Week 2 – Linear Programming: Formulation and

Applications & “What-if” Analysis

Plan for today(all of chapter 3 and start chapter 5)

 Table of Contents
Chapter 3 (Linear Programming: Formulation and Applications)

Super Grain Corp. Advertising-Mix Problem (Section 3.1) 3.2–3.5

Resource Allocation Problems (Section 3.2) 3.6–3.16
Cost-Benefit-Trade-Off Problems (Section 3.3) 3.17–3.22
Mixed Problems (Section 3.4) 3.23–3.28
Transportation Problems (Section 3.5) 3.29–3.33
Assignment Problems (Section 3.6) 3.34–3.37

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 Chapter 3 Overview

• Discuss various types of problems where we can use linear programming

• Five major categories of LP Problems:

– Resource-Allocation
– Cost-Benefit-Tradeoff
– Mixed
– Transportation
– Assignment

• Formulate Linear Programming Models for all Five Categories

• Components of Linear Programming Models

• Resource Constraints, Benefit Constraints, Fixed Requirement Constraints

 A Bit of History and Legend
• Before the 1940’s it was not known how to easily solve many of the planning problems we are discussing partly because there were some unresolved mathematical problems in

statistics and partly because no one had yet had the insight as to how to solve the problems algorithmically

• George Dantzig, a graduate student at Berkley arrived late for a graduate-level statistics class and found two problems written on the board. Not knowing they were examples of

unsolved statistics problems, he mistook them for part of a homework assignment, jotted them down, and solved them. Six weeks later, Dantzig's statistic professor notified him

that he had prepared one of his two "homework" proofs for publication, and Dantzig was given co-author credit on another paper several years later when another mathematician

independently worked out the same solution to the second problem. Dantzig later published his "homework" as a thesis to earn his doctorate.

• George Dantzig went on to work on planning methods for the US Air Force during World War II using a desk calculator. During 1946 his colleague challenged him to mechanize

the planning process in order to entice him into not taking another job. Dantzig formulated the problem as linear inequalities but ended up with a vast number of feasible

solutions. Dantzig's core insight was to realize that the way to find the best solution was to utilize a linear objective function that needed to be maximized.

• After Dantzig included an objective function as part of his formulation during mid-1947, the problem was mathematically more tractable. Dantzig realized that one of the

unsolved problems that he mistook as homework was applicable to finding an algorithm for linear programs. Dantzig realized that the column geometry used would make the

Simplex method very efficient (for computers).

• The Simplex Method is listed as one of the top ten algorithms of the 20th century and provides a structured approach for maximizing a linear function of several variables under

several constraints on other linear functions.

Sources: https://en.wikipedia.org/wiki/Simplex_algorithm

http://www.snopes.com/college/homework/unsolvable.asp#CIZUfRCJ5mCqCL2f.99
 Resource Allocation Problems

• Linear Programming are problems involving the allocation of an

organization's resources to its various productive activities. The identifying
feature for any such problem is that each functional constraint in the linear
programming model is resource constraint:

Amount of resource used ≤ Amount of resource available

• Resource constraints place limits on the levels of activities that utilize the
resources

• Objective: Choose Levels of activities so as to Maximize some overall

Measure of Performance (e.g. total profit) while satisfying all resource
constraints
 Characteristics of Resource Allocation Problems

• There are Activities which Decisions to be made are the Levels of these Activities

• There is a resource constraint for each resource

• The following information must be gathered:

1. The amount of each resource that is available

2. The amount of each resource required by each activity (the amount of resource used per
unit of the activity)
3. The contribution per unit of each activity to the overall measure of performance
Question: What’s An example of a Resource Allocation
Problem Discussed in the Lecture One?
 Super Grain Corp. Advertising-Mix Problem
• Goal: Design the promotional campaign for Crunchy Start.

• The three most effective advertising media for this product are
– Television commercials on Saturday morning programs for children.
– Advertisements in food and family-oriented magazines.
– Advertisements in Sunday supplements of major newspapers.

• The limited resources in the problem are

– Advertising budget ($4 million).
– Planning budget ($1 million).
– TV commercial spots available (5).

• The objective will be measured in terms of the expected number of exposures.

Question:

At what level should they advertise Crunchy Start in each of the three media?

What type of problem is this?

3-8
 Cost and Exposure Data

Costs

Each Each Each

Cost Category TV Commercial Magazine Ad Sunday Ad

Ad Budget $300,000 $150,000 $100,000

Planning budget 90,000 30,000 40,000

Expected number of
1,300,000 600,000 500,000
exposures

3-9
 Analysis of the Problem

1) The Data

2) The Decisions

3) The Constraints

4) The Measure of Performance

• Don’t forget the Assumptions at each Step!

• DADACAM

What are the simplifying assumptions for the Super Grain Corporation?

A) Design & Development Cost for each additional ad in a medium is about the same as the first ad in that medium

B) Cost of working in one medium is not affected by how much work it is doing with the other types of media (independence) – [e.g. not taking

into account saturation, multiple impressions across media, overlap of work, efficiencies/savings]

3-10
 Algebraic Formulation

Let TV = Number of commercials for separate spots on television

M = Number of advertisements in magazines.

