Optimization and Decision Models: Introduction

Lecture 1
 Outlines

• Optimization
• Body of Knowledge
• Problem Solving and Decision Making
• Qualitative Analysis and Decision Making
• Quantitative Analysis

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 What is Optimization

• It is finding the best solution for something

• To find the best solution, you have to have a way of measuring whether a
solution is better than another.

• It is found almost everywhere

• When you're playing a game, you want to come up with the best strategies.

• When you're doing work, you want to come up with the best product you
can.
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 What is Optimization

• In firms and in industry, it's used all over the place.

• People want to minimize cost.

• People want to maximize profit.

• People want to come up with the best products.

• People want to make their customers as happy as possible, while

simultaneously delivering value to shareholders.

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 What is Optimization

• Travel: when you travel you want to find the shortest path from one place to
another. That's the way car navigators are set up.

• So optimization is everywhere

• https://www.youtube.com/watch?v=Q2dewZweAtU

• Q. Did you ever had to apply optimization in your work?

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 Quantitative Approach

 Quantitative approaches to decision making is referred to as

•Management Science:
 application of science to management problems
•Operations Research (OR):
 is a discipline that deals with the application of advanced analytical
methods to help make better decisions. (Wikipedia)
•Decision Science
 Collection of quantitative techniques used to inform decision-making

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 Quantitative Approach

 It had its early roots in World War II and is flourishing in business and industry
due, in part, to:
•numerous methodological developments (e.g. simplex method for solving
linear programming problems)
•a virtual explosion in computing power
•User friendly software
•Lower cost computer hardware and software
•General knowledge of managers

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 Problem Solving

Q. What are the steps for problem solving? Can you think of one of them?

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 Problem Solving

Steps of Problem Solving

(First 5 steps are the process of decision making)
1. Define the problem.
2. Determine the set of alternative solutions.
3. Determine the criteria for evaluating alternatives.
4. Evaluate the alternatives.
5. Choose an alternative (make a decision).
---------------------------------------------------------------------
6. Implement the selected alternative.
7. Evaluate the results.

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Qualitative or Quantitative Analysis?

1. What is Qualitative analysis?

 Who is responsible for it in
organizations?

2. What is Quantitative analysis?

 Who is responsible for it?
 What skills are needed?

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Quantitative Analysis and Decision Making

Analysis Phase of Decision-Making Process

Qualitative Analysis
• based largely on the manager’s judgment and experience
• No direct use of quantitative data
• includes the manager’s intuitive “feel” for the problem
• is more of an art than a science

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Quantitative Analysis and Decision Making

Analysis Phase of Decision-Making Process

Quantitative Analysis
• analyst will concentrate on the quantitative facts or data associated with
the problem
• analyst will develop mathematical expressions that describe the objectives,
constraints, and other relationships that exist in the problem
• analyst will use one or more quantitative methods to make a
recommendation

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Quantitative Analysis and Decision Making

Potential Reasons for a Quantitative Analysis Approach to Decision Making

• The problem is complex.

• The problem is very important.

• The problem is new.

• The problem is repetitive.

• The problem takes time to solve

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Quantitative Analysis and Decision Making

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 Problem 3 in the book – page 19

Why is it important for a manager or decision maker to have a good understanding

of both of these approaches to decision making?

Which approach is best for which type of decision?

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 Quantitative Analysis and Decision Making

• A manager can increase decision-making effectiveness by:

 learning more about quantitative methodology
 better understanding its contribution to the decision-making process.

 A manager who is knowledgeable in quantitative decision-making procedures is

in a much better position to compare and evaluate the qualitative and
quantitative sources of recommendations and ultimately to combine the two
sources in order to make the best possible decision.

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 Problem 4 from the book – page 19

A firm just completed a new plant that will produce more than 500 different
products, using more than 50 different production lines and machines. The
production scheduling decisions are critical in that sales will be lost if customer
demands are not met on time. If no individual in the firm has experience with this
production operation and if new production schedules must be generated each
week, why should the firm consider a quantitative approach to the production
scheduling problem?

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 Problem 4 from the book – page 19

A firm just completed a new plant that will produce more than 500 different
products, using more than 50 different production lines and machines. The
production scheduling decisions are critical in that sales will be lost if customer
demands are not met on time. If no individual in the firm has experience with this
production operation and if new production schedules must be generated each
week, why should the firm consider a quantitative approach to the production
scheduling problem?

A quantitative approach should be considered because the problem is large, complex, important,
new and repetitive.

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 Quantitative Analysis and Decision Making

Quantitative Analysis Process

• Model Development

• Data Preparation

• Model Solution

• Report Generation

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 Model Development

• Models are representations of real objects or situations

• Three forms of models are:
• Iconic models - physical replicas (scalar representations) of real objects
• For example, a scale model of an airplane is a representation of a real airplane.
• A child’s toy truck is a model of a real truck.
• The model airplane and toy truck are examples of models that are physical
replicas of real objects.
• In modeling terminology, physical replicas are referred to as iconic models.

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 Model Development

• Analog models - physical in form, but do not physically resemble the object
being modeled
• The speedometer of an automobile is an analog model; the position of the
needle on the dial represents the speed of the automobile.
• A thermometer is another analog model representing temperature.

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 Model Development

• Mathematical models - represent real world problems through a system of

mathematical formulas and expressions based on key assumptions, estimates, or
statistical analyses
• Such models are referred to as mathematical models and are a critical part of any
quantitative approach to decision making.

• Example, the total profit from the sale of a product can be determined by
multiplying the profit per unit by the quantity sold.
• If we let x represent the number of units sold and P the total profit, then, with a
profit of $10 per unit, the following mathematical model defines the total profit
earned by selling x units:
P = 10x --------- this formula has a name (next slide)
What is the profit of selling 3 units?
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 Model Development

• Generally, experimenting with models (compared to experimenting with the

real situation):
• requires less time
• is less expensive
• involves less risk

• The more closely the model represents the real situation, the accurate the
conclusions and predictions will be

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 Mathematical Models

• Objective Function – a mathematical expression that describes the

problem’s objective, such as maximizing profit or minimizing cost

• Consider a simple production problem.

• Suppose x denotes the number of units produced and sold each week, and
• the firm’s objective is to maximize total weekly profit.
• With a profit of $10 per unit, the objective function is 10x.

• P = 10x is the objective function

• To maximize or minimize profit?

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 Mathematical Models

 Constraints – a set of restrictions or limitations, such as production capacities

To continue our example, a production capacity constraint would be
necessary if, for instance, 5 hours are required to produce each unit and
only 40 hours are available per week. The production capacity constraint is
given by 5x < 40.
The value of 5x is the total time required to produce x units; the symbol
indicates that the production time required must be less than or equal to
the 40 hours available.

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 Mathematical Models

 Uncontrollable Inputs – environmental factors that are not under the control
of the decision maker
In the preceding mathematical model, the profit per unit ($10), the
production time per unit (5 hours), and the production capacity (40 hours)
are environmental factors not under the control of the manager or decision
maker.

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 Mathematical Models

 Decision Variables – controllable inputs; decision alternatives specified by the

decision maker, such as the number of units of a product to produce.
In the preceding mathematical model, the production quantity x is the
controllable input to the model.

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Flow chart

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Flow chart

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 Stochastic vs Deterministic Models

• If any of the uncontrollable inputs are uncertain to the decision maker, the model is referred to as a stochastic or
probabilistic model.
• An uncontrollable input to many production planning models is demand for the product.
• A mathematical model that treats future demand—which may be any of a range of values—with uncertainty
would be called a stochastic model.

• In the production model, the number of hours of production time required per unit, the total hours available, and
the unit profit were all uncontrollable inputs.
• Because the uncontrollable inputs were all known to take on fixed values, the model was deterministic.

• If, however, the number of hours of production time per unit could vary from 3 to 6 hours depending on the
quality of the raw material, the model would be stochastic.

• The distinguishing feature of a stochastic model is that the value of the output cannot be Determined even if the
value of the controllable input is known because the specific values of the uncontrollable inputs are unknown. In
this respect, stochastic models are often more difficult to analyze.
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 Stochastic vs Deterministic Models

Problem 7 in the book

Suppose you are going on a weekend trip to a city that is d km away.

Develop a model that determines your round-trip gasoline costs.

What assumptions or approximations are necessary to treat this model as a deterministic model?

Are these assumptions or approximations acceptable to you?

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 Mathematical Models

A complete mathematical model for our previous simple production problem

is:

Maximize 10x (objective function)

subject to: 5x < 40 (constraint)
x>0 (constraint)

[The second constraint reflects the fact that it is not possible to manufacture
a negative number of units.]

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 Mathematical Models

• Data preparation is not a trivial step, due to the time required and the
possibility of data collection errors.

• A model with 50 decision variables and 25 constraints could have over 1300
data elements!

• Often, a fairly large database is needed.

• Information systems specialists might be needed.

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 Model Solution

• The analyst attempts to identify the alternative (the set of decision variable
values) that provides the “best” output for the model.

• The “best” output is the optimal solution.

• If the alternative does not satisfy all of the model constraints, it is rejected as
being infeasible, regardless of the objective function value.

• If the alternative satisfies all of the model constraints, it is feasible and a

candidate for the “best” solution.

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 Model Solution

• Trial-and-Error Solution for Production Problem

Production Projected Total Hours Feasible

Quantity (x) Profit (10x) of Production (5x) Solution
0 0 0 yes
2 20 10 yes
4 40 20 yes
6 60 30 yes
8 80 40 Yes
10 100 50 No
12 120 60 No

Why last two rows are not feasible?

What is the best solution? Why?
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 Model Solution

A variety of software packages are available for solving mathematical models.

These are popular software with examples:

• Microsoft Excel
• Example: https://www.solver.com/solver-tutorial-using-solver

• LINGO
• Example: https://www.eostrack.com/lingo

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 Model Testing and Validation

• Often, goodness/accuracy of a model cannot be assessed until solutions are

generated.
• Small test problems having known, or at least expected, solutions can be
used for model testing and validation.
• If the model generates expected solutions, use the model on the full-scale
problem.
• If inaccuracies or potential shortcomings inherent in the model are
identified, take corrective action such as:
- Collection of more-accurate input data
- Modification of the model

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 Report Generation

• A managerial report, based on the results of the model, should be prepared.

• The report should be easily understood by the decision maker.

• The report should include:

- the recommended decision
- other pertinent information about the results (for example, how sensitive
the model solution is to the assumptions and data used in the model)

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 Example: Iron Works, Inc.

• Iron Works, Inc. manufactures two products made from steel and just
received this month's allocation of b pounds of steel.
• It takes a1 pounds of steel to make a unit of product 1 and a2 pounds of steel
to make a unit of product 2.
• Let x1 and x2 denote this month's production level of product 1 and product
2, respectively.
• Denote by p1 and p2 the unit profits for products 1 and 2, respectively.
• Iron Works has a contract calling for at least m units of product 1 this month.
• The firm's facilities are such that at most u units of product 2 may be
produced monthly.

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 Example: Iron Works, Inc.

Mathematical Model

The total monthly profit =

(profit per unit of product 1) x (monthly production of product 1)
+ (profit per unit of product 2) x (monthly production of product 2)
= p1x1 + p2x2

We want to maximize total monthly profit:

Max p1x1 + p2x2

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 Example: Iron Works, Inc.

