FORE School of Management

Decision Making Models

ACKNOWLEDGEMENT
I express my sincere gratitude to Dr. Hitesh Arora, Department of Quantitative Techniques and Operations, FORE School of Management, for his encouragement, constant support and guidance. His support has been invaluable in completion of the project. I would also like to place on record the sincere efforts taken by him in giving all minor details about the subject. I also thank FORE School of Management, New Delhi for providing me with an opportunity to work on this great learning. I would also like to thank my respondent Mr. Kunal Mehta, Director of Srikant Industries Pvt. Ltd., without whom the project would have been incomplete.

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Decision Making Models

Contents
1. 2. Executive Summary ..............................................................................................................................3 Introduction ...........................................................................................................................................4 2.1. 2.2. 3. About The Company .....................................................................................................................4 Objective of the Project .................................................................................................................4

Methodology ..........................................................................................................................................5 3.1. 3.2. Data Collection ..............................................................................................................................5 Data Analysis ................................................................................................................................5

4.

Problem Description and Formulation...................................................................................................6 4.1. 4.2. Problem Description ......................................................................................................................6 Problem Formulation .....................................................................................................................8

5.

Conclusion ..........................................................................................................................................12 5.1. 5.2. Final Result .................................................................................................................................12 Limitations ...................................................................................................................................13

6. 7.

References ..........................................................................................................................................14 Appendix ................................................................................................................................................ i

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Decision Making Models

1. Executive Summary
Management science can be used in a variety of organizations to solve many different types of problems. Management science is a scientific approach to solving management problems and it encompasses a logical approach to problem solving. The key focus for management science is determining steps that can achieve Productivity Gain and doing it before the competition. A valuable tool in this quest is operations research (O.R.), a field devoted to the creation and management of productivity gain. Operations researchers identify ways to achieve high levels of performance. They approach productivity gain by uniquely conceptualizing problems at the organizational level. Their solutions flow naturally from the way they describe, understand, appreciate, and represent these problems. An operations researchers approach is to analyze traditional quantities, such as profit, cost, efficiency, and other practical, measurable items. Operations research, the discipline of applying advanced analytical methods to help make better decisions, has come to be known as the science of better. Organizations that dont rely on O.R. to identify the opportunities to improve productivity that are inherent in their firms structure will likely operate below potential. The range of savings generated by O.R. models is broad, from modest to billions of dollars. Examples of productivity gains that would not otherwise have existed are seen in case studies of Sears, Weyerhaeuser, National Car Rental, Taco Bell, HP, and Procter & Gamble. In this project, linear programming problem has been used to determine and analyze the advertising cost and amount of chemical used daily at Srikant Industries Pvt. Ltd. as part of its subsidiary work, to produce dye varieties so as to maximize daily profits.

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2. Introduction
2.1. About The Company

Srikant Industries Pvt. Ltd., Jodhpur is the leader of lime world. It also has a subsidiary plant for Dye manufacturing. It is amongst the leading manufacturers of Calcium Hydro-Oxide and Calcium Oxide and manufactures various Dye products to cater to the tye and dye industry of Rajasthan. It is in this line of manufacturing lime and dye products for the last 20 years and has established vast client network all over the country. Its client list includes Nitrex Chemicals (I) Ltd. (Valsad), Shriram Vinyl & Chemicals Industries Ltd. (Kota), Shree Shyam Pulp & Board Mills Ltd. (Kashipur), Sesa Industries Ltd. (Goa), Shree Rayalseema Hi-Strength Hypo Ltd. (Kurrnool), etc. Its product finds use in Paint Industry, Chemical Industry, Paper Industry, Plastic Industry & many more.

2.2.

Objective of the Project

The objective of this problem is to determine the maximum profit that can be made considering the overall sales generated negated by the total expenditure including the advertising costs. The chemicals need to be optimized keeping the constraints in check with its effective allocation in forming the dyes.

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3. Methodology

3.1.

Data Collection

Primary Sources: Mr. Kunal Mehta, Director of Srikant Industries Pvt. Ltd. Jodhpur provided the data. Secondary Sources: The secondary sources referred to were the companys books.

3.2.

Data Analysis

The collected data was first transformed into a tabular format for formulation of the linear programming problem. It was then solved through MS Excel Solver.

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4. Problem Description and Formulation

Srikant Industries Pvt. Ltd. as part of its subsidiary division manufactures ufactures three types of dyes (Dye1, Dye 2, and Dye 3). Each dye is produced by blending of three types of chemicals (Chemical 1, Chemical 2, and Chemical 3). Table 1 Illustrates the sales price per litre of dye and the purchase price per litre of chemicals.

