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BA Unit6

The document discusses linear optimization and its applications in business analytics, specifically within the context of a ski manufacturing company. It outlines the steps for building optimization models, identifying decision variables, objective functions, and constraints, and translating these into mathematical expressions. Additionally, it covers the use of spreadsheet models and Solver tools for solving linear optimization problems to maximize profits while adhering to constraints.

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Shaik Ashraaf
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0% found this document useful (0 votes)
23 views46 pages

BA Unit6

The document discusses linear optimization and its applications in business analytics, specifically within the context of a ski manufacturing company. It outlines the steps for building optimization models, identifying decision variables, objective functions, and constraints, and translating these into mathematical expressions. Additionally, it covers the use of spreadsheet models and Solver tools for solving linear optimization problems to maximize profits while adhering to constraints.

Uploaded by

Shaik Ashraaf
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Unit 6

Linear Optimization & Applications


BUSINESS ANALYTICS
B.Tech(CSE) IV Year - I Semester
Open Elective - III

Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University

1
Unit 6
Linear Optimization & Applications

Prof. S.Adinarayana, Dept of CS&SE, College of Engineering,


Andhra University 2
Building Linear Optimization Models on spreadsheets

• 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.
• Developing any optimization model consists of four basic steps:
• 1. Identify the decision variables.
• 2. Identify the objective function.
• 3. Identify all appropriate constraints.
• 4. Write the objective function and constraints as mathematical
expressions.Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University 3
• Decision variables 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.
• The quantity we seek to minimize or maximize is called the objective function.
• Constraints are limitations, requirements, or other restrictions that are imposed on any solution,
either from practical or technological considerations or by management policy.
• The presence of constraints along with a large number of variables usually makes identifying an
optimal solution considerably more difficult and necessitates the use of powerful software tools.
• The essence of building an optimization model is to first identify these model components, and
then translate the objective function and constraints into mathematical expressions.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


4
Andhra University
Identifying Elements for an Optimization Model

• Managers can generally describe the decisions they have to make, the
performance measures they use to evaluate the success of their
decisions and the limitations and requirements they face or must ensure
rather easily in plain language.
• The task of the analyst is to take this information and extract the key
elements that form the basis for developing a model. Here is a simple
scenario
• Sklenka Ski Company: Identifying Model Components.
Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,
5
Andhra University
• Sklenka Ski Company (SSC) is a small manufacturer of two types of popular all-terrain
snow skis, the Jordanelle and the Deercrest models. The manufacturing process consists
of two principal departments: fabrication and finishing.
• The fabrication department has 12 skilled workers, each of whom works 7 hours per day.
• The finishing department has 3 workers, who also work a 7-hour shift.
• Each pair of Jordanelle skis requires 3.5 labor hours in the fabricating department and 1
labor hour in finishing. The Deercrest model requires 4 labor hours in fabricating and 1.5
labor hours in finishing.
• The company operates 5 days per week. SSC makes a net profit of $50 on the Jordanelle
model and $65 on the Deercrest model. In anticipation of the next ski-sale season, SSC
must plan its production of these two models.
• Because of the popularity of its products and limited production capacity, its products are
in high demand, and SSC can sell all it can produce each season.
• The company anticipates selling at least twice as many Deercrest models as Jordanelle
models. The company wants to determine how many of each model should be produced
on a daily basis to maximize net profit.
Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,
6
Andhra University
• The first three steps of the modelbuilding process: identifying the decision variables, objective function,
and constraints.

• It is very important to specify the dimensions of the variables, for example, “pairs of skis produced/day” rather
than simply “Jordanelle skis.”

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


7
Andhra University
• Fabrication: Total labor hours used in fabrication cannot exceed the amount of labor
hours available.
• Finishing: Total labor hours used in finishing cannot exceed the amount of labor hours
available.
• In addition, the problem notes that the company anticipates selling at least twice as
many Deercrest models as Jordanelle models.
• Thus, we need a constraint that states the Number of pairs of Deercrest skis must be at
least twice the number of parts of Jordanelle skis.
• Finally, we must ensure that negative values of the decision variables cannot occur.
• Nonnegativity constraints are assumed in nearly all optimization models.
Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,
8
Andhra University
Translating Model Information into Mathematical Expressions

• The challenging part of developing optimization models is translating the descriptions of


the objective function and constraints into mathematical expressions.
• We usually represent decision variables by descriptive names (such as Jordanelle and
Deercrest), abbreviations, or subscripted letters such as X1 and X2.
• For mathematical formulations involving many variables, subscripted letters are often
more convenient; however, in spreadsheet models, we recommend using descriptive
names to make the models and solutions easier to understand.
• we noted the importance of specifying the dimension of the decision variables.
• This is extremely helpful to ensure the accuracy of the model.
Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,
Andhra University 9
Sklenka Ski Company: Modeling the Objective Function