Mathematical Model (continued)

The total amount of steel used during monthly production equals:
(steel required per unit of product 1) x (monthly production of product 1)
+ (steel required per unit of product 2) x (monthly production of product 2)
= a1x1 + a2x2

This quantity must be less than or equal to the allocated b pounds of steel:
a1x1 + a2x2 < b

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 Example: Iron Works, Inc.

Mathematical Model (continued)

The monthly production level of product 1 must be greater than or equal to
m:
x1 > m

The monthly production level of product 2 must be less than or equal to u :

x2 < u

However, the production level for product 2 cannot be negative:

x2 > 0

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 Example: Iron Works, Inc.

Mathematical Model Summary

Max p1x1 + p2x2 Objective Function

subject to s.t.
a1x1 + a2x2 < b
x1 > m Constraints
x2 < u
x2 > 0

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 Example: Iron Works, Inc.

Question

Suppose b = 2000, a1 = 2, a2 = 3, m = 60, u = 720, p1 = 100, p2 = 200.

Rewrite the model with these specific values for the uncontrollable inputs.

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 Example: Iron Works, Inc.

Answer
Substituting, the model is:

Max 100x1 + 200x2

s.t. 2x1 + 3x2 < 2000
x1 > 60
x2 < 720
x2 > 0

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 Example: Iron Works, Inc.

Question
The optimal solution to the current model is x1 = 60 and x2 = 626 2/3. If the
product were engines, explain why this is not a true optimal solution for the
"real-life" problem.

Answer
One cannot produce and sell 2/3 of an engine. Thus the problem is further
restricted by the fact that both x1 and x2 must be integers.

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 Methods Used Most Frequently

 Linearprogramming
 Integer programming
 Network models (such as transportation and transshipment models)

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Optimization and Decision Models: Linear
Programming
Lecture 2
 Outlines

• Linear Programming Problem

• Problem Formulation
• Diet Problem
• A Simple Maximization Problem
• Graphical Solution Procedure
• Extreme Points and the Optimal Solution

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 Introduction to Linear Programming

• Linear programming (LP) has nothing to do with computer programming.

• The use of the word “programming” here means “choosing a course of

action.”

• Linear programming involves choosing a course of action when the

mathematical model of the problem contains only linear functions.

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 Introduction to Linear Programming

• The maximization or minimization of some quantity is the objective in all

linear programming problems.

• All LP problems have constraints that limit the degree to which the objective
can be pursued.

• A feasible solution satisfies all the problem's constraints.

• An optimal solution is a feasible solution that results in the largest possible

objective function value when maximizing (or smallest when minimizing).

• A graphical solution method can be used to solve a linear program with two
variables.
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 Linear Programming (LP) Problem

• If both the objective function and the constraints are linear, the problem is referred
to as a linear programming problem.

• Linear functions are functions in which each variable appears in a separate term
raised to the first power and is multiplied by a constant (which could be 0).

• Linear constraints are linear functions that are restricted to be "less than or equal to",
"equal to", or "greater than or equal to" a constant.

f(x,y) = 4x+5y
s.t.
x≥0
y≥0
x+y≤6
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 Problem Formulation

• Problem formulation or modeling is the process of translating a verbal

statement of a problem into a mathematical statement.

• Formulating models is an art that can only be mastered with practice and
experience.

• Every LP problems has some unique features, but most problems also have
common features.

• General guidelines for LP model formulation are illustrated on the slides that
follow.

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 Guidelines for Model Formulation

• Understand the problem thoroughly.

• Describe the objective.

• Describe each constraint.

• Define the decision variables.

• Write the objective in terms of the decision variables.

• Write the constraints in terms of the decision variables.

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 Example 1: Diet Problem

• The diet problem is one of the classical illustrations of a problem that leads
to a linear programming model.

• The problem is concerned with providing at minimal cost a diet adequate for
a person to sustain himself or herself.

• Simply stated, what is the least expensive way of combining various amounts
of available foods in a diet that meets a person's nutritional requirements?

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 Example 1: Diet Problem

• We wish to minimize the cost of meeting our daily requirements of proteins,

vitamin C, and iron with a diet restricted to apples, bananas, carrots, dates,
and eggs.

• The nutrient values and cost of a unit of each of these five foods are given in
the next slide.

• Our daily diet requires at least 70 g of protein, 50 mg of vitamin C, and 12 mg

of iron.

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 Example 1: Diet Problem

Food Measure of Protein Vitamin c Iron Cost

unit (g/unit) (mg/unit) (mg/unit) (fils/unit)
Apples 1 med 0.4 6 0.4 8

Bananas 1 med 1.2 10 0.6 10

Carrots 1 med 0.6 3 0.4 3

Dates ½ med 0.6 1 0.2 20

Eggs 2 med 12.2 0 2.6 15

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 Example 1: Diet Problem

• Take only Apple (A) and Banana (B)

(to solve the problem graphically we must have 2 decision variables)

• What will be the mathematical model

• Find the optimal solution using graphing method

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 Example 1: Diet Problem

To simplify, we will consider that we eat only apples and bananas

Food Measure of Protein Vitamin c Iron Cost
unit (g/unit) (mg/unit) (mg/unit) (fils/unit)
Apples 1 med 0.4 6 0.4 8
Bananas 1 med 1.2 10 0.6 10
Min 70 50 12

Since we have only apples and bananas, then we only have two variables A and B
Mathematical Model:
F(A,B) = ?

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 Example 1: Diet Problem

Mathematical Model:

Food Measur Protein Vitamin c Iron Cost

OF = F(A, B)= (min) e of unit (g/unit) (mg/unit) (mg/unit) (fils/unit)
Apples 1 med 0.4 6 0.4 8
Subject to Bananas 1 med 1.2 10 0.6 10
Min 70 50 12
?

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 Example 1: Diet Problem Solution

• We use the graphing method

• For every constraint we draw line

• Then we find the common feasible region

• Then we look for the optimal solution with the objective that provide the
best solution

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 Example 1: Diet Problem Solution

C4: A,B >= 0

This constraints says that it is in the first quadrant in (A,B) coordinates where both
x and y are positive
We will find the boundaries of C1, it will be a straight line.
Easiest way to find the line is to find intercepts:

C1: 0.4A + 1.2B >= 70

We solve 0.4A+1.2B = 70
Set A=0 and find B (B = 58.3)
Set B=0 and find A (A = 175)
P1 ( 0, 58.3) P2 (175, 0)
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 Example 1: Diet Problem Solution

Exercise: Repeat the same steps for C2 and C3:

C2: 6A + 10B >= 50

C3: 0.4A + 0.6B >= 12

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 Example 1: Diet Problem Solution

C2: 6A + 10B >= 50

C3: 0.4A + 0.6B >= 12

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 Example 1: Diet Problem Solution

C3: 0.4A + 0.6B >= 12

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 Example 1: Diet Problem Solution

Putting them all together:

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 Example 1: Diet Problem Graphical Solution

B
58.33

20

C1

8 C3

C2

30 A
10 175
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 Example 1: Diet Problem Solution

What is minimum point of feasible region? (0, 58.3), (175,0), other ?

Substitute points in F(A,B) and try:

Ex) (0, 58.3) in

F(A,B) = 8A+10B
F(A, B) = 0 +10(58.3) = 583 cents

If you only eat apples and bananas,

and you want to minimize your cost,
you will only be eating bananas.

Is this the minimum cost?

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 Example 1: Diet Problem Solution

Corner method: try all corners of the feasible region: (0, 58.3), (175,0)
Take the best solution
Substitute points in F(A,B) :

(0, 58.3) in
F(A,B) = 8A+10B
F(A, B) = 0 +10(58.3) = 583 cents

(175,0)=

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 Example 1: Diet Problem Solution

Another approach find the Minimum point of feasible region: contour lines

These are contoure lines of the function

i.e. Straight lines with the same slope -0.8 that are
parallel to each other

• If we move the line up, the k-value is increasing

and cost will be larger.
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 Example 1: Diet Problem Solution

The grey area is the feasible region that

satisfies all the contraints

The green line is the objective function

Red lines are the contoure lines

Think that yo are holding a red line and

moving it up until you touch the feasible
region and the green line.

So, we will touch the red dot. Here the cost

function has a minimum value
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 Example 1: Diet Problem Solution

Summary:

All constraints are linear

The cost function is also linear

The minimum is achieved at a corner of the domain defined by the constraint (a.k.a
feasible region )

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 Example 2: A Simple Maximization Problem
LP Formulation

Objective
Max 5x1 + 7x2 Function

s.t. x1 < 6
Constraints
2x1 + 3x2 < 19
x1 + x2 < 8
Non-negativity
x1 > 0 and x2 > 0 Constraints

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 Example 1: Graphical Solution

x2

8
7 x1 = 6

6
Shaded region
5 contains all
4 feasible points
for this constraint
3
2 (6, 0)
1
x1
1 2 3 4 5 6 7 8 9 10

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 Example 2: Graphical Solution
Second Constraint Graphed

x2

8 (0, 6 1/3)
7
6
2x1 + 3x2 = 19
5
4
Shaded
3
region contains
2 all feasible points (9 1/2, 0)
1 for this constraint

x1
1 2 3 4 5 6 7 8 9 10

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 Graphical Solution
Third Constraint Graphed

x2 (0, 8)
8
7
6 x1 + x2 = 8

5
4
Shaded
3
region contains
2 all feasible points
for this constraint (8, 0)
1
x1
1 2 3 4 5 6 7 8 9 10

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 Example 2: Graphical Solution
Combined-Constraint Graph Showing Feasible Region

x2
x1 + x2 = 8
8
7
x1 = 6
6
5
4
3
Feasible 2x1 + 3x2 = 19
2 Region
1
x1
1 2 3 4 5 6 7 8 9 10

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 Example2: Graphical Solution

x2  Selected Objective Function Lines

8
7
5x1 + 7x2 = 35
6
5 5x1 + 7x2 = 39

4
3 5x1 + 7x2 = 42

2
1
x1
1 2 3 4 5 6 7 8 9 10

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 Example 2: Graphical Solution
Optimal Solution

x2 Maximum
Objective Function Line
8 5x1 + 7x2 = 46
7
6 Optimal Solution
(x1 = 5, x2 = 3)
5
4
3
2
1
x1
1 2 3 4 5 6 7 8 9 10

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 Extreme Points and the Optimal Solution

• The corners or vertices of the feasible region are referred to as

the extreme points.

• An optimal solution to an LP problem can be found at an

extreme point of the feasible region.

• When looking for the optimal solution, you do not have to

evaluate all feasible solution points.

• You have to consider only the extreme points of the feasible

region.
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 Example 2: Extreme Points

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 Example 2: Extreme Points

x2

8
7 5 (0, 6 1/3)
6
5
4
4 (5, 3)
3 Feasible
Region 3 (6, 2)
2
1 1 (0, 0) 2 (6, 0)
x1
1 2 3 4 5 6 7 8 9 10
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 Summary of the Graphical Solution Procedure
for Optimization Problems

• Prepare a graph of the feasible solutions for each of the constraints.

• Determine the feasible region that satisfies all the constraints

simultaneously.

• Draw an objective function line.

• Any feasible solution on the objective function line with the largest value
is an optimal solution.

