Topic 10: Linear programming

Camn et al (2016), Chapter 11, 14

1. A simple maximization problem
2. A simple minimization problem
3. Monte Carlo simulation for risk management
 Prescriptive analytics and optimization models
Optimization problems maximize or minimize some function, called the objective function , and usually have a
set of restrictions known as constraints . Consider the following typical applications of optimization:
• A manufacturer wants to develop a production schedule and an inventory policy that will satisfy demand in
future periods. Ideally, the schedule and policy will enable the company to satisfy demand and at the same
time minimize the total production and inventory costs.
• A financial analyst must select an investment portfolio from a variety of stock and bond investment
alternatives. The analyst would like to establish the portfolio that maximizes the return on investment.
• A marketing manager wants to determine how best to allocate a fixed advertising budget among alternative
advertising media such as web, radio, television, newspaper, and magazine. The manager would like to
determine the media mix that maximizes advertising effectiveness.
• A company has warehouses in a number of locations. Given specific customer demands, the company
would like to determine how much each warehouse should ship to each customer so that total
transportation costs are minimized.
General process for optimization problem
• Problem formulation
◦ Understand the problem thoroughly
◦ Describe the objective
◦ Describe each constraint
◦ Define the decision variables: controllable inputs
◦ Write the objective in terms of the decision variables
◦ Write the constraints in term of the decision variables

• Mathematical model
• Solving the model _ with Excel Solver
 Case: Par
• Par, Inc. is a small manufacturer of golf equipment and supplies whose management has decided to move into the
market for medium and high-priced golf bags. Par’s distributor is enthusiastic about the new product line and has
agreed to buy all the golf bags Par produces over the next three months. After a thorough investigation of the steps
involved in manufacturing a golf bag, management determined that each golf bag produced will require the
following operations: Cutting and dyeing the material; Sewing; Finishing (inserting umbrella holder, club separators,
etc.); Inspection and packaging

• The director of manufacturing analyzed each of the operations and concluded that if the company produces a
medium-priced standard model, each bag will require 7 Ú 10 hour in the cutting and dyeing department, 1 Ú 2 hour in
the sewing department, 1 hour in the finishing department, and 1 Ú 10 hour in the inspection and packaging
department. The more expensive deluxe model will require 1 hour for cutting and dyeing, 5 Ú 6 hour for sewing, 2 Ú 3
hour for finishing, and 1 Ú 4 hour for inspection and packaging. This production information is summarized in 11.1.

• Par’s production is constrained by a limited number of hours available in each department. After studying
departmental workload projections, the director of manufacturing estimates that 630 hours for cutting and dyeing,
600 hours for sewing, 708 hours for finishing, and 135 hours for inspection and packaging will be available for the
production of golf bags during the next three months.
Case: Par
Understand the problem thoroughly
◦ Describe the objective
◦ Describe each constraint
◦ Define the decision variables: controllable inputs
◦ Write the objective in terms of the decision variables
◦ Write the constraints in term of the decision variables
Case: Par
Describe the objective
◦ Describe the objective:
The objective is to maximize the total contribution to profit.
Case: Par
Describe each constraint
◦ Constraint 1: The number of hours of cutting and dyeing time used must be
less than or equal to the number of hours of cutting and dyeing time available.
◦ Constraint 2: The number of hours of sewing time used must be less than or
equal to the number of hours of sewing time available.
◦ Constraint 3: The number of hours of finishing time used must be less than or
equal to the number of hours of finishing time available.
◦ Constraint 4: The number of hours of inspection and packaging time used must
be less than or equal to the number of hours of inspection and packaging time
available.
Case: Par
Define the decision variables: controllable inputs
◦ S - number of standard bags
◦ D - number of deluxe bags

Write the objective in terms of the decision variables

=> Objective function: Max 10S + 9D
Case: Par
Write the constraints in term of the decision variables
Case: Par
Mathematical model
 Case: Par
Solving the model _ with Excel Solver
• Step 1. Click the Data tab in the Ribbon
• Step 2. Click Solver in the Analyze group
• Step 3. When the Solver Parameters dialog box appears: Enter B16 in the Set Objective: box
Select Max for the To: option
Enter B14:C14 in the By Changing Variable Cells: box
When the Add Constraint dialog box appears:
• Step 4. Click the Add button
Enter B19:B22 in the left-hand box under Cell Reference:
Select < 5 from the dropdown button
Enter C19:C22 in the Constraint: box
Click OK
• Step 5. Select the checkbox for Make Unconstrained Variables Non-Negative
• Step 6. From the drop-down menu for Select a Solving Method: , choose Simplex LP
• Step 7. Click Solve
• Step 8. When the Solver Results dialog box appears: Select Keep Solver Solution
In the Reports section, select Answer Report
Click OK
 With
Excel
Solver
Excel Solver results

