C. The constraints are as follows:

 The percentages must sum to 100%
 The blend must contain at least 9% Element A
 The blend must contain between 6.5% and 11% Element B
 The percentages must be greater than or equal to zero
Exercise 7.5: Blending Feedmix

An animal feed is to be blended from four types of grain . . .

• The final blend must have sufficient quantities of three nutrients

Nutrient A Nutrient B Nutrient C
Units required per bushel 5 8 35

• Each grain has a different concentration of these nutrients

Nutrient units per bushel

Grain type 1 2 3 4

Nutrient A 2.2 3.4 7.2 1.5

Nutrient B 2.3 5.6 11.1 1.3

Nutrient C 12.0 11.9 41.8 52.1

• If the four grains cost $25, $40, $75, and $80 per bushel
respectively, what blend will result in the lowest cost feed that
meets the nutritional requirements?
Staff Scheduling

• The objective of optimization is to meet specified manpower

requirements at minimum cost

• The schedule must meet certain conditions – such as those

imposed by regulations or union contracts involving shift length,
number of work breaks, or maximum overtime hours
Staff Scheduling: An Example

A business with daily staff requirements . . .

• The daily staff requirements range from 120 to 190 people,

depending on varying work loads each day of the week
Mon Tue Wed Thu Fri Sat Sun
Staff
180 160 150 160 190 140 120
Requirements

• The staff needs should be met each day of the week at min cost
• A labor union requirement must be met, such as
 Employees work a five-consecutive-day workweek followed by two days off
 The allowable shifts are Monday through Friday, Tuesday through Saturday,
Wednesday through Sunday, . . .
 Each employee earns $500 per week
The ABC’s of the Scheduling Model

A. The adjustable cells , F8:F14 are the number of employees

starting each day

B. The best solution is what minimizes total cost, cell F19

C. The constraints are as follows:

 Daily staff sizes are constrained to be at least as great as the
staff needs
 The number of employees starting each day are constrained
to be greater than or equal to zero
Exercise 7.8: The Cutting Stock Problem

A supplier of sheet steel cuts stock in various widths from 100'' rolls . . .

• The rolls can be cut using any of the four patterns

The Cutting Stock Problem (cont’d)

• Current demand in feet is

Width in inches 15 18 25 35

Demand in feet 1450 967 3000 1020

• Two kinds of waste can occur

 Edge w aste occurs for the entire length cut from a pattern that sum to
less than 100 inches (A & D for example)
 End w aste can occur with any of the patterns, and corresponds to the
amount of any width for which more than the demand was produced
 The cost penalty of edge waste is $1.50 per inch foot
 The cost penalty of end waste is $0.75 per inch foot
The Cutting Stock Problem (cont’d)

a. Build an optimization model to determine the quantity of each

pattern to cut to meet demand with minimum total waste cost,
assuming that the rolls are much longer than the total quantities
being cut

b. Come up with a new pattern, which when added to the current

four, results in an improved optimum cost. Hint: Look at the dual
values
Transportation

• This problem is the simplest of a class known as network

problems

• Generally involve the shipping of goods through transportation

networks, or of oil or gas through systems of pipelines

• How to ship goods to meet demand at minimum cost?

Transportation: Two Steel Mills Example

Two steel mills supply three manufacturing plants . . .

Steel Mill 1 Steel Mill 2

Capacity 100 Capacity 150

$300 $600
$200 $400
$500
$500

Plant A Plant B Plant C

Demand 50 Demand 90 Demand 80

• Each plant has a demand for steel that must be met

• Each steel mill has limited manufacturing capacity
Transportation: Two Steel Mills Example (cont’d)

• The unit shipping costs from the mills to each plant

From:
To: Steel Mill 1 Steel Mill2
Plant A $200 $500
Plant B $300 $400
Plant C $500 $600

• The objective is to minimize shipping cost while meeting all

demand without exceeding steel mill capacity
The ABC’s of the Transportation Model

A. The adjustable cells , B6:C8 represent the amount shipped

from each mill to each plant

B. The best solution is what minimizes total shipping cost, cell

G14

C. The constraints are as follows:

 The total shipped to each plant is at least as great as the
demand
 The total shipped from each mill does not exceed its capacity
 The amounts shipped are constrained to be greater than or
equal to zero
Exercise 7.10: Disaster Relief

A major earthquake has hit a developing nation, leaving thousands of people

homeless . . .

