Chapter 13:

Linear Optimization
Business Analytics
Optimization
• Optimization is the process of selecting values of decision
variables that minimize or maximize some quantity of
interest.
• Optimization models have wide applicability in operations
and supply chains, finance, marketing, and other
disciplines.
• Also known as mathematical programming
Linear Optimization Models
• A linear optimization model (often called a linear
program, or LP) has two basic properties.

1. 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.

2. All variables are continuous.

– This means that they may assume any real value
(typically, nonnegative).
Integer Linear Optimization Models
• In an integer linear optimization model (also called an
integer program, or IP model), some of or all the
variables are restricted to being whole numbers.
– A special type of integer problem is one in which
variables can be only 0 or 1.
• More difficult to solve, but have important applications in
scheduling and supply chains.
Nonlinear Optimization Models
• Whenever either the objective function or a constraint is
not linear, we have a nonlinear optimization model (also
called a nonlinear program, or NLP model).
– The objective function and/or constraint functions are
nonlinear functions of the decision variables.
Generic Examples of Linear
Optimization Models (1 of 2)
Type of model Decisions Objective Typical Constraints

Product mix Quantities of product to Maximize contribution Resource limitations (for

produce and sell to profit example, production
time,
labor, material);
minimum sales
requirements; maximum
sales
potential
Process selection Quantities of product to Minimize cost Demand requirements;
make using alternative resource limitations
processes
Blending Quantity of materials to Minimize cost Specifications on
mix to produce one unit acceptable
of output mixture
Portfolio selection Proportions to invest in Maximize future Limit on available funds;
different financial return or minimize risk sector
instruments exposure requirements or
restrictions; proportional
relationships on
investment mix
Generic Examples of Linear
Optimization Models (2 of 2)
Type of model Decisions Objective Typical Constraints

Transportation Amount to ship between Minimize total Limited availability at

sources of supply and transportation cost sources;
destinations required demands met at
destinations
Multiperiod production Ouantities of product to Minimize total production Limited production rates;
planning produce in each of and inventory material balance
several time costs equations
periods; amount of
inventory
to hold between periods
Multiperiod financial Amount to invest in short Maximize cash on hand Cash balance equations;
management term instruments required cash obligations

Production/Marketing Allocations od advertising Maximize profit Budget limitation;

expenditures;production production
quantities Iimitations; demand
requirements
Developing Linear Optimization
Models
1. Identify the decision variables - the unknown values that the model
seeks to determine.
2. Identify the objective function - the quantity we seek to minimize or
maximize.
3. Identify all appropriate constraints - limitations, requirements, or
other restrictions that are imposed on any solution, either from
practical or technological considerations or by management policy.
4. Write the objective function and constraints as mathematical
expressions.
5. Implement the mathematical model on a spreadsheet.
Example 13.1: Sklenka Ski Company: Identifying
Model Components (1 of 4)
• SSC sells two snow ski models - Jordanelle & Deercrest.

• Manufacturing requires 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.
• Because of high demand, SSC can sell all it can produce each season.

• The company anticipates selling at least twice as many Deercrest models as

Jordanelle models.
Example 13.1: Sklenka Ski Company:
Identifying Model Components (2 of 4)
• Step 1: Identify the decision variables.
• The company wants to determine how many of each model
should be produced on a daily basis to maximize net profit.
• Define
– Jordanelle = number of pairs of Jordanelle skis
produced/day
– Deercrest = number of pairs of Deercrest skis produced/day
• Clearly specify the dimensions of the variables!
Example 13.1: Sklenka Ski Company:
Identifying Model Components (3 of 4)
• Step 2: Identify the objective function.
• SSC wishes to maximize net profit, and we are given the
net profit figures for each type of ski.
– SSC makes a net profit of $50 on the Jordanelle model
and $65 on the Deercrest model.
Example 13.1: Sklenka Ski Company:
Identifying Model Components (4 of 4)
• Step 3: Identify the constraints.
– Look for clues in the problem statement that describe limited resources that are
available, requirements that must be met, or other restrictions.