Excel Solver

binding constraint
is one that holds
as an equality at
the optimal
solution.
Binding constraints and Slack value
• Slack value for each less-than-or-equal-to constraint indicates the
difference between the left-hand and right-hand values for a constraint.
 by definition, binding constraints have zero slack.
 Example of the sewing department constraint. Slack variable is identified
by:
• The shadow price for a constraint is the change in the optimal
objective function value if the right-hand side of that constraint is
increased by one.
• The reduced cost for a decision variable is the shadow price of the
nonnegativity constraint for that variable. In other words, the reduced
cost indicates the change in the optimal objective function value that
results from changing the right-hand side of the nonnegativity
constraint from 0 to 1.
Case: M&D Chemicals
M&D Chemicals produces two products that are sold as raw materials to
companies that manufacture bath soaps and laundry detergents. Based on an
analysis of current inventory levels and potential demand for the coming month,
M&D’s management specified that the combined production for products A and
B must total at least 350 gallons.
Separately, a major customer’s order for 125 gallons of product A must also be
satisfied. Product A requires 2 hours of processing time per gallon, and product
B requires 1 hour of processing time per gallon. For the coming month, 600
hours of processing time are available. M&D’s objective is to satisfy these
requirements at a minimum total production cost. Production costs are $2 per
gallon for product A and $3 per gallon for product B.
Case: M&D Chemicals
Understand the problem thoroughly
◦ Understand the problem thoroughly
◦ Describe the objective
◦ Describe each constraint
◦ Define the decision variables: controllable inputs
◦ Write the objective in terms of the decision variables
◦ Write the constraints in term of the decision variables
Monte Carlo simulation
• Monte Carlo simulation to evaluate the impact of uncertainty on a decision.
Simulation models have been successfully used in a variety of disciplines.
◦ Financial applications include investment planning, project selection, and option pricing.
◦ Marketing applications include new product development and the timing of market entry for a
product.
◦ Management applications include project management, inventory ordering (especially
important for seasonal products), capacity planning, and revenue management (prominent in
the airline, hotel, and car rental industries).
• In each of these applications, uncertain quantities complicate the decision
process.
 Monte Carlo simulation
• To evaluate a decision with a Monte Carlo simulation, an analyst identifies parameters that are not known
with a high degree of certainty and treats these parameters as random, or uncertain, variables.

• The values for the random variables are randomly generated from the specified probability distributions.

• The simulation model uses the randomly generated values of the random variables and the relationships
between parameters and decisions to compute the corresponding values of an output.

• Specifically, a simulation experiment produces a distribution of output values that correspond to the
randomly generated values of the uncertain input variables. This probability distribution of the output values
describes the range of possible outcomes, as well as the relative likelihood of each outcome.

• After reviewing the simulation results, the analyst is often able to make decision recommendations for the
controllable inputs that address not only the average output but also the variability of the output.
 Monte Carlo simulation
Case: Sanotronics
• Sanotronics LLC is a start-up company that manufactures medical devices for use in hospital clinics. Inspired by experiences
with family members who have battled cancer, Sanotronics’s founders have developed a prototype for a new device that limits
health care workers’ exposure to chemotherapy treatments while they are preparing, administering, and disposing of these
hazardous medications. The new device features an innovative design and has the potential to capture a substantial share of the
market.

• Sanotronics would like an analysis of the first-year profit potential for the device. Because of Sanotronics’s tight cash flow
situation, management is particularly concerned about the potential for a loss.

• Sanotronics has identified the key parameters in determining first-year profit: selling price per unit ( p ), first-year administrative
and advertising costs, direct labor cost per unit, parts cost per unit, and first-year demand.

• After conducting market research and a financial analysis, Sanotronics estimates with a high level of certainty that the device’s
selling price will be $249 per unit and that the first-year administrative and advertising costs will total $1,000,000.

• Sanotronics is not certain about the values for the cost of direct labor, the cost of parts, and the first-year demand. At this stage
of the planning process, Sanotronics’s base estimates of these inputs are $45 per unit for the direct labor cost, $90 per unit for
the parts cost, and 15,000 units for the first-year demand.

• For instance, suppose that Sanotronics believes that direct labor costs could range from $43 to $47 per unit, parts cost could
range from $80 to $100 per unit, and first-year demand could range from 0 to 30,000 units.
 Simulation
results
P R O F IT DI S T R I BUT ION

The simulation results help Sanotronics’s

management better understand the
profit/loss potential of the new medical
device. The 0.095 probability of a loss.