OPERATIONS RESEARCH I

CASE STUDY – FALL 2015

INSTRUCTIONS: (Please read them carefully)

1. This case is worth 10% of the course total grade.
2. This case is to be solved in groups of a maximum of two students.
3. Students cheating solutions from each other or plagiarizing answers from any other
source will be awarded a grade of zero for the case. There is zero tolerance policy
when it comes to plagiarism.
4. The case is due on January 6, 2015 and it is to be submitted during class.
5. The developed linear program shall be solved using both Excel Solver as well as
LINGO software.
6. With your report, include (1) a hard copy of the Excel sheet and the LINGO codes,
and (2) the output report generated by both Excel and Lingo after running the code.
7. A soft copy of the Excel and LINGO files shall also be emailed to me at
rafif@aus.edu by the above stated deadline at 11:59 p.m. the latest.
8. There will NOT be any presentations for this case.

PRBLEM DESCRIPTION: International Textile Company

International Textile Company, Ltd., is a Hong Kong–based firm that distributes textiles
worldwide. The company is owned by the Lao family. International Textile has mills in the
Bahamas, Hong Kong, Korea, Nigeria, and Venezuela, each weaving fabrics out of two or more
raw fibers: cotton, polyester, and/or silk. The mills service eight distribution centers located near
the customers’ geographical centers of activity.

Because transportation costs historically have been less than 10% of the total expenses,
management has paid little attention to extracting savings through judicious routing of
shipments. However, Ching Lao is returning from the United States, where he has just completed
his bachelor’s degree in marketing. He believes that each year he can save the company hundreds
of thousands of dollars—perhaps millions—just by better routing of fabrics from mills to
distribution centers. One glaring example of poor routing is the current assignment of fabric
output to the Mexico City distribution center from Nigeria instead of from Venezuela, less than a
third the distance. Similarly, the Manila center now gets most of its textiles from Nigeria and
Venezuela, although the mills in Hong Kong itself are much closer. Of course, the cost of
shipping a bolt of cloth does not depend on distance alone. Table 1 provides the actual shipping
costs supplied to Lao from company headquarters.

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Table 1. Shipping cost data ($ per bolt of cloth)
Distribution Center
Mill
Los Angeles Chicago London Mexico City Manila Rome Tokyo New York
Bahamas 2 2 3 3 7 4 7 1
Hong Kong 6 7 8 10 2 9 4 8
Korea 5 6 8 11 4 9 1 7
Nigeria 14 12 6 9 11 7 5 10
Venezuela 4 3 5 1 9 6 11 4

Distribution center demands are seasonal, so a new shipment plan must be made each month.
Table 2 provides the fabric requirements for the month of March. International Textile’s mills
have varying capacities for producing the various types of cloth, where Table 3 provides the
quantities that apply during March.

Table 2. Fabric demands for the month of March (in bolts)

Distribution Center
Fabric
Los Angeles Chicago London Mexico City Manila Rome Tokyo New York
Cotton 500 800 900 900 800 100 200 700
Polyester 1000 2000 3000 1500 400 700 900 2500
Silk 100 100 200 50 400 200 700 200

Table 3. March production quantities (in bolts)

Production Capacity
Mill
Cotton Polyester Silk
Bahamas 1000 3000 0
Hong Kong 2000 2500 1000
Korea 1000 3500 500
Nigeria 2000 0 0
Venezuela 1000 2000 0

Lao wants to schedule production and shipments in such a way that the most costly
customers are shorted when there is insufficient capacity, and the least-efficient plants operate at

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Managerial Report
a) Using your own wordings, describe the problem at hand and clearly list what the objective of
the analysis is.
b) For each type of fabric (e.g. cotton, polyester cloth and silk), formulate the problem as a
linear program that determines the optimal shipping schedule of that fabric separately.
Clearly define the decision variables and provide a verbal description of the objective
function as well as each of the constraints.
c) Solve the models developed in part (b) using Excel solver.
d) Solve the models developed in part (b) using LINGO.
e) For each type of fabric, what is the optimal shipment schedule obtained, and what is the
associated optimal objective function value?
f) For each type of fabric, is the optimal solution obtained degenerate? Why?
g) For each type of fabric, is the optimal solution obtained unique? Why?
h) For a specific type of fabric of your choice, discuss the range of optimality for the objective
function coefficients and provide its interpretation.
i) For a specific type of fabric of your choice, discuss the range of feasibility for the constraints
right hand sides and provide its interpretation.
j) For a specific type of fabric of your choice, present the shadow prices for the constraints
along with their interpretations.
k) What are the resources that exist in this problem? Comment on the utilization of these
resources (i.e., which of the resources have been fully utilized and which haven’t).
l) If the demand for the cotton fabric at the Mexico City distribution center is increased from
900 to 1000, is the shadow price associated with that constraint still valid to assess what
impact this increase in the right hand side would have on the objective function value?
m) Assume that the mill located in Nigeria breaks down at the beginning of March and it won’t
be fixed till the end of the month indicating that no production occurs at that facility during
March. How would such unexpected event impact the company’s shipping schedule?
n) If the cost associated with shipping one bolt of Polyester fabric from the mill located in Korea
to the distribution center in London is changed to $10, would the optimal solution change?
Why?
o) What is the maximum that International Textile Company should be willing to pay in order
to increase the available production capacity at the Venezuela’s production mill by one bolt
during the month of March (assuming such an increase is possible)?
p) The company will be opening a silk-making department in the Nigeria mill. Although it will
not be completed for several months, a current capacity of 1,000 bolts for that fabric might be
used during March for an added one time cost of $2,000. Find the new optimal shipment
schedule and the total cost for that fabric. Should the Nigeria mill process silk in March?
q) Suppose International Textile Company is thinking about signing an agreement that allows
the option of paying a $500 penalty for each distribution center that gets only 90% of its
demand fulfilled (i.e. demand is not fully satisfied at that distribution center). Should the
company proceed ahead with signing that agreement? Why or Why not?
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r) Lao learns that changes might have to be made to the March plans. If a new customer is
obtained, the cotton demand in Manila and in Mexico City will increase by 10% at each
location. Meanwhile, a big New York customer might cut back, which would reduce
polyester demand by 10% in both New York and Chicago. Find the contingent optimal
schedules and total costs (a) for cotton and (b) for polyester.
s) International Textile loses a profit of $10 for each bolt of cotton it falls short of meeting the
distribution center’s demand. For polyester, the loss is $20 per bolt; for silk, it is a whopping
$50 per bolt. By running the mills on overtime, the company can produce additional bolts at
the additional costs shown in Table 4 below. Using only the original data from Tables 1
through 3 and the information in Table 4, determine new production schedules to maximize
overall profit for (a) cotton, (b) polyester, and (c) silk. Which fabrics and locations involve
overtime production, and what are the overtime quantities?

Table 4. Overtime production costs

Cost per Bolt ($)
Mill
Cotton Polyester Silk
Bahamas 10 10 N.A.
Hong Kong 15 12 25
Korea 5 8 22
Nigeria 6 N.A. N.A.
Venezuela 7 6 N.A.

t) Formulate the original problem (with the original data figures) as a single linear program that
includes all three fabrics in the same model. Solve the resulting model using the software and
report the optimal solution obtained.
u) How does the solution found in part (t) differ from that found in parts (c) and (d)? What does
this imply?
v) Without making any calculations, offer Lao other suggestions for reducing costs of
transportation.

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