BPS 411: QUANTITATIVE METHODS

Introduction
Optimization is the way of life. We all have finite resources and time and we want to make the
most of them. From using your time productively to solving supply chain problems for your
company – everything uses optimization.

It is also a very interesting topic – it starts with simple problems, but it can get very complex. For
example, sharing a bar of chocolate between siblings is a simple optimization problem. We don’t
think in mathematical terms while solving it. On the other hand, devising inventory and
warehousing strategy for an retailer can be very complex.

Linear programming (LP) is one of the simplest ways to perform optimization. It helps you solve
some very complex optimization problems by making a few simplifying assumptions. As an
analyst, you are bound to come across applications and problems to be solved by Linear
Programming.

Table of Content
1. What is Linear Programming?
o Basic Terminologies
o The process to define an LP problem
2. Solve Linear Program by Graphical Method
3. Solve Linear Program using R
4. Solve Linear Program using OpenSolver
5. Simplex Method
6. Northwest Corner Method and Least Cost Method
7. Applications of Linear programming

1. What is Linear Programming?

Now, what is linear programming? Linear programming is a simple technique where we depict
complex relationships through linear functions and then find the optimum points. The important
word in the previous sentence is depicted. The real relationships might be much more complex –
but we can simplify them to linear relationships.

You use linear programming at personal and professional fronts. You are using linear
programming when you are driving from home to work and want to take the shortest route. Or
when you have a project delivery you make strategies to make your team work efficiently for on-
time delivery.
Example of a linear programming problem

Let’s say a FedEx delivery man has 6 packages to deliver in a day. The warehouse is located at
point A. The 6 delivery destinations are given by U, V, W, X, Y, and Z. The numbers on the
lines indicate the distance between the cities. To save on fuel and time the delivery person wants
to take the shortest route.

So, the delivery person will calculate different routes for going to all the 6 destinations and then
come up with the shortest route. This technique of choosing the shortest route is called linear
programming.

In this case, the objective of the delivery person is to deliver the parcel on time at all 6
destinations. The process of choosing the best route is called Operation Research. Operation
research is an approach to decision-making, which involves a set of methods to operate a system.
In the above example, my system was the Delivery model.

Linear programming is used for obtaining the most optimal solution for a problem with given
constraints. In linear programming, we formulate our real-life problem into a mathematical
model. It involves an objective function, linear inequalities with subject to constraints.

Is the linear representation of the 6 points above representative of the real-world? Yes and No. It
is an oversimplification as the real route would not be a straight line. It would likely have
multiple turns, U-turns, signals and traffic jams. But with a simple assumption, we have reduced
the complexity of the problem drastically and are creating a solution that should work in most
scenarios.
Formulating a problem – Let’s manufacture some chocolates

Example: Consider a chocolate manufacturing company that produces only two types of
chocolate – A and B. Both the chocolates require Milk and Choco only. To manufacture each
unit of A and B, the following quantities are required:

 Each unit of A requires 1 unit of Milk and 3 units of Choco

 Each unit of B requires 1 unit of Milk and 2 units of Choco

The company kitchen has a total of 5 units of Milk and 12 units of Choco. On each sale, the
company makes a profit of

 Shs 6 per unit A sold

 Shs 5 per unit B sold.

Now, the company wishes to maximize its profit. How many units of A and B should it produce
respectively?

Solution: The first thing I’m gonna do is represent the problem in a tabular form for better
understanding.

Milk Choco Profit per unit

A 1 3 Shs 6
B 1 2 Shs 5
Total 5 12

Let the total number of units produced by A be = X

Let the total number of units produced by B be = Y

Now, the total profit is represented by Z

The total profit the company makes is given by the total number of units of A and B produced
multiplied by its per-unit profit of Rs 6 and Rs 5 respectively.

Profit: Max Z = 6X+5Y

which means we have to maximize Z.

The company will try to produce as many units of A and B to maximize the profit. But the
resources Milk and Choco are available in a limited amount.

As per the above table, each unit of A and B requires 1 unit of Milk. The total amount of Milk
available is 5 units. To represent this mathematically,
 X+Y ≤ 5

Also, each unit of A and B requires 3 units & 2 units of Choco respectively. The total amount of
Choco available is 12 units. To represent this mathematically,

3X+2Y ≤ 12

Also, the values for units of A can only be integers.

So we have two more constraints, X ≥ 0 & Y ≥ 0

For the company to make maximum profit, the above inequalities have to be satisfied.

This is called formulating a real-world problem into a mathematical model.

Common terminologies used in Linear Programming

Let us define some terminologies used in Linear Programming using the above example.

