BA Unit6
BA Unit6
1
Unit 6
Linear Optimization & Applications
• 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.”
• 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.
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.
• 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.
• 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
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.
• 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.
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.
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.
• 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
• 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