• Both the fabrication and finishing departments have limited numbers of workers, who
work only 7 hours each day; this limits the amount of production time available in each
department:
– 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.

• The problem also notes that the company anticipates selling at least twice as many
Deercrest models as Jordanelle models:
– Number of pairs of Deercrest skis must be at least twice the number of parts of
Jordanelle skis.

• Negative values of the decision variables cannot occur (“nonnegativity constraints”).

Developing a Mathematical Model
• Represent decision variables by descriptive names,
abbreviations, or subscripted letters.

– For mathematical formulations involving many

variables, subscripted letters are often more
convenient.
– In spreadsheet models, we recommend using more
descriptive names to make the models and solutions
easier to understand.
Example 13.2: SSC - Modeling the
Objective Function
• Profit per pair of skis sold:$50 for Jordanelle skis, $65 for
Deercrest skis
• Objective Function: Maximize total profit= 50 Jordanelle +
65 Deercrest
• Note how the dimensions verify that the expression is
correct:

–
Translating Constraints Mathematically
• Constraints are expressed as algebraic inequalities or equations, with
all variables on the left side and constant terms on the right.
• Look for key words in word statements of constraints:

– “Cannot exceed” translates mathematically

as
– “At least,” would translate as

– “Must contain exactly,” would specify an “= ” relationship.

• All constraints in optimization models must be one of these three
forms.
Constraint Functions
• A constraint function is the left-hand side of a constraint.
– E.g.: Total labor-hours used in fabrication cannot
exceed the amount of labor hours available.
Example 13.3: SSC - Modeling the
Constraints (1 of 2)
• Fabrication constraint
– Available fabrication labor hours:

– Required fabrication labor hours per ski pair: 3.5 hours for
Jordanelle, 4 hours for Deercrest
– Fabrication constraint:
• Finishing constraint
– Available finishing labor hours:

– Required finishing labor hours per ski pair: 1 hour for Jordanelle;
1.5 hours for Deercrest
– Finishing constraint:
Example 13.3: SSC - Modeling the
Constraints (2 of 2)
• Market mixture constraint
– The number of pairs of Deercrest skis must be at least
twice the number of Jordanelle skis.

–
– or
• Nonnegativity constraints:

–
–
SSC Optimization Model
Maximize total profit = 50 Jordanelle + 65 Deercrest

3.5 Jordanelle + 4 Deercrest 84

1 Jordanelle + 1.5 Deercrest 21
 2 Jordanelle + 1 Deercrest 0
Jordanelle 0
Deercrest 0

The highlighted portions are the constraint functions.

Types of Constraints
• Simple Bounds. Simple bounds constrain the value of a single
variable.
• Limitations. Limitations usually involve the allocation of scarce
resources.
• Requirements. Requirements involve the specification of
minimum levels of performance.
• Proportional Relationships. Proportional relationships are often
found in problems involving mixtures or blends of materials or
strategies.
• Balance Constraints. Balance constraints essentially state that
input = output.
Example 13.4: Modeling Constraints (1 of 5)
• Simple bound: We must produce at least 350 units of
product Y to meet customer commitments this month.
– Amount of product Y ≥ 350
– Define Product_Y to be the number of units of product
Y produced. Then the constraint is
Example 13.4: Modeling Constraints (2 of 5)
• Limitation: The amount of money spent on research and
development projects cannot exceed the assigned budget
of $300,000.
– Amount spent on research and development ≤
$300,000
– Define R&DExpenses to be the amount of money spent
on research and development projects. Then the
constraint is
Example 13.4: Modeling Constraints (3 of 5)
• Requirement: Contractual requirements specify that a
total of at least 500 units of product must be shipped
from factories in Austin and Atlanta.
– Number of units of product shipped from Austin and
Atlanta ≥ 500
– Define X1 = amount shipped from Austin and X2 =
amount shipped from Atlanta. Then the constraint is
X1 + X2 ≥ 500.
Example 13.4: Modeling Constraints (4 of 5)
• Proportional relationship: A mixture of fertilizer must contain
exactly 30% nitrogen.
– Amount of nitrogen in mixture/total amount in mixture = 0.30
– Suppose that two ingredients contain 20% and 33%
nitrogen, respectively. Define x and y to be the number of
pounds of the two ingredients in the mixture.