• Constraints are generally expressed mathematically as algebraic inequalities or equations with all
variables on the left side and constant terms on the right.
• To model the constraints, we use a similar approach. First, consider the fabrication and finishing
constraints.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


Andhra University 10
• First, All constraints in optimization models must be one of these three forms.<= or >=, or =.
• Second, note that “cannot exceed” divides each constraint into two parts—the left-hand
side (“total labor hours used”) and the right-hand side (“amount of labor hours available”).
• The left-hand side of each of these expressions is called a constraint function.
• A constraint function is a function of the decision variables in the problem.
• The right-hand sides are numerical values (although occasionally they may be constraint
functions as well).
• All that remains is to translate both the constraint functions and the righthand sides into
mathematical expressions.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering, Andhra University


11
Sklenka Ski Company: Modeling the Constraints
• The amount of labor available in fabrication is (12 workers)(7 hours/day) = 84 hours/day, whereas
in finishing we have (3 workers)(7 hours/day) = 21 hours/day.
• Because each pair of Jordanelle skis requires 3.5 labor hours and each pair of Deercrest skis
requires 4 labor hours in the fabricating department, the total labor used in fabrication is 3.5
Jordanelle + 4 Deercrest.
• Note that the dimensions of these terms are (hours/pair of skis)(number of skis produced) =
hours.
• Similarly, for the finishing department, the total labor used is 1 Jordanelle + 1.5 Deercrest.
Therefore, the appropriate constraints are:

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering, Andhra University


12
• For the market mixture constraint “Number of pairs of Deercrest skis must be at least twice the number of
pairs of Jordanelle skis,” we have Deercrest >= 2 Jordanelle
• It is customary to write all the variables on the left-hand side of the constraint.
• Thus, an alternative expression for this constraint is Deercrest − 2 Jordanelle >= 0.
• The difference between the number of Deercrest skis and twice the number of Jordanelle skis can be
thought of as the excess number of Deercrest skis produced over the minimum market mixture
requirement.
• Finally, nonnegativity constraints are written as Deercrest >= 0 Jordanelle >= 0.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering, Andhra University


13
More about Constraints in optimization problems
• Constraints may take on many different forms. Here are some additional examples of constraints that we may find in
a linear optimization model.

To model any constraint, first identify the phrase that corresponds to either <= or >= or = and substitute
these into the constraint. Thus, for these examples, we would write the following:

• Then it simply becomes an exercise to translate the constraint function into mathematical expressions using
the decision variables in the problem.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


Andhra University 14
Characteristics of Linear Optimization Models

• A linear optimization model (often called a linear program, or LP) 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.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering, Andhra University 15


• The second property of a linear optimization model is that all variables are
continuous, meaning that they may assume any real value (typically,
nonnegative).
• Of course, this assumption may not be realistic for a practical business
problem.
• 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.
Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering, Andhra University 16
A Spreadsheet Model for Linear optimization model-SSC problem

• In the Model section, the number of each product to make is given in cells B14 and C14. Also in the Model section are
calculations for the constraint functions 3.5 Jordanelle + 4 Deercrest (hours used in fabrication, cell D15) 1 Jordanelle
+ 1.5 Deercrest (hours used in finishing, cell D16) Deercrest − 2 Jordanelle (market mixture, cell D19) and the objective
function, 50 Jordanelle + 65 Deercrest (cell D22).
Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering, Andhra University 17
Solving Linear Optimization models

• To solve an optimization problem, we seek values of the decision variables that


maximize or minimize the objective function and satisfy all constraints.
• Any solution that satisfies all problem constraints is called a feasible solution.
• Finding an optimal solution among the infinite number of possible feasible solutions to a
given problem is a difficult task.
• A simple approach is to try to manipulate the decision variables in the spreadsheet
models to find the best solution possible; however, for many problems, it might be very
difficult to find a feasible solution, let alone an optimal solution.

18
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
Solving Linear Optimization models

• You might try to find the best solution you can for the Sklenka Ski problem by using the
spreadsheet model. As it is a simple problem.
• Solver (“standard Solver”) is an add-in packaged with Excel that was developed by
Frontline Systems, Inc. (www.solver.com), and can be used to solve many different
types of optimization problems.
• The standard Solver can be found in the Analysis group under the Data tab in Excel.
• When Solver is invoked, the Solver Parameters dialog appears. You use this dialog to
define the objective, decision variables, and constraints from your spreadsheet model
within Solver.

