OPERATIONS RESEARCH

PART 1: INTRODUCTION

TRUNG-HIEP BUI
scv.udn.vn/buitrunghiep | [email protected] | 0935-743-555
 INTRODUCTION

CONTENT

❑ Definition of Operation Research

❑ The Applications of Operation Research
❑ Problem Solving & Decision Making & Quantitative analysis
❑ Management Science Techniques

LEARNING OUTCOMES
 INTRODUCTION

DEFINITION
Operations Research (OR) is the methodology to allocate the available resources to the various
activities in a way that is most effective for the organization as a whole.
It is “applied to problems that concern how to conduct and coordinate the operations within an
organization.” By doing OR studies, we generate some suggestions for decision-makers.
Names of similar subjects/ideas:
Management science | Decision science | Optimization method/algorithm | Mathematical programming
INTRODUCTION

DEVELOPMENT HISTORY

From the early 1900s: The use of quantitative methods in management (The scientific
management revolution - Frederic Winslow Taylor).
The World War II (01/09/1939–02/09/1945): deal with strategic and tactical problems faced by
the military.
The Post-World War II period: use of management science in nonmilitary application
+ Simplex method for solving linear programming problems - 1947 - George Dantzig
More recently: Data Science, Big Data, Machine Learning
INTRODUCTION

BUSINESS ANALYTICS
Today, everybody talks about Business Analytics.
Master of Business Administration (MBA) becomes Master of Business Analytics
INTRODUCTION

EXAMPLE: JOB ALLOCATION

Two people are going to hold an event, and they need to complete some tasks.
One task must be assigned to exactly one person; one person can work on one task at a time.
How to assign the tasks so that they can complete all tasks the fastest?
What are the resources? What is the objective?
INTRODUCTION

EXAMPLE: PROJECT MANAGEMENT

n workers are going to complete m jobs in a project.
✔ Some jobs must be processed with precedence rules.
✔ Some jobs cannot be done by certain workers.
✔ Some jobs can be split and allocated to several workers.
✔ Some jobs require different processing time if allocated to different workers.
How many days does it take to complete this project?
INTRODUCTION

EXAMPLE: PRODUCT INVENTORY

How to set the inventory level of product to maximize the total expected profit?
Suppose that there is ONLY ONE PRODUCT.
Prevent Understocking or Overstocking.
Data analysis: Estimate the random amount of demand during one order cycle time.
Operations research: According to the random amount of demand,
Find the inventory level to maximize the expected profit.
INTRODUCTION

EXAMPLE: MULTI-PRODUCT INVENTORY

How to set the inventory levels of multiple products to maximize the total expected profit?
When we have MULTIPLE PRODUCTS.
Demand substitution: “There is no more Coke. How about Pepsi?”
Data analysis is difficult. Estimate the probability of demand substitution between A and B, which is the
probability for one to purchase B when A is sold out (or purchase A when B is sold out).
Operations research is also difficult. Given the substitution probabilities, find the best inventory levels of
all products.
INTRODUCTION

EXAMPLE: KNAPSACK PROBLEM

You preparing for hiking. There are some useful items, but your backpack can only carry 5 kilograms.
An item cannot be split: Each item should be either chosen or discarded.
Which items should you bring to maximize the total value?
INTRODUCTION

EXAMPLE: INDUSTRY APPLICATION

Key decisions:
✔ How to deliver 6.5 millions items to more than 220 countries each day?
✔ In each region, where to build distribution hubs?
✔ In each distribution hub, how to classify and sort items?
✔ In each city, how to choose routes?
What do you need?
✔ Well-designed information systems.
✔ Operations Research!
INTRODUCTION

EXAMPLE: INDUSTRY APPLICATION

Key decisions:
✔ How to determine the cities to connect?
✔ How to schedule more than 2000 flights per day?
✔ How to assign crews to flights?
✔ How to reassign crews immediately when there is an emergency?
What do you need?
✔ Well-designed information systems.
✔ Operations Research!
INTRODUCTION

PROBLEM SOLVING AND DECISION MAKING

Problem-solving: The process of identifying a difference between the actual and the desired state of
affairs and then taking action to resolve the difference.
Problem-solving process involves the following 7 steps:
1. Identify and define the problem.
2. Determine the set of alternative solutions.
3. Determine the criterion or criteria that will be used to evaluate the alternatives.
4. Evaluate the alternatives.
5. Choose an alternative (MAKE THE DECISION)
6. Implement the selected alternative.
7. Evaluate the results to determine whether a satisfactory solution has been obtained.

Decision making is the term generally associated with the first 5 steps of the problem-solving process.
INTRODUCTION

DECISION MAKING

Single-criterion decision problem

v/s
Multicriteria decision problem
INTRODUCTION

QUANTITATIVE ANALYSIS AND DECISION MAKING

QUANTITATIVE ANALYSIS might be used when the problem is:

COMPLEX | IMPORTANT | NEW | REPETITIVE
 INTRODUCTION

QUANTITATIVE ANALYSIS: MODEL DEVELOPMENT

QUANTITATIVE ANALYSIS: Concentrate on the quantitative facts or data associated

with the problem and develop MATHEMATICAL EXPRESSIONS that describe the
objectives, constraints, and other relationships that exist in the problem.

Let x indicate the number of units produced each week: VARIABLE

The profit equation P = 10x: OBJECTIVE FUNCTION for a firm attempting to maximize profit.
A production capacity CONSTRAINT: 5 hours are required to produce each unit and only 40 hours
of production time are available per week.
INTRODUCTION

QUANTITATIVE ANALYSIS: MODEL DEVELOPMENT

DETERMINISTIC MODEL
v/s
STOCHASTIC | PROBABILISTIC MODEL
 INTRODUCTION

QUANTITATIVE ANALYSIS: MODEL DEVELOPMENT - EXAMPLE

 INTRODUCTION

MANAGEMENT SCIENCE TECHNIQUES

LINEAR PROGRAMMING is a problem-solving approach developed for situations involving maximizing or minimizing a linear
function subject to linear constraints that limit the degree to which the objective can be pursued.
INTEGER LINEAR PROGRAMMING is an approach used for problems that can be set up as linear programs, with the additional
requirement that some or all of the decision variables be integer values.
DISTRIBUTION AND NETWORK MODELS A network is a graphical description of a problem consisting of circles called nodes
that are interconnected by lines called arcs (supply chain design, information system design, and project scheduling…).
NONLINEAR PROGRAMMING is a technique for maximizing or minimizing a nonlinear function subject to nonlinear
constraints.
PROJECT SCHEDULING: In many situations, managers are responsible for planning, scheduling, and controlling projects that
consist of numerous separate jobs or tasks performed by a variety of departments, individuals, and so forth. The PERT (Program
Evaluation and Review Technique) and CPM (Critical Path Method) techniques help managers carry out their project scheduling
responsibilities.
INVENTORY MODELS are used by managers faced with the dual problems of maintaining sufficient inventories to meet demand
for goods and, at the same time, incurring the lowest possible inventory holding costs.
WAITING-LINE | QUEUEING MODELS have been developed to help managers understand and make better decisions concerning
the operation of systems involving waiting lines.
SIMULATION is a technique used to model the operation of a system. This technique employs a computer program to model the
operation and perform simulation computations.
DECISION ANALYSIS can be used to determine optimal strategies in situations involving several decision alternatives and an
uncertain or risk-filled pattern of events.
GOAL PROGRAMMING is a technique for solving multicriteria decision problems, usually within the framework of linear
programming.
ANALYTIC HIERARCHY PROCESS This multicriteria decision-making technique permits the inclusion of subjective factors in
arriving at a recommended decision.
FORECASTING are techniques that can be used to predict future aspects of a business operation.
MARKOV PROCESS MODELS are useful in studying the evolution of certain systems over repeated trials. Markov processes have
been used to describe the probability that a machine, functioning in one period, will function or break down in another period.
OPERATIONS RESEARCH
PART 2: LINEAR PROGRAMMING