• Refugees are located in four camps with the requirements for emergency
supplies
Camp A Camp B Camp C Camp D

Tons Required 10 5 10 20

• Supplies are available in two neighboring countries, with 25 tons in country 1

and 20 tons in country 2
• The shipping cost per ton from the two countries to each of the four camps

From:

To: Country 1 Country 2

Determine the most cost effective
Camp A $100 $150
allocation of emergency supplies to
Camp B $150 $200
camps
Camp C $200 $300

Camp D $300 $400

Integer Optimization Models
 California Manufacturing Company

• The California Manufacturing Company is a diversified company with several

factories and warehouses throughout California, but none yet in Los Angeles
or San Francisco.

• A basic issue is whether to build a new factory in Los Angeles or San

Francisco, or perhaps even both.

• Management is also considering building at most one new warehouse, but will
restrict the choice to a city where a new factory is being built.

Question: Should the California Manufacturing Company expand with

factories and/or warehouses in Los Angeles and/or San Francisco?

7-39
 Data for California Manufacturing

Net Present Capital

Decision Yes-or-No Decision Value Required
Number Question Variable (Millions) (Millions)
1 Build a factory in Los Angeles? x1 $8 $6
2 Build a factory in San Francisco? x2 5 3
3 Build a warehouse in Los Angeles? x3 6 5
4 Build a warehouse in San Francisco? x4 4 2
Capital Available: $10 million

7-40
 Binary Decision Variables

Decision Decision Possible Interpretation Interpretation

Number Variable Value of a Value of 1 of a Value of 0

Build a factory in Do not build

1 x1 0 or 1
Los Angeles this factory

Build a factory in Do not build

2 x2 0 or 1
San Francisco this factory

Build a warehouse in Do not build

3 x3 0 or 1
Los Angeles this warehouse

Build a warehouse in Do not build

4 x4 0 or 1
San Francisco this warehouse

7-41
 Algebraic Formulation

Let x1 = 1 if build a factory in L.A.; 0 otherwise

x2 = 1 if build a factory in S.F.; 0 otherwise
x3 = 1 if build a warehouse in Los Angeles; 0 otherwise
x4 = 1 if build a warehouse in San Francisco; 0 otherwise

Maximize NPV = 8x1 + 5x2 + 6x3 + 4x4 ($millions)

subject to
Capital Spent: 6x1 + 3x2 + 5x3 + 2x4 ≤ 10 ($millions)
Max 1 Warehouse: x3 + x4 ≤ 1
Warehouse only if Factory: x3 ≤ x1
x4 ≤ x2
and
x1, x2, x3, x4 are binary variables.

7-42
 Spreadsheet Model

B C D E F G
3 NPV ($millions) LA SF
4 Warehouse 6 4
5
6 Factory 8 5
7
8 Capital Required
9 ($millions) LA SF
10 Warehouse 5 2 Capital Capital
11 Spent Available
12 Factory 6 3 9 <= 10
13
14 Total Maximum
15 Build? LA SF Warehouses Warehouses
16 Warehouse 0 0 0 <= 1
17 <= <=
18 Factory 1 1
19
20 Total NPV ($millions) 13

7-43
 Project Selection at Tazer Corp.

• Tazer Corporation is searching for a new breakthrough drug.

• Five potential research and development projects:

– Project Up: Develop a more effect antidepressant that doesn’t cause mood swings
– Project Stable: Develop a drug that addresses manic depression
– Project Choice: Develop a less intrusive birth control method for women
– Project Hope: Develop a vaccine to prevent HIV infection
– Project Release: Develop a more effective drug to lower blood pressure

• $1.2 billion available for investment (enough for 2 or 3 projects)

Question: Which projects should be selected to research and develop?

