Shelby Shelving Model: Business Analytics

Business Analytics Lecture 7 1
Lecture 7
 Shelby Shelving Model
 Graphical representation of linear programs
 Sensitivity Analysis and Shadow Prices

Bland Brewery Problem
“Raw” Components Products
Corn Beer
Hops
Malt
Ale
Bland Brewery Problem (Continued)

• Profitability
1 Barrel of Beer 1 Barrel of Ale
$23 $13
• Mixing Quantities • Availability
1 Barrel of Beer 1 Barrel of Ale Corn 480 lbs
Corn 15 lbs 5 lbs Hops 160 ozs
Hops 4 ozs 4 ozs Malt 1,190 lbs
Malt 20 lbs 35 lbs
How much of beer and ale to produce, if we want to

maximize profits?
Bland Brewery Model: Standard Notation
 Decision Variables
Let A = # of barrels of ale to produce, and
B = # of barrels of beer to produce.
Note: Use suggestive (mnemonic) variable names for
readability
 Objective Function
Profit in $ = 13A + 23B
 Constraints
Corn Availability: 5A + 15B ≤ 480
Hops Availability: 4A + 4B ≤ 160
Malt Availability: 35A + 20B ≤ 1190
Non-negativity: A, B ≥ 0
Bland Brewery Linear Program
max 13 A + 23 B (Profit) Objective Function

subject to Coefficients
(corn) 5A + 15B ≤ 480
(hops) 4A + 4B ≤ 160
Right hand sides
(malt) 35A + 20B ≤ 1190
(nonnegativity) A, B ≥ 0
Variables
Terminology
 Feasible and Infeasible Solutions
 A production plan (A,B) that satisfies all of the constraints is

called a feasible solution
 For example, in the Bland Brewery LP, the solution (A=10,

B=10) is feasible.
 Constraints
Corn Availability: 5 x 10 + 15 x 10 = 200 ≤ 480
Hops Availability: 4 x 10 + 4 x 10 = 80 ≤ 160
Malt Availability: 35 x 10 + 20 x 10 = 550 ≤ 1190
Non-negativity: 10, 10 ≥ 0
Terminology (continued)
 Feasible and Infeasible Solutions
 The production plan (A=40, B=10) is not feasible, i.e. it is

infeasible because the hops and malt constraints are violated
 Constraints
Corn Availability: 5 x 40 + 15 x 10 = 350 ≤ 480
Hops Availability: 4 x 40 + 4 x 10 = 200 > 160
Malt Availability: 35 x 40 + 20 x 10 = 1600 > 1190
Non-negativity: 40, 10 ≥ 0
 Optimal Solution
 For a maximization (respectively, minimization) problem, an
optimal solution is a feasible solution that has the largest
(respectively, smallest) objective function value among all
feasible solutions
 The optimal solution for the Bland Brewery production model

is (A=12, B=28). The optimal objective function value is $800.
Assumptions in a Linear Program
 Continuity: the decision variables are continuous, i.e., fractional

values are allowed
 Proportionality: for example, it takes twice as much hops to

make twice as much beer or ale; there are no economies of
scale
 Additivity: profit is the sum of the profit contributions from ale

and beer
 In short, the objective function and constraints must be linear

with respect to decision variables
 Linear functions of A and B:

 13A + 23B
 0.5A + (2/3)B
 Non-Linear functions of A and B:

 13A2 + 23AB
 log(A) + cos(B)
 max(A,0)
 IF(A< 5,0,10)

.
Allowable variations:
 Objective function can be maximized or minimized
 Constraints can be ≥, ≤, or =
 Noninteger or integer coefficients and right-hand sides are

allowed
 Negative or positive coefficients and right-hand sides are allowed

Lecture 7 12
Business Analytics
Shelby Shelving Case
 A small company that produces two types of shelves for grocery stores:
Model S and Model LX
 Three steps in manufacturing process:

 Stamping, forming and assembly
 Capacity of Stamping and Forming machines: 800 hours a month
 Capacity of model S assembly department: 1900 units/month
 Capacity of model LX assembly department: 1400 units/month
 Machine Requirements (Hours/per unit):

 Stamping: 0.3h/u for model S and 0.3h/u for model LX
 Forming: 0.25h/u for model S and 0.5h/u for model LX
 Selling Price: Model S $1800/unit; Model LX $2100/unit
 Current monthly production: 400 units of S and 1400 unit of LX