TRUNG-HIEP BUI
scv.udn.vn/buitrunghiep | [email protected] | 0935-743-555
 LINEAR
PROGRAMMING
CONTENT
❑ Introduction to Linear Programming
❑ General Linear Programming Notations
❑ A Simple Maximization Problem
❑ Graphical Solution Procedure
❑ Extreme Points and the Optimal Solutions
❑ Computer application for solving Linear problems
LEARNING OUTCOMES
 LINEAR
PROGRAMMING
SOME LINEAR PROGRAMMING PROBLEMS

1. A manufacturer wants to develop a production schedule and an inventory policy that will satisfy sales
demand in future periods. Ideally, the schedule and policy will enable the company to satisfy demand and at the
same time minimize the total production and inventory costs.

2. A financial analyst must select an investment portfolio from a variety of stock and bond investment
alternatives. The analyst would like to establish a portfolio that maximizes the return on investment.

3. A marketing manager wants to determine how best to allocate a fixed advertising budget among
alternative advertising media such as radio, television, online, and magazines. The manager would like to
determine the media mix that maximizes advertising effectiveness.

4. A company has warehouses in a number of locations. For a set of customer demands, the company would
like to determine how much each warehouse should ship to each customer so that total transportation costs are
minimized.
 LINEAR
PROGRAMMING
A SIMPLE MAXIMIZATION PROBLEM

A manufacturer of golf equipment produces 02 types of golf bag (Standard | Deluxe).

A profit contribution of $10 for every standard bag and $9 for every deluxe bag produced.

CONSTRAINTS

Nonnegativity constraints: nonnegative values for the decision variables.

 LINEAR
PROGRAMMING
A SIMPLE MAXIMIZATION PROBLEM: PROBLEM FORMULATION

A manufacturer of golf equipment produces 02 types of golf bag (Standard | Deluxe).

A profit contribution of $10 for every standard bag and $9 for every deluxe bag produced.

Define the Decision Variables

LINEAR
PROGRAMMING
A SIMPLE MAXIMIZATION PROBLEM: GRAPHICAL SOLUTION PROCEDURE

Solution points for the Two-Variable Problem

LINEAR
PROGRAMMING
A SIMPLE MAXIMIZATION PROBLEM: GRAPHICAL SOLUTION PROCEDURE

The Cutting and Dyeing Constraint Line

LINEAR
PROGRAMMING
A SIMPLE MAXIMIZATION PROBLEM: GRAPHICAL SOLUTION PROCEDURE

The Cutting and Dyeing Constraint Line

Infeasible solution

Infeasible region

Feasible solution

Feasible region
LINEAR
PROGRAMMING
A SIMPLE MAXIMIZATION PROBLEM: GRAPHICAL SOLUTION PROCEDURE

Other Constraint Lines

LINEAR
PROGRAMMING
A SIMPLE MAXIMIZATION PROBLEM: GRAPHICAL SOLUTION PROCEDURE

Combined-constraint graph showing the Feasible region

LINEAR
PROGRAMMING
A SIMPLE MAXIMIZATION PROBLEM: GRAPHICAL SOLUTION PROCEDURE

1800$ Profit Line: 10S + 19D = 1800 $

LINEAR
PROGRAMMING
A SIMPLE MAXIMIZATION PROBLEM: GRAPHICAL SOLUTION PROCEDURE

1800$ | 3600$ | 5400$ Profit Lines

Let P represent Total Profit Contribution

The slope-intercept form

of the linear equation relating S and D.
LINEAR
PROGRAMMING
A SIMPLE MAXIMIZATION PROBLEM: GRAPHICAL SOLUTION PROCEDURE

Optimal Solution

Optimal solution point is on both:

The Cutting and Dying constraint line

The Finishing constraint line

The slope-intercept form

of the linear equation relating S and D.
LINEAR
PROGRAMMING
SLACK VARIABLE

Optimal Solution: S = 540 and D =252

The 120 hours of unused sewing time and 18 hours of unused inspection and packaging time
are referred to as slack for the two departments.
 LINEAR
PROGRAMMING
SLACK VARIABLE

Whenever a linear program is written in a form with all constraints expressed as equalities,
it is said to be written in STANDARD FORM.

SLACK VARIABLES are added to the formulation of a linear

programming problem to represent the slack, or idle capacity.

Unused ((idle) capacity makes no contribution to profit;

thus, slack variables have coefficients of zero in the objective function.

Adding 4 slack variables, denoted as S1, S2, S3, and S4.

Binding constraint

Non-binding constraint
LINEAR
PROGRAMMING
EXTREME POINTS AND THE OPTIMAL SOLUTION
Suppose that the profit contribution for standard golf bag is reduced from $10 to $5 per bag,
while the profit contribution for the deluxe golf bag and all the constraints remain unchanged.
The revised objective function: Max (5S + 9D)
Without any change in the constraints, the feasible region does not change.
However, the profit lines have been altered to reflect the new objective function.

The reduced profit contribution

for the standard bag caused a
change in the optimal solution.
LINEAR
PROGRAMMING
EXTREME POINTS AND THE OPTIMAL SOLUTION

The optimal solution to a linear program can be found at an extreme point of the feasible region.

We can find the optimal solution by evaluating the 5 extreme-point solutions

and selecting the one that provides the largest profit contribution.
LINEAR
PROGRAMMING
COMPUTER SOLUTION
.
LINEAR
PROGRAMMING
COMPUTER SOLUTION: SOLVER ADD-IN
.
LINEAR
PROGRAMMING
COMPUTER SOLUTION: SOLVER ADD-IN
.
LINEAR
PROGRAMMING
COMPUTER SOLUTION: SOLVER ADD-IN
.
 LINEAR
PROGRAMMING
A SIMPLE MINIMIZATION PROBLEM

A manufacturer needs 02 types of products (A | B).

Demand Processing time Production cost

per gallon per gallons
Product A ≥ 125 gallons 2 hours 2$
Product B 1 hours 3$
Total ≥ 350 gallons ≤ 600 hours

VARIABLES

MATHEMATICAL MODEL
LINEAR
PROGRAMMING
A SIMPLE MINIMIZATION PROBLEM
LINEAR
PROGRAMMING
A SIMPLE MINIMIZATION PROBLEM
LINEAR
PROGRAMMING
SURPLUS VARIABLE

Optimal Solution: A = 250 and B = 100

The production of product A exceeds its minimum level by 250 - 125 = 125 gallons.
This excess production for product A is referred to as SURPLUS.
In linear programming terminology, any excess quantity corresponding to
a ≥ constraint is referred to as SURPLUS.
LINEAR
PROGRAMMING
SLACK VARIABLE & SURPLUS VARIABLE

With a ≤ constraint,
a SLACK variable can be added to the left-hand side of the inequality
to convert the constraint to equality form.

