Spreadsheet Modeling

& Decision Analysis

A Practical Introduction to
Management Science
5th edition

Cliff T. Ragsdale
 Chapter 3

Modeling and Solving LP

Problems in a Spreadsheet
 Introduction
 Solving LP problems graphically is only
possible when there are two decision
variables
 Few real-world LP have only two decision
variables
 Fortunately, we can now use
spreadsheets to solve LP problems
 Spreadsheet Solvers

 The company that makes the Solver in

Excel, Lotus 1-2-3, and Quattro Pro is
Frontline Systems, Inc.
Check out their web site:
http://www.solver.com
 Other packages for solving MP problems:
AMPL LINDO
CPLEX MPSX
 The Steps in Implementing an
LP Model in a Spreadsheet
1. Organize the data for the model on the
spreadsheet.
2. Reserve separate cells in the spreadsheet for
each decision variable in the model.
3. Create a formula in a cell in the spreadsheet that
corresponds to the objective function.
4. For each constraint, create a formula in a
separate cell in the spreadsheet that corresponds
to the left-hand side (LHS) of the constraint.
Let’s Implement a Model for the

Blue Ridge Hot Tubs Example...

MAX: 350X1 + 300X2 } profit
S.T.: 1X1 + 1X2 <= 200} pumps
9X1 + 6X2 <= 1566 } labor
12X1 + 16X2 <= 2880 } tubing
X1, X2 >= 0 } nonnegativity
Implementing the Model
See file Fig3-1.xls
 How Solver Views the Model
 Target cell - the cell in the spreadsheet
that represents the objective function
 Changing cells - the cells in the
spreadsheet representing the decision
variables
 Constraint cells - the cells in the
spreadsheet representing the LHS
formulas on the constraints
Let’s go back to Excel and
see how Solver works...
 Goals For Spreadsheet Design
 Communication - A spreadsheet's primary business
purpose is communicating information to managers.
 Reliability - The output a spreadsheet generates
should be correct and consistent.
 Auditability - A manager should be able to retrace the
steps followed to generate the different outputs from the
model in order to understand and verify results.
 Modifiability - A well-designed spreadsheet should
be easy to change or enhance in order to meet dynamic
user requirements.
 Spreadsheet Design
Guidelines - I
 Organize the data, then build the model
around the data.
 Do not embed numeric constants in
formulas.
 Things which are logically related should
be physically related.
 Use formulas that can be copied.
 Column/rows totals should be close to the
columns/rows being totaled.
 Spreadsheet Design
Guidelines - II
 The English-reading eye scans left to right,
top to bottom.
 Use color, shading, borders and protection
to distinguish changeable parameters from
other model elements.
 Use text boxes and cell notes to document
various elements of the model.
 Make vs. Buy Decisions:
The Electro-Poly Corporation
 Electro-Poly is a leading maker of slip-rings.
 A $750,000 order has just been received.
Model 1 Model 2 Model 3
Number ordered 3,000 2,000 900
Hours of wiring/unit 2 1.5 3
Hours of harnessing/unit 1 2 1
Cost to Make $50 $83 $130
Cost to Buy $61 $97 $145