19
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
Steps to Solve the Linear Optimization Models Using Standard Solver
1.Open Solver Parameters 2. Add constraints 4. Optimal Solution to the SSC
Model

3. Solver Results

20
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
Using Premium Solver for the SSC Model
1. First click on Objective and then click the Add button. The Add Objective dialog appears,
prompting you for the cell reference for the objective function and the type of objective
(min or max) similar to the top portion of the standard Solver Parameters dialog.
2. Next, highlight Normal under the Variables list and click Add; this will bring up an Add
Variable Cells dialog. Enter the range of the decision variables in the Cell Reference field.
3. Next, highlight Normal under the Constraints list and click the Add button; this brings up
the Add Constraint dialog, just like in the standard version. Add the constraints in the
same fashion as in the standard Solver. Check the box Make Unconstrained Variables Non-
Negative.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


Andhra University 21
Premium Solver for Solving SSC problem

1. Click on Objective and then


click the Add button
2. Next, highlight Normal under
the Variables list and click
Add.
3. Next, highlight Normal under
the Constraints list and click
the Add button; this brings
up the Add Constraint dialog
to add constraints.
4. Press Solve to generate the
solution.
Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,
Andhra University
22
Solver Answer Report

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


Andhra University 23
Solver Answer Report

• The Solver Answer Report (all reports in this section were generated using Premium Solver)
provides basic information about the solution, including the values of the original and optimal
objective function (in the Objective Cell section) and decision variables (in the Decision Variable
Cells section).
• In the Constraints section, Cell Value refers to the value of the constraint function using the
optimal values of the decision variables.
• The Status column tells whether each constraint is binding or not binding.
• A binding constraint is one for which the Cell Value is equal to the right-hand side of the value of
the constraint.
• Slack refers to the difference between the left- and right-hand sides of the constraints for the
optimal solution Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,
Andhra University 24
Graphical interpretation of linear optimization

• We can easily illustrate optimization problems with two decision variables graphically.
• This can help you to better understand the properties of linear optimization models and the interpretation of the Solver
output.
• Linear programs generally have an infinite number of feasible solutions. We first characterize the set of feasible
solutions, often called the feasible region. We use the SSC model to illustrate this graphical approach:

25
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
• For a problem with only two decision variables, x1 and x2, we can draw the feasible region on a two-
dimensional coordinate system.
• Let us begin by considering the simplest constraints in a linear optimization model, namely, that the
decision variables must be non-negative.
• These constraints are x1 >=0 and x2 >=0. The constraint x1 >=0 corresponds to all points on or to the right of
the x2-axis; the constraint x2 >=0 corresponds to all points on or above the x1-axis, where x1 = Jordanelle
and x2 = Deercrest).
• Taken together, these nonnegativity restrictions imply that any feasible solution must be restricted to the
first (upper-right) quadrant of the coordinate system. This is true for the feasible solutions to the SSC
problem.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


Andhra University 26
Feasible Points Satisfying Nonnegativity Constraints x1 = Jordanelle and x2 = Deercrest

• An inequality constraint divides the coordinate system


into two regions, the set of points that do satisfy the
inequality and the set of points that don’t.
• In two dimensions, an equality constraint is simply a
line. To graph a line in two dimensions, we need to find
two points that lie on the line.
• As long as the right-hand side term is not zero, the two
points that are easiest to find are the x1- and x2-
intercepts (the points where the line crosses the x1 and
x2 axes).
• To find the x2-intercept, set x1 = 0 and solve for x2.
Likewise, to find the x1 intercept, set x2 = 0 and solve
for x1.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


Andhra University 27
Graph of the Fabrication Constraint x1 = Jordanelle and x2 = Deercrest
• After graphing each of the constraints, we
identify the feasible region.
• For a linear optimization problem, the
feasible region will be some geometric
shape that is bounded by straight lines.
• The points at which the constraint lines
intersect along the feasible region are called
corner points.
• One of the important properties of linear
optimization models is that if an optimal
solution exists, then it will occur at a corner
point.
• This makes it easy to identify optimal
solutions and is the basis for the
computational procedure used by Solver.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


Andhra University 28
Graph of the Finishing Constraint x1 = Jordanelle and x2 = Deercrest