– Amount of nitrogen in mixture =

– Total amount of mixture = x + y

– Fraction of nitrogen in mix =

Example 13.4: Modeling Constraints (5
of 5)

• Balance constraint: Available inventory and production in

June must satisfy the demand of 150 units or be held over
to July.
– Inventory and production in current month = demand
and inventory held over to the next month
– Define I_June = inventory available in June, I_July =
inventory held over to July, and P_June = production in
June.
– Then the constraint is I_June + P_June = 150 + I_July.
Implementing Linear Optimization
Models on Spreadsheets
• Put the objective function coefficients, constraint coefficients, and
right-hand values in a logical format in the spreadsheet.
– For example, you might assign the decision variables to columns
and the constraints to rows.
• Define a set of cells (either rows or columns) for the values of the
decision variables.
– The names of the decision variables should be listed directly
above the decision variable cells.
– Use shading or other formatting to distinguish these cells.
• Define separate cells for the objective function and each constraint
function (the left-hand side of a constraint).
– Use descriptive labels directly above these cells.
Example 13.5: A Spreadsheet Model
for Sklenka Skis
Correspondence Between the Model
and the Spreadsheet
Maximize 50 Jordanelle + 65
Deercrest
3.5 Jordanelle + 4 Deercrest 84
1 Jordanelle + 1.5 Deercrest 21
Deercrest  2 Jordanelle 0
Jordanelle 0
Deercrest 0
Using the SUMPRODUCT Function
• In Excel, the pairwise sum of products of terms can easily
be computed using the SUMPRODUCT function.

• This often simplifies the model-building process,

particularly when many variables are involved.
Excel Functions to Avoid in Linear
Optimization
• Several common functions in Excel can cause difficulties when
attempting to solve linear programs using Solver because they
are discontinuous (or “nonsmooth”) and do not satisfy the
conditions of a linear model.
• These include:
– ABS
– IF
– MIN and MAX
– INT
– ROUND
– COUNT
Solving Linear Optimization Models
• A feasible solution to an optimization problem is any solution that
satisfies all of the constraints.
• An optimal solution is the best of all the feasible solutions.
• Software for determining optimal solutions
– Solver (“standard Solver”) is a free add-in packaged with Excel
for solving optimization problems.

• Use the Solver Parameters dialog to define the objective, decision

variables, and constraints from your spreadsheet model.
Example 13.6: Using Standard Solver
for the SSC Problem
• Solver Parameters dialog
Solver Results Dialog
• Three reports: Answer,
Sensitivity, and Limits
– To add them to your
Excel workbook, click
on the ones you want
and then click OK.
• Do not check the box
Outline Reports; this is an
Excel feature that produces
the reports in “outlined
format.”
Optimal Solution to SSC Problem
Solver Answer Report
• The Solver Answer Report 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.
• A binding constraint is one for which the Cell Value is equal to the
right-hand side of the value of the constraint.
– The Status column tells whether each constraint is binding or not
binding.
• Slack refers to the difference between the left- and right-hand sides of
the constraints for the optimal solution.
Example 13.7: Interpreting the SSC
Answer Report (1 of 2)
Example 13.7: Interpreting the SSC
Answer Report (2 of 2)
• Understanding slack values

Optimal solution: Jordanelle = 5.25; Deercrest = 10.5

Fabrication constraint:
23.625 excess fabrication hours
Finishing constraint:

No excess finishing hours

Market mix constraint:
Exactly twice the number of Deercrest skis as Jordanelle skis
Graphical Interpretation of Linear
Optimization
• The set of feasible solutions is called the feasible region.