• To find this optimal point:

• Contour lines
• Extreme points
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 Example 3:The Blending Model

• They involve blending several resources or materials to create one or more products
corresponding to a demand.

• To feed his stock a farmer can purchase two kinds of feed.

• The farmer has determined that the herd requires 60, 84, and 72 units of the nutritional
elements A, B, and C, respectively, per day.

• The contents and cost of a pound of each of the two feeds are given in the next slide.

• Question: What is the best blend that the farmer he can make and satisfying the daily nutrition
requirements?

• Or: How much of each feed should the farmer use everyday and meet the daily needs?

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 Example 3:The Blending Model

Nutritional Elements (units/lb)

A B C Cost ($/lb)
Feed1 3 7 3 10
Feed2 2 2 6 4

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 Example 3:The Blending Model

Write the constraints.

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 Example 3:The Blending Model

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 Example 3: The Blending Model

• Determine the decision variables

• Determine the objective function

• Determine the constraints

• Write down the mathematical model.

• Solve this problem using the graphing method

• Interpret the solution

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 Example 3: The Blending Model

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 Example 3: The Blending Model

Put them all together

What is the feasible region?

What does it mean to say that this

is the feasible region?
Every point in this
region satisfies all the
constraints

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 Example 3: The Blending Model

Put them all together

How many extreme

points we have and
where they are?

Every point in this

region satisfies all the
constraints

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 Example 3: The Blending Model

Can you solve the equations to find

the extreme points coordinates?

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 Example 3: The Blending Model

Feasible solution?

Interpret the result?

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 Example 3: The Blending Model

The best choice is to use ? lb of feed x

and ? lb of feed y

Which gives the minimum daily cost of ?

cents and has all the nutrients

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Desmos Solutions for the blending problem

https://www.youtube.com/watch?v=vGvuqFyMUi8&t=57s
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Example

Solve the below problem

a) Graphically
b) Using Solver or other tool

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Optimization and Decision Models:
Simplex Method
Lecture 3
 Outlines

• An Overview of the Simplex Method

• Standard Form

Annexe
• Simplex Method
• LP Special Cases
• Solver

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 Overview of the Simplex Method
Steps Leading to the Simplex Method

Formulate Put In Put In Execute

Problem Standard Tableau Simplex
as LP Form Form Method

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 Standard Form

• An LP is in standard form when:

 All variables are non-negative
 All constraints are equalities

• Putting an LP formulation into standard form involves:

 Adding slack variables to “<“ constraints
 Subtracting surplus variables from “>” constraints.

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 Slack and Surplus Variables

• A linear program in which all the variables are non-negative and

all the constraints are equalities is said to be in standard form.

• Standard form is attained by adding slack variables to "less than or

equal to" constraints, and by subtracting surplus variables from
"greater than or equal to" constraints.

• Slack and surplus variables represent the difference between the

left and right sides of the constraints.

• Slack and surplus variables have objective function coefficients

equal to 0.
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Standard Form

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Standard Form

 Adding slack variables to “<“ constraints

 Subtracting surplus variables from “>”
constraints.

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 Example: Initial Formulation

A Minimization Problem

Min 2x1 - 3x2 - 4x3

s. t. x1 + x2 + x3 < 30

2x1 + x2 + 3x3 > 60

x1 - x2 + 2x3 = 20

x1 , x2 , x3 > 0

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 Example: Standard Form

Problem in Standard Form

Min 2x1 - 3x2 - 4x3

s. t. x1 + x2 + x3 + s1 = 30

2x1 + x2 + 3x3 - s2 = 60

x1 - x2 + 2x3 = 20

x1, x2, x3, s1, s2 > 0

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 Special Cases

 Infeasibility
• No solution to the LP problem satisfies all the
constraints, including the non-negativity conditions.
• Graphically, this means a feasible region does not
exist.
• Causes include:
 A formulation error has been made.
 Management’s expectations are too high.
 Too many restrictions have been placed on the
problem (i.e. the problem is over-constrained).

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 Example: Infeasible Problem
Consider the following LP problem.

Max 2x1 + 6x2

s.t. 4x1 + 3x2 < 12

2x1 + x2 > 8

x1, x2 > 0

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 Example: Infeasible Problem
There are no points that satisfy both constraints, so there is no feasible region (and no feasible solution).

x2
10

2x1 + x2 > 8
8

6
4x1 + 3x2 < 12
4

x1
2 4 6 8 10

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 Special Cases

 Unbounded
• The solution to a maximization LP problem is
unbounded if the value of the solution may be
made indefinitely large without violating any of the
constraints.
• For real problems, this is the result of improper
formulation. (Quite likely, a constraint has been
inadvertently omitted.)

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 Example: Unbounded Solution
Consider the following LP problem.

Max 4x1 + 5x2

s.t. x1 + x2 > 5
3x1 + x2 > 8

x1, x2 > 0

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 Example: Unbounded Solution

The feasible region is unbounded and the objective function line can be
moved outward from the origin without bound, infinitely increasing the
objective function.
x2
10
3x1 + x2 > 8
8

4
x1 + x2 > 5
2

x1
2 4 6 8 10

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Annexe

Tableau Form

Simplex Method

Solver

Exercises

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 Tableau Form

A set of equations is in tableau form if for each equation:

its right hand side (RHS) is non-negative, and
there is a basic variable.
(A basic variable for an equation is a variable whose coefficient in the equation is
+1 and whose coefficient in all other equations of the problem is 0.)

To generate an initial tableau form:

An artificial variable must be added to each constraint that does not have a basic
variable.

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 Example: Tableau Form

Problem in Tableau Form

Min 2x1 - 3x2 - 4x3 + 0s1 - 0s2 + Ma2 + Ma3

s. t. x1 + x2 + x3 + s1 = 30

2x1 + x2 + 3x3 - s2 + a2 = 60

x1 - x2 + 2x3 + a3 = 20

x1, x2, x3, s1, s2, a2, a3 > 0

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 Tableau Form

• When a linear programme contains all less-than-or-equal-to constraints with nonnegative right-
hand side values, it is easy to set up the tableau form:
• we simply add a slack variable to each constraint.

• However, obtaining the tableau form is more complex if:

• the linear programme contains greater-than-or-equal-to constraints
• equality constraints
• and/or negative right-hand side values.

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 Simplex Tableau

The simplex tableau is a convenient means for performing the calculations

required by the simplex method.

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 Setting Up Initial Simplex Tableau

Step 1: If the problem is a minimization problem,

multiply the objective function by -1.

Step 2: If the problem formulation contains any

constraints with negative right-hand sides,
multiply each constraint by -1.

Step 3: Add a slack variable to each < constraint.

Step 4: Subtract a surplus variable and add an

artificial variable to each > constraint.

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 Setting Up Initial Simplex Tableau

Step 5: Add an artificial variable to each = constraint.

Step 6: Set each slack and surplus variable's

coefficient in the objective function equal to zero.

Step 7: Set each artificial variable's coefficient in the

objective function equal to -M, where M is a very large
number.

Step 8: Each slack and artificial variable becomes one of the basic
variables in the initial basic feasible solution.

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 Simplex Method

Step 1: Determine Entering Variable

Identify the variable with the most positive value in the cj -
zj row. (The entering column is called the pivot column.)

Step 2: Determine Leaving Variable

For each positive number in the entering column, compute
the ratio of the right-hand side values divided by these
entering column values.
If there are no positive values in the entering column,
STOP; the problem is unbounded.
Otherwise, select the variable with the minimal ratio. (The
leaving row is called the pivot row.)

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 Simplex Method

Step 3: Generate Next Tableau

Divide the pivot row by the pivot element (the entry at the
intersection of the pivot row and pivot column) to get a
new row. We denote this new row as (row *).
Replace each non-pivot row i with:
[new row i] = [current row i] - [(aij) x (row *)],
where aij is the value in entering column j of row i

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 Simplex Method

Step 4: Calculate zj Row for New Tableau

For each column j, multiply the objective function
coefficients of the basic variables by the corresponding
numbers in column j and sum them.

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 Simplex Method

Step 5: Calculate cj - zj Row for New Tableau

For each column j, subtract the zj row from the cj row.
If none of the values in the cj - zj row are positive, GO TO STEP
1.
If there is an artificial variable in the basis with a positive value,
the problem is infeasible. STOP.
Otherwise, an optimal solution has been found. The current
values of the basic variables are optimal. The optimal values
of the non-basic variables are all zero.
If any non-basic variable's cj - zj value is 0, alternate optimal
solutions might exist. STOP.

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 Example: Simplex Method

Solve the following problem by the simplex method:

Max 12x1 + 18x2 + 10x3

s.t. 2x1 + 3x2 + 4x3 < 50

x1 - x2 - x3 > 0
x2 - 1.5x3 > 0

x1, x2, x3 > 0

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 Example: Simplex Method

Writing the Problem in Tableau Form

We can avoid introducing artificial variables to the
second and third constraints by multiplying each by -1 (making
them < constraints). Thus, slack variables s1, s2, and s3 are
added to the three constraints.

Max 12x1 + 18x2 + 10x3 + 0s1 + 0s2 + 0s3

s.t. 2x1 + 3x2 + 4x3 + s1 = 50
- x1 + x2 + x3 + s2 = 0
- x2 + 1.5x3 + s3 = 0
x1, x2, x3, s1, s2, s3 > 0

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 Example: Simplex Method

Initial Simplex Tableau

x1 x2 x3 s1 s2 s3
Basis cB 12 18 10 0 0 0

s1 0 2 3 4 1 0 0 50
s2 0 -1 1 1 0 1 0 0 (* row)
s3 0 0 -1 1.5 0 0 1 0

zj 0 0 0 0 0 0 0
cj - zj 12 18 10 0 0 0

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 Example: Simplex Method

Iteration 1
Step 1: Determine the Entering Variable
The most positive cj - zj = 18. Thus x2 is the
entering variable.
Step 2: Determine the Leaving Variable
Take the ratio between the right hand side and
positive numbers in the x2 column:
50/3 = 16 2/3
0/1 = 0 minimum
s2 is the leaving variable and the 1 is the pivot
element.

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 Example: Simplex Method

Iteration 1 (continued)
Step 3: Generate New Tableau
Divide the second row by 1, the pivot element. Call the
"new" (in this case, unchanged) row the "* row".
Subtract 3 x (* row) from row 1.
Subtract -1 x (* row) from row 3.
New rows 1, 2, and 3 are shown in the upcoming
tableau.

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 Example: Simplex Method

Iteration 1 (continued)
Step 4: Calculate zj Row for New Tableau
The new zj row values are obtained by multiplying the cB
column by each column, element by element and summing.
For example, z1 = 5(0) + -1(18) + -1(0) = -18.

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 Example: Simplex Method

Iteration 1 (continued)
Step 5: Calculate cj - zj Row for New Tableau
The new cj-zj row values are obtained by
subtracting zj value in a column from the cj value in the same
column.
For example, c1-z1 = 12 - (-18) = 30.

