A Prototype Example: The Acme Bicycte Company

It's time now to introduce you to a small example that we will be visiting numerous times
throughout the book: the Acme Bicycle Company (ABC). The name follows the time-
honored hadition in optimization and operations research texts of inventing bogus
companies such as the "Wyndor Glass Company" (which, oddly, makes glass windows
and doors), or the "Nori and Leets" Iron and Steel Company.

The Acme Bicycle Company produces two kinds of bicycles by hand: mountain bikes
and street racers. Acme wishes to determine the rate at which each type of bicycle should
be produced in order to maximize the profits on the sales of the bicycles. Acme assumes
that it can sell all of the bicycles produced.

The physical data on the production process is available from the company engineer. A
different team produces each kind of bicycle, and each team has a different maximum
production ratel.2mountain bikes per day and 3 racers per day, respectively. Producing a
bicycle of either type requires the same amount of time on the metal finishing machine (a
production bottleneck), and this machine can process at most a total of 4 bicycles per day,
of either type. The company accountant estimates that mountain bikes are currentiy
generating a profit of around$15-gertieyqle, and racers a profit of around $10 per
bicycle.

Formulation Practice: the smailtime Mutual Funds company

Formulating LPs well takes practice. In a classroom situation you will
often know in
advance that you are formulating a linear progmm. In contrasl in
the real world you
normally don't l<now the type of the problem *h"n you begin studying
it, and that makes
formulation much more difficult. The only way to irrrp.ou-" your skills
in formulation is
practice, practice, practice. So here's another example. Try
to formulate it before
looking at the solution as give below.

You are the investments manager for the Smalltime Mutual Funds Company,
and are
trying to determine how to invest a pool of $14 million released by cashin!
o,.ri so-e of
the stock investments. Table 2.1 summarizes the information
that you have about a set of
five possible investments.

To be as conseryative_ as possible, you assume that in the event of a loss by the

investment, you lose all of your money. This is a fairly serious assumption,
since most

Practical optimization: a Gentle lntroduction orohnw.chinneck,20Or 7

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mutual fund investments are likely to lose some but not all of their value. On the other
hand, you also assume that if there is not a loss, then the investment will grow by the
growth rate shown.

For policy reasons, there are limits on how you can invest the money. You must allocate
at least 35% of the total funds available to the balanced and bond investments. Of all the
money put into equity, special equity and foreign investments, at least half must be in the
equity investment. Finally, the expected lost capital must be less than l|Yu Of course,
your overall objective is to maximize the return on the original pool of money.

This is a textbook problem, so the data is stated much more succinctly and clearly than in
real world problems, which are plagued by misleading, hidden, and spurious information.
Still, extracting an LP formulation from even a textbook word problem can be harder
than it seems. You can test yourself by trying to answer the questions posed in the next
few paragraphs before reading the answers.

type of investment annual growth rate probabilitv of loss

equity 0.15 0.18
special equity 0.21 0.31
balanced 0.11 0.09
foreign 0.19 0.19
bond 0.08 0.03
Table 2.1: Investments available to the Smalltime Mutual f,'unds Company.

The first thing to do in an LP formulation is to identiff the decision variables. Ask

yourself what it is that you can control in this problem, what quantities do you need to
find values for? Wat are tlte decision variables?
SilComputers makes quarterly decisions about their prorluct mix. tr\rhile their full product
line
includes hundreds of products, vr.e will consicler a simpler problem with jrrst tu,o proclucts:
notebook
computers and desktop computers. SilComputers r.voulcl like to knorv how ruany of ear:h prncluct
to
procluce in order to nraximize profit for the quarter.
There are a number of limits on what SilConrputers can produce. The rnajor constraints are
as
[o]lt-rws:

1. Each computer (either rtotebook or tlesktop) requires a Processing Chip. Due to tightless in
the market, our supplier ha^s allocated 10,000 such chil>s to us.
2' Ea,ch computer requires memory. lilemory comes in t6I{B clrip sets.
"\ notebonk colrputer
has 16I'{E} menlorv installecl (so nee,Js 1 chip set) while a clesktop computer has J2I,fB (so
requires 2 chip sets). \t'e received a great deal on chip sets, so have a stock ol 15,000 chip
sets to use over the next quarter.

3. Each computer requires assembly t,ime. I)ue to tight tolerances, a notebook computer takes
rnore time to assernble: .l minutes versus 3 minul,es for a desktop. There are ?5,000 minutes
of a,ssembll.' i,ime ara,ila,ble in the next qua,rter.