• For a problem with only two decision variables,

we can draw the

feasible region on a two-dimensional coordinate system by plotting the

equations corresponding to each constraint.
• Nonnegativity constraints:
Example 13.8: Graphing the
Constraints in the SSC Problem (1 of 3)
• Fabrication constraint:

– Plot the equation: 3.5 Jordanelle + 4 Deercrest = 84

– Set Jordanelle = 0; Deercrest = 21
– Set Deercrest = 0; Jordanelle = 24
Example 13.8: Graphing the
Constraints in the SSC Problem (2 of 3)
• Finishing constraint:

– Plot the equation: 1 Jordanelle + 1.5 Deercrest = 21

– Set Jordanelle = 0; Deercrest = 14
– Set Deercrest = 0; Jordanelle = 21
Example 13.8: Graphing the
Constraints in the SSC Problem (3 of 3)
• Market mix constraint:

– Plot the equation: −2 Jordanelle + 1 Deercrest = 0

– Set Jordanelle = 5; Deercrest = 10
– Set Deercrest = 0; Jordanelle = 0
Example 13.9: Identifying the Feasible
Region and Optimal Solution (1 of 2)
• Feasible region
Corner Points
• The points at which the constraint lines intersect along
the feasible region are called corner points.
• If an optimal solution exists, then it will occur at a corner
point.
Example 13.9: Identifying the Feasible
Region and Optimal Solution (2 of 2)
• Because our objective is to
maximize profit, we seek a
corner point that has the
largest value of the
objective function Total
Profit = 50 Jordanelle + 65
Deercrest.
• Graph the profit line and
move in an improving
direction until it passes
through the last corner point
of the feasible region.
• Solve the two intersecting
equations simultaneously to
find the optimal solution.
How Solver Works
• Solver uses a mathematical algorithm called the simplex
method, which was developed in 1947 by the late Dr.
George Dantzig.
– The simplex method characterizes feasible solutions
algebraically by solving systems of linear equations.
– It moves systematically from one corner point to
another to improve the objective function until an
optimal solution is found (or until the problem is
deemed infeasible or unbounded).
– It is quick and efficient.
Example 13.10: Crebo
Manufacturing (1 of 2)
• Crebo Manufacturing produces 4 types of structural
support fittings.
• Machining centers have a capacity of 280,000 minutes
per year.
• Gross margin/unit and machining requirements:

Product Plugs Rails Rivets Clips

Gross margin/unit $0.30 $1.30 $0.75 $1.20
Minutes/unit 1 2.5 1.5 2

• How many units of each product type should be

produced to maximize gross profit margin?
Example 13.10: Crebo
Manufacturing (2 of 2)
• Define as the number of plugs, rails,
rivets, and clips to produce.

• Objective:
– Maximize gross profit margin =

• Constraints:
–
–

Product Plugs Rails Rivets Clips

Gross margin/unit $0.30 $1.30 $0.75 $1.20
Minutes/unit 1 2.5 1.5 2
How the Simplex Method Works
• The simplex method evaluates the impact of constraints in
terms of their contribution to the objective function for each
variable.
• For the simple case of only one constraint, the optimal
(maximum) solution is found by simply choosing the
variable with the highest ratio of the objective coefficient to
the constraint coefficient.
Example 13.11: Solving the Crebo
Manufacturing Model

• Clips have the highest marginal profit per unit of resource consumed.

• Maximum possible production of clips

• Profit for maximum production of clips

How Solver Creates Names in
Reports
• Solver assigns names to:
– Target cells
– Changing cells
– Constraint function cells
• Names are formed by concatenating the first cell
containing text to the:
– Left of the cell and
– Above the cell
SSC Example
• Name assigned to objective function
– Cell D22: “Profit Contribution + Total Profit”

• Names assigned to decision variables:

– Cell B14: “Quantity Produced + Jordanelle”
– Cell C14: Quantity Produced + Deercrest”

• Names assigned to constraints:

– Cell D15: “Fabrication + Hours Used”
– Cell D16: “Finishing + Hours Used”
– Cell D19: “Market mixture + Excess
Deercrest”
Solver Outcomes
• Unique optimal solution
– There is exactly one solution that will result in the maximum (or minimum)
objective.
• Alternative (multiple) optimal solutions
– The objective is maximized (or minimized) by more than one combination
of decision variables, all of which have the same objective function value.
• Unbounded solution
– The objective can be increased or decreased without bound (i.e., to
infinity for a maximization problem or negative infinity for a minimization
problem)
• Infeasibility
– No feasible solution exists
Example 13.12: A Model with
Alternative Optimal Solutions
• New objective function in the SSC problem:
– Max 50 Jordanelle + 75 Deercrest
Example 13.13: A Model with an
Unbounded Solution
• Remove the finishing and fabrication constraints from the Sklenka Ski
problem.