With a ≥ constraint,
a SURPLUS variable can be subtracted from the left-hand side of the inequality
to convert the constraint to equality form.
 LINEAR
PROGRAMMING
SLACK VARIABLE & SURPLUS VARIABLE

✔ SURPLUS variables are given a coefficient of zero in the objective function because they have no effect on its value.

✔ Adding 02 SURPLUS variables, denoted as S1, S2 (≥ constraint) and 01 SLACK variable, denoted as S3 (≤ constraint)

✔ Whenever a linear program is written in a form with all constraints expressed as equalities, it has STANDARD FORM.
LINEAR
PROGRAMMING
OTHER EXAMPLE: SLACK VARIABLE & SURPLUS VARIABLE

All three constraint forms The standard-form

LINEAR
PROGRAMMING
COMPUTER SOLUTION
.
LINEAR
PROGRAMMING
COMPUTER SOLUTION
.
 LINEAR
PROGRAMMING
ALTERNATIVE OPTIMAL SOLUTIONS
.
Optimal objective function line coincides with one of the binding constraint lines
on the boundary of the feasible region.

Alternative optimal solutions

OPERATIONS RESEARCH
PART 3: SENSITATIVE ANALYSIS

TRUNG-HIEP BUI
scv.udn.vn/buitrunghiep | [email protected] | 0935-743-555
 SENSITIVITY ANALYSIS

CONTENT

❑ Introduction to Sensitivity Analysis

❑ Graphical Sensitivity Analysis
❑ Sensitivity Analysis: Computer Solution
❑ Limitations of Classical Sensitivity Analysis

LEARNING OUTCOMES
 SENSITIVITY ANALYSIS

DEFINITION & PROPERTIES

Sensitivity analysis is the study of how the changes in the coefficients of an optimization model
affect the optimal solution. Using sensitivity analysis, we can answer questions such as the following:
1. How will a change in the coefficient of the objective function affect the optimal solution?
2. How will a change in the right-hand-side value for a constraint affect the optimal solution?

Remind: Optimal solution: S = 540 standard bags and D = 252 deluxe bags,
was based on profit contribution figures of $10 per standard bag and $9 per deluxe bag
 SENSITIVITY ANALYSIS

GRAPHICAL SENSITIVITY ANALYSIS - Objective Function Coefficients

The range of optimality for each objective function coefficient provides the range
of values over which the current solution will remain optimal.
Extreme point (3) will be the optimal solution as long as:
SENSITIVITY ANALYSIS

GRAPHICAL SENSITIVITY ANALYSIS - Objective Function Coefficients

Line A

Line B
SENSITIVITY ANALYSIS

GRAPHICAL SENSITIVITY ANALYSIS - Objective Function Coefficients

Slope of the Objective function line

SENSITIVITY ANALYSIS

GRAPHICAL SENSITIVITY ANALYSIS - Objective Function Coefficients

Slope of the Objective function line

SENSITIVITY ANALYSIS

GRAPHICAL SENSITIVITY ANALYSIS - Objective Function Coefficients

Slope of the Objective function line

SENSITIVITY ANALYSIS

GRAPHICAL SENSITIVITY ANALYSIS - Objective Function Coefficients

Slope of the Objective function line

SENSITIVITY ANALYSIS

GRAPHICAL SENSITIVITY ANALYSIS - Objective Function Coefficients

Slope of the Objective function line

If new objective function: 13S + 8D

SENSITIVITY ANALYSIS

GRAPHICAL SENSITIVITY ANALYSIS - Objective Function Coefficients

OTHER CASE: New objective function: 18S + 9D

Slope of the Objective function line

 SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS - Right-Hand Side

Sensitivity analysis is the study of how the changes in the coefficients of an optimization model
affect the optimal solution. Using sensitivity analysis, we can answer questions such as the following:
1. How will a change in the coefficient of the objective function affect the optimal solution?
2. How will a change in the right-hand-side value for a constraint affect the optimal solution?

Optimal solution: S = 540 standard bags and D = 252 deluxe bags,

was based on profit contribution figures of $10 per standard bag and $9 per deluxe bag
SENSITIVITY ANALYSIS

GRAPHICAL SENSITIVITY ANALYSIS - Right-Hand Side

The RHS of the “Cutting and Dyeing constraint” is changed from 630 to 640
SENSITIVITY ANALYSIS

GRAPHICAL SENSITIVITY ANALYSIS - Right-Hand Side – Dual value

The RHS of the “Cutting and Dyeing constraint” is changed from 630 to 640
SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS - Computer Solution

 SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS - Right-Hand Side – Reduced Cost

The reduced cost of a variable is equal to the dual value for the nonnegativity constraint
associated with that variable.
 SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS -
Ranges for Objective Function Coefficients and the RHS of the constraints

S (current profit coefficient of 10), has an Allowable increase of 3.5 and an Allowable decrease of 3.7.
If the profit contribution of the Standard bag is between 10 - 3.7 = $ 6.3 and 10 + 3.5 = $ 13.5,
the production of (S= 540; D= 252) will remain the optimal solution.
 SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS -
Ranges for Objective Function Coefficients and the RHS of the constraints

If the constraint RHS is not increased (decreased) by more than the Allowable increase (decrease),
the associated dual value gives the exact change in the value of the Optimal solution per unit increase
in the RHS.
SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS -
Ranges for Objective Function Coefficients and the RHS of the constraints

Constraint 1: Dual value 4.375 is valid for RHS values within the range [495.6 ; 682.36364]
(630 – 134.4 = 495.6 ; 630 + 52.36364 = 682.36364)
SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS - Range Of Feasibility

SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS - Interpretation of Dual Values

SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS - New problem

New lightweight model

SENSITIVITY ANALYSIS

SENSITIVITY ANALYSIS - Computer Solution

 OPERATIONS
PART 4: DISTRIBUTION AND NETWORK MODELS
RESEARCH

TRUNG-HIEP BUI
scv.udn.vn/buitrunghiep | [email protected] | 0935-743-555
 DISTRIBUTION AND NETWORK MODELS

CONTENT

❑ Supply Chain Models

❑ Assignment Problem
❑ Shortest-Route Problem
❑ Maximal Flow Problem
❑ A Production and Inventory Application

LEARNING OUTCOMES
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS

TRANSPORTATION PROBLEM SUPPLY DEMAND

✔ Arises frequently in planning for the distribution
of goods/services from several supply locations
to several demand locations.
✔ The quantity of goods available at each supply
locations (origin) is limited.
✔ The quantity of goods needed at each of demand
locations (destinations) is known.
✔ The usual objective is to minimize the cost of
shipping goods from the origins to the
destinations.

ORIGIN DESTINATION
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS

TRANSSHIPMENT PROBLEM
SUPPLY DEMAND
✔ Is an extension of the transportation problem.
✔ Add intermediate nodes (transhipment nodes).
✔ Shipments may be made between any pair of the
three general types of nodes.
✔ The supply available at each origin is limited.
✔ The demand at each destination is specified.
✔ The objective is to determine how many units
should be shipped over each arc in the network
so that all destination demands are satisfied with ORIGIN TRANSSHIPMENT DESTINATION
the minimum possible transportation cost.
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS

ASSIGNMENT PROBLEM

✔ Is an extension of the transportation problem.

