Recent Chaos at Delhi Airport!

Route Optimization
• Optimal Facility location
• Optimal Distribution Strategy
• Optimal merchandize mix in a store
• Schedule Optimization
• Portfolio Optimization
And……
 Success stories
• Chevron
• Alliance for Paired Donations (APD)
• Developed optimization tool for
• Transplant patients needing a kidney
often have potential donors who are • Operational & strategic planning
incompatible • Mixing crude oils
• APD finds exchanges with other patient- • Planning capital expenditures
donor pairs to optimize paired matches • Benefits:
• Benefits: • Annual savings of $1.0 billion
• 220 lives saved since 2006
• Value of savings: priceless

• Kroger • Dell
• Analytics team created models to • Built analytics models to
determine reorder point & order up to • Optimize hardware configurations
quantities for items in 1,950 in-store
pharmacies • Optimize its website’s design
• Benefits: • Optimize promotion design and timing
• Benefits:
• Reduced prescription stock outs by
1.6 million • Increased profit by $142 million
• Lowered inventory by over $120
million
• Increased revenue by $80 million
Introduction
• We face numerous decisions in life & business.

• A set of mathematical relationships and logical assumptions

implemented in a computer as an abstract representation of
a real-world object of phenomenon.

• We can use computers to analyze the potential outcomes of

decision alternatives.

• Spreadsheets are the tool of choice for today’s managers.

The Modeling Approach
to Decision Making

• Everybody uses models to make decisions.

• Types of models

–Mental (arranging furniture)

–Visual (blueprints, road maps)
–Physical/Scale (aerodynamics, buildings)
–Mathematical (what we’ll be studying)
Characteristics of Models

• Models are usually simplified versions

of the things they represent

• A valid model accurately represents

the relevant characteristics of the
object or decision being studied
Benefits of Modeling

Economy
• It is often less costly to analyze decision problems using models.
Timeliness
• Models often deliver needed information more quickly than their real-world
counterparts.
Feasibility
• Models can be used to do things that would be impossible.

Insights
• Models give us insight & understanding that improves decision making.
Example of a
Mathematical Model

Profit = Revenue - Expenses

or

Profit = f(Revenue, Expenses)

or

Y= f(X1, X2)
Steps in Decision
Modeling
 What is
Business Analytics?

• A field of study that uses

computers, statistics, and
mathematics to solve business
problems.

• Considerable overlap with:

• Operations Research

• Management Science

• Decision Science
Categories of
Analytical
Models
Good Decisions vs. Good Outcomes
Good decisions do not always lead to good outcomes...
A structured, modeling approach to decision making helps us make good decisions
but can’t guarantee good outcomes.
 A good decision is one that harmonizes

What we What we What we

can do know want

Good Decisions

And to which we are committed

Introduction to Optimization
and Linear Programming
Introduction to Optimization

• We all face decision about how to use limited

resources such as:

• Oil in the earth

• Land for dumps

• Time

• Money

• Workers
 • MP is a field of management science that
Mathematical
finds the optimal, or most efficient, way of
Programming...
using limited resources to achieve the
objectives of an individual of a business.

• a.k.a. Optimization
 Determining Product Manufacturing
Mix
Applications of
Optimization

Routing and Logistics Financial Planning

 Decisions

Characteristics
of
Constraints
Optimization
Problems

Objectives
 MAX (or MIN): f0(X1, X2, …, Xn)
Subject to: f1(X1, X2, …, Xn)<=b1
:
General fk(X1, X2, …, Xn)>=bk
Form of an :
Optimization fm(X1, X2, …, Xn)=bm
Problem
Note: If all the functions in an optimization are
linear, the problem is a Linear Programming
(LP) problem
 MAX (or MIN): c1X1 + c2X2 + … + cnXn
Subject to: a11X1 + a12X2 + … + a1nXn <= b1
Linear
:
Programming ak1X1 + ak2X2 + … + aknXn >=bk
(LP) Problems :
am1X1 + am2X2 + … + amnXn = bm
 Aqua-Spa Hydro-Lux
Pumps 1 1
Labor 9 hours 6 hours
Tubing 12 feet 16 feet
Unit Profit $350 $300
An Example • Blue Ridge Tubs produces two types of tubs: Aqua-
LP Problem Spas & Hydro-Luxes.

There are 200 pumps, 1566 hours of labor,

and 2880 feet of tubing available.
 1. Understand the problem.

2. Identify the decision variables

5 Steps In X1=number of Aqua-Spas to produce

Formulating X2=number of Hydro-Luxes to produce
LP Models: 3. State the objective function as a linear
combination of the decision variables.

MAX: 350X1 + 300X2

 4. State the constraints as linear combinations of
the decision variables.

1X1 + 1X2 <= 200 } pumps

5 Steps In 9X1 + 6X2 <= 1566 } labor
Formulating 12X1 + 16X2 <= 2880 } tubing
LP Models 5. Identify any upper or lower bounds on the
(continued) decision variables.