7-44
 Data for the Tazer Project Selection Problem

1 2 3 4 5
Up Stable Choice Hope Release

R&D 400 300 600 500 200

($million)

Success Rate 50% 35% 35% 20% 45%

Revenue if 1,400 1,200 2,200 3,000 600

Successful
($million)

Expected 300 120 170 100 70

Profit
($million)

7-45
 Algebraic Formulation of Tazer Project Selection

Let xi = 1 if approve project i; 0 otherwise (for i = 1, 2, 3, 4, and 5)

Maximize P = 300x1 + 120x2 + 170x3 + 100x4 + 70x5 ($million)

subject to

R&D Budget: 400x1 + 300x2 + 600x3 + 500x4 + 200x5 ≤ 1,200 ($million)

and xi are binary (for i = 1, 2, 3, 4, and 5).

7-46
 Spreadsheet for Tazer Project Selection Problem

A B C D E F G H I J
1 Tazer Corp. Project Selection Problem
2
3
4 Up Stable Choice Hope Release Total Budget
5 R&D Investment ($million) 400 300 600 500 200 1200 <= 1200
6 Success Rate 50% 35% 35% 20% 45%
7 Revenue if Successful ($million) 1400 1200 2200 3000 600
8 Expected Profit ($million) 300 120 170 100 70 540
9
10 Do Project? 1 0 1 0 1

7-47
 Selection of Sites for Emergency Services:
The Caliente City Problem
• Caliente City is growing rapidly and spreading well beyond its original borders

• They still have only one fire station, located in the congested center of town

• The result has been long delays in fire trucks reaching the outer part of the city

Goal: Develop a plan for locating multiple fire stations throughout the city

New Policy: Response Time ≤ 10 minutes

7-48
 Response Time and Cost Data for Caliente City

Fire Station in Tract

1 2 3 4 5 6 7 8
Response 1 2 8 18 9 23 22 16 28
times
2 9 3 10 12 16 14 21 25
(minutes)
for a fire in 3 17 8 4 20 21 8 22 17
tract
4 10 13 19 2 18 21 6 12
5 21 12 16 13 5 11 9 12
6 25 15 7 21 15 3 14 8
7 14 22 18 7 13 15 2 9
8 30 24 15 14 17 9 8 3
Cost of Station 350 250 450 300 50 400 300 200
($thousands)

7-49
 Algebraic Formulation of Caliente City Problem

Let xj = 1 if tract j is selected to receive a fire station; 0 otherwise (j = 1, 2, … , 8)

Minimize C = 350x1 + 250x2 + 450x3 + 300x4 + 50x5 + 400x6 + 300x7 + 200x8

subject to

Tract 1: x1 + x2 + x4 ≥ 1
Tract 2: x1 + x2 + x3 ≥ 1
Tract 3: x2 + x3 + x6 ≥ 1
Tract 4: x1 + x4 + x7 ≥ 1
Tract 5: x5 + x7 ≥ 1
Tract 6: x3 + x6 + x8 ≥ 1
Tract 7: x4 + x7 + x8 ≥ 1
Tract 8: x6 + x7 + x8 ≥ 1

and xj are binary (for j = 1, 2, … , 8).

7-50
Spreadsheet Model for Caliente City Problem
A B C D E F G H I J K L M N
1 Caliente City Fire Station Location Problem
2
3 Fire Station in Tract
4 1 2 3 4 5 6 7 8
5 1 2 8 18 9 23 22 16 28
6 Response 2 9 3 10 12 16 14 21 25
7 Times 3 17 8 4 20 21 8 22 17
8 (Minutes) 4 10 13 19 2 18 21 6 12
9 for a Fire 5 21 12 16 13 5 11 9 12
10 in Tract 6 25 15 7 21 15 3 14 8
11 7 14 22 18 7 13 15 2 9
12 8 30 24 15 14 17 9 8 3
13
14 Cost of Station 350 250 450 300 50 400 300 200
15 ($thousands) Number
16 Covering
17 1 1 1 0 1 0 0 0 0 1 >= 1
18 Response 2 1 1 1 0 0 0 0 0 1 >= 1
19 Time 3 0 1 1 0 0 1 0 0 1 >= 1
20 <= 4 1 0 0 1 0 0 1 0 1 >= 1
21 10 5 0 0 0 0 1 0 1 0 1 >= 1
22 Minutes? 6 0 0 1 0 0 1 0 1 1 >= 1
23 7 0 0 0 1 0 0 1 1 2 >= 1
24 8 0 0 0 0 0 1 1 1 2 >= 1
25
26 Total
27 Fire Station in Tract Cost
28 1 2 3 4 5 6 7 8 ($thousands)
29 Station in Tract? 0 1 0 0 0 0 1 1 750