✔ One agent is assigned to one and only one task.
✔ The objective is to set of assignments that will
optimize a stated objective, such as minimize
cost, minimize time, or maximize profits.
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS

SHORTEST-ROUTE PROBLEM

✔ The objective is to determine the shortest route,

or path, between two nodes in a network

MAXIMAL FLOW PROBLEM

✔ The objective is to determine the maximum

amount of flow (vehicles, messages, fluid, etc.)
that can enter and exit a network system in a
given period of time.
✔ Attempt to transmit flow through all arcs of the
network as efficiently as possible.
✔ The amount of flow is limited due to capacity
restrictions (flow capacity) on the various arcs
of the network.
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS

Proctor & Gamble makes and markets over 300 brands of consumer goods worldwide.
The company had hundreds of suppliers, over 60 plants, 15 distributing centers, and over 1000
consumer zones. Managing item flows over the huge supply network is challenging!
✔ An LP/IP model helps.
✔ The special structure of network transportation must also be utilized.
200 million dollars are saved after an OR study! (https://doi.org/10.1287/inte.27.1.128)
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS

A lot of operations are to transport items on a network.

Moving materials from suppliers to factories.
Moving goods from factories to distributing centers.
Moving goods from distributing centers to retail stores.
Sending passengers through railroads or by flights.
Sending data packets on the Internet.
Sending water through pipelines.
And many more.
A unified model, the minimum cost network flow (MCNF) model, covers many network operations.
It has some very nice theoretical properties.
It can also be used for making decisions regarding inventory, project management, job assignment,
facility location, etc.
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS: COMPACT FORMULATION

 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS - TRANSPORTATION PROBLEM

TRANSPORTATION PROBLEM SUPPLY DEMAND

✔ Arises frequently in planning for the distribution
of goods/services from several supply locations
to several demand locations.
✔ The quantity of goods available at each supply
locations (origin) is limited.
✔ The quantity of goods needed at each of demand
locations (destinations) is known.
✔ The usual objective is to minimize the cost of
shipping goods from the origins to the
destinations.

ORIGIN DESTINATION
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – TRANSPORTATION MODEL

Transportation Cost per Unit

 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – TRANSPORTATION MODEL

The decision variables for a transportation problem having m origins

and n destinations are written as:
xij : number of units shipped from origin i to destination j
(where i=1, 2, . . . , m and j= 1, 2, . . . , n)
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – TRANSPORTATION MODEL

 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – VARIATION OF BASIC TRANSPORTATION MODEL

• TOTAL SUPPLY not equal to TOTAL DEMAND

TOTAL SUPPLY > TOTAL DEMAND TOTAL SUPPLY < TOTAL DEMAND

• No modification in the LP formulation is • Add a dummy origin with a supply equal to the
necessary. difference between the total demand and the total
• Excess supply will appear as SLACK in the supply.
linear programming solution. • Add an arc from the dummy origin to each destination.
• SLACK for any particular origin can be • Assign a zero cost per unit to each arc leaving the
interpreted as the unused supply or amount not dummy origin (no shipments actually will be made
shipped from the origin. from the dummy origin).
• When the optimal solution is implemented, the
destinations showing shipments being received from the
dummy origin will be the shortfall or unsatisfied
demand of the destinations.
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – GENERAL LINEAR PROGRAMMING MODEL

• Route capacities or Route minimums or Unacceptable routes
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS - TRANSSHIPMENT PROBLEM

TRANSSHIPMENT PROBLEM
SUPPLY DEMAND
✔ Is an extension of the transportation problem.
✔ Add intermediate nodes (transhipment nodes).
✔ Shipments may be made between any pair of the
three general types of nodes.
✔ The supply available at each origin is limited.
✔ The demand at each destination is specified.
✔ The objective is to determine how many units
should be shipped over each arc in the network
so that all destination demands are satisfied with ORIGIN TRANSSHIPMENT DESTINATION
the minimum possible transportation cost.
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – TRANSSHIPMENT MODEL

Transportation Cost per Unit

Constraints corresponding to the two transshipment nodes:

NODE 3 NODE 4
Number of units shipped into node
Number of units shipped out of node
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – TRANSSHIPMENT MODEL

The objective function reflects the total shipping cost over the 12 shipping routes.
Combining the Objective function and Constraints leads to a 12-variable, 8-constraint LP model
of the transshipment problem.
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – TRANSSHIPMENT MODEL

200

550

150

50 350

400

300
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – VARIATION OF BASIC TRANSSHIPMENT MODEL

Suppose that it is possible to ship directly:

- from Atlanta to New Orleans at $4 / unit
- from Dallas to New Orleans at $1/ unit
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – GENERAL LINEAR PROGRAMMING MODEL

 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS - ASSIGNMENT PROBLEM

ASSIGNMENT PROBLEM

✔ Is an extension of the transportation problem.

✔ One agent is assigned to one and only one task.
✔ The objective is to set of assignments that will
optimize a stated objective, such as minimize
cost, minimize time, or maximize profits.
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – ASSIGNMENT MODEL

DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – ASSIGNMENT MODEL

DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – ASSIGNMENT MODEL

SOLUTION A GENERAL LINEAR PROGRAMMING MODEL

If ai denotes the upper limit for the number of tasks

to which agent i can be assigned
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – SHORTEST-ROUTE PROBLEM

The shortest-route problem can be viewed as a transshipment problem

with one origin node (node 1), one destination node (node 6),
and four transshipment nodes (nodes 2, 3, 4, and 5).
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – SHORTEST-ROUTE PROBLEM

Origin node (node 1): Has a supply of 1 unit; Connected arc always go out.
Destination node (node 6): Has a demand of 1 unit; Connected arc always go into.
Four transshipment nodes (nodes 2, 3, 4, and 5): Two directed arcs connect between the pairs of transshipment nodes.
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – SHORTEST-ROUTE PROBLEM

 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – SHORTEST-ROUTE PROBLEM - Constraints

The constraint for Node 1: x12 + x13 = 1

The constraint for Node 6: x26 + x46 + x56 = 1
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – SHORTEST-ROUTE PROBLEM – LP Formulation

DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – SHORTEST-ROUTE PROBLEM – LP Formulation

DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – SHORTEST-ROUTE PROBLEM – LP Formulation

 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS - MAXIMAL FLOW PROBLEM

MAXIMAL FLOW PROBLEM

✔ The objective is to determine the maximum

amount of flow (vehicles, messages, fluid, etc.)
that can enter and exit a network system in a
given period of time.
✔ Attempt to transmit flow through all arcs of the
network as efficiently as possible.
✔ The amount of flow is limited due to capacity
restrictions (flow capacity) on the various arcs
of the network.
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – MAXIMAL FLOW PROBLEM

NORTH-SOUTH VEHICLE FLOW: 15.000 vehicles/hour

Each arc’s flow direction is indicated, and the arc capacity (1.000 vehicles/hour) is shown next to each arc.
The maximum flow problem can be viewed as a capacitated transshipment model.
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – MAXIMAL FLOW PROBLEM

NORTH-SOUTH VEHICLE FLOW: 15.000 vehicles/hour
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – MAXIMAL FLOW PROBLEM

NORTH-SOUTH VEHICLE FLOW: 15.000 vehicles/hour

xij : Amount of traffic from Node i to Node j.