 The company has 10,000 hours of wiring

capacity and 5,000 hours of harnessing
capacity.
Defining the Decision Variables

M1 = Number of model 1 slip rings to make in-house

M2 = Number of model 2 slip rings to make in-house
M3 = Number of model 3 slip rings to make in-house
B1 = Number of model 1 slip rings to buy from competitor
B2 = Number of model 2 slip rings to buy from competitor
B3 = Number of model 3 slip rings to buy from competitor
 Defining the Objective Function
Minimize the total cost of filling the order.
MIN: 50M1+ 83M2+ 130M3+ 61B1+ 97B2+ 145B3
 Defining the Constraints
 Demand Constraints
M1 + B1 = 3,000 } model 1
M2 + B2 = 2,000 } model 2
M 3 + B3 = 900 } model 3
 Resource Constraints
2M1 + 1.5M2 + 3M3 <= 10,000 } wiring
1M1 + 2.0M2 + 1M3 <= 5,000 } harnessing
 Nonnegativity Conditions
M1, M2, M3, B1, B2, B3 >= 0
Implementing the Model
See file Fig3-17.xls
 An Investment Problem:
Retirement Planning Services, Inc.
 A client wishes to invest $750,000 in the
following bonds.
Years to
Company Return Maturity Rating
Acme Chemical 8.65% 11 1-Excellent
DynaStar 9.50% 10 3-Good
Eagle Vision 10.00% 6 4-Fair
Micro Modeling 8.75% 10 1-Excellent
OptiPro 9.25% 7 3-Good
Sabre Systems 9.00% 13 2-Very Good
 Investment Restrictions
 No more than 25% can be invested in any
single company.
 At least 50% should be invested in long-
term bonds (maturing in 10+ years).
 No more than 35% can be invested in
DynaStar, Eagle Vision, and OptiPro.
Defining the Decision Variables

X1 = amount of money to invest in Acme Chemical

X2 = amount of money to invest in DynaStar
X3 = amount of money to invest in Eagle Vision
X4 = amount of money to invest in MicroModeling
X5 = amount of money to invest in OptiPro
X6 = amount of money to invest in Sabre Systems
Defining the Objective Function
Maximize the total
annual investment return:

MAX: .0865X1+ .095X2+ .10X3+ .0875X4+ .0925X5+ .09X6

 Defining the Constraints
 Total amount is invested
X1 + X2 + X3 + X4 + X5 + X6 = 750,000
 No more than 25% in any one investment
Xi <= 187,500, for all i
 50% long term investment restriction.
X1 + X2 + X4 + X6 >= 375,000
 35% Restriction on DynaStar, Eagle Vision, and
OptiPro.
X2 + X3 + X5 <= 262,500
 Nonnegativity conditions
Xi >= 0 for all i
Implementing the Model
See file Fig3-20.xls
 A Transportation Problem:
Tropicsun
Processing
Groves Distances (in miles) Plants
Supply Capacity
Mt. Dora 21 Ocala
275,000 200,000
1 50 4

40

35
Eustis 30 Orlando
400,000 600,000
2 5
22

55

Clermont 20 Leesburg
300,000 225,000
3 25 6
 Defining the Decision
Variables
Xij = # of bushels shipped from node i to node j
Specifically, the nine decision variables are:

X14 = # of bushels shipped from Mt. Dora (node 1) to Ocala (node 4)

X15 = # of bushels shipped from Mt. Dora (node 1) to Orlando (node 5)
X16 = # of bushels shipped from Mt. Dora (node 1) to Leesburg (node 6)
X24 = # of bushels shipped from Eustis (node 2) to Ocala (node 4)
X25 = # of bushels shipped from Eustis (node 2) to Orlando (node 5)
X26 = # of bushels shipped from Eustis (node 2) to Leesburg (node 6)
X34 = # of bushels shipped from Clermont (node 3) to Ocala (node 4)
X35 = # of bushels shipped from Clermont (node 3) to Orlando (node 5)
X36 = # of bushels shipped from Clermont (node 3) to Leesburg (node 6)
Defining the Objective Function

Minimize the total number of bushel-miles.

MIN: 21X14 + 50X15 + 40X16 +
35X24 + 30X25 + 22X26 +
55X34 + 20X35 + 25X36
 Defining the Constraints
 Capacity constraints
X14 + X24 + X34 <= 200,000 } Ocala
X15 + X25 + X35 <= 600,000 } Orlando
X16 + X26 + X36 <= 225,000 } Leesburg
 Supply constraints
X14 + X15 + X16 = 275,000 } Mt. Dora
X24 + X25 + X26 = 400,000 } Eustis
X34 + X35 + X36 = 300,000 } Clermont
 Nonnegativity conditions
Xij >= 0 for all i and j
Implementing the Model
See file Fig3-24.xls
 A Blending Problem:
The Agri-Pro Company
 Agri-Pro has received an order for 8,000 pounds of
chicken feed to be mixed from the following feeds.
Percent of Nutrient in
Nutrient Feed 1 Feed 2 Feed 3 Feed 4
Corn 30% 5% 20% 10%
Grain 10% 3% 15% 10%
Minerals 20% 20% 20% 30%
Cost per pound $0.25 $0.30 $0.32 $0.15