• After graphing each of the constraints, we


identify the feasible region.
• For a linear optimization problem, the
feasible region will be some geometric
shape that is bounded by straight lines.
• The points at which the constraint lines
intersect along the feasible region are
called corner points.
• One of the important properties of linear
optimization models is that if an optimal
solution exists, then it will occur at a
corner point.
• This makes it easy to identify optimal
solutions and is the basis for the
Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,
computational procedure used by Solver. Andhra University
29
Graph of the Market Mix Constraintx1 = Jordanelle and x2 = Deercrest
• After graphing each of the constraints, we
identify the feasible region.
• For a linear optimization problem, the
feasible region will be some geometric shape
that is bounded by straight lines.
• The points at which the constraint lines
intersect along the feasible region are called
corner points.
• One of the important properties of linear
optimization models is that if an optimal
solution exists, then it will occur at a corner
point.
• This makes it easy to identify optimal
solutions and is the basis for the
computational procedure used by Solver. Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,
Andhra University 30
Using optimization models of prediction and insight
• The principal purpose of formulating and solving an optimization model should never be to just find the
“best answer”; rather, the model should be used to provide insight for making better decisions.
• Thus, it is important to analyze optimization models from a predictive analytics perspective to determine
what might happen should the model assumptions change or when the data used in the model are
uncertain.
• For example, managers have some control over pricing but may not be able to control supplier costs.
• Even though we may have solved a model to find an optimal solution, it would be beneficial to determine
what impact a change in a price or cost would have on net profit.
• Similarly, many constraints represent resource limitations or customer commitments.
• Limited capacity can be adjusted through overtime or supplier contracts can be renegotiated.
• So managers would want to know whether it would be worth it to increase capacity or change a contract.

31
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
Types of constraints in optimization models
• The most challenging aspect of model formulation is identifying constraints. Understanding the different
types of constraints can help in proper identification and modeling.
• Constraints generally fall into one of the following categories:
1. Simple Bounds.
2. Limitations.
3. Requirements.
4. Proportional Relationships.
5. Balance Constraints.
• Constraints in linear optimization models are generally some combination of constraints from these
categories.
• Problem data or verbal clues in a problem statement often help you identify the appropriate constraint.
• In some situations, all constraints may not be explicitly stated, but are required for the model to
represent the real problem accurately.

32
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
1. Simple Bounds.
• Simple bounds constrain the value of a single variable. You can recognize
simple bounds in problem statements such as no more than $10,000 may
be invested in stock ABC or we must produce at least 350 units of product Y
to meet customer commitments this month.
• The mathematical forms for these examples are:

33
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
2. Limitations.
• Limitations usually involve the allocation of scarce resources.
• Problem statements such as the amount of material used in production
cannot exceed the amount available in inventory, minutes used in assembly
cannot exceed the available labor hours, or the amount shipped from the
Austin plant in July cannot exceed the plant’s capacity are typical of these
types of constraints.

34
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
3. Requirements.
• Requirements involve the specification of minimum levels of performance.
• Such statements as enough cash must be available in February to meet
financial obligations, production must be sufficient to meet promised
customer orders, or the marketing plan should ensure that at least 400
customers are contacted each month are some examples.

35
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
4. Proportional relationships .
• Proportional relationships are often found in problems involving mixtures or blends of
materials or strategies.
• Examples include the amount invested in aggressive growth stocks cannot be more than
twice the amount invested in equity-income funds or the octane rating of gasoline
obtained from mixing different crude blends must be at least 89.

Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University


36
5. Simple Bounds.
• Balance constraints essentially state that input = output and ensure that the flow of
material or money is accounted for at locations or between time periods.
• Example1:Production in June plus any available inventory must equal June’s demand
plus inventory held to July,
• Example 2: The total amount shipped to a distribution center from all plants must
equal the amount shipped from the distribution center to all customers,
• Example 3: The total amount of money invested or saved in March must equal the
amount of money available at the end of February.

37
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
Process selection models

