Lecture 2 PDF

MANAGEMENT DECISION MAKING
International Executive MBA PGSM

Spreadsheet Modeling
& Decision Analysis
A Practical Introduction to
Management Science
5
th
edition
Cliff T. Ragsdale
Modeling and Solving LP
Problems in a Spreadsheet
Lecture 2
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.
Lets Implement a Model for the
Blue Ridge Hot Tubs Example...
MAX: 350X
1
+ 300X
2
} profit
S.T.: 1X
1
+ 1X
2
<= 200 } pumps
9X
1
+ 6X
2
<= 1566 } labor
12X
1
+ 16X
2
<= 2880 } tubing
X
1
, X
2
>= 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
Lets go back to Excel and see
how Solver works...
Goals For Spreadsheet Design
Communication - A spreadsheets 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.
The company has 10,000 hours of wiring
capacity and 5,000 hours of harnessing capacity.
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
Defining the Decision Variables
M
1
= Number of model 1 slip rings to make in-house
M
2
M
3
B
1
= Number of model 1 slip rings to buy from competitor
B
2
B
3
Defining the Objective Function
Minimize the total cost of filling the order.
MIN: 50M
1
+ 83M
2
+ 130M
3
+ 61B
1
+ 97B
2
+ 145B
3
Defining the Constraints
Demand Constraints
M
1
+ B
1
= 3,000 } model 1
M
2
+ B
2
= 2,000 } model 2
M
3
+ B
3
= 900 } model 3
Resource Constraints
2M
1
+ 1.5M
2
+ 3M
3
<= 10,000 } wiring
1M
1
+ 2.0M
2
+ 1M
3
<= 5,000 } harnessing
Nonnegativity Conditions
M
1
, M
2
, M
3
, B
1
, B
2
, B
3
>= 0
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.
X
1
= amount of money to invest in Acme Chemical
X
2
= amount of money to invest in DynaStar
X
3
= amount of money to invest in Eagle Vision
X
4
= amount of money to invest in MicroModeling
X
5
= amount of money to invest in OptiPro
X
6
= amount of money to invest in Sabre Systems
Maximize the total
annual investment return:
MAX: .0865X
1
+ .095X
2
+ .10X
3
+ .0875X
4
+ .0925X
5
+ .09X
6
Total amount is invested
X
1
+ X
2
+ X
3
+ X
4
+ X
5
+ X
6
= 750,000
No more than 25% in any one investment
X
i
<= 187,500, for all i
50% long term investment restriction.
X
1
+ X
2
+ X
4
+ X
6
>= 375,000
35% Restriction on DynaStar, Eagle Vision, and
OptiPro.
X
2
+ X
3
+ X
5
<= 262,500
Nonnegativity conditions
X
i
>= 0 for all i
A Transportation Problem:
Tropicsun
Mt. Dora
1
Eustis
2
Clermont
3
Ocala
4
Orlando
5
Leesburg
6
Distances (in miles)
Capacity
Supply
275,000
400,000
300,000
225,000
600,000
200,000
Groves
Processing
Plants
21
50
40
35
30
22
55
25
20
Defining the Decision
Variables
X
ij
= # of bushels shipped from node i to node j
Specifically, the nine decision variables are:
X
14
= # of bushels shipped from Mt. Dora (node 1) to Ocala (node 4)
X
15
= # of bushels shipped from Mt. Dora (node 1) to Orlando (node 5)
X
16
= # of bushels shipped from Mt. Dora (node 1) to Leesburg (node 6)
X
24
= # of bushels shipped from Eustis (node 2) to Ocala (node 4)
X
25
= # of bushels shipped from Eustis (node 2) to Orlando (node 5)
X
26
= # of bushels shipped from Eustis (node 2) to Leesburg (node 6)
X
34
= # of bushels shipped from Clermont (node 3) to Ocala (node 4)
X
35
= # of bushels shipped from Clermont (node 3) to Orlando (node 5)
X
36
= # of bushels shipped from Clermont (node 3) to Leesburg (node 6)
Minimize the total number of bushel-miles.
MIN: 21X
14