SS = Number of advertisements in Sunday supplements.

Maximize Exposure = 1,300TV + 600M + 500SS

subject to

Ad Spending: 300TV + 150M + 100SS ≤ 4,000 ($thousand)

Planning Cost: 90TV + 30M + 30SS ≤ 1,000 ($thousand)

Number of TV Spots: TV ≤ 5

and

TV ≥ 0, M ≥ 0, SS ≥ 0.

3-11
Super Grain - Excel Formulation
Solver Parameters
 Spreadsheet Formulation – After Solver Run

A B C D E F G H
1 Super Grain Corp. Advertising-Mix Problem
2
3 TV Spots Magazine Ads SS Ads
4 Exposures per Ad 1,300 600 500
5 (thousands)
6 Budget Budget
7 Cost per Ad ($thousands) Spent Available
8 Ad Budget 300 150 100 4,000 <= 4,000
9 Planning Budget 90 30 40 1,000 <= 1,000
10
11 Total Exposures
12 TV Spots Magazine Ads SS Ads (thousands)
13 Number of Ads 0 20 10 17,000
14 <=
15 Max TV Spots 5

3-14
 Some Observations

• We ended up with an integer solution (we got “lucky”)

• What if we had fractional answers?

• Measurement: Instead of measuring profit, Claire decided to measure the “expected number of exposures”. Why?

• It this a reasonable assumption?

 The TBA Airlines Problem

• TBA Airlines is a small regional company that specializes in short flights in

small airplanes.

• The company has been doing well and has decided to expand its operations.

• The basic issue facing management is whether to purchase more small

airplanes to add some new short flights, or start moving into the national
market by purchasing some large airplanes, or both.

Question: How many airplanes of each type should be purchased to maximize

their total net annual profit?

3-16
 DADACAM for TBA
Data:

Decisions:

• How many planes of each type?

Constraints:

• Capital ≤ $250 million

• Can only buy full airplanes ( Solution must have integer values)

Measure of Performance:

• Profit (Maximize)
Wait! This ProblemViolates Divisibility Assumption of
LP
• Divisibility Assumption of Linear Programming: Decision variables in a
linear programming model are allowed to have any values, including fractional
values, that satisfy the functional and nonnegativity constraints. Thus, these
variables are not restricted to just integer values.

• Since the number of airplanes purchased by TBA must have an integer value,
the divisibility assumption is violated.

• Instead of “Linear Programming”, this is a special category called “Integer

Programming”

3-18
 Algebraic Formulation

Let S = Number of small airplanes to purchase

L = Number of large airplanes to purchase

Maximize Profit = 7S + 22L ($millions)

subject to

Capital Available: 25S + 75L ≤ 250 ($millions)

Max Small Planes: S≤5

and

S ≥ 0, L ≥ 0

S, L are restricted to integer values only

3-19
TBA Spreadsheet Formulation
TBA Solver Set-up Parameters
Spreadsheet Model Solved by Solver

3-22
 TBA Solved by RSPE

Integer Constraint

Note: Model changed to LP/MIP

 Think-Big Capital Budgeting Problem
• Think-Big Development Co. is a major investor in commercial real-estate development
projects.

• They are considering three large construction projects

– Construct a high-rise office building.
– Construct a hotel.
– Construct a shopping center.

• Each project requires each partner to make four investments: a down payment now, and
additional capital after one, two, and three years.

• All three projects are expected to be very profitable in the long run so the management of
Think-Big wants to invest as much as possible in some or all of them.

• Management is willing to commit all the company’s investment capital currently available
as well as all additional investment capital that will become available over the next three
years.

Question: At what fraction should Think-Big invest in each of the three projects? That is
 What is the investment mix required to maximize profit?

3-24
 Think-Big Financial Data for the Projects
Investment Capital Requirements

Year Office Building Hotel Shopping Center

0 $40 million $80 million $90 million

1 60 million 80 million 50 million

2 90 million 80 million 20 million

3 10 million 70 million 60 million

Net present value $45 million $70 million $50 million

Additional Investment Cumulative Investment

Capital Availability Per Year Capital Availability Per Year
Year
0 $25 million $25 million
1 20 million 45 million
2 20 million 65 million
3 15 million 80 million
3-25
 Activities and Resources
• Activities
– Activity 1 : Invest in office building construction
– Activity 2 : Invest in hotel building construction
– Activity 3: Invest in shopping center construction

• Resources
– Resource 1 : Total Investment Capital Available now
– Resource 2 : Cumulative investment capital available at end of one year
– Resource 3 : Cumulative investment capital available at end of two years
– Resource 4 : Cumulative investment capital available at end of three years

3-26
 Think- Big
Resource Availability & Capital Requirements
 Think-Big Algebraic Formulation
Let OB = Participation share in the office building,

H = Participation share in the hotel,

SC = Participation share in the shopping center.

Maximize NPV = 45OB + 70H + 50SC

subject to

Total invested now: 40OB + 80H + 90SC ≤ 25 ($million)

Total invested within 1 year: 100OB + 160H + 140SC ≤ 45 ($million)

Total invested within 2 years: 190OB + 240H + 160SC ≤ 65 ($million)

Total invested within 3 years: 200OB + 310H + 220SC ≤ 80 ($million)

and

OB ≥ 0, H ≥ 0, SC ≥ 0.