Table1 Price Details

It can purchase up to 5000 litres of each type of chemicals daily. The three types of dyes differ in their Organic Organic-Content rating (OCR) and sulphur content. Dye 1 - The chemicals blended for making dye 1 must have an average OCR of at least 10 and contain at most 1% sulphur. Dye 2 - The chemicals blended for making dye 2 must have an average OCR of atleast 8 and contain at most 2% sulphur. Dye 3 - The chemicals blended for making dye 3 must have an average OCR of at least 6 and contain at most 1% sulphur.

Table 2 Dyes for Customers

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The average OCR and the sulphur ur content of the three types of chemicals are illustrated in Table 2.

Table 3 Chemicals for Blending It costs Rs. 4 to covert 1 litre of synthetics into one litre of dye & Srikant Industries Pvt. Ltd. can produce up to 14,000 litres of dyes daily. Srikant Industries Pvt. Ltd.s customers require dye in the following amounts: Dye 1 - at 3000 litres per day Dye 2 - at 2000 litres per day Dye 3 - at 1000 litres per day. Meeting these demands is a necessity. Srikant Industries Pvt. Ltd. also advertis advertise e to stimulate demand for the products. For every 1 rupee spent, the demand for that particular dye increases by 10 litres. litres The problem is to maximize daily profits under given the conditions.

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4.2.

Problem Formulation

* for each type of Dye: 1 ad/day will increase demand by 10 litres/day * Rs. 4 to transform 1 litre chemical into 1 litre dye * Max Dye to be produced d 14000 litres /day

Now, to formulate the decisions we define the Decision Variables: 1, 2, 3 and j =1, 2, 3 Let xij = litres of chemical i used daily to produce dye j where i = 1 ai = amount spent daily on advertising dye i where i = 1, 2, 3 Decision Variables Imply: x11 + x12 + x13 = litres of Chemical 1 used daily x21 + x22 + x23 = litres of Chemical 2 used daily x31 + x32 + x33 = litres of Chemical 3 used daily x11 + x21 + x31 = litres of Dye 1 produced daily x12+ x22 + x32 = litres of Dye 2 produced daily x13+ x23 + x33 = litres of Dye 3 produced daily

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Daily Revenues: Dye Sales: 70(x11 + x21 + x31) + 60 (x12+ x22 + x32 ) + 50(x13+ x23 + x33 ) Daily Costs: Purchasing Cost of Chemicals: 45(x11 + x12 + x13) + 35(x21 + x22 + x23 ) + 25(x31 + x32 + x33 ) Advertising Cost: a1 + a2 + a3 Production Cost: 4(x11 + x12 + x13 + x21 + x22 + x23 + x31 + x32 + x33)

Daily Profit: Dye Sales [Purchasing costs of Chemicals + Production Cost + Advertising Cost ]

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Objective Function: Maximize z = 70(x11 + x21 + x31) + 60 (x12+ x22 + x32 ) + 50(x13+ x23 + x33 ) - [{45(x11 + x12 + x13) + 35(x21 + x22 + x23 ) + 25(x31 + x32 + x33 ) } + {4(x11 + x12 + x13 + x21 + x22 + x23 + x31 + x32 + x33)} + {a1 + a2 + a3}] z max= 21 x11 + 11 x12 + x13 + 31x21 + 21x22 + 11 x23 + 41 x31 + 31 x32 + 21 x33 - a1 - a2 - a3 Subject to (1) Demand constraints Dye 1, 2 and 3 produced daily should equal its daily demand. x11 + x21 + x31 - 10 a1 = 3000 (Dye 1 Demand Constraint) x12 + x22 + x32 - 10 a2 = 2000 (Dye 2 Demand Constraint) x13 + x23 + x33 - 10 a3 = 1000 (Dye 3 Demand Constraint)

(2) Usage constraints At most 5,000 litres of each chemical type can be purchased daily. x11 + x12 + x13 5000 (Chemical 1 Usage Constraint) x21 + x22 + x23 5000 (Chemical 2 Usage Constraint) x31 + x32 + x33 5000 (Chemical 3 Usage Constraint)