7-51
 Southwestern Airways Crew Scheduling

• Southwestern Airways needs to assign crews to cover all its upcoming flights.

• We will focus on assigning 3 crews based in San Francisco (SFO) to 11 flights.

Question: How should the 3 crews be assigned 3 sequences of flights so that

every one of the 11 flights is covered?

7-52
 Southwestern Airways Flights

Seat tl e
(SEA)

Denver Chi cago

(DEN) ORD)
San Francis co
(SFO)

Los Angel es
(LAX)

7-53
 Data for the Southwestern Airways Problem

Feasible Sequence of Flights

Flights 1 2 3 4 5 6 7 8 9 10 11 12
1. SFO–LAX 1 1 1 1
2. SFO–DEN 1 1 1 1
3. SFO–SEA 1 1 1 1
4. LAX–ORD 2 2 3 2 3
5. LAX–SFO 2 3 5 5
6. ORD–DEN 3 3 4
7. ORD–SEA 3 3 3 3 4
8. DEN–SFO 2 4 4 5
9. DEN–ORD 2 2 2
10. SEA–SFO 2 4 4 5
11. SEA–LAX 2 2 4 4 2
Cost, $1,000s 2 3 4 6 7 5 7 8 9 9 8 9

7-54
 Algebraic Formulation

Let xj = 1 if flight sequence j is assigned to a crew; 0 otherwise. (j = 1, 2, … , 12).

Minimize Cost = 2x1 + 3x2 + 4x3 + 6x4 + 7x5 + 5x6 + 7x7 + 8x8 + 9x9 + 9x10 + 8x11 + 9x12
(in $thousands)
subject to
Flight 1 covered: x1 + x4 + x7 + x10 ≥ 1
Flight 2 covered: x2 + x5 + x8 + x11 ≥ 1
: :
Flight 11 covered: x6 + x9 + x10 + x11 + x12 ≥ 1
Three Crews: x1 + x2 + x3 + x4 + x5 + x6 + x7 + x8 + x9 + x10 + x11 + x12 ≤ 3
and
xj are binary (j = 1, 2, … , 12).

7-55
 Spreadsheet Model

B C D E F G H I J K L M N O P Q
3 Flight Sequence
4 1 2 3 4 5 6 7 8 9 10 11 12
5 Cost ($thousands) 2 3 4 6 7 5 7 8 9 9 8 9 At
6 Least
7 Includes Segment? Total One
8 SFO-LAX 1 0 0 1 0 0 1 0 0 1 0 0 1 >= 1
9 SFO-DEN 0 1 0 0 1 0 0 1 0 0 1 0 1 >= 1
10 SFO-SEA 0 0 1 0 0 1 0 0 1 0 0 1 1 >= 1
11 LAX-ORD 0 0 0 1 0 0 1 0 1 1 0 1 1 >= 1
12 LAX-SFO 1 0 0 0 0 1 0 0 0 1 1 0 1 >= 1
13 ORD-DEN 0 0 0 1 1 0 0 0 1 0 0 0 1 >= 1
14 ORD-SEA 0 0 0 0 0 0 1 1 0 1 1 1 1 >= 1
15 DEN-SFO 0 1 0 1 1 0 0 0 1 0 0 0 1 >= 1
16 DEN-ORD 0 0 0 0 1 0 0 1 0 0 1 0 1 >= 1
17 SEA-SFO 0 0 1 0 0 0 1 1 0 0 0 1 1 >= 1
18 SEA-LAX 0 0 0 0 0 1 0 0 1 1 1 1 1 >= 1
19
20 Total Number
21 1 2 3 4 5 6 7 8 9 10 11 12 Sequences of Crews
22 Fly Sequence? 0 0 1 1 0 0 0 0 0 0 1 0 3 <= 3
23
24 Total Cost ($thousands) 18

