Spreadsheet Modeling and Decision Making

BAN230

Chapter 2
Introduction to Optimization and
Linear Programming

Yi-Chin Lin
[email protected]
Mathematical Programming (Optimization)
• Motivation • Linear Programming (LP)
• Applications • A Product Mix Example
• Approaches to Solving LP
• Characteristics Problems
• Decisions • Graphical Approach
• Constraints • Spreadsheet Approach
• Objective • Special Conditions
• Mathematical Expressions

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Motivation
• Business Problems
• Our world is filled with limited recourses
• Gas, land, time, money, workers, space…etc.
• How to efficiently allocate the limited resources to achieve business goals
(e.g. maximized profits or minimized costs)?
• Solution
• Optimization (Mathematical programming, or MP)

3
Applications of Optimization
• Product mix
• Decision: how many of each product to produce?
• Goal: maximized manufacturing profits
• Limited resources: raw materials, labors, time
• Routing and logistics
• Decision: which stores should be served by which warehouse? What is the best route for each
truck?
• Goal: minimized distribution costs from warehouses to stores
• Limited resources: number and capacity of trucks, drivers, time
• Financial planning
• Decision: how to allocate the income to various finance strategies before retirement?
• Goal: maximized savings at the time of retirement
• Limited resources: income, time, investment strategies

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Characteristics of Optimization Problems
• Each problem involves one or more decisions that must be made
• Each problem has an objective that the decision maker considers
when deciding which course of action is best
• Constraints are likely to be placed on the alternatives available to the
decision maker

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Expressing Optimization Problems
Mathematically
• Use mathematical terms or symbols to represent each of the three
elements of optimization problems
• Decisions
• An objective
• Constraints

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Expressing Optimization Problems Mathematically
Decisions
• Decisions (in words)
• The number of different products the manager can choose to produce
• The number of different pieces of merchandise to ship from a warehouse to a
certain store
• The amount of money to be saved to different investment accounts
• Decision variables
• Arbitrary symbols, such as X1, X2, …, Xn

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Expressing Optimization Problems Mathematically
Objective
• Goal
• Maximize profit associated with a product mix
• Objective function
• Identifies some function of the decision variables that the decision maker
wants to either maximize or minimize
• MAX (or MIN): f(X1, X2, …, Xn)

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Expressing Optimization Problems Mathematically
Constraints
• Constraints (in words)
• Different products require different number of labors and hours
• The total number of labors and hours are limited
• Constraints (mathematically)
• Are functions of the decision variables that must be less than or equal to,
greater than or equal to, or equal to some constant Variables
A less than or equal to constraint f(X1, X2, …, Xn) ≤ b Constant

A greater than or equal to constraint f(X1, X2, …, Xn) ≥ b

An equal to constraint f(X1, X2, …, Xn) = b
Left-hand-side (LHS) Right-hand-side (RHS)
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Expressing Optimization Problems
Mathematically

Definitions of Xi
MAX (or MIN): f0 (X1, X2, …, Xn)
Subject to: fl (X1, X2, …, Xn) ≤ bl
fk (X1, X2, …, Xn) ≥ bk
fm(X1, X2, …, Xn) = bm
Optimization: maximize (or minimize) the objective function without violating any
of the constraints.

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Mathematical Programming Techniques
• Linear programming (LP)
• The functions in a model form straight lines or flat surfaces
• Nonlinear programming
• The functions in a model form curved lines or curved surfaces
• Integer programming
• The optimal values of the decision variables in a model must be integers