The objective function that maximizes the flow over the highway system is: Max x71
The flow OUT for Node 1: x12 + x13 + x14
The flow IN for Node 1: x71
=> The constraint: x12 + x13 + x14 - x71 = 0

“Capacity on the arc” constraints:

DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODEL – MAXIMAL FLOW PROBLEM

NORTH-SOUTH VEHICLE FLOW: 15.000 vehicles/hour
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS – A PRODUCTION AND INVENTORY APPLICATION

Determine how many products (yards of carpeting) to manufacture each quarter

to minimize the total production and inventory cost for the four-quarter period?
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS – A PRODUCTION AND INVENTORY APPLICATION

We begin by developing a network representation of the problem.

Create 04 nodes corresponding to the production in each quarter.
For each production node: an outgoing arc to the demand node for the same period.
The flow on the arc represents the number of square yards of carpet manufactured for the period.
Create four nodes corresponding to the demand in each quarter
For each demand node: an outgoing arc represents the amount of inventory (square yards of carpet)
carried over to the demand node for the next period.
 DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS – A PRODUCTION AND INVENTORY APPLICATION

The objective is to determine a production

scheduling and inventory policy that minimizes the
total production and inventory cost for the 4 quarters.
Min
2x15 + 5x26 + 3x37 + 3x48 + 0.25x56 + 0.25x67 + 0.25x78
DISTRIBUTION AND NETWORK MODELS

SUPPLY CHAIN MODELS – A PRODUCTION AND INVENTORY APPLICATION

 OPERATIONS
PART 5: INTEGER LINEAR PROGRAMMING
RESEARCH

TRUNG-HIEP BUI
scv.udn.vn/buitrunghiep | [email protected] | 0935-743-555
 DISTRIBUTION AND NETWORK MODELS

CONTENT

❑ Types of Integer Linear Programming Models

❑ Graphical and Computer Solutions for an All-integer LP
❑ Application involving 0-1 Variables
❑ Modeling Flexibility Provided by 0-1 Integer Variables

LEARNING OUTCOMES
 DISTRIBUTION AND NETWORK MODELS

TYPES OF INTEGER LINEAR PROGRAMMING MODELS

All-integer linear program LP RELAXATION Mixed-integer linear program

0-1 linear integer program

 DISTRIBUTION AND NETWORK MODELS

GRAPHICAL AND COMPUTER SOLUTIONS FOR AN ALL-INTEGER LP

BT has $2 million to purchase rental property (townhouse and apartment buildings).

- Each townhouse can be purchased for $282,000 and 05 townhouses are available.
- Each apartment building can be purchased for $400,000 and the is no limit quantity of apartments.
BT can devote up to 140 hours per month to managing these new properties.
- Each townhouse requires 4 hours per month.
- Each apartment building requires 40 hours per month.
The annual cash flow is estimated at $10,000 per townhouse and $15,000 per apartment.
BT would like to determine the number of townhouses (T) and the number of apartment buildings
(A) to purchase to maximise annual cash flow.
DISTRIBUTION AND NETWORK MODELS

GRAPHICAL AND COMPUTER SOLUTIONS FOR AN ALL-INTEGER LP

DISTRIBUTION AND NETWORK MODELS

GRAPHICAL AND COMPUTER SOLUTIONS FOR AN ALL-INTEGER LP

 DISTRIBUTION AND NETWORK MODELS

GRAPHICAL AND COMPUTER SOLUTIONS FOR AN ALL-INTEGER LP

T = 2.479 ; A = 3.252
10(2.479) + 15(3.252) = 73.574 (k$)

Round the solution:

T = 2.479 ≈ 2; A = 3.252 ≈ 3
10(2) + 15(3) = 65 (k$)

(T = 3; A = 3): Infeasible solution

282(3) + 400(3) = 2046 (k$) > 2.000 (k$)
 DISTRIBUTION AND NETWORK MODELS

GRAPHICAL AND COMPUTER SOLUTIONS FOR AN ALL-INTEGER LP

T = 2.479 ≈ 2; A = 3.252 ≈3
10(2.479) + 15(3.252) = 73.574 (k$)

Round the solution:

T = 2.479 ≈ 2; A = 3.252 ≈3
10(2) + 15(3) = 65 (k$)

Optimal Integer solution:

(T = 4; A = 2):
10(4) + 15(2) = 70 (k$)
 DISTRIBUTION AND NETWORK MODELS

GRAPHICAL AND COMPUTER SOLUTIONS FOR AN ALL-INTEGER LP

T = 2.479 ≈ 2; A = 3.252 ≈3
10(2.479) + 15(3.252) = 73.574 (k$)

Round the solution:

T = 2.479 ≈ 2; A = 3.252 ≈3
10(2) + 15(3) = 65 (k$)

Optimal Integer solution:

(T = 4; A = 2):
10(4) + 15(2) = 70 (k$)
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – CAPITAL BUDGETING

Faced with limited capital for the next 04 years, company needs to select the most profitable projects.
Present value*: The estimated net present value is the net cash flow discounted back to the beginning of year 1

The four 0-1 decision variables are:

P = 1 if the Plant expansion project is accepted; 0 if rejected
W = 1 if the Warehouse expansion project is accepted; 0 if rejected
M = 1 if the New machinery project is accepted; 0 if rejected
R = 1 if the New product research project is accepted; 0 if rejected
DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – CAPITAL BUDGETING

DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – CAPITAL BUDGETING

 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – FIXED COST PROBLEM

03 materials are used to produce 03 products: Fuel additive, Solvent base, and Carpet cleaning fluid.
The following decision variables are used:
F = tons of fuel additive produced
S = tons of solvent base produced
C = tons of carpet cleaning fluid produced

Profit Quantity of material to produce a ton of product

PRODUCT
per ton of product Material 1 Material 2 Material 3
Fuel additive 40 0.4 0.6
Solvent base 30 0.5 0.2 0.3
Carpet cleaning fluid 50 0.6 0.1 0.3
Maximum available material
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – FIXED COST PROBLEM

03 materials are used to produce 03 products: Fuel additive, Solvent base, and Carpet cleaning fluid.

Profit Quantity of material to produce a ton of product

PRODUCT
per ton of product Material 1 Material 2 Material 3
Fuel additive 40 0.4 0.6
Solvent base 30 0.5 0.2 0.3
Carpet cleaning fluid 50 0.6 0.1 0.3
Maximum available material

This LP formulation does not include a fixed cost for production setup of the products.
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – FIXED COST PROBLEM

03 materials are used to produce 03 products: Fuel additive, Solvent base, and Carpet cleaning fluid.

Quantity of material
Profit Maximum
to produce a ton of product Setup
PRODUCT per ton of production
cost
product Material 1 Material 2 Material 3 (tons)

Fuel additive 40 0.4 0.6 200 50

Solvent base 30 0.5 0.2 0.3 50 25
Carpet cleaning fluid 50 0.6 0.1 0.3 400 40
Maximum available
material
The 0-1 variables can be used to incorporate the fixed setup costs into the production model.
SF = 1 if the fuel additive is produced; 0 if not
SS = 1 if the solvent base is produced; 0 if not
SC = 1 if the carpet cleaning fluid is produced; 0 if not

Using these setup variables, the total setup cost is: 200.SF + 50.SS + 400.SC
The objective function to include the setup cost: Max (40.F + 30.S + 50.C – 200.SF - 50.SS – 400.SC)
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – FIXED COST PROBLEM

03 materials are used to produce 03 products: Fuel additive, Solvent base, and Carpet cleaning fluid.