Note that this model possesses the key identifying feature for resource-allocation problems, namely, each functional constraint is a

resource constraint that has the form:

Amount of resource used ≤ Amount of resource available

3-28
Setting up the Think Big Spreadsheet
Think Big – Solver Set-up

Settings
Think Big – Solver Results

3-31
Think Big – RSPE Results
 Summary of Formulation Procedure for Resource-
Allocation Problems
1. Identify the activities for the problem at hand.
2. Identify an appropriate overall measure of performance (commonly profit).
3. For each activity, estimate the contribution per unit of the activity to the
overall measure of performance.
4. Identify the resources that must be allocated.
5. For each resource, identify the amount available and then the amount used per
unit of each activity.
6. Enter the data in steps 3 and 5 into data cells.
7. Designate changing cells for displaying the decisions.
8. In the row for each resource, use SUMPRODUCT to calculate the total
amount used. Enter <= and the amount available in two adjacent cells.
9. Designate an objective cell. Use SUMPRODUCT to calculate this measure of
performance.

3-33
 Template for Resource-Allocation Problems

Activities

Unit Profit profit per unit of activity

Resources Resources
Used Available
Constraints

SUMPRODUCT
resource used per unit of activity (resource used per unit,
changing cells) <=

Total Profit
Level of Activity changing cells SUMPRODUCT(profit per unit, changing cells)

What is the identifying feature for resource-allocation problem?

What is the form of a resource constraint?

What are the 3 kinds of data to be gathered in an R-C problem?

1. Activities/Contribution per unit of activity

2. Resources 3-34
 Cost-Benefit Trade-Off Problems
• Unlike Resource-Allocation problems, C-B problems strive to define what
benefits much be achieved

• Instead of maximizing an objective (such as profit) subject to a given set of

constraints, C-B problem solutions attempt to achieve a set of benefits while
minimizing cost

• Therefore - A mix of levels of various activities is chosen to achieve minimum

acceptable levels for various benefits at minimum cost

• Benefit Constraint:
– Level Achieved ≥ Minimum Acceptable Level for a given benefit

• Types of Data Required:

1. Minimum Acceptable Level for each benefit
2. The contribution of each activity to each benefit (per unit of activity)
3. The cost per unit of each activity
Have we seen a C-B Problem Already?
 The Profit & Gambit Co.

• Management has decided to undertake a major advertising campaign that will

focus on the following three key products:
– A spray prewash stain remover.
– A liquid laundry detergent.
– A powder laundry detergent.

• The campaign will use both television and print media

• The general goal is to increase sales of these products.

• Management has set the following goals for the campaign:

– Sales of the stain remover should increase by at least 3%.
– Sales of the liquid detergent should increase by at least 18%.
– Sales of the powder detergent should increase by at least 4%.

Question: how much should the company advertise in each medium to

meet the sales goals at a minimum total cost?

2-37
 The Profit & Gambit Co. – Activity Analysis
• Activities:

Activity 1: Advertise on Television

Activity 2: Advertise in the Print Media

• Benefits:

Benefit 1: Increased sales for a spray prewash stain remover

Benefit 2: Increased sales for a liquid laundry detergent
Benefit 3: Increased sales for a powder laundry detergent

• Minimum Acceptable Benefit Levels:

– Level of Benefit 1 ≥ 3%.
– Level of Benefit 2 ≥ 18%.
– Level of Benefit 3 ≥ 4%.

Question: how much should the company advertise in each medium

to meet the sales goals at a minimum total cost?
2-38
 By the Numbers
Increase in Sales per Unit of Advertising

Product Television Print Media Minimum

Required
Increase
Stain Remover 0% 1% 3%
Liquid Detergent 3 2 18
Powder -1 4 4
Detergent
Unit Cost $1 million $2 million  

2-39
 Algebraic Model for Profit & Gambit

Let TV = the number of units of advertising on television

PM = the number of units of advertising in the print media

Minimize Cost = TV + 2PM (in millions of dollars)

subject to

Stain remover increased sales: PM ≥ 3

Liquid detergent increased sales: 3TV + 2PM ≥ 18

Powder detergent increased sales: –TV + 4PM ≥ 4

2-40
 Take Home Points
• It is not the nature of the application that determines the
classification of the resulting linear programming
formulation.

• Rather, it is the nature of the restrictions imposed on the

decisions regarding the mix of activity levels.

• Limits on resource usage  Resource Allocation

• Goals for the Level of Benefits  Cost Benefit Trade-off

• Not all LP problem will fit neatly in these categories and

hybrid types of formulations are possible. We will discuss
later

2-41
 Union Airways Personnel Scheduling:
A Pure Cost Trade-off Problem
• Union Airways is adding more flights to and from its hub airport and so needs
to hire additional customer service agents.