+ 50X
15
+ 40X
16
+
35X
24
+ 30X
25
+ 22X
26
+
55X
34
+ 20X
35
+ 25X
36
Capacity constraints
X
14
+ X
24
+ X
34
<= 200,000 } Ocala
X
15
+ X
25
+ X
35
<= 600,000 } Orlando
X
16
+ X
26
+ X
36
<= 225,000 } Leesburg
Supply constraints
X
14
+ X
15
+ X
16
= 275,000 } Mt. Dora
X
24
+ X
25
+ X
26
= 400,000 } Eustis
X
34
+ X
35
+ X
36
= 300,000 } Clermont
X
ij
>= 0 for all i and j
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.
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
Percent of Nutrient in
The order must contain at least 20% corn, 15%
grain, and 15% minerals.
X
1
= pounds of feed 1 to use in the mix
X
2
X
3
X
4
MIN: 0.25X
1
+ 0.30X
2
+ 0.32X
3
+ 0.15X
4
Produce 8,000 pounds of feed
X
1
+ X
2
+ X
3
+ X
4
= 8,000
Mix consists of at least 20% corn
(0.3X
1
+ 0.5X
2
+ 0.2X
3
+ 0.1X
4
)/8000 >= 0.2
Mix consists of at least 15% grain
(0.1X
1
+ 0.3X
2
+ 0.15X
3
+ 0.1X
4
)/8000 >= 0.15
Mix consists of at least 15% minerals
(0.2X
1
+ 0.2X
2
+ 0.2X
3
+ 0.3X
4
)/8000 >= 0.15
X
1
, X
2
, X
3
, X
4
>= 0
A Comment About Scaling
Notice the coefficient for X
2
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
X
1
=thousands of pounds of feed 1 to use in the mix
X
2
X
3
X
4
Re-Defining the
Objective Function
MIN: 250X
1
+ 300X
2
+ 320X
3
+ 150X
4
Re-Defining the Constraints
Produce 8,000 pounds of feed
X
1
+ X
2
+ X
3
+ X
4
= 8
Mix consists of at least 20% corn
(0.3X
1
+ 0.5X
2
+ 0.2X
3
+ 0.1X
4
)/8 >= 0.2
Mix consists of at least 15% grain
(0.1X
1
+ 0.3X
2
+ 0.15X
3
+ 0.1X
4
)/8 >= 0.15
Mix consists of at least 15% minerals
(0.2X
1
+ 0.2X
2
+ 0.2X
3
+ 0.3X
4
)/8 >= 0.15
X
1
, X
2
, X
3
, X
4
>= 0
Scaling: Before and After
Before:
Largest constraint coefficient was 8,000
Smallest constraint coefficient was
0.05/8 = 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 isnt linear when you
know it is, try solving it again. If that doesnt
work, try re-scaling your model.
A Production Planning Problem:
The Upton Corporation
Upton is planning the production of their heavy-duty air
compressors for the next 6 months.
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
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
Month
P
i
= number of units to produce in month i, i=1 to 6
B
i
= beginning inventory month i, i=1 to 6
Minimize the total cost production
& inventory costs.
MIN: 240P
1
+250P
2
+265P
3
+285P
4
+280P
5
+260P
6
+ 3.6(B
1
+B
2
)/2 + 3.75(B
2
+B
3
)/2 + 3.98(B
3
+B
4
)/2
+ 4.28(B
4
+B
5
)/2 + 4.20(B
5
+ B
6
)/2 + 3.9(B
6
+B
7
)/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 <= P
1
<= 4,000 } month 1
1,750 <= P
2
<= 3,500 } month 2
2,000 <= P
3
<= 4,000 } month 3
2,250 <= P
4
<= 4,500 } month 4
2,000 <= P
5
<= 4,000 } month 5
1,750 <= P
6
<= 3,500 } month 6
Defining the Constraints - II
Ending Inventory (EI = BI + P - D)
1,500 < B
1
+ P
1
- 1,000 < 6,000 } month 1
1,500 < B
2
+ P
2
- 4,500 < 6,000 } month 2
1,500 < B
3
+ P
3
- 6,000 < 6,000 } month 3
1,500 < B
4
+ P
4
- 5,500 < 6,000 } month 4
1,500 < B
5
+ P
5
- 3,500 < 6,000 } month 5
1,500 < B
6
+ P
6
- 4,000 < 6,000 } month 6
Defining the Constraints - III
Beginning Balances
B
1
= 2750
B
2
= B
1
+ P
1
- 1,000
B
3
= B
2
+ P
2
- 4,500
B
4
= B
3
+ P
3
- 6,000
B
5
= B
4
+ P
4
- 5,500
B
6
= B
5
+ P
5
- 3,500
B
7
= B
6
+ P
6
- 4,000
Notice that the B
i