Quantity of material
Profit Maximum
to produce a ton of product Setup
PRODUCT per ton of production
cost
product Material 1 Material 2 Material 3 (tons)

Fuel additive 40 0.4 0.6 200 50

Solvent base 30 0.5 0.2 0.3 50 25
Carpet cleaning fluid 50 0.6 0.1 0.3 400 40
Maximum available material
Using these setup variables, the total setup cost is: 200.SF + 50.SS + 400.SC

The objective function to include the setup cost: Max (40.F + 30.S + 50.C – 200.SF - 50.SS – 400.SC)
The constraints:
F ≤ 50.SF S ≤ 25.SS C ≤ 40.SC
SF, SS, SC = 0 or 1
DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – FIXED COST PROBLEM

Quantity of material
Profit Maximum
to produce a ton of product Setup
PRODUCT per ton of production
cost
product Material 1 Material 2 Material 3 (tons)

Fuel additive 40 0.4 0.6 200 50

Solvent base 30 0.5 0.2 0.3 50 25
Carpet cleaning fluid 50 0.6 0.1 0.3 400 40
Maximum available material
DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – FIXED COST PROBLEM

 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – DISTRIBUTION SYSTEM DESIGN

Shipping cost per unit ($)

Annual fixed cost Annual capacity from Plant to Distribution center
Proposed plant
($) (unit)
Boston Atlanta Houston
Detroit 175.000 10.000 5 2 3
Toledo 300.000 20.000 4 3 4
Denver 375.000 30.000 9 7 5
Kansas city 500.000 40.000 10 4 2
Current plant
ST. Louis 30.000 8 4 3
Annual
30.000 20.000 20.000
Demand
DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – DISTRIBUTION SYSTEM DESIGN

0-1 variables can be used in this distribution system

design problem to develop a model for choosing the best
plant locations and for determining how much to ship
from each plant to each distribution center.
DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – DISTRIBUTION SYSTEM DESIGN

The annual fixed cost of operating the new plants (k$)

175 y1 + 300 y2 + 375 y3 + 500 y4

x ij = the units shipped from Plant i to Distribution center j

(i = 1, 2, 3, 4, 5 and j = 1, 2, 3) *unit in thousand

The annual transportation cost (k$)

(5x11 + 2x12 + 3x13) + (4x21 + 3x22 + 4x23) +
(9x31 + 7x32 + 5x33 ) + (10x41 + 4x42 + 2x43)+
(8x51 + 4x52 + 3x53)
DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – DISTRIBUTION SYSTEM DESIGN

Capacity constraints:
x11 + x12 + x13 ≤ 10y1 Detroit capacity
x21 + x22 + x23 ≤ 20y2 Toledo capacity
x31 + x32 + x33 ≤ 30y3 Denver capacity
x41 + x42 + x43 ≤ 40y4 Kansas city capacity
x51 + x52 + x53 ≤ 30 St. Louis capacity
Demand constraints:
x11 + x21 + x31 + x41 + x51 = 30 Boston demand
x12 + x22 + x32 + x42 + x52 = 20 Toledo demand
x13 + x23 + x33 + x43 + x53 = 20 Houston demand

Variable constraints:
xij ≥ 0 for all i, j;
y1, y2, y3, y4 =0; 1
DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – DISTRIBUTION SYSTEM DESIGN

DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – BUSINESS LOCATION

DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – BUSINESS LOCATION

DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – BUSINESS LOCATION

DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – BUSINESS LOCATION

DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – BUSINESS LOCATION

DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – BUSINESS LOCATION

DISTRIBUTION AND NETWORK MODELS

APPLICATIONS INVOLVING 0-1 VARIABLES – BUSINESS LOCATION

 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS 0-1 VARIABLES – PRODUCT DESIGN & MARKET SHARE OPTIMIZATION

CONJOINT ANALYSIS is a market research technique that can be used to learn how prospective
buyers of a product value the product’s attributes.
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS 0-1 VARIABLES – PRODUCT DESIGN & MARKET SHARE OPTIMIZATION

CONJOINT ANALYSIS

In a typical Conjoint Analysis, a sample of consumers are asked to

express their preference for specially prepared pizzas with chosen levels
for the attributes.

PIZZA’S 4 FOUR MOST IMPORTANT ATTRIBUTES LEVEL

Crust (Vỏ) Thin / Thick
Cheese (Phô mai) Mozzarella / Blend
Sauce (Nước sốt) Smooth / Chunky
Sausage flavor (Hương vị xúc xích) Mild / Medium / Hot

Then regression analysis is used to determine the part-worth for each of

the attribute levels. In essence, the part-worth is the utility value that a
consumer attaches to each level of each attribute.
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS 0-1 VARIABLES – PRODUCT DESIGN & MARKET SHARE OPTIMIZATION

CONJOINT ANALYSIS

Salem Foods is planning to enter the pizza market, where 02 existing brands, Antonio and King,
have the major share of the market.

Salem Foods
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS 0-1 VARIABLES – PRODUCT DESIGN & MARKET SHARE OPTIMIZATION

CONJOINT ANALYSIS

Salem Foods is planning to enter the pizza market, where 02 existing brands, Antonio and King,
have the major share of the market.

Salem Foods

Consumer 1’s current favorite pizza is the Antonio’s brand,

which has a thick crust, mozzarella cheese, chunky sauce, and medium-flavored sausage
=> Consumer 1’s utility for the Antonio’s brand pizza is: 2 + 6 + 17 + 27 = 52
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS 0-1 VARIABLES – PRODUCT DESIGN & MARKET SHARE OPTIMIZATION

CONJOINT ANALYSIS

Salem Foods is planning to enter the pizza market, where 02 existing brands, Antonio and King,
have the major share of the market.

Salem Foods

King’s pizza
which has a thin crust, a cheese blend, smooth sauce, and mild-flavored sausage
=> Consumer 1’s utility for the King’s brand pizza is: 11 + 7 + 3 + 26 = 47
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS 0-1 VARIABLES – PRODUCT DESIGN & MARKET SHARE OPTIMIZATION

Assuming the 8 consumers in the current study is representative of the marketplace for pizza,
we create an integer programming model that helps Salem design a pizza,
which have the highest utility for enough people.
* In Marketing literature, the problem being solved is called the share of choice problem.