X1 >= 0

X2 >= 0
 MAX: 350X1 + 300X2

S.T.: 1X1 + 1X2 <= 200

LP Model for 9X1 + 6X2 <= 1566

Blue Ridge 12X1 + 16X2 <= 2880
Tubs
X1 >= 0

X2 >= 0
 • Idea: Each Aqua-Spa (X1) generates the highest
unit profit ($350), so let’s make as many of them
as possible!
• How many would that be?
Solving LP • Let X2 = 0
• 1st constraint: 1X1 <= 200
Problems: • 2nd constraint: 9X1 <=1566 or X1 <=174
An Intuitive • 3rd constraint: 12X1 <= 2880 or X1 <= 240
• If X2=0, the maximum value of X1 is 174 and the
Approach total profit is $350*174 + $300*0 = $60,900
• This solution is feasible, but is it optimal?
• No!
 • The constraints of an LP problem defines
its feasible region.
Solving LP
• The best point in the feasible region is the
Problems:
optimal solution to the problem.
A Graphical
Approach • For LP problems with 2 variables, it is easy
to plot the feasible region and find the
optimal solution.
Plotting the First
Constraint
MAX: 350X1 + 300X2
S.T.: 1X1 + 1X2 <= 200
LP Model for
9X1 + 6X2 <= 1566 Blue Ridge
12X1 + 16X2 <= 2880 Tubs
X1 >= 0
X2 >= 0
Plotting the First Constraint
MAX: 350X1 + 300X2

S.T.: X1 + X2 <= 200

X2
9X1 + 6X2 <= 1566

250 12X1 + 16X2 <= 2880

(0, 200) X1 >= 0

200 X2 >= 0
boundary line of pump constraint
X1 + X2 = 200
150

100

50
(200, 0)

0
0 50 100 150 200 250 X1
 MAX: 350X1 + 300X2

S.T.: X1 + X2 <= 200

X2
(0, 261) 9X1 + 6X2 <= 1566
250 12X1 + 16X2 <= 2880

X1 >= 0
200 X2 >= 0
boundary line of manhours constraint
9X1 + 6X2 = 1566
150

100

50
(174, 0)
0
0 50 100 150 200 250 X1
Plotting the Second Constraint
Plotting the Third Constraint MAX: 350X1 + 300X2

S.T.: X1 + X2 <= 200

X2
9X1 + 6X2 <= 1566
250 12X1 + 16X2 <= 2880
(0, 180) X1 >= 0
200 X2 >= 0

150 boundary line of tubing constraint

12X1 + 16X2 = 2880

100

50

(240, 0)
0
0 50 100 150 200 250 X1
Plotting a Level Curve of Objective Function
MAX: 350X1 + 300X2
X2
S.T.: X1 + X2 <= 200
250 9X1 + 6X2 <= 1566

12X1 + 16X2 <= 2880

200 X1 >= 0
(0, 116.67) X2 >= 0
150 objective function
350X1 + 300X2 = 35000

100

(100, 0)
50

0
0 50 100 150 200 250 X1
Plotting a second Level Curve of Objective Function
X2

250

(0, 175) objective function

200 350X1 + 300X2 = 35000

objective function
150 350X1 + 300X2 = 52500

100

(150, 0)
50

0
0 50 100 150 200 250 X1
Using A Level Curve to Locate the Optimal Solution
X2

250

objective function
200 350X1 + 300X2 = 35000

150
Optimal
Solution objective function
100 350X1 + 300X2 = 52500

50 Feasible solution space

0
0 50 100 150 200 250 X1
Enumerating The Corner Points
X2
250

200

150

100

50
obj. value = $0
(0, 0)
0
0 50 100 150 200 250 X1
Enumerating The Corner Points
X2
250
obj. value = $54,000
200 (0, 180)

150

obj. value = $66,100

100
(122, 78)

50
obj. value = $0
(0, 0)
0
0 50 100 150 200 250 X1
Enumerating The Corner Points
X2
250
obj. value = $54,000
200 (0, 180)

obj. value = $64,000

150
(80, 120)

obj. value = $66,100

100
(122, 78)

50
obj. value = $0 obj. value = $60,900
(0, 0) (174, 0)
0
0 50 100 150 200 250 X1
 1. Plot the boundary line of
each constraint

2. Identify the feasible region

Summary of
Graphical 3. Locate the optimal
Solution solution by either:
to LP Problems a. Plotting level curves

b. Enumerating the
extreme points
Exercise 1:
Max Z = 40x + 50y subject to
4x + 3y ≤ 24
4x+5y ≤ 40
x≤ 4
y ≤ 6, x, y ≥ 0.

• Binding Constraint
• Non-binding and
• Redundant constraint
 Graphical solution to Exercise 1:

G(0,8) Feasible region?