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An Example of LP Problem: Product Mix
Blue Ridge Hot Tubs manufactures and sells two models of hot tubs: the Aqua-Spa and the Hydro-Lux.
Howie Jones, the owner and manager of the company, needs to decide how many of each type of hot tub
to produce during his next production cycle. Howie buys prefabricated fiberglass hot tub shells from a
local supplier and adds the pump and tubing to the shells to create his hot tubs. (This supplier has the
capacity to deliver as many hot tub shells as Howie needs.) Howie installs the same type of pump into
both hot tubs. He will have only 200 pumps available during his next production cycle. From a
manufacturing standpoint, the main difference between the two models of hot tubs is the amount of
tubing and labor required. Each Aqua-Spa requires 9 hours of labor and 12 feet of tubing. Each Hydro-Lux
requires 6 hours of labor and 16 feet of tubing. Howie expects to have 1,566 production labor hours and
2,880 feet of tubing available during the next production cycle. Howie earns a profit of $350 on each
Aqua-Spa he sells and $300 on each Hydro-Lux he sells. He is confident that he can sell all the hot tubs he
produces. The question is, how many Aqua-Spas and Hydro-Luxes should Howie produce if he wants to
maximize his profits during the next production cycle?

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An Example of LP Problem: Product Mix
Blue Ridge Hot Tubs manufactures and sells two models of hot tubs: the Aqua-Spa and the Hydro-Lux.
Howie Jones, the owner and manager of the company, needs to decide how many of each type of hot tub
to produce during his next production cycle. Howie buys prefabricated fiberglass hot tub shells from a
local supplier and adds the pump and tubing to the shells to create his hot tubs. (This supplier has the
capacity to deliver as many hot tub shells as Howie needs.) Howie installs the same type of pump into
both hot tubs. He will have only 200 pumps available during his next production cycle. From a
manufacturing standpoint, the main difference between the two models of hot tubs is the amount of
tubing and labor required. Each Aqua-Spa requires 9 hours of labor and 12 feet of tubing. Each Hydro-Lux
requires 6 hours of labor and 16 feet of tubing. Howie expects to have 1,566 production labor hours and
2,880 feet of tubing available during the next production cycle. Howie earns a profit of $350 on each
Aqua-Spa he sells and $300 on each Hydro-Lux he sells. He is confident that he can sell all the hot tubs he
produces. The question is, how many Aqua-Spas and Hydro-Luxes should Howie produce if he wants to
maximize his profits during the next production cycle?

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An Example of LP Problem: Product Mix
Model Formulation Step 1
• Decisions in words
• Numbers of each type of hot tub to produce
• Decision variables in mathematics (symbols and their boundaries)
• The number of Aqua-Spas to produce: X1
• The number of Hydro-Luxes to produce: X2

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An Example of LP Problem: Product Mix
Model Formulation Step 2
• Objective in words
• Maximize profits
• Objective function (a linear combination of the decision variables)
• MAX: 350X1 + 300X2

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An Example of LP Problem: Product Mix
Model Formulation Step 3
• Constraints
Pump Labor (hours) Tubing (feet)
Aqua-Spa 1 9 12
Hydro-Lux 1 6 16
Constraints 200 1,566 2,880

• Constraint equations (linear combinations of the decision variables)

• 1X1 + 1X2 ≤ 200
• 9X1 + 6X2 ≤ 1,566
• 12X1 + 16X2 ≤ 2,880
• X1 ≥ 0; X2 ≥ 0 (nonnegativity conditions)
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An Example of LP Problem: Product Mix
The LP Model
X1: The number of Aqua-Spas to produce
X2: The number of Hydro-Luxes to produce

MAX:350X1 + 300X2
Subject to: 1X1 + 1X2 ≤ 200
9X1 + 6X2 ≤ 1,566
12X1 + 16X2 ≤ 2,880
1X1 ≥ 0
1X2 ≥ 0

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Approaches to Solving LP Problems
• Graphical approach
• Spreadsheet approach (Chapter 3)

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Solving LP Problems
An Graphical Approach
• Can be used only if there are two decision variables
• Graphically identify the feasible region (the set of feasible solutions)
by plotting the constraints
• Find the optimal solution by one of the following two approaches
• Level curve approach
• Corner point approach

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 Solving LP Problems
X2
250
Plotting the First Constraint
200