The decision variables are defined as follows:

lij = 1 if Salem Foods chooses level i for attribute j; 0 otherwise
yk = 1 if consumer k chooses the Salem Foods pizza; 0 otherwise

The number of customers preferring the Salem brand pizza is just the sum of the yk variables,
=> The objective function is: Max (y1 + y2 + . . . + y8)
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS 0-1 VARIABLES – PRODUCT DESIGN & MARKET SHARE OPTIMIZATION

lij = 1 if Salem Foods chooses level i for attribute j; 0 otherwise
yk = 1 if consumer k chooses the Salem Foods pizza; 0 otherwise
The objective function is: Max (y1 + y2 + . . . + y8)

The 1st consumer’s utility of a particular type of pizza:

Utility for 1st consumer = (11.l11 + 2.l21) + (6.l12 + 7.l22) + (3.l13 + 17.l23) + (26.l14 + 27.l24 + 8.l34)

To succeed with its brand, Salem Foods realizes that it must entice consumers in the marketplace to
switch from their current favourite brand of pizza to the Salem Foods product.
Consumer 1 only purchases the Salem instead of Antonio’s brand pizza if the levels of the attributes for
the Salem are chosen such that:
Utility for 1st consumer = (11.l11 + 2.l21) + (6.l12 + 7.l22) + (3.l13 + 17.l23) + (26.l14 + 27.l24 + 8.l34) > 52
(Consumer 1’s utility for his current favourite Antonio’s brand pizza is: 2 + 6 + 17 + 27 = 52)
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS 0-1 VARIABLES – PRODUCT DESIGN & MARKET SHARE OPTIMIZATION

lij = 1 if Salem Foods chooses level i for attribute j; 0 otherwise
yk = 1 if consumer k chooses the Salem Foods pizza; 0 otherwise
The objective function is: Max (y1 + y2 + . . . + y8)

For instance, y1 = 1 when the 1st consumer prefers the Salem pizza and y1 = 0 otherwise.
Thus, the constraint for 1st consumer:
(11.l11 + 2.l21) + (6.l12 + 7.l22) + (3.l13 + 17.l23) + (26.l14 + 27.l24 + 8.l34) ≥ 1 + 52.y1

Four more constraints must be added, one for each attribute.

l11 + l21 = 1 l12 + l22 = 1 l13 + l23 = 1 l14 + l24 + l34 = 1
 DISTRIBUTION AND NETWORK MODELS

APPLICATIONS 0-1 VARIABLES – PRODUCT DESIGN & MARKET SHARE OPTIMIZATION

The Optimal solution to this ILP:

l11 = 1 l22 = 1 l23 = 1 l14 = 1
y1 = 1 y2 = 1 y6 = 1 y7 = 1

Salem Foods

Salem Food’s pizza

which has a thin crust, a cheese blend, chunky sauce, and mild-flavored sausage
 DISTRIBUTION AND NETWORK MODELS

MODELING FLEXIBILITY – MULTIPLE-CHOICE

Faced with limited capital for the next 04 years, company needs to select the most profitable projects.
Present value*: The estimated net present value is the net cash flow discounted back to the beginning of year 1

The four 0-1 decision variables are:

P = 1 if the Plant expansion project is accepted; 0 if rejected
W = 1 if the Warehouse expansion project is accepted; 0 if rejected
M = 1 if the New machinery project is accepted; 0 if rejected
R = 1 if the New product research project is accepted; 0 if rejected
 DISTRIBUTION AND NETWORK MODELS

MODELING FLEXIBILITY – MULTIPLE-CHOICE CONSTRAINT

If the company actually has 3 warehouses and it just

wants to expand only one warehouse.
Newly defined variables:
W1 = 1 if the 1st warehouse is chosen; 0 if rejected;
W2 = 1 if the 2nd warehouse is chosen; 0 if rejected;
W3 = 1 if the 3rd warehouse is chosen; 0 if rejected.

Multiple-choice constraint reflects the

requirement that exactly 01 of these
warehouses be selected: W1 + W2 + W3 = 1
DISTRIBUTION AND NETWORK MODELS

MODELING FLEXIBILITY – MUTUALLY EXCLUSIVE CONSTRAINT

DISTRIBUTION AND NETWORK MODELS

MODELING FLEXIBILITY – k OUT OF n ALTERNATIVES CONSTRAINT

DISTRIBUTION AND NETWORK MODELS

MODELING FLEXIBILITY – CONDITIONAL CONSTRAINT

Conditional constraint: The acceptance of one option is conditional on the acceptance of another.

For instance: the Warehouse expansion project was conditional on the Plant expansion project
FEASIBILITY TABLE
DISTRIBUTION AND NETWORK MODELS

MODELING FLEXIBILITY – COREQUISITE CONSTRAINT

Corequisite constraint: Two options are dependent on each other.

For instance: the warehouse expansion project had to be accepted whenever the plant expansion

project was accepted, and vice versa

FEASIBILITY TABLE
 OPERATIONS RESEARCH
PART 6: TIME SERIES ANALYSIS & FORECASTING

TRUNG-HIEP BUI
scv.udn.vn/buitrunghiep | [email protected] | 0935-743-555
TIME SERIES ANALYSIS & FORECASTING

CONTENT

❑ Time Series Patterns

❑ Forecast Accuracy
❑ Moving Averages and Exponential Smoothing
❑ Linear Trend Projection
❑ Seasonality

LEARNING OUTCOMES
 TIME SERIES ANALYSIS & FORECASTING

INTRODUCTION

❑ Forecasts are a basic input in the decision processes of MS Budgeting

because they provide information on future demand.

Planning capacity
❑ The primary goal of MS is to match supply to demand.
❑ Two important aspects of forecasts: Sales
• The expected level of demand (trend, seasonal variation)
• The degree of forecasting accuracy Production & Inventory

Personnel

Purchasing

FORECASTING
etc.
 TIME SERIES ANALYSIS & FORECASTING

INTRODUCTION

❑ Forecasts affect decisions and activities throughout an organization

OPERATIONS. Schedules, capacity planning, work assignments and workloads,

inventory planning, make-or-buy decisions, outsourcing, project management.

PRODUCT / SERVICE DESIGN

Revision of current features, design of new products or services.

ACCOUNTING
New product/process cost estimates, profit projections, cash management.

FINANCE
FORECASTING
Equipment/Replacement needs, timing and amount of funding/borrowing needs.

HUMAN RESOURCES
Hiring activities; layoff planning, including outplacement counseling

MARKETING
Pricing and promotion, e-business strategies, global competition strategies.

MIS
New/revised information systems, Internet services.
TIME SERIES ANALYSIS & FORECASTING

INTRODUCTION
❑ Forecasting methods can be classified as qualitative or quantitative.
❑ Qualitative forecasting methods generally involve the use of expert judgment.
❑ Quantitative forecasting methods can be used when:
(1) past information about the variable being forecast is available,
(2) the information can be quantified,
(3) it is reasonable to assume that the past is prologue.
 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS - A Horizontal Pattern

❑ Changes in business conditions often result in a time series with a horizontal pattern that shifts
to a new level at some point in time.

Changes in business conditions

 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Trend Pattern

❑ A time series shows gradual movements to relatively higher or lower values over a longer period.
❑ A trend is usually the result of long-term factors (population increases/decreases, shifting
demographic characteristics of the population, improving technology, and/or changes in
consumer preferences…).

A TIME SERIES WITH A LINEAR TREND PATTERN:

Time series seems to have a systematically increasing or upward trend
 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Trend Pattern

❑ A time series shows gradual movements to relatively higher or lower values over a longer period.
❑ A trend is usually the result of long-term factors.

A TIME SERIES WITH A NON-LINEAR TREND PATTERN:

When the percentage change from one period to the next is relatively constant
 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Seasonal Pattern

❑ Seasonal patterns are recognized by observing recurring patterns over successive periods.
 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Seasonal Pattern

❑ Seasonal patterns are recognized by observing recurring patterns over successive periods.
 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Trend and Seasonal Pattern

❑ Some time series include both a trend and a seasonal pattern.

 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Trend and Seasonal Pattern

❑ Some time series include both a trend and a seasonal pattern.