 The order must contain at least 20% corn, 15%

grain, and 15% minerals.
Defining the Decision Variables

X1 = pounds of feed 1 to use in the mix

X2 = pounds of feed 2 to use in the mix

X3 = pounds of feed 3 to use in the mix

X4 = pounds of feed 4 to use in the mix

Defining the Objective Function

Minimize the total cost of filling the order.

MIN: 0.25X1 + 0.30X2 + 0.32X3 + 0.15X4

 Defining the Constraints
 Produce 8,000 pounds of feed
X1 + X2 + X3 + X4 = 8,000
 Mix consists of at least 20% corn
(0.3X1 + 0.05X2 + 0.2X3 + 0.1X4)/8000 >= 0.2
 Mix consists of at least 15% grain
(0.1X1 + 0.3X2 + 0.15X3 + 0.1X4)/8000 >= 0.15
 Mix consists of at least 15% minerals
(0.2X1 + 0.2X2 + 0.2X3 + 0.3X4)/8000 >= 0.15
 Nonnegativity conditions
X1, X2, X3, X4 >= 0
 A Comment About Scaling
 Notice the coefficient for X2 in the ‘corn’
constraint is 0.05/8000 = 0.00000625
 As Solver runs, intermediate calculations are
made that make coefficients larger or smaller.
 Storage problems may force the computer to
use approximations of the actual numbers.
 Such ‘scaling’ problems sometimes prevents
Solver from being able to solve the problem
accurately.
 Most problems can be formulated in a way to
minimize scaling errors...
 Re-Defining the Decision
Variables
X1 = thousands of pounds of feed 1 to use in the mix

X2 = thousands of pounds of feed 2 to use in the mix

X3 = thousands of pounds of feed 3 to use in the mix

X4 = thousands of pounds of feed 4 to use in the mix

 Re-Defining the
Objective Function
Minimize the total cost of filling the order.

MIN: 250X1 + 300X2 + 320X3 + 150X4

 Re-Defining the Constraints
 Produce 8,000 pounds of feed
X1 + X2 + X3 + X4 = 8
 Mix consists of at least 20% corn
(0.3X1 + 0.05X2 + 0.2X3 + 0.1X4)/8 >= 0.2
 Mix consists of at least 15% grain
(0.1X1 + 0.3X2 + 0.15X3 + 0.1X4)/8 >= 0.15
 Mix consists of at least 15% minerals
(0.2X1 + 0.2X2 + 0.2X3 + 0.3X4)/8 >= 0.15
 Nonnegativity conditions
X1, X2, X3, X4 >= 0
 Scaling: Before and After
 Before:
– Largest constraint coefficient was 8,000
– Smallest constraint coefficient was
0.05/8,000 = 0.00000625.
 After:
– Largest constraint coefficient is 8
– Smallest constraint coefficient is
0.05/8 = 0.00625.
 The problem is now more evenly scaled!
 The Assume Linear Model Option
 The Solver Options dialog box has an option
labeled “Assume Linear Model”.
 This option makes Solver perform some tests to
verify that your model is in fact linear.
 These test are not 100% accurate & may fail as a
result of a poorly scaled model.
 If Solver tells you a model isn’t linear when you
know it is, try solving it again. If that doesn’t work,
try re-scaling your model.
Implementing the Model
See file Fig3-28.xls
 A Production Planning Problem:
The Upton Corporation
 Upton is planning the production of their heavy-duty air
compressors for the next 6 months.
Month
1 2 3 4 5 6
Unit Production Cost $240 $250 $265 $285 $280 $260
Units Demanded 1,000 4,500 6,000 5,500 3,500 4,000
Maximum Production 4,000 3,500 4,000 4,500 4,000 3,500
Minimum Production 2,000 1,750 2,000 2,250 2,000 1,750