Lecture 7 13
Business Analytics
Shelby Shelving: Data and Objective
 Fixed Cost = 385,000
 Variable Costs
Variable Costs Model S Model LX
Selling Price 1,800 2,100
Direct Materials 1,000 1,200
Direct Labor 175 210

Variable
500 445
Overhead
 Objective to be maximized = Net Profit

Lecture 7 14
Business Analytics
Shelby Shelving: Decision Model

 Decision Variables:
Let S = # of Model S shelves to produce, and
LX = # of Model LX shelves to produce.
Model S Model LX
Selling Price 1,800 2,100
Direct Materials 1,000 1,200
Direct Labor 175 210
Variable
500 445
Overhead
Profit
125 245
Contribution
= 1,800-(1,000+175+500)
 Net Profit ($) = 125S + 245LX - 385,000
Lecture 7 15
Business Analytics
Shelby Shelving: Constraints
(S assembly) S ≤ 1900
(LX assembly) LX ≤ 1400
(Stamping) 0.3 S + 0.3 LX ≤ 800
(Forming) 0.25 S + 0.5 LX ≤ 800
(Nonnegativity) S, LX ≥ 0
Lecture 7 16
Business Analytics
Shelby Shelving: Complete LP formulation
 Linear Program
max 125 S + 245 LX - 385,000 (Net Profit)

subject to:
(Stamping) 0.3 S + 0.3 LX ≤ 800
(Forming) 0.25 S + 0.5 LX ≤ 800
Lecture 7 17
Business Analytics
Spreadsheet Solution
 Optimal Solution: S = 1900 and LX = 650
 Very different from the solution to part A: S = 400 and LX = 140

Shelby Shelving Case
 A small company that produces two types of shelves for grocery stores:
Model S and Model LX
 Three steps in manufacturing process:

 Stamping, forming and assembly
 Capacity of Stamping and Forming machines: 800 hours a month
 Capacity of model S assembly department: 1900 units/month
 Capacity of model LX assembly department: 1400 units/month
 Machine Requirements (Hours/per unit):

 Stamping: 0.3h/u for model S and 0.3h/u for model LX
 Forming: 0.25h/u for model S and 0.5h/u for model LX
 Selling Price: Model S $1800/unit; Model LX $2100/unit
 Current monthly production: 400 units of S and 1400 units of LX

Shelby Shelving: Decision Model

 Decision Variables:
Let S = # of Model S shelves to produce, and
LX = # of Model LX shelves to produce.
 Constraints:
(Stamping) 0.3 S + 0.3 LX ≤ 800
(Forming) 0.25 S + 0.5 LX ≤ 800
Shelby Shelving: Complete LP formulation
 Linear Program
max 125 S + 245 LX - 385,000 (Net Profit)

subject to:
(Stamping) 0.3 S + 0.3 LX ≤ 800
(Forming) 0.25 S + 0.5 LX ≤ 800
Graphing the Shelby Shelving Problem
2500 LX model
2000
1500
1000
(S=1000, LX=500) – a solution

500
0 500 1000 1500 2000 2500 3000 S model

Constraint Representation and Feasibility: Assembly Constraints
2500 LX model
S=1900 (S assembly constraint)
2000
1500
LX=1400 (LX assembly constraint)
1000
Feasible
500
0 500 1000 1500 2000 2500 3000S model

Constraint Representation and Feasibility: Forming Constraint
2500 LX model
S=1900 (S assembly)
2000
1500
LX=1400 (LX assembly)
Infeasible
1000
Feasible
500
0 500 1000 1500 2000 2500 3000S model

Constraint Representation and Feasibility: Stamping Constraint
2500 LX model
S=1900 (S assembly)
2000
1500
LX=1400 (LX assembly)
1000
Feasible Region for

500 the Shelby Shelving
0 500 1000 1500 2000 2500 3000S model

NOTE: The stamping constraint is redundant!
Isoprofit Lines
2500 LX model
2000 Profit for (S=1000, LX = 500) = 125x1000+245x500 =

247,500
1500
1000
(S=1000, LX=500)
500
0 500 1000 1500 2000 2500 3000S model

Isoprofit Lines
2500 LX model
2000 Profit for (S=1000, LX = 500) = 125x1000+245x500 =

247,500
1500
1000
(S=1000, LX=500)
500
Profit = 247,500
0 500 1000 1500 2000 2500 3000S model
Optimal Solution
2500 LX model
2000
Direction of increasing profit
1500
1000 (S=1900, LX=650) Optimal solution:

This is as far as we
can go in the direction
500 of increasing profit!
0 500 1000 1500 2000 2500 3000S model