• Process selection models generally involve choosing among different types of processes to produce a
good.
• Make-or-buy decisions are examples of process selection models, whereby we must choose whether to
make one or more products in-house or subcontract them out to another firm.
• Ex: Aravind Textiles has a mill that produces 3 types of fabrics on a make-to-order basis.
• The mill operates on a 24/7 basis. The key decision facing the plant manager is about the type of loom needed to
process each fabric during the coming quarter (13 weeks) to meet demands for the three fabrics and not exceed the
capacity of the looms in the mill. Two types of looms are used: Dobbie and regular. Dobbie looms can be used to make
all fabrics and are the only looms that can weave certain fabrics, such as plaids. Demands, variable costs for each
fabric, and production rates on the looms are given in Table 14.2. The mill has 15 regular looms and 3 Dobbie looms.
After weaving, fabrics are sent to the finishing department and then sold. Any fabrics that cannot be woven in the mill
because of limited capacity will be purchased from an external supplier, finished at the mill, and sold at the selling
price. In addition to determining which looms to use to process the fabrics, the manager also needs to determine
38
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
Process selection models
• Ex: Aravind Textiles has a mill that produces 3 types of fabrics on a make-to-order basis.
• The mill operates on a 24/7 basis.
• The key decision facing the plant manager is about the type of loom needed to process each fabric during the coming
quarter (13 weeks) to meet demands for the three fabrics and not exceed the capacity of the looms in the mill.
• Two types of looms are used: Dobbie and Regular.
• Dobbie looms can be used to make all fabrics and are the only looms that can weave certain fabrics, such as plaids.
Demands, variable costs for each fabric, and production rates on the looms are presented in in the below Table.

39
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
• The mill has 15 Regular looms and 3 Dobbie looms. After weaving, fabrics are sent to
the finishing department and then sold.
• Any fabrics that cannot be woven in the mill because of limited capacity will be
purchased from an external supplier, finished at the mill, and sold at the selling price.
• In addition to determining which looms to use to process the fabrics, the manager also
needs to determine which fabrics to buy externally.

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


Andhra University 40
Solution
• To formulate a linear optimization model,
• define Di = number of yards of fabric i to produce on Dobbie looms, i = 1, N, 3.
• Example:
• D1 = Number of yards of fabric 1 to produce on Dobbie looms,
• D2 = Number of yards of fabric 2 to produce on Dobbie looms, and
• D3 = Number of yards of fabric 3 to produce on Dobbie looms.
• In a similar fashion, define:
• Ri = number of yards of fabric i to produce on regular looms, i = 2, 3 only
• Pi = number of yards of fabric i to purchase from an outside supplier, i = 1, N, 3
• The objective function is to minimize total cost, found by multiplying the cost per yard based on the mill cost or
outsourcing by the number of yards of fabric for each type of decision variable:

Constraints to ensure meeting production requirements are

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


Andhra University 41
Solution
• This constraint states that the amount of fabric 1 produced on Dobbie looms or outsourced must equal the total
demand of 45,000 yards. The constraints for the other two fabrics are

• To specify the constraints on loom capacity, we must convert yards per hour into hours per yard.
• For example, for fabric 1 on a Dobbie loom, 4.7 yards/hour = 0.213 hours/yard.

• Therefore, the term 0.213D1 represents the total time required to produce D1 yards of fabric 1 on a
Dobbie loom (hours/yard × yards).
• The total capacity for Dobbie looms is

Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,


Andhra University
42
Blending Models

• Blending problems involve mixing several raw materials that have different
characteristics to make a product that meets certain specifications.
• Blending models deal with situations in which some raw material has to be
mixed in order to obtain a blend with specific quality requirements.
• Examples: Dietary planning, gasoline and oil refining, coal and fertilizer
production, and the production of many other types of bulk commodities
involve blending.
• We typically see proportional constraints in blending models.
43
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
• The following table summarizes some of the most typical applications of blending models.
Each application is identified by the input “materials”, the quality to be taken into consideration, the
desired output.

• A classic and well–known example of blending is the so-called diet problem; this is also the first example
of a nontrivial linear optimization problem solved using the simplex method.
• A list of available foods is given, along with associated characteristics, like purchase price and nutritional
characteristics (vitamins, proteins, carbohydrates, fat, calories, iron, …). It is required to find a minimum-
cost food blend that satisfies nutritional requirements (upper and/or lower bounds on each nutritional
characteristic).
Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,
Andhra University 44
Portfolio Investment models

• Many types of financial investment problems are modeled and solved using linear optimization.
• Such portfolio investment model problems have the basic characteristics of blending models.

45
Prof. S.Adinarayana, Dept of CS&SE, College of Engineering, Andhra University
How Do Model Portfolios Work?

• For each different model portfolio, professional managers spell out a specific asset
allocation and then regularly rebalance the allocation to ensure the portfolio stays on
target.
• Model portfolios generally use common market indexes—like the S&P 500 or the Russell
2000—as performance benchmarks, and they strive to adhere to a set balance of return
and risk by owning a collection of securities.
• Model portfolios are a good choice for investors who are uncomfortable with investing
or are unwilling to create and manage their portfolios. Plus they provide direct
ownership of a diversified, managed set of investments.
Prof. S.Adinarayana, Dept of CS&SE, AU College of Engineering,
Andhra University
46

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