• Beginning inventory = 2,750 units

• Safety stock = 1,500 units
• Unit carrying cost = 1.5% of unit production cost
• Maximum warehouse capacity = 6,000 units
 Defining the Decision Variables
Pi = number of units to produce in month i, i=1 to 6

Bi = beginning inventory month i, i=1 to 6

 Defining the Objective Function
Minimize the total cost production
& inventory costs.

MIN: 240P1+250P2+265P3+285P4+280P5+260P6
+ 3.6(B1+B2)/2 + 3.75(B2+B3)/2 + 3.98(B3+B4)/2
+ 4.28(B4+B5)/2 + 4.20(B5+ B6)/2 + 3.9(B6+B7)/2

Note: The beginning inventory in any month is the

same as the ending inventory in the previous month.
 Defining the Constraints - I
 Production levels
2,000 <= P1 <= 4,000 } month 1
1,750 <= P2 <= 3,500 } month 2
2,000 <= P3 <= 4,000 } month 3
2,250 <= P4 <= 4,500 } month 4
2,000 <= P5 <= 4,000 } month 5
1,750 <= P6 <= 3,500 } month 6
 Defining the Constraints - II
 Ending Inventory (EI = BI + P - D)
1,500 < B1 + P1 - 1,000 < 6,000 } month 1
1,500 < B2 + P2 - 4,500 < 6,000 } month 2
1,500 < B3 + P3 - 6,000 < 6,000 } month 3
1,500 < B4 + P4 - 5,500 < 6,000 } month 4
1,500 < B5 + P5 - 3,500 < 6,000 } month 5
1,500 < B6 + P6 - 4,000 < 6,000 } month 6
 Defining the Constraints - III
 Beginning Balances
B1 = 2750
B2 = B1 + P1 - 1,000 Notice that the Bi
B3 = B2 + P2 - 4,500 can be computed
B4 = B3 + P3 - 6,000 directly from the
Pi. Therefore,
B5 = B4 + P4 - 5,500
only the Pi need
B6 = B5 + P5 - 3,500 to be identified
B7 = B6 + P6 - 4,000 as changing
cells.
Implementing the Model
See file Fig3-31.xls
 A Multi-Period Cash Flow
Problem:
The Taco-Viva Sinking Fund - I
 Taco-Viva needs a sinking fund to pay $800,000 in
building costs for a new restaurant in the next 6 months.
 Payments of $250,000 are due at the end of months 2
and 4, and a final payment of $300,000 is due at the end
of month 6.
 The following investments may be used.
Investment Available in Month Months to Maturity Yield at Maturity
A 1, 2, 3, 4, 5, 6 1 1.8%
B 1, 3, 5 2 3.5%
C 1, 4 3 5.8%
D 1 6 11.0%
 Summary of Possible Cash Flows
Cash Inflow/Outflow at the Beginning of Month
Investment 1 2 3 4 5 6 7
A1 -1 1.018
B1 -1 <_____> 1.035
C1 -1 <_____> <_____> 1.058
D1 -1 <_____> <_____> <_____> <_____> <_____> 1.11
A2 -1 1.018
A3 -1 1.018
B3 -1 <_____> 1.035
A4 -1 1.018
C4 -1 <_____> <_____> 1.058
A5 -1 1.018
B5 -1 <_____> 1.035
A6 -1 1.018
Req’d Payments $0 $0 $250 $0 $250 $0 $300
 Defining the Decision Variables
Ai = amount (in $1,000s) placed in investment A at
the beginning of month i=1, 2, 3, 4, 5, 6
Bi = amount (in $1,000s) placed in investment B at
the beginning of month i=1, 3, 5
Ci = amount (in $1,000s) placed in investment C at
the beginning of month i=1, 4
Di = amount (in $1,000s) placed in investment D at
the beginning of month i=1
Defining the Objective Function

Minimize the total cash invested in month 1.