(3) Production capacity constraint Production capacity is 14000 litres of Dye per day x11 + x21 + x31 + x12 + x22 + x32 + x13 + x23 + x33 14,000 (Production Capacity Constraint) (4) Average OCR limitation Chemical blended to make Dye 1 must have an average OCR of at least 10. (12 x11 + 6 x21 + 8 x31) / (x11 + x21 + x31) 10 2 x11 - 4 x21 - 2 x31 0 (Dye 1 OCR Constraint) Chemical blended to make Dye 2 must have an average OCR of at least 8. (12 x12 + 6 x22 + 8 x32) / (x12 + x22 + x32) 8
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4 x12 - 2 x22 0 (Dye 2 OCR Constraint) Chemical blended to make Dye 3 must have an average OCR of at least 6. ( 12 x13 + 6 x23 + 8 x33 ) / ( x13 + x23 + x33 ) 6 6x13 + 2 x33 0 (Dye 3 OCR Constraint) But , we also know that x13 and x33 are always 0. So, we need not consider this constraints. These are called as Redundant Constraints as each type of Chemical will have OCR as minimum 6. (5) Percentage of sulphur Chemical blended to make Dye 1 must contain at most 1% sulphur (0.005 x11 + 0.02 x21 + 0.03 x31) / (x11 + x21 + x31) 0.01 -0.005 x11 + 0.01 x21 + 0.02 x31 0 (Dye1 Sulphur Constraint) Chemical blended to make Dye 2 must contain at most 2% sulphur (0.005 x12 + 0.02 x22 + 0.03 x32) / (x12 + x22 + x32) 0.02 -0.015 x12 + 0.01 x32 0 (Dye2 Sulphur Constraint) Chemical blended to make Dye 3 must contain at most 1% sulphur (0.005 x13 + 0.02 x23 + 0.03 x33) / (x13 + x23 + x33) 0.01 -0.005 x13 + 0.01 x23 + 0.02 x33 0 (Dye 3 Sulphur Constraint)

(6) Non-negativity constraint xij 0, i =1,2,3 and , j =1,2,3 ai 0, i =1,2,3

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5. Conclusion

5.1.

Final Result

By using the data solver in MS Excel 2007, an optimal solution was reached, as stated below:

Therefore, To produce Dye 1 daily 2000 litres of Chemical 1, 1000 litres of Chemical 2 and 0 litres of Chemical 3 should be used To produce Dye 2 daily 2333.33 litres of Chemical 1, 3666.66 litres of Chemical 2 and 3500 litres of Chemical 3 should be used To produce Dye 3 daily 666.66 litres of Chemical 1, 333.33 litres of Chemical 2 and 0 litres of Chemical 3 should be used And, The amount to be spent daily on advertising Dye 1 is Rs. 0 The amount to be spent daily on advertising Dye 2 is Rs. 750 The amount to be pent daily on advertising Dye 3 is Rs. 0

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5.2.

Limitations

OCR (Organic Content Rating) and Sulphur Rating are assumed to the nearest approximation as per data available. However, they are subject to change in reality. The cost of conversion of chemicals into dye is the nearest approximation, as the exact number could not be obtained. Other external factors have not been considered.

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6. References

Problem based on a real life case provided by Mr. Kunal Mehta, owner of Srikant Industries Pvt. Ltd. Frederick S. Hillier & Gerald J. Lieberman, Introduction to Operations Research Anderson/Sweeney/Williams/Martin, An Introduction to Management Science: Quantitative Approaches to Decision Making

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7. Appendix
PAGE

Appendix A Solution Table Using Excel Solver ii Appendix B Answer Report...................................................................... iii Appendix C Sensitivity Report..iv

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Appendix A - Solution Table Using Excel Solver

x11
Profit
Dye 1 Demand Constraint Dye 2 Demand Constraint Dye 3 Demand Constraint Chemical 1 Usage Constraint Chemical 2 Usage Constraint Chemical 3 Usage Constraint Production Capacity Constraint Dye 1 OCR Constraint Dye 2 OCR Constraint Dye 3 OCR Constraint Dye1 Sulphur Constraint Dye2 Sulphur Constraint Dye 3 Sulphur Constraint

x12
11
0 1 0 1 0 0 1 0 4 0 0 -0.015 0

x13
1
0 0 1 1 0 0 1 0 0 6 0 0 -0.005

x21
31
1 0 0 0 1 0 1 -4 0 0 0.01 0 0

x22
21
0 1 0 0 1 0 1 0 -2 0 0 0 0

x23
11
0 0 1 0 1 0 1 0 0 0 0 0 0.01

x31
41
1 0 0 0 0 1 1 -2 0 0 0.02 0 0

x32
31
0 1 0 0 0 1 1 0 0 0 0 0.01 0

x33
21
0 0 1 0 0 1 1 0 0 2 0 0 0.02

a1
-1
-10 0 0 0 0 0 0 0 0 0 0 0 0

a2
-1
0 -10 0 0 0 0 0 0 0 0 0 0 0

a3
-1
0 0 -10 0 0 0 0 0 0 0 0 0 0

LHS
287750
3000 2000 1000 5000 5000 3500 13500 0 2000 4000 0 0 0 = = = <= <= <= <= >= >= >= <= <= <=

RHS
3000 2000 1000 5000 5000 5000 14000 0 0 0 0 0 0

21
1 0 0 1 0 0 1 2 0 0 -0.005 0 0

Solution Values

2000

2333.333333 666.6666667

1000

3666.666667 333.3333333

3500

750

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Appendix B Answer Report

Microsoft Excel 12.0 Answer Report Worksheet: [DMM_Project.xlsx]Solution Report Created: 9/9/2013 5:07:41 PM