• It is not clear how many more agents should be hired

• Cost control must be balanced with a Satisfactory Level of Customer Service

• The five authorized eight-hour shifts are

– Shift 1: 6:00 AM to 2:00 PM
– Shift 2: 8:00 AM to 4:00 PM
– Shift 3: Noon to 8:00 PM
– Shift 4: 4:00 PM to midnight
– Shift 5: 10:00 PM to 6:00 AM

Question: How many agents should be assigned to each shift?

3-42
 Schedule Data
Time Periods Covered by Shift

Minimum
Number of
Time Period 1 2 3 4 5 Agents Needed
6 AM to 8 AM √ 48
8 AM to 10 AM √ √ 79
10 AM to noon √ √ 65
Noon to 2 PM √ √ √ 87
2 PM to 4 PM √ √ 64
4 PM to 6 PM √ √ 73
6 PM to 8 PM √ √ 82
8 PM to 10 PM √ 43
10 PM to midnight √ √ 52
Midnight to 6 AM √ 15
Daily cost per agent $170 $160 $175 $180 $195

Note: The last column is derived from a study on the size of queues meant to keep customer waiting times to 3-43
 Formulation
1) The Data – Shift Coverage

2) The Decisions – How many agents to hire?

3) The Constraints – Customer Service cannot suffer/queue size/number of agents per shift. Shifts are predetermined

4) The Measure of Performance – Minimize cost with satisfactory customer service

5) Assumptions – Not worried about profit, just minimizing cost, resources unrestricted

C-B Problem Approach applied to Union Airways

Minimum Acceptable Level for each benefit:

Defined by Queuing Study (Last Column)

The contribution of each activity to each benefit (per unit of activity)

Activity Levels: Number of Agents assigned to each shift

Activity Unit: Agent assigned to a shift

 Algebraic Formulation – Union Airways

Let Si = Number working shift i (for i = 1 to 5),

Minimize Cost = $170S1 + $160S2 + $175S3 + $180S4 + $195S5

subject to

Total agents 6AM–8AM: S1 ≥ 48

Total agents 8AM–10AM: S1 + S2 ≥ 79

Total agents 10AM–12PM: S1 + S2 ≥ 65

Total agents 12PM–2PM: S1 + S2 + S3 ≥ 87

Total agents 2PM–4PM: S2 + S3 ≥ 64

Total agents 4PM–6PM: S3 + S4 ≥ 73

Total agents 6PM–8PM: S3 + S4 ≥ 82

Total agents 8PM–10PM: S4 ≥ 43

Total agents 10PM–12AM: S4 + S5 ≥ 52

Total agents 12AM–6AM: S5 ≥ 15

and

Si ≥ 0 (for i = 1 to 5)
3-45
 Spreadsheet Formulation – Union Airways

Things to Note:
• Blue – Data Provided/Constraints
• Yellow – User Enters or Solver Solves
• Constraints are “ ≥” So we are dealing we must provide a minimum level or adequate level of service
• H17  Sum Product – Figuring out how many agents are working during that time period
• J21  Sum Product – Calculates total cost for all shifts

3-46
 Solver & RSPE Parameters

Things to Note:
• NumberWorking = Integer (as much as management would not like to admit it  )
Optimal LP Solution that Minimizes Cost
Summary of Formulation Procedure for Cost Benefit
Tradeoff

1. Identify the activities for the problem at hand.

2. Identify an appropriate overall measure of performance (commonly total
cost).
3. For each activity, estimate the contribution per unit of the activity to the
overall measure of performance.
4. Identify the benefits that must be considered.
5. For each benefit, identify the amount available and then the amount used per
unit of each activity.
6. Enter the data in steps 3 and 5 into data cells.
7. Designate changing cells for displaying the decisions.
8. In the row for each resource, use SUMPRODUCT to calculate the total
amount used. Enter >= and the benefit needed in two adjacent cells.
9. Designate an objective cell. Use SUMPRODUCT to calculate this measure of
performance.

3-49
 Template for Cost-Benefit Tradoff Problems
Activities

Unit Cost cost per unit of activity

Benefit Benefit
Achieved Needed
Constraints

SUMPRODUCT
benefit achieved per unit of activity (benefit per unit,
changing cells) >=

Total Cost
Level of Activity changing cells SUMPRODUCT(cost per unit, changing cells)

Template for Resource-Allocation Problems

Activities

Unit Profit profit per unit of activity

Resources Resources
Used Available
Constraints

SUMPRODUCT
resource used per unit of activity (resource used per unit,
changing cells) <=

Total Profit
Level of Activity changing cells SUMPRODUCT(profit per unit, changing cells)
3-50
 Summary of Formulation Procedure for
Cost-Benefit-Tradeoff Problems
1. Identify the activities for the problem at hand.
2. Identify an appropriate overall measure of performance (commonly cost).
3. For each activity, estimate the contribution per unit of the activity to the
overall measure of performance.
4. Identify the benefits that must be achieved.
5. For each benefit, identify the minimum acceptable level and then the
contribution of each activity to that benefit.
6. Enter the data in steps 3 and 5 into data cells.
7. Designate changing cells for displaying the decisions.
8. In the row for each benefit, use SUMPRODUCT to calculate the level
achieved. Enter >= and the minimum acceptable level in two adjacent cells.
9. Designate an objective cell. Use SUMPRODUCT to calculate this measure of
performance.