• Solver message:
Example 13.14: An Infeasible Model
• Suppose, by mistake, the modeler in the Sklenka Ski problem used
Blending Models
• Blending problems involve mixing several raw materials
that have different characteristics to make a product that
meets certain specifications.
– 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.
Example 13.15: BG Seed Company (1 of 4)
• BG Seed Company is developing a new birdseed mix.
– Nutritional requirements specify that the mixture contain at least
13% protein, at least 15% fat, and no more than 14% fiber.
– BG’s objective is to determine the minimum cost mixture that
meets nutritional requirements.

Ingredient Protein % Fat % Fiber % Cost/lb

Sunflower seeds 16.9 26 29 $0.22
White millet 12 4.1 8.3 $0.19
Kibble corn 8.5 3.8 2.7 $0.10
Oats 15.4 6.3 2.4 $0.10
Cracked corn 8.5 3.8 2.7 $0.07
Wheat 12 1.7 2.3 $0.05
Safflower 18 17.9 28.8 $0.26
Canary grass seed 11.9 4 10.9 $0.11
Example 13.15: BG Seed Company (2 of 4)

• Formulating the model

– Define = pounds of ingredient i in 1 pound of mix
• Objective function
– minimize

Ingredient Protein % Fat % Fiber % Cost/lb

Sunflower seeds 16.9 26 29 $0.22
White millet 12 4.1 8.3 $0.19
Kibble corn 8.5 3.8 2.7 $0.10
Oats 15.4 6.3 2.4 $0.10
Cracked corn 8.5 3.8 2.7 $0.07
Wheat 12 1.7 2.3 $0.05
Safflower 18 17.9 28.8 $0.26
Canary grass seed 11.9 4 10.9 $0.11
Example 13.15: BG Seed Company (3 of 4)
• Protein constraint

• Add constraint
– Protein constraint simplifies to
–
Ingredient Protein % Fat % Fiber % Cost/lb
Sunflower seeds 16.9 26 29 $0.22
White millet 12 4.1 8.3 $0.19
Kibble corn 8.5 3.8 2.7 $0.10
Formulate other nutritional Oats 15.4 6.3 2.4 $0.10
constraints in a similar way. Cracked corn 8.5 3.8 2.7 $0.07
Wheat 12 1.7 2.3 $0.05
Safflower 18 17.9 28.8 $0.26
Canary grass seed 11.9 4 10.9 $0.11
Example 13.15: BG Seed Company (4 of 4)

• Complete model

Minimize:
Mixture:

Protein:

Fat:

Fiber:

Nonnegativity:
Spreadsheet Implementation of BG
Seed Company
Solver Model for BG Seed Company
Dealing with Infeasibility
• Solver solution shows the model is infeasible!
• Solver Feasibility Report

A conflict exists in trying to meet both fat and fiber

constraints.
Only sunflower seeds and safflower contain enough fat but
they also have a lot of fiber.
What-If Scenarios
• Lower the fat requirement or raise the fiber limitation

1st Scenario:
Fat requirement is lowered from
15% to 14.5%.
2nd Scenario:
Fiber limitation is raised from
14% to 14.5%.
Optimal Cost per pound:
$0.148 if fat requirement
lowered
$0.152 if fiber limitation raised
Portfolio Investment Models
• Many types of financial investment problems are modeled
and solved using linear optimization.
• Such portfolio investment models problems have the basic
characteristics of blending models.
Example 13.16: Innis Investments (1 of 3)
• Innis Investments manages 6 mutual funds. A client wants to invest a $500,000
inheritance. The objective is to minimize risk.
• Constraints:
– Invest no more than $200,000 in any one fund.
– Invest at least $50,000 each in the multinational and balanced funds.
– Invest at least 40% combined in the income equity and balanced funds.
– Achieve an average return of at least 5%.