What if profit coefficient for S is increased to 150?
2500 LX model
2000 Profit for (S=1000, LX = 500) = 150x1000+245x500 =

272,500
1500
1000
(S=1000, LX=500)
500
Profit = 272,500
0 500 1000 1500 2000 2500 3000S model
Optimal Solution for New Profit Values
2500 LX model
2000
New direction of increasing profit
1500
1000 Same Optimal Solution:

(S=1900, LX=650)
500
0 500 1000 1500 2000 2500 3000S model

What if profit coefficient for LX is increased to 500?
2500 LX model
2000 Profit for (S=1000, LX = 500) = 125x1000+500x500 =

375,000
1500
1000
(S=1000, LX=500)
500
Profit = 375,000
0 500 1000 1500 2000 2500 3000S model

Optimal Solution for New Profit Values
2500 LX model
2000
New direction of increasing profit
New Optimal Solution:
(S=400, LX=1400)
1500
1000 Old Optimal Solution:

(S=1900, LX=650)
500
0 500 1000 1500 2000 2500 3000S model

Graphical Solution Summary
 Optimal solutions are at “corner points” of the constraint set, defined by

a set of “binding constraints”
 Binding constraints – these are constraints that limit the
improvement in the objective function, e.g. use all resources
available
 Non-binding constraints – these are constraints that do not limit
improvement, e.g. have “left over” resources
 Changes in objective function coefficients do not necessarily change the
optimal solution (i.e. the same constraints may be binding)
 When the optimal solution does change as a result of changing
objective function coefficients, it “jumps” from one corner point to
another corner point, so small changes in parameters may lead to large
shifts in the decision variables
 Small changes in the binding constraints will result in changes in the
optimal solution; small changes in non-binding constraints will not affect
the optimal solution.

Shelby Shelving Model: Business Analytics

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Business Analytics Lecture 7 1

 Shelby Shelving Model

 Graphical representation of linear programs

 Sensitivity Analysis and Shadow Prices

Bland Brewery Problem

“Raw” Components Products

Bland Brewery Problem (Continued)

1 Barrel of Beer 1 Barrel of Ale

• Mixing Quantities • Availability

1 Barrel of Beer 1 Barrel of Ale Corn 480 lbs

Corn 15 lbs 5 lbs Hops 160 ozs

Hops 4 ozs 4 ozs Malt 1,190 lbs

Malt 20 lbs 35 lbs

How much of beer and ale to produce, if we want to

Bland Brewery Model: Standard Notation

Bland Brewery Linear Program

max 13 A + 23 B (Profit) Objective Function

 Feasible and Infeasible Solutions

 A production plan (A,B) that satisfies all of the constraints is

 For example, in the Bland Brewery LP, the solution (A=10,

 Feasible and Infeasible Solutions

 The production plan (A=40, B=10) is not feasible, i.e. it is

 The optimal solution for the Bland Brewery production model

Assumptions in a Linear Program

 Continuity: the decision variables are continuous, i.e., fractional

 Proportionality: for example, it takes twice as much hops to

 Additivity: profit is the sum of the profit contributions from ale

Assumptions in a Linear Program

 In short, the objective function and constraints must be linear

 Linear functions of A and B:

 Non-Linear functions of A and B:

Assumptions in a Linear Program

 Objective function can be maximized or minimized

 Noninteger or integer coefficients and right-hand sides are

 Negative or positive coefficients and right-hand sides are allowed

Shelby Shelving Case

 Three steps in manufacturing process:

 Machine Requirements (Hours/per unit):

 Selling Price: Model S $1800/unit; Model LX $2100/unit

 Current monthly production: 400 units of S and 1400 unit of LX

Shelby Shelving: Data and Objective

 Fixed Cost = 385,000

Variable Costs Model S Model LX

Selling Price 1,800 2,100

Direct Materials 1,000 1,200

Direct Labor 175 210

 Objective to be maximized = Net Profit

Shelby Shelving: Decision Model

Selling Price 1,800 2,100

Direct Materials 1,000 1,200

Direct Labor 175 210

Shelby Shelving: Constraints

Shelby Shelving: Complete LP formulation

max 125 S + 245 LX - 385,000 (Net Profit)

 Optimal Solution: S = 1900 and LX = 650

 Very different from the solution to part A: S = 400 and LX = 140

Shelby Shelving Case

 Three steps in manufacturing process:

 Machine Requirements (Hours/per unit):

 Selling Price: Model S $1800/unit; Model LX $2100/unit

 Current monthly production: 400 units of S and 1400 units of LX

Shelby Shelving: Decision Model