3-51
 Mixed Problems

• Just when you thought it was safe to venture out into the Linear Programming
world!

• Along comes “Mixed Problems”!

 First a Word About Constraints

1. The Identifying Feature of a Pure Resource Allocation Problem is that all of its functional constraints are resource constraints

2. The Identifying Feature of a Pure Cost-Benefit Trade-off Problem is that all of its functional constraints are benefit constraints

3. NOTE: Functional Constraints are include all the constraints of a problem except for it non-negativity constraints

4. With resource constraints: <=

5. With Benefit constraints: >=

6. With Fixed Requirement Constraints: = (we haven’t done this yet)

3-53
 Types of Functional Constraints

Type Form* Typical Interpretation Main Usage

For some resource, Resource-allocation
Resource constraint LHS ≤ RHS Amount used ≤ problems and mixed
Amount available problems

For some benefit, Cost-benefit-trade-off

Benefit constraint LHS ≥ RHS Level achieved ≥ problems and mixed
Minimum Acceptable problems

For some quantity, Transportation

Fixed-requirement
LHS = RHS Amount provided = problems and mixed
constraint
Required amount problems

* LHS = Left-hand side (a SUMPRODUCT function).

RHS = Right-hand side (a constant).

3-54
 Revisiting the Super Grain Case Study
• Recall that with Super Grain Claire determined that there should be no TV
Commercials:
A B C D E F G H
1 Super Grain Corp. Advertising-Mix Problem
2
3 TV Spots Magazine Ads SS Ads
4 Exposures per Ad 1,300 600 500
5 (thousands)
6 Budget Budget
7 Cost per Ad ($thousands) Spent Available
8 Ad Budget 300 150 100 4,000 <= 4,000
9 Planning Budget 90 30 40 1,000 <= 1,000
10
11 Total Exposures
12 TV Spots Magazine Ads SS Ads (thousands)
13 Number of Ads 0 20 10 17,000
14 <=
15 Max TV Spots 5

• In discussions with her manager, the model is questions. Although Claire has found a
way to maximize ad exposures but small children are not reading cereal ads. The
importance of TV Commercials on Saturday Morning shows should not be overlooked.
The model should be adjusted.

• The boss also would like Claire to take into account the budget for coupon discounts
and to find a way to increase the reach of the campaign to young children and parents
of young children.

3-55
 Continuing the Super Grain Case Study
• David and Claire conclude that the spreadsheet model needs to be expanded to
incorporate some additional considerations.

• In particular, they feel that two audiences should be targeted — young

children and parents of young children.

• Two new goals

– The advertising should be seen by at least five million young children.
– The advertising should be seen by at least five million parents of young children.

• Furthermore, exactly $1,490,000 should be allocated for cents-off coupons.

• Benefits
– Promoting the new breakfast cereal to young children.
– Promoting the new breakfast cereal to parents of young children.

3-56
 Benefit and Fixed-Requirement Data

Number Reached in Target Category (millions)

Minimum
Each Each Each Acceptable
TV Commercial Magazine Ad Sunday Ad Level

Young children 1.2 0.1 0 5

Parents of young children 0.5 0.2 0.2 5

Contribution Toward Required Amount

Each Each Each Required
TV Commercial Magazine Ad Sunday Ad Amount

Coupon redemption 0 $40,000 $120,000 $1,490,000

3-57
 Algebraic Formulation - Original

Let TV = Number of commercials for separate spots on television

M = Number of advertisements in magazines.

SS = Number of advertisements in Sunday supplements.

Maximize Exposure = 1,300TV + 600M + 500SS

subject to

Ad Spending: 300TV + 150M + 100SS ≤ 4,000 ($thousand)

Planning Cost: 90TV + 30M + 30SS ≤ 1,000 ($thousand)

Number of TV Spots: TV ≤ 5

and

TV ≥ 0, M ≥ 0, SS ≥ 0.

3-58
 Algebraic Formulation - New

Let TV = Number of commercials for separate spots on television

M = Number of advertisements in magazines.

SS = Number of advertisements in Sunday supplements.

Maximize Exposure = 1,300TV + 600M + 500SS

subject to

Ad Spending: 300TV + 150M + 100SS ≤ 4,000 ($thousand)

Planning Cost: 90TV + 30M + 30SS ≤ 1,000 ($thousand)

Number of TV Spots: TV ≤ 5

Young children: 1.2TV + 0.1M ≥ 5 (millions)

Parents: 0.5TV + 0.2M + 0.2SS ≥ 5 (millions)