Fund Expected Annual Return Risk Measure

1. Innis Low-priced Stock Fund 8.13% 10.57
2. Innis Multinational Fund 9.02% 13.22
3. Innis Mid-cap Stock Fund 7.56% 14.02
4. Innis Mortgage Fund 3.62% 2.39
5. Innis Income Equity Fund 7.79% 9.30
6. Innis Balanced Fund 4.40% 7.61
Example 13.16: Innis Investments (2 of 3)
• Model Formulation

– Define X j = dollar amount invested in fund j

– The total risk would be measured by the weighted risk of the portfolio, where the weights
are the proportion of the total
investment in any fund

minimize total risk

Fund Expected Annual Return Risk Measure

1. Innis Low-priced Stock Fund 8.13% 10.57
2. Innis Multinational Fund 9.02% 13.22
3. Innis Mid-cap Stock Fund 7.56% 14.02
4. Innis Mortgage Fund 3.62% 2.39
5. Innis Income Equity Fund 7.79% 9.30
6. Innis Balanced Fund 4.40% 7.61
Example 13.16: Innis Investments (3 of 3)
• Constraints
– Invest all money:
– Achieve required return:

– Have at least 40% in income equity and balanced funds:

– At least $50,000 in each of multinational and balanced funds:

– Restrict each investment to $200,000, and include nonnegativity:

Spreadsheet Implementation for Innis
Investments
Solver Model for Innis Investments
Scaling Issues in Using Solver
• A poorly scaled model is one that computes values of the objective,
constraints, or intermediate results that differ by several orders of
magnitude.
• Poor scaling can cause Solver engines to return messages such as
“Solver could not find a feasible solution,” “Solver could not improve
the current solution,” or even “The linearity conditions required by this
Solver engine are not satisfied,” or it may return results that are
suboptimal.
– In the Solver options, you can check the box Use Automatic
Scaling.
– The best way to avoid scaling problems is to carefully choose the
“units” implicitly used in your model so that all computed results
are within a few orders of magnitude of each other.
Example 13.17: Little Investment
Advisors (1 of 4)
• Little Investment Advisors is working with a client on determining
an optimal portfolio of bond funds. The client has $350,000 to
invest and wants to achieve the largest weighted percentage
return and keep the weighted risk measure no greater than 5.00.

Bond Portfolio Expected Return Risk Measure

1. Ohio National Bond Portfolio 6.11% 4.62

2. PIMCO Global Bond Unhedged Portfolio 7.61% 7.22

3. Federated High Income Bond Portfolio 5.29% 9.75

4. Morgan Stanley UIF Core Plus Fixed Income 2.79% 3.95

Portfolio
5. PIMCO Real Return Portfolio 7.37% 6.04

6. PIMCO Total Return Portfolio 5.65% 5.17

Example 13.17: Little Investment
Advisors (2 of 4)
• Model

– Define be the amount invested in each of the six funds.

– Maximize

–
–
Bond Portfolio Expected Return Risk Measure
1. Ohio National Bond Portfolio 6.11% 4.62
2. PIMCO Global Bond Unhedged Portfolio 7.61% 7.22
3. Federated High Income Bond Portfolio 5.29% 9.75
4. Morgan Stanley U IF Core Plus Fixed Income Portfolio 2.79% 3.95
5. PIMCO Real Return Portfolio 7.37% 6.04
6. PIMCO Total Return Portfolio 5.65% 5.17
Example 13.17: Little Investment
Advisors (3 of 4)
• Solver solution without scaling, resulting in an incorrect
solution!
Example 13.17: Little Investment
Advisors (4 of 4)
• Solver solution after scaling the variables
Transportation Models
• The transportation problem involves determining how
much to ship from a set of sources of supply (factories,
warehouses, etc.) to a set of demand locations
(warehouses, customers, etc.) at minimum cost.
Example 13.18: General Appliance
Corporation (1 of 2)
• GAC produces refrigerants at 2 plants and ships to 5 distribution centers.
Plant Distribution Distribution Distribution Distribution Distribution
center: center: center: Chicago center: Phoenix center:
Cleveland Baltimore Capacity
Marietta $12.60 $14.35 $11.52 $17.58 1,200

Minneapolis $9.75 $16.26 $8.11 $17.92 800

blank

Demand 150 350 500 1,000

• Define the decision variables as: = amount shipped

from plant i to distribution center j

• The objective is to minimize the total cost of shipping between plants and distribution
centers.