7-56
 Woodridge Pewter Company

• Woodridge Pewter Company is a manufacturer of three pewter products:

platters, bowls, and pitchers.
• The manufacture of each product requires Woodridge to have the appropriate
machinery and molds available. The machinery and molds for each product
can be rented at the following rates: for the platters, $400/week; for the bowls,
$250/week; for the pitcher, $300/week.
• Each product requires the amounts of labor and pewter given in the table
below. The sales price and variable cost are also given in the table.
Labor Pewter Sales Variable
Hours (pounds) Price Cost
Platter 3 5 $100 $60
Bowl 1 4 85 50
Pitcher 4 3 75 40
Available 130 240

Question: Which products should be produced, and in what quantity?

7-57
 Algebraic Formulation

Let x1 = Number of platters produced,

x2 = Number of bowls produced,
x3 = Number of pitchers produced,
yi = 1 if lease machine and mold for product i; 0 otherwise (i = 1, 2, 3).
Maximize Profit = ($100–$60)x1 + ($85–$50)x2 + ($75–$40)x3 – $400y1 – $250y2 – $300y3
subject to
Labor: 3x1 + x2 + 4x3 ≤ 130 hours
Pewter: 5x1 + 4x2 + 3x3 ≤ 240 pounds
Allow production only if machines and molds are purchased:
x1 ≤ 99y1
x2 ≤ 99y2
x3 ≤ 99y3
and
xi ≥ 0, and yi are binary (i = 1, 2, 3).

7-58
 Spreadsheet Solution

A B C D E F G H
1 Woodridge Pewter Company
2
3 Platters Bowls Pitchers
4 Sales Price $100 $85 $75
5 Variable Cost $60 $50 $40
6 Fixed Cost $400 $250 $300
7
8 Constraint Usage (per unit produced) Total Available
9 Labor (hrs.) 3 1 4 60 <= 130
10 Pewter (lbs.) 5 4 3 240 <= 240
11
12 Lease Equipment? 0 1 0
13 Revenue $5,100
14 Production Quantity 0 60 0 Variable Cost $3,000
15 <= <= <= Fixed Cost $250
16 Produce only if Lease 0 99 0 Profit $1,850

7-59
 Electrical Generator Startup Planning (Fixed Costs)

• An electrical utility company owns five generators.

• To generate electricity, a generator must be started up, and associated with this
is a fixed startup cost.

• All of the generators are shut off at the end of each day.

Generator
A B C D E
Fixed Startup Cost $2,450 $1,600 $1,000 $1,250 $2,200
Variable Cost (per MW) $3 $4 $6 $5 $4
Capacity (MW) 2,000 2,800 4,300 2,100 2,000

Question: Which generators should be started up to meet the total

capacity needed for the day (6000 MW)?

7-60
 Spreadsheet Solution

A B C D E F G H I J
1 Electrical Utility Generator Startup Planning
2
3 Generator A Generator B Generator C Generator D Generator E
4 Fixed Startup Cost $2,450 $1,600 $1,000 $1,250 $2,200
5 Cost per Megawatt $3 $4 $6 $5 $4
6 Max Capacity (MW) 2,000 2,800 4,300 2,100 2,000
7
8 Startup? 1 1 0 1 0
9 Total MW MW Needed
10 MW Generated 2,100 3,000 0 900 0 6000 >= 6,000
11 <= <= <= <= <=
12 Capacity 2,000 2,800 0 2,100 0
13
14 Fixed Cost $5,300
15 Variable Cost $22,800
16 Total Cost $28,100

7-61
 Facility Location

• Consider a company that operates 5 plants and 3 warehouses that serve

customers in 4 different regions.
• To lower costs, they are considering streamlining by closing one or more
plants and warehouses.
• Associated with each plant are fixed costs, shipping costs, and production
costs. Each plant has a limited capacity.
• Associated with each warehouse are fixed costs and shipping costs. Each
warehouse has a limited capacity.