Coupons: 40M + 120SS = 1,490 ($thousand)

and

TV ≥ 0, M ≥ 0, SS ≥ 0. 3-59
Spreadsheet Formulation – Super Grain Revisited
 Super Grain Revisited - Solved
A B C D E F G H
1 Super Grain Corp. Advertising-Mix Problem
2
3 TV Spots Magazine Ads SS Ads
4 Exposures per Ad 1,300 600 500
5 (thousands)
6 Cost per Ad ($thousands) Budget Spent Budget Available
7 Ad Budget 300 150 100 3,775 <= 4,000
8 Planning Budget 90 30 40 1,000 <= 1,000
9
10 Number Reached per Ad (millions) Total Reached Minimum Acceptable
11 Young Children 1.2 0.1 0 5 >= 5
12 Parents of Young Children 0.5 0.2 0.2 5.85 >= 5
13
14 TV Spots Magazine Ads SS Ads Total Redeemed Required Amount
15 Coupon Redemption per Ad 0 40 120 1,490 = 1,490
16 ($thousands)
17 Total Exposures
18 TV Spots Magazine Ads SS Ads (thousands)
19 Number of Ads 3 14 7.75 16,175
20 <=
21 Maximum TV Spots 5

3-61
Solver & RSPE Parameters – Super Grain Revisited
 Summary of Formulation Procedure for Mixed Linear Programming
Problems
1. Identify the activities for the problem at hand. The decisions to be made are the levels of
these activities.
2. Identify an appropriate overall measure of performance for solutions to the problem.
3. For each activity, estimate the contribution per unit of the activity to the overall measure of
performance.
4. Identify any resources that must be allocated to the activities.
5. Identify any benefits to be obtained from the activities. For each one, identify the minimum
acceptable level and then the contribution per unit of each activity to that benefit.
6. Identify any fixed requirements that, for some type of quantity, the amount provided must
equal a required amount. For each fixed requirement, identify the required amount and
then the contribution toward this required amount per unit of each activity.
7. Enter the data in steps 3-6 into data cells in a spreadsheet.
8. Designate changing cells for displaying the decisions.
9. Use output cells to specify the constraints on resources, benefits, and fixed requirements.
10. Designate an objective cell for displaying the overall measure of performance. Use
SUMPRODUCT to calculate this measure of performance.
3-63
 Template for Mixed Problems

Activities

Unit Profit or Cost profit/cost per unit of activity

Resources Resources
Used Available

SUMPRODUCT
resource used per unit of activity (resource used per unit,
<=
C o nstra ints

changing cells)

Benefit Benefit
Achieved Needed

benefit achieved per unit of activity

SUMPRODUCT
(benefit per unit,
>=
changing cells)
=
Total Profit or Cost
Level of Activity changing cells SUMPRODUCT(profit/cost per unit, changing cells)

3-64
 Transportation Problems
• Transportation problems are one of the most common types of linear programming problems.

• Transportation problems involve optimization of a shipping plan for transporting goods.

• A typical example is a company that has several plants producing a product that needs to get
to customers or distribution centers. In WWII it was used to plan troop deployment from
bases in the United States to Europe and Asia.

• For the Factory/Plant metaphor, the main question is how much each plant should ship in
order to minimize the overall cost of shipping while meeting customer demands.

• The classic statement of the transportation problem uses a matrix with the rows representing
sources and columns representing destinations. The costs of shipping from sources to
destinations are indicated by the entries in the matrix. If shipment is impossible between a
given source and destination, a large cost is entered. This discourages the solution from using
such cells.

• Supplies and demands are shown along the margins of the matrix. In the classic formulation
of the transportation problem total supply is equal to total demand.
 The Big M Transportation Problem

• The Big M Company produces a variety of heavy duty machinery at two

factories. One of its products is a large turret lathe.

• Orders have been received from three customers for the turret lathe.

Question: How many lathes should be shipped from each factory to each
customer?

Shipping Cost for Each Lathe

To Customer 1 Customer 2 Customer 3

From Output

Factory 1 $700 $900 $800 12 lathes

Factory 2 800 900 700 15 lathes

Order Size 10 lathes 8 lathes 9 lathes

3-66
 The Distribution Network

Factories Customers
C1 10 lathes
needed
$700/lathe

12 lathe F1
produced
$900/lathe

$800/lathe
C2 8 lathes
needed
$800/lathe $900/lathe

15 lathes F2
produced

$700/lathe
C3 9 lathes
needed
Activities – correspond to shipping lanes depicted by arrows

Activity Level – equal to the number of lathes shipped

through the corresponding shipping lane

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 Algebraic Formulation – Big M Company

Let Sij = Number of lathes to ship from i to j (i = F1, F2; j = C1, C2, C3).

Minimize Cost = $700SF1-C1 + $900SF1-C2 + $800SF1-C3

+ $800SF2-C1 + $900SF2-C2 + $700SF2-C3

subject to

Factory 1: SF1-C1 + SF1-C2 + SF1-C3 = 12

Factory 2: SF2-C1 + SF2-C2 + SF2-C3 = 15

Customer 1: SF1-C1 + SF2-C1 = 10

Customer 2: SF1-C2 + SF2-C2 = 8

Customer 3: SF1-C3 + SF2-C3 = 9

and

Sij ≥ 0 (i = F1, F2; j = C1, C2, C3).