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 Example: Simplex Method

Iteration 1 (continued) - New Tableau

x1 x2 x3 s1 s2 s3
Basis cB 12 18 10 0 0 0

s1 0 5 0 1 1 -3 0 50 (* row)
x2 18 -1 1 1 0 1 0 0
s3 0 -1 0 2.5 0 1 1 0

zj -18 18 18 0 18 0 0
cj - zj 30 0 -8 0 -18 0

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 Example: Simplex Method

Iteration 2
Step 1: Determine the Entering Variable
The most positive cj - zj = 30. x1 is the entering
variable.
Step 2: Determine the Leaving Variable
Take the ratio between the right hand side and
positive numbers in the x1 column:
10/5 = 2 minimum
There are no ratios for the second and third rows
because their column elements (-1) are negative.
Thus, s1 (corresponding to row 1) is the leaving
variable and 5 is the pivot element.

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 Example: Simplex Method

Iteration 2 (continued)
Step 3: Generate New Tableau
Divide row 1 by 5, the pivot element. (Call this new row 1 the
"* row").
Subtract (-1) x (* row) from the second row.
Subtract (-1) x (* row) from the third row.
Step 4: Calculate zj Row for New Tableau
The new zj row values are obtained by
multiplying the cB column by each column, element by
element and summing.
For example, z3 = .2(12) + 1.2(18) + .2(0) = 24.

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 Example: Simplex Method

Iteration 2 (continued)
Step 5: Calculate cj - zj Row for New Tableau
The new cj-zj row values are obtained by subtracting zj value in
a column from the cj value in the same column.
For example, c3-z3 = 10 - (24) = -14.

Since there are no positive numbers in the cj - zj row, this

tableau is optimal. The optimal solution is: x1 = 10; x2 =
10; x3 = 0; s1 = 0; s2 = 0 s3 = 10, and the optimal value of the
objective function is 300.

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 Feasible Region

• The feasible region for a two-variable LP problem can be

nonexistent, a single point, a line, a polygon, or an
unbounded area.
• Any linear program falls in one of four categories:
 is infeasible
 has a unique optimal solution
 has alternative optimal solutions
 has an objective function that can be increased without
bound
• A feasible region may be unbounded and yet there may be
optimal solutions. This is common in minimization problems
and is possible in maximization problems.

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 Special Cases

Alternative Optimal Solutions

In the graphical method, if the objective function line is
parallel to a boundary constraint in the direction of
optimization, there are alternate optimal solutions, with
all points on this line segment being optimal.

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 Example: Alternative Optimal Solutions

 Consider the following LP problem.

Max 4x1 + 6x2

s.t. x1 < 6
2x1 + 3x2 < 18
x1 + x2 < 7

x1 > 0 and x2 > 0

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 40

 Example: Alternative Optimal Solutions

 Boundary constraint 2x1 + 3x2 < 18 and objective function Max

4x1 + 6x2 are parallel (coincide). All points on line segment A –
B are optimal solutions.
x2 x1 + x2 < 7
7
6
A
5
B x1 < 6
4
3 2x1 + 3x2 < 18
2
1
x1
1 2 3 4 5 6 7 8 9 10
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42

Solver

• Most optimization software uses the Simplex Method to solve the problems.

• Excel’s Solver Add-In is an example of such software.

• Solver can solve LPs of up to 200 variables.

• Enhanced versions of Solver are available from Frontline Systems

(http://www.solver.com).

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43

Spreadsheet Layout Guidelines

• Develop correct model

• Make sections for decision variables, objective function, and constraints

• Use natural structure of the problem to guide structure of the spreadsheet

• Use one cell for each decision variable

• Store objective function coefficients in separate cells, and use another cell to
compute the objective function value

• Store constraint coefficients in cells, compute the LHS value of each constraint, for
comparison to the RHS value

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44

Example: Blending Problem

A farmer has to feed his stock from two feeds. These feeds contain nutritional
elements A, B and C. He has to feed his stock at least with 60 units of A, 84
units of B and 72 units of C in a daily basis.
One lb. of feed1 contains 3 units of A, 7 units of B and 3 units of C
One lb. of feed2 contains 2 units of A, 2 units of B and 6 units of C
Cost per lb of feeds is: 10 fils / lb for feed1 and 4 fils / lb for feed2

Question: what is the best mix of feeds that the farmer should use that satisfy
his daily nutritional requirements and with the minimum cost.

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45

Example: Blending Problem

Formulate the problem as a mathematical model

Let x denotes # lb for feed1 - decision variable 1
Let y denotes # lb for feed1 - decision variable 2

Objective function:
minimize z = 10x + 4y

Constraints
3x + 2y >= 60
7x + 2y >= 84
3x + 6y >= 72
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46
Example: Blending Problem

Blending problem in tabular form

Feed 1 Feed 2 Requirements

A 3 2 60
B 7 2 84
C 3 6 72

Cost/lb 10 4

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47

Blending Problem in Spreadsheet

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48

Solver Steps

• First finish a working spreadsheet model that you can use.

• Solver Settings
 Specify Objective Cell (objective function)
 Specify Changing Cells (decision variables)
 Specify Constraints

• Solve Problem to find Optimal Solution

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49

Solver Settings: Objective Function Cell and Changing Cells

Specify Objective Function Cell: B10

Specify: Min
Changing Cells (decision variables)
B5:C5

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50

Solver Settings: Constraints

• Click “Add” to add constraints

• Select LHS Cell (E14), relationship (>=), and RHS Cell (G14).
 LHS Cell should contain a formula which computes the LHS Value of the
constraint.
 RHS Cell should contain a fixed value.

• Repeat for the other two constraints.

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51

Solver Settings: Constraints

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52

Solver Parameters

• Select “Simplex LP”

o Tells Solver to use the Simplex Method, which
is faster and is Solver’s default optimization
method.
• Check “Make unconstrained Variables Non-
negative”
o Tells Solver that the decision variables (B5:C5,
representing the number of Feed1 and Feed2)
must be  0 in any feasible solution.
• Leave other settings at their defaults

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53

Solver Results

Read the message on the box. The one shown indicates the optimal solution has been found.

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54

Solved Spreadsheet (Optimal Solution)

• Optimal Solution: Feed1 = 6 lb., Feed2 = 21 lb.

• Optimal Objective Value: 144 AED.

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Example: Try to solve the below problem using Simplex method

Solve the below problem using Simplex method

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56

Learning Exercise 1

• A poultry producer stock requires at least 124 units of nutritional element A

and 60 units of nutritional element B daily. Two feeds are available for use.

• One lb. of feed1 costs 16 fils and contains 10 units of A and 3 units of B.

• One lb. of feed2 costs 14 fils and contains 4 units of A and 5 units of B.

• Determine the least expensive adequate feeding diet.

• Use Solver to determine the optimum solution

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57

Learning Exercise 2

ABC is a small manufacturer of golf equipment and supplies whose

management has decided to move into the market for medium- and high-
priced golf bags. ABC distributor is enthusiastic about the new product line and
has agreed to buy all the golf bags ABC produces over the next three months.
After a thorough investigation of the steps involved in manufacturing a golf
bag, management determined that each golf bag produced will require the
following operations:
1. Cutting and dyeing the material
2. Sewing
3. Finishing
4. Inspection and packaging
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 Learning Exercise 2

The director of manufacturing analyzed each of the operations and concluded

that if the company produces a medium-priced standard model, each bag will
require ⁷⁄₁₀ hour in the cutting and dyeing department, 1⁄₂ hour in the sewing
department, 1 hour in the finishing department, and 1⁄₁₀ hour in the inspection
and packaging department. The more expensive deluxe model will require 1
hour for cutting and dyeing, ⁵⁄₆ hour for sewing, 2⁄₃ hour for finishing, and 1⁄₄
hour for inspection and packaging.

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 Learning Exercise 2

ABC production is constrained by a limited number of hours available in each

department. After studying departmental workload projections, the director of
manufacturing estimates that 630 hours for cutting and dyeing, 600 hours for
sewing, 708 hours for finishing, and 135 hours for inspection and packaging will
be available for the production of golf bags during the next three months.

The accounting department analyzed the production data, assigned all relevant
variable costs, and arrived at prices for both bags that will result in a profit
contribution of 10 AED for every standard bag and 9 AED for every deluxe bag
produced.

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60

Learning Exercise 2

Develop a mathematical model of ABC problem that can be used to determine

the number of standard bags and the number of deluxe bags to produce in
order to maximize total profit.
Use Solver to get the optimal solution

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Optimization and Decision Models:
Sensitivity Analysis
Lecture 4
 Outlines

• Introduction to Sensitivity Analysis

• Objective Function Coefficients
• Right-Hand Sides

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 Introduction to Sensitivity Analysis

• Sensitivity analysis (or post-optimality analysis) is used to determine how

the optimal solution is affected by changes, within specified ranges, in:

• the objective function coefficients

• the right-hand side (RHS) values

• Sensitivity analysis is important to a manager who must operate in a

dynamic environment with imprecise estimates of the coefficients.

• Sensitivity analysis allows a manager to ask certain what-if questions

about the problem.
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 Sensitivity Analysis: Computer Solution

Software packages such as LINGO and Microsoft Excel

provide the following LP information:
 Information about the objective function:
• its optimal value
• coefficient ranges (ranges of optimality)
 Information about the decision variables:
• their optimal values
• their reduced costs
 Information about the constraints:
• the amount of slack or surplus
• right-hand side ranges (ranges of feasibility)

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 4 4

 Right-Hand Sides

• Let us consider how a change in the right-hand side for a constraint might affect
the feasible region and perhaps cause a change in the optimal solution.

• The improvement in the value of the optimal solution per unit increase in the
right-hand side is called the shadow price.

• The range of feasibility is the range over which the shadow price is applicable.
• As the RHS increases, other constraints will become binding and limit the change
in the value of the objective function.

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 Range of Feasibility

• The range of feasibility for a change in the right hand side

value is the range of values for this coefficient in which the
original dual price remains constant.

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 Example 2: Olympic Bike Co.

• Olympic Bike is introducing two new lightweight bicycle frames, the

Deluxe and the Professional, to be made from special aluminum and
steel alloys.

• The anticipated unit profits are $10 for the Deluxe and $15 for the
Professional.

• The number of pounds of each alloy needed per frame is summarized on

the next slide.

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 Example 2: Olympic Bike Co.

A supplier delivers 100 pounds of the aluminum alloy

and 80 pounds of the steel alloy weekly.

Aluminum Alloy Steel Alloy

Deluxe 2 3
Professional 4 2

How many Deluxe and Professional frames should

Olympic produce each week?

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 8 8

 Example 2: Olympic Bike Co.

Model Formulation
Verbal Statement of the Objective Function
Maximize total weekly profit.
Verbal Statement of the Constraints
Total weekly usage of aluminum alloy < 100 pounds.
Total weekly usage of steel alloy < 80 pounds.
Definition of the Decision Variables
x1 = number of Deluxe frames produced weekly.
x2 = number of Professional frames produced weekly.

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 Example 2: Olympic Bike Co.

Max 10x1 + 15x2 (Total Weekly Profit)

s.t. 2x1 + 4x2 < 100 (Aluminum Available)

3x1 + 2x2 < 80 (Steel Available)

x1, x2 > 0

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 Example 2: Olympic Bike Co.

A B C D
6 Decision Variables
7 Deluxe Professional
8 Bikes Made 15 17.500
9
10 Maximized Total Profit 412.500
11
12 Constraints Amount Used Amount Avail.
13 Aluminum 100 <= 100
14 Steel 80 <= 80

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 Example 2: Olympic Bike Co.