Questions:
Which plants should they keep open?
Which warehouses should they keep open?
How should they divide production among the open plants?
How much should be shipped from each plant to each warehouse, and from each
warehouse to each customer?

7-62
 Data for Facility Location Problem

Fixed (Shipping + Production) Cost Capacity

Cost (per unit) (units per
(per month) WH #1 WH #2 WH #3 month)
Plant 1 $42,000 $650 $750 $850 400
Plant 2 50,000 500 350 550 300
Plant 3 45,000 450 450 350 300
Plant 4 50,000 400 500 600 350
Plant 5 47,000 550 450 350 375

Fixed Cost Shipping Cost (per unit) Capacity

(per month) Cust. 1 Cust. 2 Cust. 3 Cust. 4 (per month)
WH #1 $45,000 $25 $65 $70 $35 600
WH #2 25,000 50 25 40 60 400
WH #3 65,000 60 20 40 45 900
Demand: 250 225 200 275

7-63
 Spreadsheet Solution

A B C D E F G H I J K L M
1 Plant to Warehouse
2 Shipping + Production Fixed
3 Cost Warehouse 1 Warehouse 2 Warehouse 3 Cost Capacity
4 Plant 1 $650 $750 $850 $42,000 400
5 Plant 2 $500 $350 $550 $50,000 300
6 Plant 3 $450 $450 $350 $45,000 300
7 Plant 4 $400 $500 $600 $50,000 350
8 Plant 5 $550 $450 $350 $47,000 375
9
10 Shipment Total Actual
11 Quantities Warehouse 1 Warehouse 2 Warehouse 3 Shipped Capacity Open? Total Costs
12 Plant 1 0 0 0 0 <= 0 0 Shipping Cost (P-->W) $332,500
13 Plant 2 0 300 0 300 <= 300 1 Shipping Cost (W-->C) $37,375
14 Plant 3 0 0 275 275 <= 300 1 Fixed Cost (P) $142,000
15 Plant 4 0 0 0 0 <= 0 0 Fixed Cost (W) $90,000
16 Plant 5 0 0 375 375 <= 375 1 Total Cost $601,875
17 Total Shipped 0 300 650
18
19 Warehouse to Customer
20 Shipping Fixed
21 Cost Customer 1 Customer 2 Customer 3 Customer 4 Cost Capacity
22 Warehouse 1 $25 $65 $70 $35 $45,000 600
23 Warehouse 2 $50 $25 $40 $60 $25,000 400
24 Warehouse 3 $60 $20 $40 $45 $65,000 900
25
26 Shipment Shipped Shipped Actual
27 Quantities Customer 1 Customer 2 Customer 3 Customer 4 Out In Capacity Open?
28 Warehouse 1 0 0 0 0 0 <= 0 <= 0 0
29 Warehouse 2 250 0 50 0 300 <= 300 <= 400 1
30 Warehouse 3 0 225 150 275 650 <= 650 <= 900 1
31 Total Shipped 250 225 200 275
32 >= >= >= >=
33 Needed 250 225 200 275

7-64
Network Optimization Models

7-65
Network Flow Models

A generalization of the transportation model . . .

• Intermediate nodes are allowed between the sources of supply

and the demand points

• There may be capacity constraints on individual arcs within the

network that limit the hourly or daily flow

• Flow can be permitted in either direction over the arcs

 An Oil Pipeline Network Example

Supply or
Source
Consumption point or
Sink

At each network node, one of four things can happen:

 There can be a source of oil coming into the network, such as an oil field
 There can be a sink, a place where oil gets consumed, such as a refinery
 There can be flow to that node from other nodes
 There can be flow from that node to other nodes
Three Related Network Flow Problems

You might have several objectives in using such a model . . .