 Decision Variables: The decision variables are the variables that will decide my output.
They represent my ultimate solution. To solve any problem, we first need to identify the
decision variables. For the above example, the total number of units for A and B denoted
by X & Y respectively are my decision variables.
 Objective Function: It is defined as the objective of making decisions. In the above
example, the company wishes to increase the total profit represented by Z. So, profit is
my objective function.
 Constraints: The constraints are the restrictions or limitations on the decision variables.
They usually limit the value of the decision variables. In the above example, the limit on
the availability of resources Milk and Choco are my constraints.
 Non-negativity restriction: For all linear programs, the decision variables should always
take non-negative values. This means the values for decision variables should be greater
than or equal to 0.

The process to formulate a Linear Programming problem

Let us look at the steps of defining a Linear Programming problem generically:

1. Identify the decision variables

2. Write the objective function
3. Mention the constraints
4. Explicitly state the non-negativity restriction

For a problem to be a linear programming problem, the decision variables, objective function and
constraints all have to be linear functions.
If all the three conditions are satisfied, it is called a Linear Programming Problem.

2. Solve Linear Programs by Graphical Method

A linear program can be solved by multiple methods. In this section, we are going to look at the
Graphical method for solving a linear program. This method is used to solve a two-variable
linear program. If you have only two decision variables, you should use the graphical method to
find the optimal solution.

A graphical method involves formulating a set of linear inequalities subject to the constraints.
Then the inequalities are plotted on an X-Y plane. Once we have plotted all the inequalities on a
graph the intersecting region gives us a feasible region. The feasible region explains what all
values our model can take. And it also gives us the optimal solution.

Let’s understand this with the help of an example.

Example: A farmer has recently acquired a 110 hectares piece of land. He has decided to grow
Wheat and barley on that land. Due to the quality of the sun and the region’s excellent climate,
the entire production of Wheat and Barley can be sold. He wants to know how to plant each
variety in the 110 hectares, given the costs, net profits and labor requirements according to the
data shown below:

Variety Cost (Price/Hec) Net Profit (Price/Hec) Man-days/Hec

Wheat 100 50 10
Barley 200 120 30

The farmer has a budget of US$10,000 and availability of 1,200 man-days during the planning
horizon. Find the optimal solution and the optimal value.

Solution: To solve this problem, first we gonna formulate our linear program.

Formulation of Linear Problem

Step 1: Identify the decision variables

The total area for growing Wheat = X (in hectares)

The total area for growing Barley = Y (in hectares)

X and Y are my decision variables.

Step 2: Write the objective function

Since the production from the entire land can be sold in the market. The farmer would want to
maximize the profit for his total produce. We are given net profit for both Wheat and Barley. The
farmer earns a net profit of US$50 for each hectare of Wheat and US$120 for each Barley.

Our objective function (given by Z) is, Max Z = 50X + 120Y

Step 3: Writing the constraints

1. It is given that the farmer has a total budget of US$10,000. The cost of producing Wheat and
Barley per hectare is also given to us. We have an upper cap on the total cost spent by the farmer.
So our equation becomes:

100X + 200Y ≤ 10,000

2. The next constraint is the upper cap on the availability of the total number of man-days for the
planning horizon. The total number of man-days available is 1200. As per the table, we are given
the man-days per hectare for Wheat and Barley.

10X + 30Y ≤ 1200

3. The third constraint is the total area present for plantation. The total available area is 110
hectares. So the equation becomes,

X + Y ≤ 110

Step 4: The non-negativity restriction

The values of X and Y will be greater than or equal to 0. This goes without saying.

X ≥ 0, Y ≥ 0

We have formulated our linear program. It’s time to solve it.

Solving an LP through Graphical method

Since we know that X, Y ≥ 0. We will consider only the first quadrant.

To plot for the graph for the above equations, first I will simplify all the equations.

100X + 200Y ≤ 10,000 can be simplified to X + 2Y ≤ 100 by dividing by 100.

10X + 30Y ≤ 1200 can be simplified to X + 3Y ≤ 120 by dividing by 10.

The third equation is in its simplified form, X + Y ≤ 110.

Plot the first 2 lines on a graph in the first quadrant (like shown below)

The optimal feasible solution is achieved at the point of intersection where the budget & man-
days constraints are active. This means the point at which the equations X + 2Y ≤ 100 and X +
3Y ≤ 120 intersect gives us the optimal solution.

The values for X and Y which gives the optimal solution is at (60,20).

To maximize profit the farmer should produce Wheat and Barley in 60 hectares and 20 hectares
of land respectively.