Optimal Solution

According to the output:

x1 (Deluxe frames) = 15
x2 (Professional frames) = 17.5
Objective function value = $412.50

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 Example 2: Olympic Bike Co.

Range of Optimality

Question
Suppose the profit on deluxe frames is increased to $20. Is
the above solution still optimal?

What is the value of the objective function when this unit

profit is increased to $20?

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 Example 2: Olympic Bike Co.

Range of Optimality

Answer
The output states that the solution remains optimal as long as
the objective function coefficient of x1 is between 7.5 and 22.5.
Because 20 is within this range, the optimal solution will not
change.

The optimal profit will change: 20x1 + 15x2 = 20(15) + 15(17.5)

= $562.50.

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 Example 2: Olympic Bike Co.

Range of Optimality

Question
If the unit profit on deluxe frames were $6 instead of $10,
would the optimal solution change?

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 Example 2: Olympic Bike Co.

Range of Optimality

Answer
The output states that the solution remains optimal as long as
the objective function coefficient of x1 is between 7.5 and
22.5. Because 6 is outside this range, the optimal solution
would change.

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 Example 3

Min 6x1 + 9x2 ($ cost)

s.t. x1 + 2x2 < 8

10x1 + 7.5x2 > 30
x2 > 2

x1, x2 > 0

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 Example 3

Optimal Solution
According to the output:
x1 = 1.5
x2 = 2.0

Objective function value = 27.00

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 Example 3

Range of Optimality

Question
Suppose the unit cost of x1 is decreased to $4. Is the current solution
still optimal? What is the value of the objective function when this
unit cost is decreased to $4?

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 Example 3

Range of Optimality

Answer
The output states that the solution remains optimal as long as the
objective function coefficient of x1 is between 0 and 12. Because 4 is
within this range, the optimal solution will not change. However, the
optimal total cost will change:
6x1 + 9x2 = 4(1.5) + 9(2.0) = $24.00.

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 Example 3

Range of Optimality

Question
How much can the unit cost of x2 be decreased without concern
for the optimal solution changing?

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 Changes in Constraint Coefficients

 Classical sensitivity analysis provides no information about

changes resulting from a change in the coefficient of a
variable in a constraint.

 We must change the coefficient and rerun the model to

learn the impact the change will have on the solution.

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Optimization and Decision Models:
Integer Programming
Week 5
 Types of Integer Programming Models

• In this chapter we discuss a class of problems that are modeled as linear programs with the
additional requirement that one or more variables must be integer.

• Such problems are called integer linear programs.

• If all variables must be integer, we have an all-integer linear program.

• If some, but not all, variables must be integer, we have a mixed-integer linear program.

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 Types of Integer Programming Models

• In many applications of integer linear programming, one or more integer variables

are required to equal either 0 or 1. Such variables are called 0-1 or binary variables.

• If all variables are 0-1 variables, we have a 0-1 integer linear program.

• The LP that results from dropping the integer requirements is called the LP
Relaxation of the ILP.

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Types of LP problems

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Key Questions

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 Example: All-Integer LP

Consider the following all-integer linear program:

Max 3x1 + 2x2

s.t. 3x1 + x2 < 9

x1 + 3x2 < 7
-x1 + x2 < 1

x1, x2 > 0 and integer

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 Example: All-Integer LP

LP Relaxation
Solving the problem as a linear program ignoring the integer
constraints, the optimal solution to the linear program gives
fractional values for both x1 and x2. From the graph on the
next slide, we see that the optimal solution to the linear
program is:

x1 = 2.5, x2 = 1.5,
Max 3x1 + 2x2 = 10.5

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 Example: All-Integer LP

LP Relaxation

x2
5
- x1 + x2 < 1

4 3x1 + x2 < 9

3 Max 3x1 + 2x2

LP Optimal (2.5, 1.5)

2
x1 + 3x2 < 7
1

x1
1 2 3 4 5 6 7
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 Example: All-Integer LP

Rounding Up
If we round up the fractional solution (x1 = 2.5, x2 = 1.5) to
the LP relaxation problem, we get x1 = 3 and x2 = 2. From
the graph on the next slide, we see that this point lies
outside the feasible region, making this solution infeasible.

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 Example: All-Integer LP

Rounded Up Solution

x2
5
- x1 + x2 < 1

4 3x1 + x2 < 9

Max 3x1 + 2x2

3
ILP Infeasible (3, 2)

2 LP Optimal (2.5, 1.5)

x1 + 3x2 < 7
1

x1
1 2 3 4 5 6 7
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 Example: All-Integer LP

Rounding Down
By rounding the optimal solution down to x1 = 2, x2 = 1, we
see that this solution indeed is an integer solution within the
feasible region, and substituting in the objective function, it
gives 3x1 + 2x2 = 8.
We have found a feasible all-integer solution, but have we
found the OPTIMAL all-integer solution?
---------------------
The answer is NO! The optimal solution is x1 = 3 and
x2 = 0 giving 3x1 + 2x2 = 9, as evidenced in the next two slides.

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 Example: All-Integer LP

Complete Enumeration of Feasible ILP Solutions

There are eight feasible integer solutions to this problem:
x1 x2 3x1 + 2x2

1. 0 0 0
2. 1 0 3
3. 2 0 6
4. 3 0 9 optimal solution
5. 0 1 2
6. 1 1 5
7. 2 1 8
8. 1 2 7

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 Example: All-Integer LP

Optimal All-Integer Solution

x2
5 - x1 + x2 < 1

4 3x1 + x2 < 9

Max 3x1 + 2x2

3
ILP Optimal (3, 0)
2
x1 + 3x2 < 7
1

x1
1 2 3 4 5 6 7
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 Example: Capital Budgeting

The Ice-Cold Refrigerator Company is considering

investing in several projects that have varying capital
requirements over the next four years. Faced with
limited capital each year, management would like to
select the most profitable projects. The estimated net
present value for each project, the capital requirements,
and the available capital over the four-year period are
shown on the next slide.

The estimated net present value is the net cash flow discounted back to the beginning of year

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 14 14

 Example: Capital Budgeting

 Decision Variables
The four 0-1 decision variables are as follows:
P = 1 if the plant expansion project is accepted;
0 if rejected
W = 1 if the warehouse expansion project is accepted;
0 if rejected
M = 1 if the new machinery project is accepted;
0 if rejected
R = 1 if the new product research project is accepted;
0 if rejected

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 15 15

 Example: Capital Budgeting

 Problem Data

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 16 16

 Example: Capital Budgeting

 In a capital budgeting problem, the company’s objective function is to

maximize the net present value of the capital budgeting projects.

 This problem has four constraints: one for the funds available in each of
the next four years.

 A 0-1 integer linear programming model with dollars in thousands is as

follows:

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 17 17

 Example: Capital Budgeting

 Problem Formulation

Max 90P + 40W + 10M + 37R

s.t. 15P + 10W + 10M + 15R < 40 (Yr. 1 capital
avail.)
20P + 15W + 10R < 50 (Yr. 2 capital avail.
20P + 20W + 10R < 40 (Yr. 3 capital avail.)
15P + 5W + 4M + 10R < 35 (Yr. 4 capital avail.)
P, W, M, R = 0, 1

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 18 18

 Example: Capital Budgeting

 Optimal Solution
P = 1, W = 1, M = 1, R = 0.
Total estimated net present value = $140,000
The company should fund the plant expansion, the warehouse
expansion, and the new machinery projects.
The new product research project should be put on hold unless
additional capital funds become available.
The company will have $5,000 remaining in year 1, $15,000 remaining
in year 2, and $11,000 remaining in year 4. Additional capital funds of
$10,000 in year 1 and $10,000 in year 3 will be needed to fund the new
product research project.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 19 19

 Example: Fixed Cost

In many applications, the cost of production has two components: a setup cost, which is a fixed
cost, and a variable cost, which is directly related to the production quantity.
The use of 0-1 variables makes including the setup cost possible in a model for a production
application.

As an example of a fixed cost problem, consider the RMC problem. Three raw materials are
used to produce three products: a fuel additive, a solvent base, and a carpet cleaning fluid.
The following decision variables are used:
F = tons of fuel additive produced
S = tons of solvent base produced
C = tons of carpet cleaning fluid produce

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 20 20

 Example: Fixed Cost

Three raw materials are used to produce 3 products: a fuel additive, a

solvent base, and a carpet cleaning fluid. The profit contributions are $40 per
ton for the fuel additive, $30 per ton for the solvent base, and $50 per ton for
the carpet cleaning fluid.
Each ton of fuel additive is a blend of 0.4 tons of material 1 and 0.6 tons of
material 3. Each ton of solvent base requires 0.5 tons of material 1, 0.2 tons
of material 2, and 0.3 tons of material 3. Each ton of carpet cleaning fluid is a
blend of 0.6 tons of material 1, 0.1 tons of material 2, and 0.3 tons of material
3.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 21 21

 Example: Fixed Cost

RMC has 20 tons of material 1, 5 tons of material 2, and 21

tons of material 3, and is interested in determining the optimal
production quantities for the upcoming planning period.
There is a fixed cost for production setup of the products, as
well as a maximum production quantity for each of the three
products.
Product Setup Cost Maximum Production
Fuel additive $200 50 tons
Solvent base $ 50 25 tons
Cleaning fluid $400 40 tons

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 22 22

 Example: Fixed Cost

 Decision Variables

F = tons of fuel additive produced

S = tons of solvent base produced
C = tons of carpet cleaning fluid produced
SF = 1 if the fuel additive is produced; 0 if not
SS = 1 if the solvent base is produced; 0 if not
SC = 1 if the cleaning fluid is produced; 0 if not

Using these setup variables, the total setup cost is

200SF + 50SS + 400SC
PRESENTATION TITLE GOES HERE | SLIDE NUMBER 23 23
 Example: Fixed Cost

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 24 24

 Example: Fixed Cost

 Problem Formulation for net profit

Max 40F + 30S + 50C – 200SF – 50SS – 400SC
s.t. 0.4F + 0.5S + 0.6C < 20 (Mat’l. 1)
0.2S + 0.1C < 5 (Mat’l. 2)
0.6F + 0.3S + 0.3C < 21 (Mat’l. 3)
F - 50SF < 0 (Max.F)
S - 25SS < 0 (Max. S)
C - 50SF < 0 (Max. C)
F, S, C > 0; SF, SS, SC = 0, 1

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 25 25

 Example: Fixed Cost

 Optimal Solution
Produce 25 tons of fuel additive.
Produce 20 tons of solvent base.
Produce 0 tons of cleaning fluid.
The value of the objective function after deducting
the setup cost is $1350. The setup cost for the fuel
additive and the solvent base is $200 + $50 = $250.
The optimal solution shows SC = 0, which indicates
that the more expensive $400 setup cost for the carpet
cleaning fluid should be avoided.
PRESENTATION TITLE GOES HERE | SLIDE NUMBER 26 26
 Example: Bank Location

The long-range planning department for the Ohio Trust Company is

considering expanding its operation into a 20-county region in northeastern
Ohio. Ohio Trust does not have, at this time, a principal place of business in
any of the 20 counties.
According to the banking laws in Ohio, if a bank establishes a principal
place of business (PPB) in any county, branch banks can be established in
that county and in any adjacent county. To establish a new PPB, Ohio Trust
must either obtain approval for a new bank from the state’s superintendent of
banks or purchase an existing bank.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 27 27

 Example: Bank Location

The 20 counties in the region and adjacent counties are listed on the next
slide. For example, Ashtabula County is adjacent to Lake, Geauga, and
Trumbull counties; Lake County is adjacent to Ashtabula, Cuyahoga, and
Geauga counties; and so on.
As an initial step in its planning, Ohio Trust would like to determine the
minimum number of PPBs necessary to do business throughout the 20-county
region.