• Maximum Flow Problem

 What is the overall capacity of the network?
 The objective is to determine the maximum flow possible from the source
to the sink
• Minimum Cost Problem
 What is the cheapest way to achieve it?
 The objective is to determine how much oil to flow down each arc to
achieve the maximum flow
• Shortest Path Problem
 What is the shortest path between the source and the sink?
 The objective is to find the shortest set of arcs that connect the
source to the sink (ex. for laying a communication line)
The ABC’s of the Network Flow Model

A. The adjustable cells are

 The flow through each of the arcs, cells C3:C20
 The source at node 1, cell J28
 The sink at node 6, cell O35

B. The best solution is what achieves the objective of the problem

 Depends on the problem type (max flow, min cost, shortest path)

C. The constraints are as follows:

 The total flow down the arcs must not exceed the capacities
 The total flow into each node must equal to the total flow out of
that node (flow conservation constraints)
 The flows are constrained to be greater than or equal to 0
Exercise Problems
 LP Example #1

The coach of a swim team needs to assign swimmers to a 200-yard

medley relay team (four swimmers, each swims 50 yards of one of the
four strokes). Since most of the best swimmers are very fast in more
than one stroke, it is not clear which swimmer should be assigned to
each of the four strokes. The five fastest swimmers and their best times
(in seconds) they have achieved in each of the strokes (for 50 yards) are
shown below.

Backstroke Breaststroke Butterfly Freestyle

Carl 37.7 43.4 33.3 29.2
Chris 32.9 33.1 28.5 26.4
David 33.8 42.2 38.9 29.6
Tony 37.0 34.7 30.4 28.5
Ken 35.4 41.8 33.6 31.1

Question: How should the swimmers be assigned to make the fastest

relay team?
 LP Example #2

An airline reservations office is open to take reservations by telephone

24 hours per day, Monday through Friday. The number of reservation
agents needed for each time period is shown below. A union contract
requires that all employees work 8 consecutive hours.

Number of
Time Period Agents Needed
12am – 4am 11
4am – 8am 15
8am – 12pm 31
12pm – 4pm 17
4pm – 8pm 25
8pm – 12am 19

Question: How many reservation agents should work each 8-hour shift?
 LP Example #3

• In the MBA program at a prestigious university in the

Atlantic Northeast, students bid for electives in the
second year of their program.
• Each student has 100 points to bid (total) and must take
two electives.
• There are four electives available: Management Science
(MS), Finance (Fin), Operations Management (OM), and
Marketing (Mkt).
• Each class is limited to 5 students.
• The bids submitted for each of the 10 students are shown
in the table in the next page.

Question: Determine an assignment of students to classes

so as to maximize the total bid points of the assignments.
 LP Example #3 (Cont’d)

Student Bids for Classes

Student MS Fin OM Mkt
George 60 10 10 20
Fred 20 20 40 20
Ann 45 45 5 5
Eric 50 20 5 25
Susan 30 30 30 10
Liz 50 50 0 0
Ed 70 20 10 0
David 25 25 35 15
Tony 35 15 35 15
Jennifer 60 10 10 20
 LP Example #4

• Heart Start produces automated copy machines in each of two

different plants (A and B).
• The unit production costs and monthly production capacity of the
two plants are indicated in the table below.
• The automated copy machines are sold through three wholesalers.
• The shipping cost from each plant to the warehouse of each
wholesaler along with the monthly demand from each wholesaler
are also indicated in the table.

Unit Shipping Cost Unit Monthly

Warehouse Warehouse Warehouse Production Production
1 2 3 Cost Capacity

Plant A $22 $14 $30 $600 100

Plant B $16 $20 $24 $625 120
Monthly 80 60 70
Demand
 LP Example #4 (Cont’d)

• The management of Heart Start now has asked their top

management scientist (you) to address the following two questions.

