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LPP Fundamentals

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20 views3 pages

LPP Fundamentals

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Prescriptive Analytics: Prescriptive analytics is a form of data analytics that helps businesses

make better and more informed decisions. Its goal is to help answer questions about what
should be done to make something happen in the future.
Optimization: Optimization is the process of selecting values of decision variables that
minimize or maximize some quantity of interest and is the most important tool for
prescriptive analytics.
Optimization models have been used extensively in operations and supply chains, finance,
marketing, and other disciplines for more than 50 years to help managers allocate resources
more efficiently and make lower-cost or more- profitable decisions. Optimization is a very
broad and complex topic; in this chapter, we focus on formulating and solving many practical
optimization models in business.

There are three basic types of optimization models: Linear, Integer, and Nonlinear.

A.) Linear: A linear optimization model (often called a linear program, or LP model) has
two basic properties. First, the objective function and all constraints are linear
functions of the decision variables. This means that each function is simply a sum of
terms, each of which is some constant multiplied by a decision variable, such as 5x +
4y. The second property of a linear optimization model is that all variables are
continuous, meaning that they may assume any real value (typically, nonnegative, that
is, greater than or equal to zero). Of course, this assumption may not be realistic for a
practical business problem (you cannot produce half a refrigerator). However, because
this assumption simplifies the solution method and analysis, we often apply it in many
situations where the solution would not be seriously affected.

Any optimization model has the following elements:


1. Decision variables: Decision variables in an optimization model are the unknown
values that the model seeks to determine. Depending on the application, decision
variables might be the quantities of different products to produce, the amount of
money spent on R&D projects, the amount to ship from a warehouse to a customer,
the amount of shelf space to devote to a product, and so on.
2. An objective to maximize or minimize: The quantity we seek to minimize or
maximize is called the objective function; for example, we might wish to maximize
profit or revenue, or minimize cost or some measure of risk.
3. Constraints: Constraints are limitations, requirements, or other restrictions that are
imposed on any solution, either from practical or technological considerations or by
management policy.
Developing any optimization model consists of three basic steps:
1. Identify the decision variables, the objective, and all appropriate constraints.
2. Write the objective and constraints as mathematical expressions to create a
mathematical model of the problem.
3. Implement the mathematical model on a spreadsheet
Steps for Excel Techniques Solver:
1. From the Analysis group under the Data tab in Excel, select Solver.
2. Use the Solver Parameters dialog to define the objective, decision variables,
and constraints.
3. Define the objective function cell in the spreadsheet in the Set Objective field.
4. Click the appropriate radio button for Max or Min. Enter the decision variable
cells in the By Changing Variable Cells field.
5. To enter a constraint, click the Add button. In the Add Constraint dialog, enter
the cell that contains the constraint function (left-hand side of the constraint)
in the Cell Reference field. In the Constraint field, enter the numerical value of
the right-hand side of the constraint or the cell reference corresponding to it.
6. Check the box in the dialog Make Unconstrained Variables Non-Negative.
7. In the field labelled select a Solving Method, choose Simplex LP for a linear
optimization model. Then click the Solve button.
8. In the Solver Results dialog, click on Answer Report, sensitivity report and
then click OK.
Solving a linear optimization model can result in four possible outcomes:
1. A unique optimal solution: When a model has a unique optimal solution, it
means that there is exactly one solution that will result in the maximum (or
minimum) objective.
2. Alternative (multiple) optimal solutions: If a model has alternative optimal
solutions, the objective is maximized (or minimized) by more than one
combination of decision variables, all of which have the same objective function
value. Solver does not tell you when alternative solutions exist and reports only
one of the many possible alternative optimal solutions.
3. An unbounded solution: A solution is unbounded if the value of the objective
can be increased or decreased without bound (that is, to infinity for a
maximization problem or negative infinity for a minimization problem) without
violating any of the constraints. This generally indicates an incorrect model,
usually when some constraint or set of constraints have been left out.
4. Infeasibility: An infeasible problem is one for which no feasible solution exists
—that is, when there is no solution that satisfies all constraints simultaneously.
When a problem is infeasible, Solver will report “Solver could not find a feasible
solution.”
B.) IPP: In an integer linear optimization model (also called an integer program, or IP
model), some of or all the variables are restricted to being whole numbers. A special
type of integer problem is one in which variables can be only 0 or 1(Binary OR
Knapsack); these are used to model logical yes-or-no decisions. Integer linear
optimization models are generally more difficult to solve than pure linear
optimization models, but have many important applications in areas such as
scheduling and supply chains.
C.) Nonlinear optimization model (also called a nonlinear program, or NLP model). In a
nonlinear optimization model, the objective function and/or constraint functions are
nonlinear functions of the decision variables; that is, terms cannot be written as a
constant multiplied by a variable. Some examples of nonlinear terms are 3x 2, 4/y, and
6xy. Building nonlinear optimization models requires more creativity and analytical
expertise than linear or integer models; they also require different solution
techniques.

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