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Spreadsheet Formulation – Big M Company
Solver & RSPE Parameters – Big M Company
 Spreadsheet Solved – Big M Company

A B C D E F G H
1 Big M Company Distribution Problem
2
3 Shipping Cost
4 (per Lathe) Customer 1 Customer 2 Customer 3
5 Factory 1 $700 $900 $800
6 Factory 2 $800 $900 $700
7
8 Total
9 Shipped
10 Units Shipped Customer 1 Customer 2 Customer 3 Out Output
11 Factory 1 10 2 0 12 = 12
12 Factory 2 0 6 9 15 = 15
13 Total To Customer 10 8 9
14 = = = Total Cost
15 Order Size 10 8 9 $20,500

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 Assignment Problems
• The assignment problem is a special case of the Transportation problem where
there is an equal number of “sources” (suppliers) and “sinks” (demand
centers) and where the value of all supplies and demands are equal to one.

• For a reference example, consider the problem of manager who has to match
personnel to various tasks.
 Sellmore Company Assignment Problem

• The marketing manager of Sellmore Company will be holding the company’s

annual sales conference soon.

• This marketing manager is hiring four temporary employees:

– Ann
– Ian
– Joan
– Sean

• Each will handle one of the following four tasks:

– Word processing of written presentations
– Computer graphics for both oral and written presentations
– Preparation of conference packets, including copying and organizing materials
– Handling of advance and on-site registration for the conference

Question: Which person should be assigned to which task?

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 Data for the Sellmore Problem
Required Time per Task (Hours)

Temporary Word Hourly

Employee Processing Graphics Packets Registrations Wage
Ann 35 41 27 40 $14

Ian 47 45 32 51 12

Joan 39 56 36 43 13

Sean 32 51 25 46 15

So what do we really want to accomplish as managers in this case

Þ Assign the work, minimize the cost!

Þ What are some underlying assumptions?

• Work quality is equivalent between all temporary employees

• Immediate availability (no resource restrictions)
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• No interaction between tasks
Spreadsheet Formulation – Sellmore Problem

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Solver and RSPE Parameters - Sellmore
 Solution– Sellmore Problem
A B C D E F G H I J
1 Sellmore Co. Assignment Problem
2
3 Task
4 Required Time Word Hourly
5 (Hours) Processing Graphics Packets Registrations Wage
6 Ann 35 41 27 40 $14
7 Assignee Ian 47 45 32 51 $12
8 Joan 39 56 36 43 $13
9 Sean 32 51 25 46 $15
10
11
12 Task
13 Word
14 Cost Processing Graphics Packets Registrations
15 Ann $490 $574 $378 $560
16 Assignee Ian $564 $540 $384 $612
17 Joan $507 $728 $468 $559
18 Sean $480 $765 $375 $690
19
20
21 Task
22 Word Total
23 Assignment Processing Graphics Packets Registrations Assignments Supply
24 Ann 0 0 1 0 1 = 1
25 Assignee Ian 0 1 0 0 1 = 1
26 Joan 0 0 0 1 1 = 1
27 Sean 1 0 0 0 1 = 1
28 Total Assigned 1 1 1 1
29 = = = = Total Cost
30 Demand 1 1 1 1 $1,957

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 The Model for Assignment Problems

Given a set of tasks to be performed and a set of assignees who are available to
perform these tasks, the problem is to determine which assignee should be
assigned to each task.

To fit the model for an assignment problem, the following assumptions need to be
satisfied:
1. The number of assignees and the number of tasks are the same.
2. Each assignee is to be assigned to exactly one task.
3. Each task is to be performed by exactly one assignee.
4. There is a cost associated with each combination of an assignee performing a task.
5. The objective is to determine how all the assignments should be made to minimize
the total cost.

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 Table of Contents
Chapter 5 (What-If Analysis for Linear Programming)

Continuing the Wyndor Case Study (Section 5.2)5.2

Changes in One Objective Function Coefficient (Section 5.3) 5.3–5.10
Simultaneous Changes in Objective Function Coefficients (Section 5.4) 5.11–5.18
Single Changes in a Constraint (Section 5.5) 5.19–5.24
Simultaneous Changes in the Constraints (Section 5.6) 5.25–5.28

© 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.  
Before “What-If ?”- A Word About Model Formulation from the
Perspective of a Systems Engineer
• Real world problems may be much more complex than those discussed in the textbook

• Models may involve hundreds or thousands of decisions & constraints

• Subject matter expertise, experience, rules of thumb, intuition, studies and even pure guesswork may go into building a model. Models will evolve over

time and be “tuned”

• How do we know if the model is the “correct” model? We don’t. There may not be a single “correct” model. All we can do is validate the model against

sets of data for which we believe we know the “correct” answers. When we test a model against a set of known data (data with known answers), we call

this model validation.

• After decision makers are satisfied that the model has been validated, they will often ask a lot “what-if” questions:
– What if the estimates of parameters in the model are not correct?
– How do the conclusions of the model change if the assumptions are changed?
– What is the impact if other options are pursued that were not considered in the current model?
 The Trouble with the “Real World”

• Real applications seldom have parameters that are known with a lot of certainty
– For example, on the Wyndor problem profit for doors and windows are given
– However, these profits depend on many factors that may change and impact these numbers (cost of materials, shipping, production, advertising,

factors such market acceptance, channel sales etc.)