The maximum profit the company will gain is,

Max Z = 50 * (60) + 120 * (20)

= US$5400
5. Simplex Method
Simplex Method is one of the most powerful & popular methods for linear programming. The
simplex method is an iterative procedure for getting the most feasible solution. In this method,
we keep transforming the value of basic variables to get maximum value for the objective
function.

A linear programming function is in its standard form if it seeks to maximize the objective

function. subject to constraints,

. . . . . .

. . . . . .

where, and . After adding slack variables, the corresponding system of

constraint equation is,

. . . .

where,

The variables, ………………. are called slack variables. They are non-negative
numbers that are added to remove the inequalities from an equation.
The above explanation gives the theoretical explanation of the simplex method. Now, I am gonna
explain how to use the simplex method in real life using Excel.

Example: The advertising alternatives for a company include television, newspaper and radio
advertisements. The cost for each medium with its audience coverage is given below.

[su_table]

Television Newspaper Radio

Cost per advertisement ($) 2000 600 300
Audience per advertisement 100,000 40,000 18,00

[/su_table]

The local newspaper limits the number of advertisements from a single company to
ten. Moreover, in order to balance the advertising among the three types of media, no more than
half of the total number of advertisements should occur on the radio. And at least 10% should
occur on television. The weekly advertising budget is $18,200. How many advertisements should
be run in each of the three types of media to maximize the total audience?

Solution: First I am going to formulate my problem for a clear understanding.

Step 1: Identify Decision Variables

Let , , represent the total number of ads for television, newspaper, and radio
respectively.

Step 2: Objective Function

The objective of the company is to maximize the audience. The objective function is given by:

Step 3: Write down the constraints

Now, I will mention each constraint one by one.

It is clearly given that we have a budget constraint. The total budget which can be allocated is
$18,200. And the individual costs per television, newspaper and radio advertisement is $2000,
$600 and $300 respectively. This can be represented by the equation,

For a newspaper advertisement, there is an upper cap on the number of advertisements to 10. My

first constraints are,

The next constraint is the number of advertisements on television. The company wants at least
10% of the total advertisements to be on television. So, it can be represented as:

The last constraint is the number of advertisements on the radio cannot be more than half of the
total number of advertisements. It can be represented as

Now, I have formulated my linear programming problem. We are using the simplex method to
solve this. I will take you through the simplex method one by one.

To reiterate all the constraints are as follows. I have simplified the last two equations to bring
them in standard form.

We have a total of 4 equations. To balance out each equation, I am introducing 4 slack variables,

, and .

So our equations are as follows:

I hope now you are available to make sense of the entire advertising problem. All the above
equations are only for your better understanding. Now if you solve these equations, you will get
the values for X1= 4, X2= 10 and X3= 14.

On solving the objective function you will get the maximum weekly audience as 1,052,000. You
can follow the tutorial here to solve the equation. To solve a linear program in excel, follow this
tutorial.

7. Applications of Linear Programming

Linear programming and Optimization are used in various industries. The manufacturing and
service industry uses linear programming on a regular basis. In this section, we are going to look
at the various applications of Linear programming.

1. Manufacturing industries use linear programming for analyzing their supply chain
operations. Their motive is to maximize efficiency with minimum operation cost. As per
the recommendations from the linear programming model, the manufacturer can
reconfigure their storage layout, adjust their workforce and reduce the bottlenecks. Here
is a small Warehouse case study of Cequent a US-based company, watch this video for a
more clear understanding.
2. Linear programming is also used in organized retail for shelf space optimization. Since
the number of products in the market has increased in leaps and bounds, it is important to
understand what does the customer want. Optimization is aggressively used in stores like
Walmart, Hypercity, Reliance, Big Bazaar, etc. The products in the store are placed
strategically keeping in mind the customer shopping pattern. The objective is to make it
easy for a customer to locate & select the right products. This is subject to constraints like
limited shelf space, a variety of products, etc.
3. Optimization is also used for optimizing Delivery Routes. This is an extension of the
popular traveling salesman problem. The service industry uses optimization for finding
the best route for multiple salesmen traveling to multiple cities. With the help of
clustering and greedy algorithm, the delivery routes are decided by companies like
FedEx, Amazon, etc. The objective is to minimize the operation cost and time.
4. Optimizations are also used in Machine Learning. Supervised Learning works on the
fundamental of linear programming. A system is trained to fit on a mathematical model
 of a function from the labeled input data that can predict values from an unknown test
data.

Well, the applications of Linear programming don’t end here. There are many more applications
of linear programming in real-world like applied by Shareholders, Sports, Stock Markets, etc. Go
on and explore further.