Question: How many automated copy machines should be

produced in each plant, and how should they be distributed to each
of the three wholesaler warehouses so as to minimize the combined
cost of production and shipping?
 LP Example #5
• The marketing group for a cell phone manufacturer plans to conduct
a telephone survey to determine consumer attitudes toward a new
cell phone.
• They need to contact at least 100 young males, 150 older males, 120
young females, and 200 older females.
• It costs $1 to make a daytime phone call and $1.50 to make an
evening phone call.
• The table below shows the likelihood of a given customer type
answering each phone call.
Who Answers? Daytime Calls Evening Calls
Young Male 10% 20%
Older Male 15% 30%
Young Female 20% 20%
Older Female 35% 25%
No Answer 20% 5%

• Because of limited evening staffing, at most one-third of phone calls

placed can be evening phone calls.
 LP Example #5 (Cont’d)

Question: How should the marketing group conduct the telephone

survey so as to meet the sample size requirements at the lowest
possible cost?
 LP Example #6

• We need to take care of the future cash flow in the table below

Year Projected Net Cash Flow

(millions of dollars)
2007 –8
2008 –2
2009 –4
2010 3
2011 6
2012 3
2013 –4
2014 7
2015 –2
2016 10
 LP Example #6 (Cont’d)

• Their short-term cash flow requirements cannot be met without

borrowing.
• A long-term (10 year) loan can be taken with an interest rate of 7%
• A series of short-term loans (1 year) can be taken with a projected
interest rate of 10%

Question: Which loan (or combination of loans) should be taken,

and in what amounts, in order to maximize their cash-balance
position after 10 years?
 LP Example #7

I am moving from New Jersey to Indiana and have rented a truck

that can haul up to 1100 cubic feet of furniture. The volume and
value of each item I am considering moving on the truck are given
in the following.

Bedroom set Dining set Stereo Sofa TV

Value $60 $48 $14 $31 $10

Volume (cubic feet) 800 600 300 400 200

Question: Which items should I bring to Indiana?

 LP Example #8
You have been assigned to arrange the songs on the cassette version of
Madonna’s latest album. A cassette tape has two sides ( 1 and 2 ). The
songs on each side of the cassette must total between 14 and 16
minutes in length. The length and type of each song are given in the
following table
Type Length (minutes)
Song 1 Ballad 4
Song 2 Hit 5
Song 3 Ballad 3
Song 4 Hit 2
Song 5 Ballad 4
Song 6 Hit 3
Song 7 Filler 5
Song 8 Ballad and hit 4

The assignment of songs to the tape must satisfy the following

conditions:
 Each side must have exactly two ballads.
 Side 1 must have at least three hit songs
 Either song 5 or song 6 must be on side 1.
Question: Determine whether there is an arrangement of songs
satisfying these restrictions.
 LP Example #9
• United Copiers services and sells copy machines to customers in 11
cities.
• They want to set up service centers in three of these cities
• They know the distances between cities and estimated annual
number of trips to the various customers.

Annual trips
Distances between cities
Boston 885
Los San
Boston Chicago Dallas Denver Angeles Miami New York Phoenix Pittsburgh Francisco Seattle Chicago 760
Boston 0 983 1815 1991 3036 1539 213 2664 792 2385 2612 Dallas 1124
Chicago 983 0 1205 1050 2112 1390 840 1729 457 2212 2052 Denver 708
Dallas 1815 1205 0 801 1425 1332 1604 1027 1237 1765 2404
Denver 1991 1050 801 0 1174 2041 1780 836 1411 1765 1373
Los Angeles 1224
Los Angeles 3036 2112 1425 1174 0 2757 2825 398 2456 403 1909 Miami 1152
Miami 1539 1390 1332 2041 2757 0 1258 2359 1250 3097 3389 New York 1560
New York 213 840 1604 1780 2825 1258 0 2442 386 3036 2900
Phoenix 1222
Phoenix 2664 1729 1027 836 398 2359 2442 0 2073 800 1482
Pittsburgh 792 457 1237 1411 2456 1250 386 2073 0 2653 2517 Pittsburgh 856
San Francisco 2385 2212 1765 1765 403 3097 3036 800 2653 0 817 San Francisco 1443
Seattle 2612 2052 2404 1373 1909 3389 2900 1482 2517 817 0 Seattle 612

Question: What should United Copiers do to minimize the total annual

distance traveled by its service representative?