A 0-1 integer programming model can be used to solve this location problem
for Ohio Trust.
PRESENTATION TITLE GOES HERE | SLIDE NUMBER 28 28
 Example: Bank Location

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 29 29

 Example: Bank Location

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 30 30

 Example: Bank Location

 Decision Variables
xi = 1 if a PBB is established in county i; 0 otherwise
 Problem Formulation
 To minimize the number of PPBs needed, we write the objective function as follows
 Note that satisfaction of this constraint ensures that a PPB will be placed in Ashtabula County or in
one or more of the adjacent counties. This constraint thus guarantees that Ohio Trust will be able to
place branch banks in Ashtabula County.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 31 31

 Example: Bank Location

 Optimal Solution
For this 20-variable, 20-constraint problem:

Establish PPBs in Ashland, Stark, Geauga counties.

(With PPBs in these three counties, Ohio Trust can place
branch banks in all 20 counties.)
All other decision variables have an optimal value of
zero, indicating that a PPB should not be placed in these
counties.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 32 32

Optimization and Decision Models:
Transportation Problem
Lecture 7
Outlines

• Introduction

• Network Diagram

• LP Formulation

• Examples

• Variations

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3

Introduction

• Transportation model is widely used in the industry.

• It covers modeling electricity transportation from power stations to different cities

• It covers modeling water supply from reservoirs to cities

• It covers modeling the distributions from plants to warehouses

• All these require a transportation model to be solved

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4

Introduction

• A Network model is one which can be represented by a set of nodes, a set of arcs, and
functions (e.g. costs, supplies, demands, etc.) associated with the arcs and/or nodes.

• Transportation model is an LP model

• Because of the structure of the model it has, a more efficient algorithm is used rather than the
simplex algorithm

• The network representation for a transportation problem with two sources and three
destinations is given on the next slide.

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 Transportation Problem

Network Representation
1 d1
c11
s1 1 c12
c13
2 d2
c21

s2 2 c22
c23
3 d3

Sources Destinations

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Linear Programming Formulation

Using the notation:

xij = number of units shipped from origin i to destination j
cij = cost per unit of shipping from origin i to destination j
si = supply or capacity in units at origin i
dj = demand in units at destination j

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 Transportation Problem

Linear Programming Formulation (continued)

𝑚 𝑛

Min ෍ ෍ 𝑐𝑖𝑗 𝑥𝑖𝑗

𝑖=1 𝑗=1

෍ 𝑥𝑖𝑗 ≤ 𝑠𝑖 𝑓𝑜𝑟 𝑖 = 1, 2, … , 𝑚 Supply

𝑗=1

෍ 𝑥𝑖𝑗 = 𝑑𝑗 𝑓𝑜𝑟 𝑗 = 1, 2, … , 𝑛 Demand

𝑖=1

xij > 0 for all i and j

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8

ABC Example

ABC has three electric power plants that supply the needs of four cities.
Each power plant can supply the following numbers of kilowatt-hours (kwh) of electricity:
- plant 1 supply 35 million
- plant 2 supply 50 million
- plant 3 supply 40 million
The peak power demands in these cities, which occur at the same time (2 P.M.), are as follows (in
kwh):
- city 1 requires 45 million;
- city 2 requires 20 million;
- city 3 requires 30 million;
- city 4 requires 30 million.
The costs of sending 1 million kwh of electricity from plant to city depend on the distance the
electricity must travel.
Formulate an LP to minimize the cost of meeting each city’s peak power demand.

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9

ABC Example

Shipping Costs, Supply, and Demand for ABC are summarized in the following
table.
To
City 1 City 2 City 3 City 4 supply
From
Plant 1 8 6 10 9 35
Plant 2 9 12 13 7 50
Plant 3 14 9 16 5 40

Demand 45 20 30 30

(million kwh)

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10

ABC Example

Formulate an LP to minimize the cost of meeting each city’s peak power demand.
Define a variable for each decision that ABC must make.
Because ABC must determine how much power is sent from each plant to each city, we
define (for i 1, 2, 3 and j 1, 2, 3, 4)

xij number of (million) kwh produced at plant i and sent to city j

See the network diagram on the next slide

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Network Diagram

x11
Plant1 City1

x14 x12
x13

x21
x24 x22
City 4 Plant2 City2

x23

x34
x32
x31

Plant3 City3
x33

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12

ABC Example LP Formulation

Total cost of supplying the peak power demands to cities 1–4 is

8x11 + 6x12 + 10x13 + 9x14 (Cost of shipping power from plant 1)

+ 9x21 + 12x22 13x23 + 7x24 (Cost of shipping power from plant 2)
+ 14x31 + 9x32 + 16x33 + 5x34 (Cost of shipping power from plant 3)

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13

ABC Example LP Formulation

Supply Constraints

ABC faces two types of constraints: supply constraints and demand constraints.

Total power supplied by each plant cannot exceed the plant’s capacity.
Example, the total amount of power sent from plant 1 to the four cities cannot exceed
35 million kwh.

Each variable with first subscript 1 represents a shipment of power from plant 1, so we
may express this restriction by the LP constraint

x11 + x12 + x13 + x14 ≤ 35

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14

ABC Example LP Formulation

Supply Constraints

In the same way, we can find constraints that reflect plant 2’s and plant 3’s capacities.
Because power is supplied by the power plants, each is a supply point.
A constraint that ensures that the total quantity shipped from a plant does not exceed
plant capacity is a supply constraint.

The LP formulation of ABC problem contains the following three supply constraints:

x11 + x12 + x13 + x14 ≤ 35 (Plant 1 supply constraint)

x21 + x22 + x23 + x24 ≤ 50 (Plant 2 supply constraint)
x31 + x32 + x33 + x34 ≤ 40 (Plant 3 supply constraint)

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15

ABC Example LP Formulation

Demand Constraints

Constraints that ensure that each city will receive sufficient power to meet its peak
demand.

Each city demands power, so each is a demand point.

For example, city 1 must receive 45 million kwh.

Each variable with second subscript 1 represents a shipment of power to city 1, so we

obtain the following constraint:

x11 + x21 + x31 = 45

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16

ABC Example LP Formulation

Demand Constraints

Similarly, we obtain a constraint for each of cities 2, 3, and 4.

A constraint that ensures that a location receives its demand is a demand constraint.
ABC must satisfy the following four demand constraints:

x11 + x21 + x31 = 45 (City 1 demand constraint)

x12 + x22 + x32 = 20 (City 2 demand constraint)
x13 + x23 + x33 = 30 (City 3 demand constraint)
x14 + x24 + x34 = 30 (City 4 demand constraint)

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17

ABC Example LP Formulation

Combining the objective function, supply constraints, demand constraints, we get the
following LP formulation of ABC problem:

Objective function
min z = 8x11 + 6x12 + 10x13 + 9x14 + 9x21 + 12x22 + 13x23 + 7x24 + 14x31 + 9x32 +
16x33 + 5x34

Supply constraints
x11 + x12 + x13 + x14 ≤ 35
x21 + x22 + x23 + x24 ≤ 50
x31 + x32 + x33 + x34 ≤ 40

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18

ABC Example LP Formulation

Demand constraints
x11 + x21 + x31 = 45
x12 + x22 + x32= 20
x13 + x23 + x33 = 30
x14 + x24 x34 = 30

Non negativity constraints

xij ≥ 0 (i 1, 2, 3; j 1, 2, 3, 4)

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19

General Description of a Transportation Problem

A transportation problem is specified by the following information:

a) a set of m supply points from which goods is shipped. Supply point i can supply at
most si units. In the ABC example, m = 3, s1 = 35, s2 = 50, and s3 = 40.

b) a set of n demand points to which the good is shipped. Demand point j must receive
at least dj units of the shipped good. In the ABC example, n = 4, d1 = 45, d2 = 20,
d3 = 30, and d4 = 30.

c) each unit produced at supply point i and shipped to demand point j incurs a variable
cost of cij. In the ABC example, c12 = 6.

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20

General Description of a Transportation Problem

• Each node has one constraint and each arc has one variable.
• The sum of the variables corresponding to arcs from an origin node must be
less than or equal to the origin’s supply
• the sum of the variables corresponding to the arcs into a destination node
must be equal to the destination’s demand.
• The optimal objective function values and optimal decision variable values
indicates that the minimum total transportation cost is $1020.
• The values for the decision variables show the optimal amounts to ship over
each route
• Other values of the decision variables indicate the remaining shipping
quantities and routes.
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21

General Description of a Transportation Problem

If total supply equals to total demand the problem is a balanced transportation

problem.

For the ABC problem, total supply and total demand both equal 125, so this is a
balanced transportation problem.

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22

Group Work

Let us illustrate by considering a transportation problem faced by Foster Generators.

This problem involves the transportation of a product from three plants to four distribution
centers. Foster Generators operates plants in Cleveland, Ohio; Bedford, Indiana; and
York, Pennsylvania. Production

The firm distributes its generators through four regional distribution centers located
in Boston, Chicago, St. Louis, and Lexington;

Management would like to determine how much of its production should be shipped
from each plant to each distribution center. The Figure below shows graphically the 12
distribution routes Foster can use.

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23

Group Work

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24

Group Work

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25

Group Work

a) Develop a network representation of the distribution system (transportation

problem).
b) Formulate the problem as LP
c) Find the optimal solution and provide interpretation

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26

Transportation Problem Solution

Transportation model is an LP model, hence we can use the simplex to solve these
problems.

However, transportation model has a good structure that can be used to get a much
better algorithm than the simplex algorithm

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Variations

Variations of the basic transportation model may involve one or more of the following
situations:
1. Total supply not equal to total demand
2. Maximization objective function
3. Route capacities or route minimums
4. Unacceptable routes

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Optimization and Decision Models:
Optimization Network
Week 8
CLO Outcomes

Outcomes: CLO3, CLO4

• Determine best practices to optimize system for better decision making

• Evaluate time trade-offs, and usage of PERT/CMP in optimization

Textbook Chapters
Chapter 8: Network Models
Chapter 9: PERT/CPM

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 Review of network model

A Network model is one which can be represented by a set of nodes, a set of

arcs, and functions (e.g. costs, supplies, demands, etc.) associated with the
arcs and/or nodes.
1 d1
Example of one type of network problem:
c11
A Transportation Problem
s1 1 c12

Where: c13
xij = number of units shipped from origin i to destination j 2 d2
c21
cij = cost per unit of shipping from origin i to destination j
si = supply or capacity in units at origin i c22
s2 2
dj = demand in units at destination j c23
3 d3

Sources Destinations
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Introduction to Network Optimization Problems

• Optimization of resources for specific type of problems

• ”Optimization” still refers to minimization of costs or maximization of profit

• “Network” Models
• Transportation problems
• Assignment problems
• Transshipment problems
• Shortest-route problems
• Minimal span problems
• Maximal flow problems
• Project management
PRESENTATION TITLE GOES HERE | SLIDE NUMBER 4
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Examples: Supply Chain Optimization Problems

• Supply chain network optimization seeks to find an optimal combination of factories and distribution centers in the supply chain.
• The solution should match supply and demand, as well as find a network configuration with the lowest costs.
• Based on the optimization results, a manager can compare potential network designs and evaluate the maximum profitability of each of
them.