– What if the profit on the doors fell from $300 to $200?
– What if competitors force a drop in price? What is the impact?
– Once we have completed a model the first thing we want to do is change it to try to match the “real” situation

• Benefits of What-if analysis:

– What-if analysis can identify which parameters of the model are most sensitive to change (sensitivity analysis)
– What-if analysis can provide an indication of where a resulting change in a parameter of the model changes the optimal solution
– What-if analysis can provide guidance as to what a change in policy decision(s) may have on the situation
 Wyndor (Before What-If Analysis)

Assumes all parameters are accurate:

- Unit Profit

- Hours Used Per Unit Produced

- Hours Available

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But are they?
 Real World Example – Consumer Products – The iPhone

An iPhone generates approximately $650 in revenue for Apple. This figure has remained fairly steady over

time. Using deduction from overall margins, it’s possible to estimate the gross margin on the product to be

around 55%. That means that the cost of goods sold (COGS) for the iPhone is about $293.

Is that a lot? Where does that money go? What else does it tell us about how the company operates?

To find out we need to understand the cost structure of phone building.

Typically there are four main categories of costs for a phone:

1 - Bill of materials (BOM). This represents the cost of the components that go into the device.

These are paid to suppliers.

2 - Transportation/warehousing. This is the cost to transport and store the product before sale.

This is paid to shipping companies and warehousing.

3 - Manufacturing cost (including labor). This is paid to contract manufacturers.

4 - Warranty expense. This is paid back to customers for returned product that can no longer be sold.

We can estimate a device’s BOM through a teardown analysis and there are firms that do this. Usually

this offers enough competitive insight into the cost structure and hence gross margin because the
 Some Details on the iPhone Cost of Goods Sold
A. The iPhone takes 24 hours to be built. Of that 6 to 8 hours is spent in “burn-in” to install and test the

software and components automatically.

B. This leaves about 17 hours unaccounted for in the throughput time. Could this time be spent in labor

intensive operations? The wage of workers on the line is given as $1.78/hr. 17 hours of labor input

would imply $30 labor cost per iPhone. That seems a lot higher than the industry (i.e. iSupply’s

estimate is $8 for manufacturing cost.)  This is an upper bound. Obviously, those 17 hours could be

spent in automated operations which were not shown or simply sitting idle, waiting for a process to

begin.

C. There are 141 (presumably labor) work steps in the production for an iPhone. If we knew the time

each step took we could obtain another estimate. For example, if each step in the human assembly

process took 3 minutes[2] then human hands will touch the iPhone for 423 minutes or about 7 hours.

This would imply a labor cost for an iPhone of about $12.5. If each step was longer or shorter, the

cost wouldhttp://www.asymco.com/2012/02/22/the-iphone-manufacturing-cost-structure
vary accordingly.
 Back to Wyndor
- Unit profits are rough estimates, what if they vary?
- Production availability per factory can be adjusted. What if we adjust them?
- The possibilities are mind boggling!

Homework Assignment #2

- 3.10, 3.13, 3.15, 3.18, 3.20, 3.24, 3.35

 Sensitivity Analysis
What happens if the estimate of the unit profit of one of Wyndor’s new products is inaccurate?

The profit per door has been revised from $300 to $200. No change occurs in the optimal solution.

The profit per door has been revised from $300 to $500. No change occurs in the optimal solution.
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Sensitivity Analysis – When the Optimal Solution is Affected
Doors Windows
Unit Profit $1,000 $500
Hours Hours
Hours Used Per Unit Produced Used Available
Plant 1 1 0 4 <= 4
Plant 2 0 2 6 <= 12
Plant 3 3 2 18 <= 18

Doors Windows Total Profit

Units Produced 4 3 $5,500
The profit per door has been revised from $300 to $1,000. The optimal solution changes.

How can we automate this process? Use RSPE.

Select the parameter you want to analyze – C4

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Select C4 and choose Optimization under the Parameters menu

Enter Desired
Analysis Range

5-88
 Now Run a Report

Choose Optimization > Parameter Analysis under the Reports menu

Filling out the Dialog Box
Filling out the Dialog Box - Continued

Select Range Values and major axis points

(how many different values of the parameter cell

will be shown in the parameter analysis report)

Yields the following report:

Parameter Analysis Report with Range Names

Under the Reports menu on the RSPE ribbon, choose

Optimization>Parameter Analysis.

Specify which parameters to vary and which results to

show.

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The Parameter Analysis Report

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Using the Sensitivity Report to Find the Allowable Range

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$C$12 Units Produced Doors 2 0 300 450 300
$D$12 Units Produced Windows 6 0 500 1E+30 300

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 Graphical Insight into the Allowable Range
W
Production rate
for windows

(2, 6) is optimal for 0 < PD < 750

6 Line B PD = 0 (Profit = 0 D + 500 W)

4 Line C
PD = 300 (Profit = 300 D + 500 W)
Feasible
region
2
PD = 750 (Profit = 750 D + 500 W)

Line A
0 2 4 6 D
Production rate for doors

The two dashed lines that pass through the solid constraint boundary lines are the objective function lines when PD (the unit profit for

doors) is at an endpoint of its allowable range, 0 ≤ PD ≤ 750.

5-95