150
Boundary line of
X1 + X2 = 200
100

Feasible region of
X1 + X2 ≤ 200
50
(nonnegativity)

50 100 150 200 250

X1
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 Solving LP Problems
X2
250
(0,261)
Plotting the Second Constraint
200

Boundary line of
150 9X1 + 6X2 = 1,566

100

Feasible region of
X1 + X2 ≤ 200 and
50
9X1 + 6X2 ≤ 1,566
(nonnegativity)

50 100 150 (174, 0) 200 250

X1
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 Solving LP Problems
X2
250
(0,261)
Plotting the Third Constraint
200

(0,180)
150

100 Boundary line of

Feasible Region 12X1 + 16X2 = 2,880
(all points lie in this region
50 are feasible solutions, but
not yet optimal)
(240, 0)

50 100 150 (174, 0) 200 250

X1
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Solving LP Problems
An Graphical Approach
• Can be used only if there are two decision variables
• Graphically identify the feasible region (the set of feasible solutions)
by plotting the constraints
• Find the optimal solution by one of the following two approaches
• Level curve approach
• Corner point approach

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 Solving LP Problems
250
X
Finding the Optimal Solution: Level Curves
2

Using level curves

1. Specify any objective value (e.g.
200
350X1+300X2=35,000) and draw the line
2. Specify another objective value (e.g.
(0,175) 350X1+300X2=52,500) and draw the line (to
150
determine the shifting direction)
3. Parallelly shift the line until it touches the
boundary of the feasible region
(0,116.67)
100

Level curves Profit =

50 $52,500
Profit =
$35,000

50 100 150 200 250

X1
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 Solving LP Problems
X
250
Finding the Optimal Solution: Level Curves
2

200

150

Unique Optimal Solution

100 Optimal solution 1. If exists, it always occurs at
the corner points of the
feasible region
2. In this case, it is at the point
50 where the first and second
constraints intersect

50 100 150 200 250

X1
25
 Solving LP Problems
X
250
Finding the Optimal Solution: Level Curves
2

Boundary line of
X1 + X2 = 200
200

Boundary line of
9X1 + 6X2 = 1,566
150

Optimal Solution
Optimal solution Solve
100 (122, 78) X1 + X2 = 200
9X1 + 6X2 = 1,566
Solution
50 (X1, X2) = (122, 78)
Maximized profit
$350*122+$300*78=$66,100

50 100 150 200 250

X1
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Solving LP Problems
An Graphical Approach
• Can be used only if there are two decision variables
• Graphically identify the feasible region (the set of feasible solutions)
by plotting the constraints
• Find the optimal solution by one of the following two approaches
• Level curve approach
• Corner point approach

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 Solving LP Problems
X
250
Finding the Optimal Solution: Corner Points
2

200
$54,000

150 $64,000

Optimal Solution
100
1. Calculate the value of the
$66,100 objective function at each of
the corner points
2. The corner point with the
50 largest value is the optimal
solution
$0 $60,900

50 100 150 200 250

X1
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Special Conditions in LP Models
• Alternate optimal solutions
• Redundant constraints
• Unbounded solutions
Can’t find solutions
• Infeasibility

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Alternate Optimal Solutions
• More than one optimal solution
• If we used a computer to solve
this problem, it would identify
only one of the corner points of
this edge as the optimal solution
• Sometimes it is more desirable

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Redundant Constraints
• Is a constraint that plays no role in
determining the feasible region of the
problem
• There will always be an excess number
of pumps available
• Redundant constraints may not be
redundant in the future when
coefficients are changed

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Unbounded Solutions
• The objective function can be made
infinitely large (in the case of a
maximization problem) or infinitely small
(in the case of a minimization problem)
• Possible causes
• Omitted constraints
• Misspecified inequalities

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Infeasibility
• An LP problem is infeasible if there
is no way to simultaneously satisfy
all the constraints in the problem
• Possible causes
• Misspecified inequalities
• Unrealistic constraints

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