 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Common Patterns

The underlying pattern in the time series is an important factor in selecting a forecasting method.
Time series plot should be one of the first analytic tools employed when trying to determine which forecasting method to use.
 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Forecast Accuracy - Naïve forecasting method

❑ Naïve forecasting method: the simplest of all the forecasting methods, an approach that uses the
volume of the most recent period as the forecast for the next period.
 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Forecast Accuracy - Naïve forecasting method

❑ Naïve forecasting method: the simplest of all the forecasting methods, an approach that uses the
volume of the most recent period as the forecast for the next period.

Several Measures of Forecast Accuracy

❑ Forecast error: et = Yt – Y’t
Yt : actual values of the time series for period t
Y’t : forecasted values of the time series for period t
et : forecasting error for period t

❑ Mean Forecast Error (MFE)

❑ Mean Absolute Error (MAE)

n: the number of periods in our time series

k: the number of periods at the beginning of the time series
for which we cannot produce a naïve forecast
 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Forecast Accuracy - Naïve forecasting method

❑ Naïve forecasting method: the simplest of all the forecasting methods, an approach that uses the
volume of the most recent period as the forecast for the next period.

❑ Mean Squared Error (MSE):

❑ Mean Absolute Percentage Error (MAPE)

TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Forecast Accuracy - Naïve forecasting method

 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Forecast Accuracy – 2nd forecasting method

❑ Using the average of all the historical data available as the forecast for the next period
TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Forecast Accuracy – 2nd forecasting method

 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Forecast Accuracy – 2nd forecasting method

BETTER

When a shift to a new level (change in business condition) occurs, it takes several periods for the forecasting method that uses
the average of all the historical data to adjust to the new level of the time series. However, in this case, the simple naïve method
adjusts very rapidly to the change in level because it uses only the most recent observation available as the forecast.
 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Moving Averages and Exponential Smoothing

03 forecasting methods that are appropriate for a time series with a horizontal pattern:
• Moving averages
• Weighted moving averages
• Exponential smoothing
These methods are also capable of adapting well to changes in the level of a horizontal pattern.
The objective of these methods is to “smooth out” random fluctuations in the time series,
=> They are referred to as smoothing methods.
These methods are easy to use and generally provide a high level of accuracy for short-range forecasts,
such as a forecast for the next period.
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TIME SERIES ANALYSIS – Moving Averages

❑ The moving averages method uses the average of the most recent k data values in the time series
as the forecast for the next period.
❑ To use moving averages to forecast a time series, we must first select the order k (number of
time series values to be included in the moving average).

The term “moving” is used because every time a new observation becomes available for the time series,
it replaces the oldest observation in the equation and a new average is computed.
TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Moving Averages

k=3
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TIME SERIES ANALYSIS – Moving Averages

TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Moving Averages

 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Weighted Moving Averages

❑ The weighted moving averages method involves selecting a different weight for each data value
in the moving average and then computing a weighted average of the most recent k values as the
forecast for the next period.

• Note that the sum of the weights is equal to 1 for the weighted moving average method

• Generally, the most recent observation receives the largest weight,

and the weight decreases with the relative age of the data values.
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TIME SERIES ANALYSIS – Exponential Smoothing

❑ The exponential smoothing is a special case of the weighted moving averages method in which
we select only one weight (alpha)—the weight for the most recent observation.

The exponential smoothing forecast for any period is actually a weighted average of all
the previous actual values of the time series.
 TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Exponential Smoothing

❑ We set to initiate the computation. Smoothing constant 𝛼 = 0.2

TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Exponential Smoothing

The forecasts “smooth out”

the irregular or random fluctuations
in the time series.
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TIME SERIES ANALYSIS – Exponential Smoothing

❑ Rewriting the basic exponential smoothing

❑ The new forecast Y’ t + 1 is equal to the previous forecast Y’t plus an adjustment 𝜶et,
which is the smoothing constant 𝜶 times the most recent forecast error (et = Yt – Y’t).
=> The forecast in period (t + 1) is obtained by adjusting the forecast in period t by a fraction of the forecast
error from period t.
❑ If the time series contains substantial random variability, a small value of the smoothing constant is
preferred. The reason is that if much of the forecast error is due to random variability, we do not want to
overreact and adjust the forecasts too quickly.
❑ If the time series contains little random variability, a forecast error is more likely to represent a real change
in the level of the series. Thus, larger values of the smoothing constant provide the advantage of quickly
adjusting the forecasts to changes in the time series; this allows the forecasts to react more quickly to changing
conditions.
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TIME SERIES ANALYSIS – Linear Trend Projection

❑ Regression analysis may be used to forecast a time series with a linear trend.

Although the time series plot shows some up and down movements over the past 10 years, we might agree that the
linear trend line provides a reasonable approximation of the long-run movement in the series.
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TIME SERIES ANALYSIS – Linear Trend Projection

❑ In regression analysis, we estimate the relationship between dependent variable (usually

denoted as y) and one or more other independent variables (usually denoted as x1, x2, x3… xn)

❑ Simple Linear Regression: When we estimate a

linear relationship between the dependent variable
(y) and a single independent variable (x)
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TIME SERIES ANALYSIS – Linear Trend Projection

❑ Simple Linear Regression: yields the linear relationship between the independent variable and
the dependent variable that minimizes the MSE
=> We can use this method to find a best-fitting line to a set of data that exhibits a linear trend.

❑ The time variable begins at t =1 corresponding to the first time series observation and
continues until t = n corresponding to the most recent time series observation.
❑ Calculus may be used to find the b0 and b1 to yield the line that minimizes the MSE.
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TIME SERIES ANALYSIS – Linear Trend Projection

TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Linear Trend Projection

* We do not use past values of the time series to produce forecasts, and so k = 0
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TIME SERIES ANALYSIS – Seasonality without Trend

Doesn’t the time series plot indicate any long-term trend in sales?
TIME SERIES ANALYSIS & FORECASTING

TIME SERIES ANALYSIS – Seasonality without Trend

The data follow a horizontal pattern with random fluctuation

=> Single exponential smoothing could be used to forecast sales.

However, closer inspection of the time series plot reveals a pattern in the fluctuations.
=> A quarterly seasonal pattern is present.
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TIME SERIES ANALYSIS – Seasonality without Trend

❑ Categorical Variables: are used to categorize observations of data. When a categorical variable has k
levels, k – 1 dummy variables (sometimes called 0-1 variables) are required.
❑ If there are 04 seasons (Quarter 1, 2, 3, and 4), we need 03 dummy variables, which are coded as:

• Note that Quarter 4 will be denoted by

a setting of all 03 dummy variables to 0.
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TIME SERIES ANALYSIS – Seasonality without Trend

❑ Categorical Variables: are used to categorize observations of data.

❑ When a categorical variable has k levels, k – 1 dummy variables (0-1 variables) are required.
❑ We can use a multiple linear regression model to find the values of b0, b1, b2, and b3 that
minimize the sum of squared errors,
❑ The general form to estimate the forecasted value for period t:

Multiple Linear Regression Model

❑ We can use the above equation to forecast quarterly sales for next year.
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TIME SERIES ANALYSIS – Seasonality without Trend

❑ The general form to estimate the forecasted value for period t:

Multiple Linear Regression Model

❑ We can use the above equation to forecast quarterly sales for next year.

❑ We also can obtain the quarterly forecasts for next year by computing the average number in each quarter