Target Cell (Max) Cell $N$4 Profit LHS

Name

Original Value 287750

Final Value 287750

Adjustable Cells Cell Name $B$19 Solution Values x11 $C$19 Solution Values x12 $D$19 Solution Values x13 $E$19 Solution Values x21 $F$19 Solution Values x22 $G$19 Solution Values x23 $H$19 Solution Values x31 $I$19 Solution Values x32 $J$19 Solution Values x33 $K$19 Solution Values a1 $L$19 Solution Values a2 $M$19 Solution Values a3

Original Value 2000 2333.333333 666.6666667 1000 3666.666667 333.3333333 0 3500 0 0 750 0

Final Value 2000 2333.333333 666.6666667 1000 3666.666667 333.3333333 0 3500 0 0 750 0

Constraints Cell Name $N$5 Dye 1 Demand Constraint LHS $N$6 Dye 2 Demand Constraint LHS $N$7 Dye 3 Demand Constraint LHS $N$8 Chemical 1 Usage Constraint LHS $N$9 Chemical 2 Usage Constraint LHS $N$10 Chemical 3 Usage Constraint LHS $N$11 Production Capacity Constraint LHS $N$12 Dye 1 OCR Constraint LHS $N$13 Dye 2 OCR Constraint LHS $N$14 Dye 3 OCR Constraint LHS $N$15 Dye1 Sulphur Constraint LHS $N$16 Dye2 Sulphur Constraint LHS $N$17 Dye 3 Sulphur Constraint LHS

Cell Value Formula 3000 $N$5=$P$5 2000 $N$6=$P$6 1000 $N$7=$P$7 5000 $N$8<=$P$8 5000 $N$9<=$P$9 3500 $N$10<=$P$10 13500 $N$11<=$P$11 0 $N$12>=$P$12 2000 $N$13>=$P$13 4000 $N$14>=$P$14 0 $N$15<=$P$15 0 $N$16<=$P$16 0 $N$17<=$P$17

Status Not Binding Not Binding Not Binding Binding Binding Not Binding Not Binding Binding Not Binding Not Binding Binding Binding Binding

Slack 0 0 0 0 0 1500 500 0 2000 4000 0 0 0

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Appendix C Sensitivity Report

Microsoft Excel 12.0 Sensitivity Report Worksheet: [DMM_Project.xlsx]Solution Report Created: 9/9/2013 5:07:41 PM

Adjustable Cells Cell $B$19 $C$19 $D$19 $E$19 $F$19 $G$19 $H$19 $I$19 $J$19 $K$19 $L$19 $M$19 Name Solution Values x11 Solution Values x12 Solution Values x13 Solution Values x21 Solution Values x22 Solution Values x23 Solution Values x31 Solution Values x32 Solution Values x33 Solution Values a1 Solution Values a2 Solution Values a3 Final Value 2000 2333.333333 666.6666667 1000 3666.666667 333.3333333 0 3500 0 0 750 0 Reduced Cost 0 0 0 0 0 0 0 0 0 -209 0 -409 Objective Allowable Allowable Coefficient Increase Decrease 21 0 1E+30 11 1E+30 0 1.000000001 0 1E+30 31 62.7 0 21 0 20.9 11 122.7 0 41.00000369 0 46.35000411 31 1E+30 0 20.99999983 0 1E+30 -0.999999989 209 1E+30 -1 0 104.5 -0.999999989 409 1E+30

Constraints Cell $N$5 $N$6 $N$7 $N$8 $N$9 $N$10 $N$11 $N$12 $N$13 $N$14 $N$15 $N$16 $N$17 Name Dye 1 Demand Constraint LHS Dye 2 Demand Constraint LHS Dye 3 Demand Constraint LHS Chemical 1 Usage Constraint LHS Chemical 2 Usage Constraint LHS Chemical 3 Usage Constraint LHS Production Capacity Constraint LHS Dye 1 OCR Constraint LHS Dye 2 OCR Constraint LHS Dye 3 OCR Constraint LHS Dye1 Sulphur Constraint LHS Dye2 Sulphur Constraint LHS Dye 3 Sulphur Constraint LHS Final Shadow Constraint Allowable Allowable Value Price R.H. Side Increase Decrease 3000 -20.8 3000 1000 500 2000 0.1 2000 7500 1E+30 1000 -40.8 1000 1000 500 5000 57.25 5000 200 500 5000 20.9 5000 500 3666.666667 3500 0 5000 1E+30 1500 13500 0 14000 1E+30 500 0 0 0 2000.000013 0 2000 0 0 2000 1E+30 4000 0 0 4000 1E+30 0 3090.000274 0 5.000000017 0 0 3090 0 5 35 0 3090 0 5 5

iv