MIN: A1 + B1 + C1 + D1
 Defining the Constraints
 Cash Flow Constraints
1.018A1 – 1A2 = 0 } month 2
1.035B1 + 1.018A2 – 1A3 – 1B3 = 250 } month 3
1.058C1 + 1.018A3 – 1A4 – 1C4 = 0 } month 4
1.035B3 + 1.018A4 – 1A5 – 1B5 = 250 } month 5
1.018A5 –1A6 = 0 } month 6
1.11D1 + 1.058C4 + 1.035B5 + 1.018A6 = 300 } month 7
 Nonnegativity Conditions
Ai, Bi, Ci, Di >= 0, for all i
Implementing the Model
See file Fig3-35.xls
 Risk Management:
The Taco-Viva Sinking Fund - II
 Assume the CFO has assigned the following risk ratings to
each investment on a scale from 1 to 10 (10 = max risk)

Investment Risk Rating

A 1
B 3
C 8
D 6
 The CFO wants the weighted average risk to not exceed 5.
 Defining the Constraints
 Risk Constraints

1A1 + 3B1 + 8C1 + 6D1

<5 } month 1
A1 + B1 + C1 + D1
1A2 + 3B1 + 8C1 + 6D1
<5 } month 2
A2 + B1 + C1 + D1
1A3 + 3B3 + 8C1 + 6D1
<5 } month 3
A3 + B3 + C1 + D1
1A4 + 3B3 + 8C4 + 6D1
<5 } month 4
A4 + B3 + C4 + D1
1A5 + 3B5 + 8C4 + 6D1
<5 } month 5
A5 + B5 + C4 + D1
1A6 + 3B5 + 8C4 + 6D1
<5 } month 6
A6 + B5 + C4 + D1
 An Alternate Version of the Risk
Constraints
 Equivalent Risk Constraints

-4A1 – 2B1 + 3C1 + 1D1 < 0 } month 1

-2B1 + 3C1 + 1D1 – 4A2 < 0 } month 2 Note that each

coefficient is equal
3C1 + 1D1 – 4A3 – 2B3 < 0 } month 3 to the risk factor
for the investment
1D1 – 2B3 – 4A4 + 3C4 < 0 } month 4 minus 5 (the max.
allowable
1D1 + 3C4 – 4A5 – 2B5 < 0 } month 5 weighted average
risk).
1D1 + 3C4 – 2B5 – 4A6 < 0 } month 6
Implementing the Model
See file Fig3-38.xls
 Data Envelopment Analysis (DEA):
Steak & Burger
 Steak & Burger needs to evaluate the performance (efficiency) of 12
units.
 Outputs for each unit (Oij) include measures of: Profit, Customer
Satisfaction, and Cleanliness
 Inputs for each unit (Iij) include: Labor Hours, and Operating Costs
 The “Efficiency” of unit i is defined as follows:

nO

Weighted sum of unit i’s outputs  Oij w j

j 1
= nI
Weighted sum of unit i’s inputs
 I ij v j
j 1
Defining the Decision Variables
wj = weight assigned to output j
vj = weight assigned to input j

A separate LP is solved for each unit, allowing each

unit to select the best possible weights for itself.
Defining the Objective Function

Maximize the weighted output for unit i :

nO
MAX:  Oij w j
j 1
 Defining the Constraints
 Efficiency cannot exceed 100% for any unit
nO nI
 Okj w j   I kj v j , k  1 to the number of units
j 1 j 1

 Sum of weighted inputs for unit i must equal 1

nI
 I ij v j  1
j 1

 Nonnegativity Conditions
wj, vj >= 0, for all j
 Important Point

When using DEA, output variables should be

expressed on a scale where “more is better”
and input variables should be expressed on a
scale where “less is better”.
Implementing the Model
See file Fig3-41.xls
Analyzing The Solution
See file Fig3-48.xls
End of Chapter 3