– minimize
Example 13.18: General Appliance
Corporation (2 of 2)
• Constraints
– The amount shipped from each plant cannot exceed its capacity.
– Demand at each distribution center is met.
– Nonnegativity
GAC Spreadsheet Implementation
and Solver Model
Multiperiod Production Planning
Models
• The basic decisions are how much to produce in each time
period to meet anticipated demand over each period.
• Although it might seem obvious to simply produce to the
anticipated level of sales, it may be advantageous to
produce more than needed in earlier time periods when
production costs may be lower and store the excess
production as inventory for use in later time periods,
thereby letting lower production costs offset the costs of
holding the inventory.
Example 13.19: K&L Designs (1 of 5)
• K&L Designs makes hand-painted jewelry boxes.
– Forecasted sales are 150 in autumn, 400 in winter, and 50
in spring.
– Unpainted boxes cost $20 and each box takes 2 hours to
complete.
– The cost of capital is 6% per quarter.
– Holding cost per item = 0.06(20) = $1.20/quarter
– Labor rates are $5.50, $7.00, and $6.25 per hour during
autumn, winter, and spring, respectively.
• Minimize the combined cost of production and inventory holding
costs.
Example 13.19: K&L Designs (2 of 5)
• Decision variables

– = amount to produce in quarter i (1 = autumn; 2 =

winter; 3 = spring)
– = inventory at the end of quarter i
Example 13.19: K&L Designs (3 of 5)
• Objective function
– The production cost per unit is computed by multiplying the labor
rate by the number of hours required to produce one.

– Thus, the unit cost in the autumn is in the

winter, and in the spring,
minimize
Example 13.19: K&L Designs (4 of 5)
• Constraints
– Satisfy demand using production in a quarter and the inventory
held from the previous time quarter. Any amount in excess of the
demand is held to the next quarter.
– Therefore, the constraints take the form of inventory balance
equations:

production + inventory from the previous quarter = demand +

inventory held to the next quarter
Example 13.19: K&L Designs (5 of 5)
• Complete model

minimize
subject to
Spreadsheet Implementation for K&L
Designs
Solver Model for K&L Designs
Example 13.20: An Alternative
Optimization Model for K&L Designs
• To ensure that demand is satisfied, we can set the cumulative
production in each quarter to be at least as great as the
cumulative demand.
– This eliminates inventory variables.

minimize
Alternative Spreadsheet Model
Alternative Solver Model
Multiperiod Financial Planning
Models
• Financial planning often occurs over an extended time
horizon.
• Financial planning models have similar characteristics to
multiperiod production planning and can be formulated as
multiperiod optimization models.
Example 13.21: D.A. Branch & Sons (1 of 3)
• The company’s financial manager needs to ensure that funds are
available to pay expenses yet needs to maximize investment income.
• Three short-term investments are being considered:
– 1-month C D paying 0.25%
– 3-month C D paying 1.00% at maturity
– 6-month C D paying 2.30% at maturity
• The net expenditures for the next 6 months are forecast as $50,000,
($12,000), $23,000, ($20,000), $41,000, and ($13,000)
• A cash balance of $10,000 must be maintained. Currently the cash
balance is $200,000.
Example 13.21: D.A. Branch &Sons (2
of 3)

• Model development

– = amount ($) to invest in a 1-month C D at the start of month

i
– = amount ($) to invest in a 3-month C D at the start of month
i
– = amount ($) to invest in a 6-month C D at the start of month
i
Example 13.21: D.A. Branch &
Sons (3 of 3)
• Optimization model
maximize
subject to
Spreadsheet Model for D.A. Branch &
Sons
Spreadsheet Model Formulas for D.A.
Branch & Sons
Solver Model for D.A. Branch & Sons