Giverl current market, conditions, rnaterial cost, ancl our production system, each notebook
cornputer produced gencrates $750 pro{ii, ancl each deskt,op pro<luces $1000 profit.
There are mally questions SilComputer might ask. The nrost obvious are such things as ..llorv
man3i of each type computer should Sil()omputer proriuce in the next quart,er?'r ..What is
the
maximum profit SilComputer can rnake?t' Less obvious, but perhaps of more managerial interest
are "Ifort' much shorrld SilComputer be rvilling to pay for an extra memor"v chip set?" ,,lVhat is
the effect of losing 1,000 rninutes of assembly tinre due tn a,n unexpected machine failure'I" *Horr
mrrch profit $rorrld rve neecl to make on a, 32\,IB notebook computer to jrrstify its profluctiol?"
[,itrea,r programming gives us a, mechalism for ansrvering a,ll of these quest.ions quicklv and
easily'. There are three steps ir appli'ing linear progra,rnming: modeling, solving, and
interpreting.

lvIegaMarketingis1>laIrnilrgacorrcentratet1one*"ut.ewCutsEv-
eryihing superl{nife. The a.ds ha,ve been desig,ecl and producea
u,ra now the1. wish to determine
how much nloney to spend in ea'ch a,rir.ertising outlei.
In realiiy, they fu3,y6 hrrntlretls of possible
outlets to choose front. we will illustrate their problem
wil;h two nutlets: prirne-tir,e T\r, ancl
nervsrnagazi nes.
The prol:letn of optimally spending aclveltising dollars can
l:e formulatecl in rnany ,l.ays. I.br
itrstance, given a fixer1 bridget, the goa.l rnight Lre t,o rnaxirnize
the number of t;1rget custonlers
rcachecl (a target customer is acustonter rvith a, reasonable
chance of purcha,sitg the prod,ct).
:\rt alternatir'n approach, rvhich lve a,rlopt, liere, is to clefine targets
for reaching ea,ch rnarket
segtnent a'nd to mininrize the nroney spent to reach
those targets. For this procluct, the target
segments are Teenage Bovs, Affuent \tr'bruen (ages'tr0-zl9),
ri.l R"tirud x,Ien. Each minute of
primetirne TV and page of newsmagazine arlvertisernent
reacires the follorving number of people (in
nrillions) :

Outlet Boys Women lv,Ierl Cost

T\,' 513 600
I\.{ag' ?63 500
Target 24 18 24

Agaitt, l'Iega'x"{arketing is interested in stra,ightforward

ansrvers like lorv ma'y units of eac6
outlet to purchase to trreet the segnrent goals. Tliey are
.lso int*."*t".] in -;.;';;;",;ns as ,,Ho*,
mucir rvill it cost to reach att exira milliori retirecl men?", o'one
radio spot ruachei I nrillion boys, 1
million lvolnell' and I million ll]en: hou, much iu'e we willing
to pa-v fbr such a ripoti,,., a,nd sirnilar
rluesl;ions.
5.4.L Diet Problem
Problem Deffnition
What is the perfect diet? An i{eal cliet rvould meel, or exceed basic nutritional requiremeuts, be
ilexpensive, ha,ve varietv, ancl be "pleasing to the palate". IIow can wt: {itrd sucrh ar, diet?
Supl>ose the only foods in the world are as follows:
. . __ ,,
Price Linrit
Food Serving Size (kc.a,l) (s) (nrg) (cents/sen ing) (servings/da')')
')Ro' 110 4 ? ., 4
Oatmeal
100g 2Ai: 32 12 24 3
Clhicken
2 Large 160 13 54 13 2
Eggs
Whole I\{ilk 160 8 285 I I
420 4 22 ?0 2
C-lherrv Pie
260g 260 80 19 2
Pork&Beans 1.1

After consulting with rutitiolists, we decree that a, satisflactory diet has at least 2000 kcal of
energ-v, 55 g of protein, anci 800 urg of calcium (vitamins and iron are supplied by pills). While
some of us tvould be ha.ppy to subsist on 10 servings of pork and heatts, we have decidecl to in.rpose
r.ariel,ybyhavingalimitonthenumberof servings/da5'foreachof oursixfoods. Whatistheleast
cost satisfactory diet?

5.4.2'Workforce Planning
Problem Definition.
Based ou past experience, the number of
Consider a restaurant thal, is oPen seven days a week.
workers needecl on a pa,rticttla'r tla-v is gir,'cu as follows:
D",y I{on \tr'ed Thu Fri Sa,t n

l3
tr*'o da!'s off, re1>ea,ting this Patl;ern
Every worker works five consecutir,'e days, and then ta'lics
staff t;he resta.urant?
inclelinitely. How can we minimize the number of workers tlrat
5.4.3 Financial Portfolio
Problem Definition.
creating "optimal" portfolios' The
In your finance courses, y'ou will learn a nuurber of techrliques for
risk and other a'spects of
optimality of a portfolio d"p"n.lu heavily on the model used for clefining
anenable to linear programmiug
financial instruments. Here is a particularly simple moclel that is
techttiqttes.
various investtnenl,s. There are {ive
Consider a rnortgage team u,ith $t00,000,000 to I'ttra,nce
categories of loatrs, each wittr an a,ssociated return atd risk
(1-10, 1 best) :

Lc.ran/invesl;ment Rel,rrrn (%) Risk

l'irst
IUortgagcs I r)

Second trIortgages l2 6
Perrsonal Loans Lit 8
Cloururercial Loans 8 2
Government Securities (, 1

An.y- uninvestetl mone-v goes into a savings a,ccotlul; rvith no risk and 3% returu. The goal for
the mortgage team is to allocate the trroney to the categories so as to:
(a) Maximize the average return per dollar
(b) Have an average risk of lto more than 5 (all averages and fractiolts ta,ken over the invested
morre.! (uot over the sal'iug account)).
(c) Invest at least 20%, h commercial loans
(cl) I'he a,mount in second trrortgages ancl persona,l loans cornbined shorrld be no higher than
the amount it first mortgages.