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 Examples: Supply Chain Optimization Problems

To get the most efficient one, you can perform a network optimization experiment using a software tool for supply chain
design by using optimization algorithms and simulation.

The output data will show values of transportation and production flows, inventory at the end of each time period, and
associated costs.

Furthermore, you will have data on several possible network configurations options, including those with the lowest costs.

From that, you can then choose the one that best fits your business and implement it in the real world.

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Various Supply Chain Problems

You can use network optimization for several supply chain design problems:

•Facility location problem

•Distribution network design with inventory, lead time, and transportation mode selection

•Hub location problem

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 Solving The Travelling Salesman Problem For Deliveries

The Travelling Salesman Problem (TSP) is the challenge

of finding the shortest yet most efficient route for a person
to take given a list of specific destinations.

It is a well-known algorithmic problem in the fields of

computer science and operations research.

There are obviously a lot of different routes to choose from,

but finding the best one—the one that will require the least
distance or cost—is what mathematicians and computer
scientists have spent decades trying to solve for.

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 Solving The Travelling Salesman Problem For Deliveries

TSP has commanded so much attention

because it’s so easy to describe yet so difficult
to solve.

In fact, TSP belongs to the class of

combinatorial optimization problems known as
NP-complete.

This means that TSP is classified as NP-hard

because it has no “quick” solution where a
simply technique could always be applied.

The complexity of calculating the best route

will increase when you add more destinations
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Solving The Travelling Salesman Problem For Deliveries

The problem can be solved by analyzing

every round-trip route to determine the
shortest one.

With 10 destinations, there can be more than

300,000 roundtrip permutations and
combinations.

With 15 destinations, the number of possible

routes could exceed 87 billion!

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The Brute-Force Approach
The Brute Force approach, also known
as the Naive Approach, calculates
and compares all possible
permutations of routes or paths to
determine the shortest unique solution.

To solve the TSP using the Brute-

Force approach, you must calculate
the total number of routes and then
draw and list all the possible routes.
Calculate the distance of each route
and then choose the shortest one—
this is the optimal solution.

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 The Nearest Neighbor Method to solve the TSP

This is perhaps the simplest TSP

heuristic.

The key to this method is to always visit

the nearest destination and then go
back to the first city when all other
cities are visited.

To solve the TSP using this method,

choose a random city and then look for
the closest unvisited city and go there.

Once you have visited all cities, you must

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Network Problems

•Shortest-route problems
•Minimal span problems
•Maximal flow problems
•Project management

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Shortest-route problems

Example of “Government Development Agency (GDA) in Brunei, South Asia (Ch. 8: p.335)
- Several economic development construction projects
- Projects for public infrastructure to support various regions
- GDA offices in the region must visit several sites on daily basis.
Decision: Which route to follow to minimize total travel time ?

17

6
6
15 6
3 4
GDA
10 2
4
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 Shortest-Route Algorithm

Note: We use the notation [ ] to represent a permanent label and ( ) to represent a

tentative label.

Step 1: Assign node 1 the permanent label [0,S]. The first number is the distance from
node 1; the second number is the preceding node. Since node 1 has no preceding node,
it is labelled S for the starting node.

Step 2: Compute tentative labels, (d,n), for the nodes that can be reached directly from
node 1. d = the direct distance from node 1 to the node in question – this is called the
distance value. n indicates the preceding node on the route from node 1 – this is called
the preceding node value.

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 Shortest-Route Algorithm

Step 3: Identify the tentatively labelled node with the smallest distance value. Suppose
it is node k. Node k is now permanently labelled (using [ , ] brackets). If all nodes are
permanently labelled, GO TO STEP 5.

Step 4: Consider all nodes without permanent labels that can be reached directly from
the node k identified in Step 3. For each, calculate the quantity t, where

t = (arc distance from node k to node i) + (distance value at node k).

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 Shortest-Route Algorithm

Step 4: (continued)
If the non-permanently labelled node has a tentative label, compare t with
the current distance value at the tentatively labelled node in question.

If t < distance value of the tentatively labelled node, replace the tentative label
with (t,k).
If t > distance value of the tentatively labelled node, keep the current tentative
label.

If the non-permanently labelled node does not have a tentative label, create
a tentative label of (t,k) for the node in question.
In either case, now GO BACK TO STEP 3.

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 Shortest-Route Algorithm

Step 5: The permanent labels identify the shortest distance from node 1 to each
node as well as the preceding node on the shortest route. The shortest route to a
given node can be found by working backwards by starting at the given node and
moving to its preceding node. Continuing this procedure from the preceding node
will provide the shortest route from node 1 to the node in question.

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 Example: Shortest Route

Find the Shortest Route From Node 1 to All Other Nodes in the Network:

5
2 5

4 6
3
2
7 3 7
1 3

5 1 2
6
4 6
8

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 Example: Shortest Route

Iteration 1

Step 1: Assign Node 1 the permanent label [0,S].

Step 2: Since Nodes 2, 3 and 4 are directly connected to Node 1, assign the
tentative labels of (4,1) to Node 2; (7,1) to Node 3; and (5,1) to Node 4.

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 Example: Shortest Route
Tentative Labels Shown

(4,1)
5
2 5

4 6
3 2
7 3 7
[0,S] 1 3 (7,1)

5 1 2
6
(5,1) 4 6
8

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 Example: Shortest Route

Iteration 1
Step 3: Node 2 is the tentatively labelled node with the smallest
distance (4), and hence becomes the new permanently labelled
node.

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 Example: Shortest Route

Permanent Label Shown

[4,1]
2 5 5
4 6
3 2
7 3 7
[0,S] 1 3 (7,1)
1
5 6 2

(5,1) 4 6
8

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 Example: Shortest Route

Iteration 1
Step 4: For each node with a tentative label which is connected to Node 2 by just
one arc, compute the sum of its arc length plus the distance value of Node 2
(which is 4).

Node 3: 3 + 4 = 7 (not smaller than current label; do not change)

Node 5: 5 + 4 = 9 (assign tentative label to Node 5 of (9,2) since node 5 had no
label)

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 Example: Shortest Route

Iteration 1, Step 4 Results

[4,1] (9,2)
5
2 5

4 6
3 2
7 3 7
[0,S] 1 3 (7,1)
1
5 6 2

(5,1) 4 6
8

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 Example: Shortest Route

Iteration 2
Step 3: Node 4 has the smallest tentative label distance (5). It
now becomes the new permanently labelled node.

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 Example: Shortest Route

Iteration 2, Step 3 Results

[4,1] (9,2)
5
2 5

4 6
3 2
7 3
[0,S] 1 3 (6,4) 7

1
5 6 2
[5,1] 4 6
8

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 Example: Shortest Route

Iteration 2
Step 4: For each node with a tentative label which is connected to node
4 by just one arc, compute the sum of its arc length plus the distance
value of node 4 (which is 5).

Node 3: 1 + 5 = 6 (replace the tentative label of node 3 by (6,4) since 6 <

7, the current distance)

Node 6: 8 + 5 = 13 (assign tentative label to node 6 of (13,4) since node 6

had no label)

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 Example: Shortest Route

Iteration 2, Step 4 Results

[4,1] (9,2)
5
2 5
4 6
3 2
7 3 7
[0,S] 1 3 (6,4)
1
5 6 2
[5,1] 4 6 (13,4)
8

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 Example: Shortest Route

Iteration 3
Step 3: Node 3 has the smallest tentative distance label (6). It
now becomes the new permanently labelled node.

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 Example: Shortest Route

Iteration 3, Step 3 Results

[4,1] (9,2)
5
2 5

4 6
3 2
7 3 7
[0,S] 1 3 [6,4]
1
5 6 2
[5,1] 4 6 (13,4)
8

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 Example: Shortest Route

Iteration 3
Step 4: For each node with a tentative label which is connected to node 3 by just one
arc, compute the sum of its arc length plus the distance to node 3 (which is 6).

Node 5: 2 + 6 = 8 (replace the tentative label of node 5 with (8,3) since 8 < 9, the
current distance)

Node 6: 6 + 6 = 12 (replace the tentative label of node 6 with (12,3) since 12 < 13, the
current distance)

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 32

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 Example: Shortest Route
Iteration 3, Step 4 Results
[4,1] (8,3)
5
2 5
4 6
3 2
7 3 7
[0,S] 1 3 [6,4]
1
5 6 2

[5,1] 4 6 (12,3)
8

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 33

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Shortest Route

Iteration 4
Step 3: Node 5 has the smallest tentative label distance (8). It
now becomes the new permanently labelled node.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 34

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Shortest Route

Iteration 4, Step 3 Results

[4,1] [8,3]
5
2 5
4 6
3 2
7 3 7
[0,S] 1 3 [6,4]

5 1 2
6
[5,1] 4 6 (12,3)
8

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 35

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Shortest Route

Iteration 4
Step 4: For each node with a tentative label which is connected
to node 5 by just one arc, compute the sum of its arc length
plus the distance value of node 5 (which is 8).

Node 6: 3 + 8 = 11 (replace the tentative label with (11,5) since

11 < 12, the current distance)

Node 7: 6 + 8 = 14 (assign)

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 36

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Shortest Route
Iteration 4, Step 4 Results
[4,1] [8,3]
5
2 5
6
4 3 (14,5)
2
7 3 7
[0,S] 1 3 [6,4]

5 1 2
6
[5,1] 4 6 (11,5)
8

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 37

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Shortest Route

Iteration 5
Step 3: Node 6 has the smallest tentative label distance (11). It
now becomes the new permanently labelled node.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 38

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Shortest Route

Iteration 5, Step 3 Results

[4,1] [8,3]
5
2 5
6
4 3 (14,5)
2
7 3 7
[0,S] 1 3 [6,4]

5 1 2
6
[5,1] 4 6 [11,5]
8

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 39

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Shortest Route

Iteration 5
Step 4: For each node with a tentative label which is connected
to Node 6 by just one arc, compute the sum of its arc length
plus the distance value of Node 6 (which is 11).

Node 7: 2 + 11 = 13 (replace the tentative label with (13,6)

since 13 < 14, the current distance)

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 40

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Shortest Route

Iteration 5, Step 4 Results

[4,1] [8,3]
5
2 5
6
4 3 (13,6)
2
7 3 7
[0,S] 1 3 [6,4]

5 1 2
6
[5,1] 4 6 [11,5]
8

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 41

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Shortest Route

Iteration 6
Step 3: Node 7 becomes permanently labelled, and hence all
nodes are now permanently labelled. Thus proceed to
summarize in Step 5.