can be computed
directly from the
P
i
. Therefore,
only the P
i
need
to be identified
as changing
cells.
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
Investment 1 2 3 4 5 6 7
A
1
-1 1.018
B
1
-1 <
_____
> 1.035
C
1
-1 <
_____
> <
_____
> 1.058
D
1
-1 <
_____
> <
_____
> <
_____
> <
_____
> <
_____
> 1.11
A
2
-1 1.018
A
3
-1 1.018
B
3
-1 <
_____
> 1.035
A
4
-1 1.018
C
4
-1 <
_____
> <
_____
> 1.058
A
5
-1 1.018
B
5
-1 <
_____
> 1.035
A
6
-1 1.018
Reqd Payments $0 $0 $250 $0 $250 $0 $300
(in $1,000s)
Cash Inflow/Outflow at the Beginning of Month
A
i
= amount (in $1,000s) placed in investment A at
the beginning of month i=1, 2, 3, 4, 5, 6
B
i
= amount (in $1,000s) placed in investment B at
the beginning of month i=1, 3, 5
C
i
= amount (in $1,000s) placed in investment C at
the beginning of month i=1, 4
D
i
= amount (in $1,000s) placed in investment D at
the beginning of month i=1
Minimize the total cash invested in month 1.
MIN: A
1
+ B
1
+ C
1
+ D
1
Cash Flow Constraints
1.018A
1
1A
2
= 0 } month 2
1.035B
1
+ 1.018A
2
1A
3
1B
3
= 250 } month 3
1.058C
1
+ 1.018A
3
1A
4
1C
4
= 0 } month 4
1.035B
3
+ 1.018A
4
1A
5
1B
5
= 250 } month 5
1.018A
5
1A
6
= 0 } month 6
1.11D
1
+ 1.058C
4
+ 1.035B
5
+ 1.018A
6
= 300 } month 7
A
i
, B
i
, C
i
, D
i
>= 0, for all i
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.
Risk Constraints
1A
1
+ 3B
1
+ 8C
1
+ 6D
1
< 5
A
1
+ B
1
+ C
1
+ D
1
} month 1
1A
2
+ 3B
1
+ 8C
1
+ 6D
1
< 5
A
2
+ B
1
+ C
1
+ D
1
} month 2
1A
3
+ 3B
3
+ 8C
1
+ 6D
1
<5
A
3
+ B
3
+ C
1
+ D
1
} month 3
1A
4
+ 3B
3
+ 8C
4
+ 6D
1
<5
A
4
+ B
3
+ C
4
+ D
1
} month 4
1A
5
+ 3B
5
+ 8C
4
+ 6D
1
<5
A
5
+ B
5
+ C
4
+ D
1
} month 5
1A
6
+ 3B
5
+ 8C
4
+ 6D
1
<5
A
6
+ B
5
+ C
4
+ D
1
} month 6
An Alternate Version of the Risk
Constraints
Equivalent Risk Constraints
-4A
1
2B
1
+ 3C
1
+ 1D
1
< 0 } month 1
-2B
1
+ 3C
1
+ 1D
1
4A
2
< 0 } month 2
3C
1
+ 1D
1
4A
3
2B
3
< 0 } month 3
1D
1
2B
3
4A
4
+ 3C
4
< 0 } month 4
1D
1
+ 3C
4
4A
5
2B
5
< 0 } month 5
1D
1
+ 3C
4
2B
5
4A
6
< 0 } month 6
Note that each
coefficient is equal
to the risk factor
for the investment
minus 5 (the max.
allowable
weighted average
risk).
Data Envelopment Analysis (DEA):
Steak & Burger
Steak & Burger needs to evaluate the performance
(efficiency) of 12 units.
Outputs for each unit (O
ij
) include measures of: Profit,
Customer Satisfaction, and Cleanliness
Inputs for each unit (I
ij
) include: Labor Hours, and Operating
Costs
The Efficiency of unit i is defined as follows:
Weighted sum of unit is outputs
Weighted sum of unit is inputs
=
I
O
n
j
j ij
n
j
j ij
v I
w O
1
1
w
j
= weight assigned to output j
v
j
= weight assigned to input j
A separate LP is solved for each unit, allowing each
unit to select the best possible weights for itself.
Maximize the weighted output for unit i :
O
n
j
j ij
w O
1
MAX:
Efficiency cannot exceed 100% for any unit
Sum of weighted inputs for unit i must equal 1
w
j
, v
j
>= 0, for all j
units of number the to 1 ,
1 1

k v I w O
O I
n
j
n
j
j kj j kj
1
1

I
n
j
j ij
v I
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.
Analyzing The Solution
End of Chapter 3

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MANAGEMENT DECISION MAKING

International Executive MBA PGSM

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