Variable y
B(3/2, 6)
A(0,6) Feasible solution?
Optimal solution?
C(4, 8/3)

(0, 0) E(6,0) F(10,0)

D(4,0)
Variable x
Multiple Optima:

Exercise 2:
Max Z= 8x +16y
Subject to
x + y ≤ 200
y ≤ 125
3x +6y ≤ 900, x, y ≥ 0.
Infeasibility
Exercise 3:
Max Z= 20x + 30y
s.t
2x + y ≤ 40,
4x - y ≤20,
x≥ 30,
x, y ≥ 0
Unbounded
Exercise 4:
Max Z = 10x +20y
s.t
2x +4y ≥ 16
x + 5y ≥ 15
x, y ≥ 0
Solution Using
Excel Solver
Exercise
The Central Canteen at India Hospitals has to prepare at least 800 kg of
a special nutrition-rich dish for surgeons every day. This special dish is
a mixture of corn and soyabean paste, which in turn contain some
proportions of protein and fiber in them. While corn contains 9%
protein and 2% fiber, soyabean paste contains 60% protein and 6%
fiber. It is also known that corn and soyabean paste cost Rs. 0.3 and Rs.
0.9 per kg respectively. The dietary requirements of the special dish
are that it must contain at least 30% protein and at most 5% fiber.
Formulate and solve this problem as an LPP to identify the minimum-
cost mix of corn and soyabean paste to use, to make the special dish
daily.
 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
An Investment Problem: Retirement Planning Services, Inc.
A client wishes to invest $750,000 in the following bonds and wants to Maximize
the annual investment return.
 • No more than 25% can be invested in any single

company.

Investment • At least 50% should be invested in long-term

Restrictions bonds (maturing in 10+ years).

• No more than 35% can be invested in DynaStar,

Eagle Vision, and OptiPro.

 Defining the • X1 = amount of money to invest in Acme Chemical
Decision Variables
• X2 = amount of money to invest in DynaStar

• X3 = amount of money to invest in Eagle Vision

• X4 = amount of money to invest in MicroModeling

• X5 = amount of money to invest in OptiPro

• X6 = amount of money to invest in Sabre Systems

Defining the
Objective ▪ Maximize the annual investment return
Function ▪ MAX: .0865X1+ .095X2+ .10X3+ .0875X4+ .0925X5+ .09X6
 Defining the Constraints

• Total amount is invested

X1 + X2 + X3 + X4 + X5 + X6 = 750,000
• No more than 25% in any one investment
Xi <= 187,500, for all i
• 50% long term investment restriction.
X1 + X2 + X4 + X6 >= 375,000
• 35% Restriction on DynaStar, Eagle Vision, & OptiPro
X2 + X3 + X5 <= 262,500
• Nonnegativity conditions
Xi >= 0 for all i
 Bus Scheduling
The Jhajjar District Commissioner’s office wishes to make Time slot Min No. of Buses

a plan for the number of buses that must run between

00:00 – 04:00 0
Jhajjar and Gurgaon through the 24 hours of the day.
04:00 – 08:00 8
Through an elaborate research study on the demand for
08:00 – 12:00 10
buses, it is found that the minimum number of buses that
12:00 – 16:00 7
must run varies during the day as per the table below.
16:00 – 20:00 12

Each bus can operate only in one continuous 8-hour shift 20:00 - 00:00 4

in a given cycle of 24 hours. Its shift can start at the

beginning of any of the 4-hour slots given in the table
above. Determine the minimum total number of buses
that must be made available to run between Jhajjar and
Gurgaon.
 Chemical Blending
OXL refining company produces two types of unleaded petrol: Regular and Super. It sells
these to service stations at Rs. 60 and Rs. 70 per liter respectively. Both types are
produced from OXL’s inventory of refined domestic oil and refined foreign oil. The OXL
products must meet the following specifications:

The input refined oils in OXL inventory have the following characteristics:
Assume that the vapor pressure of the liquid
after blending is the weighted average (by Vapor Octane
Weekly
Cost
Refined Oil inventory
volume) of the vapor pressures of its ingredients. Pressure Rating
(liters)
(Rs/Litres)

Same for Octane Rating as well. What quantities Domestic Oil 25 87 40000 8
of the two refined oils should OXL blend into the Foreign Oil 15 98 60000 15
two petrol types in order to maximize profit?
 Production Planning
• A manufacturer is planning the production, storage, and marketing
of a product whose demand and selling price vary seasonally. The
Production
company is in the process of developing a manufacturing strategy. Period
Production
Capacity
Demand Selling
According to the formulated strategy, the company wants to Costs (Rs.) (tons) price (Rs.)
(tons)
manufacture the product in the seasons during which production 1 20 1500 1100 180
costs are low, and then store and sell the product when the selling 2 25 2000 1500 180
3 30 2200 1800 250
price is high. The manufacturer has obtained the following 4 40 3000 1600 270
estimates of demand, cost, capacity, and expected selling price of 5 50 2700 2300 300
the product for each period. 6 60 2500 2500 320

• The manufacturer is also aware of inventory storage costs of Rs. 2

per ton from one period to the next. The inventory at the
beginning of Period 1 is 500 tons and the desired closing inventory
at end of Period 6 is 300 tons.
• Formulate and solve an LPP that provides the optimal production
schedule to maximize the total profit.
Chapter 3 Question 40; Page 114