Step 5: Summarize by tracing the shortest routes backwards

through the permanent labels.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 42

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Shortest Route

Solution Summary

Node Minimum Distance Shortest Route

2 4 1-2
3 6 1-4-3
4 5 1-4
5 8 1-4-3-5
6 11 1-4-3-5-6
7 13 1-4-3-5-6-7

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 43

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
Exercise

Solve the GDA problem using the algorithm just used…

17 5
1
6
6
15 3 6
3 4
GDA 6

4
10 2
2 4

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 44

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
Minimal span problems

In this problem, we seek to find a way to reach all the nodes of a network by minimizing the total length of
the arcs.

Ex) A Regional Computer Center seeking to be connected to several users.

6
5

1
2

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 45

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Minimal Spanning Tree

3 60
45 9
50 20 30
1 45 6
4
40 40
30 35
5 15
25 20
7 10
2 35
30
8 25
50

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 46

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Minimal Spanning Tree

Iteration 1: Arbitrarily selecting node 1, we see that its closest node is Order of connection
node 2 (distance = 30). Therefore, initially we have: 2
Connected nodes: 1,2 5
Unconnected nodes: 3,4,5,6,7,8,9,10
Chosen arcs: 1 – 2
Iteration 2: The closest unconnected node to a connected node is node 5
(distance = 25 to node 2). Node 5 becomes a connected node.
Connected nodes: 1,2,5
Unconnected nodes: 3,4,6,7,8,9,10
Chosen arcs: 1–2, 2–5

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 47

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Minimal Spanning Tree

Iteration 3: The closest unconnected node to a connected node is node 7

(distance = 15 to node 5). Node 7 becomes a connected node. Order of connection
Connected nodes: 1,2,5,7 2
Unconnected nodes: 3,4,6,8,9,10 5
Chosen arcs: 1–2, 2–5, 5–7 7
10
Iteration 4: The closest unconnected node to a connected node is node 10
(distance = 20 to node 7). Node 10 becomes a connected node.
Connected nodes: 1,2,5,7,10
Unconnected nodes: 3,4,6,8,9
Chosen arcs: 1–2, 2–5, 5–7, 7–10

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 48

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Minimal Spanning Tree

Iteration 5: The closest unconnected node to a connected node is node 8

(distance = 25 to node 10). Node 8 becomes a connected node.
Connected nodes: 1,2,5,7,10,8 Order of connection
Unconnected nodes: 3,4,6,9 2
Chosen arcs: 1–2, 2–5, 5–7, 7–10, 10–8 5
7
Iteration 6: The closest unconnected node to a connected node is node 6 10
8
(distance = 35 to node 10). Node 6 becomes a connected node.
6
Connected nodes: 1,2,5,7,10,8,6
Unconnected nodes: 3,4,9
Chosen arcs: 1–2, 2–5, 5–7, 7–10, 10–8, 10–6

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 49

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Minimal Spanning Tree

Iteration 7: The closest unconnected node to a connected node is node

3 (distance = 20 to node 6). Node 3 becomes a connected node. Order of connection
Connected nodes: 1,2,5,7,10,8,6,3 2
Unconnected nodes: 4,9 5
Chosen arcs: 1–2, 2–5, 5–7, 7–10, 10–8, 10–6, 6–3 7
10
8
Iteration 8: The closest unconnected node to a connected node is node 6
9 (distance = 30 to node 6). Node 9 becomes a connected node. 3
Connected nodes: 1,2,5,7,10,8,6,3,9 9
Unconnected nodes: 4
Chosen arcs: 1–2, 2–5, 5–7, 7–10, 10–8, 10–6, 6–3, 6–-9

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 50

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Minimal Spanning Tree

Iteration 9: The only remaining unconnected node is node 4. It is

closest to connected node 6 (distance = 45). Order of connection
2
Thus, the minimal spanning tree (displayed on the next slide) 5
consists of: 7
Arcs: 1–2, 2–5, 5–7, 7–10, 10–8, 10–6, 6–3, 6–9, 6–4 10
Values: 30 + 25 + 15 + 20 + 25 + 35 + 20 + 30 + 45 8
6
= 245 3
9
4

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 51

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Minimal Spanning Tree

Optimal Spanning Tree

3 60
45 9
50 20 30
1 45 6
4
40 40
30 35
5 15
25 20
7 10
2 35
30
50 25
8

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 52

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
Maximal flow problems

Objective is to find the maximum flow that can enter (source) and exit (sink) a network system.

Examples: Vehicles going through in a city, messages on the internet, fluids in piping system…

The network systems usually have capacity constraints on the arcs, referred to as Flow Capacity

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 53

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Maximal Flow

Modified Network Model (added link from 7 to 1)

3
2 5
3
4 2 3 2
Source 3 4 Sink
4 3
1 4 7
3 1
3 5 1 5
3 6
6

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 54

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Maximal Flow Problem

LP Formulation
(as Capacitated Transshipment Problem)

There is a variable for every arc.

There is a constraint for every node; the flow out must equal the flow in.
There is a constraint for every arc (except the added sink-to-source arc); arc
capacity cannot be exceeded.
The objective is to maximize the flow over the added, sink-to-source arc.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 55

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Maximal Flow Problem

LP Formulation
(as Capacitated Transshipment Problem)

Max xk1 (k is sink node, 1 is source node)

s.t. xij - xji = 0 (conservation of flow)
i j
xij < cij (cij is capacity of ij arc)
xij > 0, for all i and j (non-negativity)
(xij represents the flow from node i to node j)

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 56

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Maximal Flow

LP Formulation
18 variables (for 17 original arcs and 1 added arc)
24 constraints
7 node flow-conservation constraints
17 arc capacity constraints (for original arcs)

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 57

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Maximal Flow
3
2 5
LP Formulation 3
4 2 3 2
Objective Function Source 3 4 Sink
Max x71 4 4 3
1 7
3 1
3 5 1 5
Node Flow-Conservation Constraints
3 6
x71 - x12 - x13 - x14 = 0 (flow in & out of node 1) 6
x12 + x42 + x52 – x24 - x25 = 0 (node 2)
x13 + x43 – x34 – x36 = 0 (etc.)
x14 + x24 + x34 + x54 + x64 – x42 - x43 - x45 - x46 - x47 = 0
x25 + x45 – x52 – x54 - x57 = 0
x36 + x46 - x64 - x67 = 0
x47 + x57 + x67 - x71 = 0

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 58

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Maximal Flow
3
2 5
3
4 2 3 2
LP Formulation (continued) Source 4 Sink
3
4 4 3
Arc Capacity Constraints 1 7
x12 < 4 x13 < 3 x14 < 4 3 1
3 5 1 5
x24 < 2 x25 < 3 3 6
6
x34 < 3 x36 < 6
x42 < 3 x43 < 5 x45 < 3 x46 < 1 x47 < 3
x52 < 5 x54 < 5 x57 < 5
x64 < 5 x67 < 5

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 59

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Maximal Flow
3
Optimal Solution 2 5
3
4 2 3 2
Source 3 4 Sink
2 4 4 3
2 5 1 7
3 1
3 1 2 3 5 1 5
Source Sink 3
6
6
4 4 3
1 7
1
3 1 5
10 3 6
4

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 60

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Maximum Flow exercise

Glasgow traffic flow problem

Quantities are maximum flow of vehicles / hour (1000s/hr)

3
5
2
8
2 3 Flow out of Glasgow
5 1 1 7
2
Flow out of Glasgow 6 7
3 6
7
1
3
5
5
4

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 61

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
Project Management Problems

Project Management Problems involve creating a network of tasks that need to be accomplished.

An important decision is determining the time it will take to execute a project, AND which tasks
are important to monitor.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 62

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 PERT/CPM techniques

PERT
Programme Evaluation and Review Technique
Developed by US Navy for Polaris missile project
Developed to handle uncertain activity times

CPM
Critical Path Method
Developed by Du Pont & Remington Rand
Developed for industrial projects for which activity times generally were
known

Today’s project management software packages have combined the best

features of both approaches
PRESENTATION TITLE GOES HERE | SLIDE NUMBER 63
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 PERT/CPM

PERT and CPM have been used to plan, schedule, and control a
wide variety of projects:

• R&D of new products and processes

• Construction of buildings and highways
• Maintenance of large and complex equipment
• Design and installation of new systems

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 64

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 PERT/CPM

PERT/CPM is used to plan the scheduling of individual activities

that make up a project.

Projects may have as many as several thousand activities.

A complicating factor in carrying out the activities is that some

activities depend on the completion of other activities before they
can be started. “Precedence” needs to be considered.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 65

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 PERT/CPM

Project managers rely on PERT/CPM to help them answer questions such as:

What is the total time to complete the project?

What are the scheduled start and finish dates for each specific activity?
Which activities are critical and must be completed exactly as scheduled to
keep the project on schedule?
How long can noncritical activities be delayed before they cause an
increase in the project completion time?

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 66

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Project Network

A project network can be constructed to model the precedence of the

activities.

The nodes of the network represent the activities.

The arcs of the network reflect the precedence relationships of the

activities.

A critical path for the network is a path consisting of activities with zero
slack.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 67

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Frank’s Fine Floats

Frank’s Fine Floats is in the business of building elaborate parade floats. Frank and
his crew have a new float to build and want to use PERT/CPM to help them manage the
project.

The table on the next slide shows the activities that comprise the project. Each activity’s
estimated completion time (in days) and immediate predecessors are listed as well.

Frank wants to know the total time to complete the project, which activities are
critical, and the earliest and latest start and finish dates for each activity.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 68

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Frank’s Fine Floats

Immediate Completion
Activity Description Predecessors Time (days)
A Initial Paperwork --- 3 Exercise:
B Build Body A 3
C Build Frame A 2 -Draw the network
D Finish Body B 3
E Finish Frame C 7
F Final Paperwork B,C 3
G Mount Body to Frame D,E 6
H Install Skirt on Frame C 2

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 69

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Frank’s Fine Floats

B D
3 3 G
F 6

A 3
Start Finish
3 E
7
C H
2 2

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 70

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Earliest Start and Finish Times

Step 1: Make a forward pass through the network as follows: For each activity i
beginning at the Start node, compute:

Earliest Start Time = the maximum of the earliest finish times of all activities
immediately preceding activity i. (This is 0 for an activity with no
predecessors.)

Earliest Finish Time = (Earliest Start Time) + (Time to complete activity i ).

The project completion time is the maximum of the Earliest Finish Times at
the Finish node.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 71

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Frank’s Fine Floats

Earliest Start and Finish Times

B 3 6 D 6 9
3 3 G 12 18
6 9 6
F
3
A 0 3
Start Finish
3 E 5 12
3 5 7
C H 5 7
2 2

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 72

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Latest Start and Finish Times

Step 2: Make a backwards pass through the network as follows: Move

sequentially backwards from the Finish node to the Start node. At a given
node, j, consider all activities ending at node j. For each of these activities, i,
compute:
Latest Finish Time = the minimum of the latest start times beginning at
node j. (For node N, this is the project completion time.)
Latest Start Time = (Latest Finish Time) – (Time to complete activity i ).

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 73

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Frank’s Fine Floats

Latest Start and Finish Times

B 3 6 D 6 9
3 6 9 3 9 12 G 12 18
6 9 6 12 18
F
3 15 18
A 0 3
Start 0 3 Finish
3 E 5 12
3 5 7 5 12
C H 5 7
2 3 5 2 16 18

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 74

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Determining the Critical Path

Step 3: Calculate the slack time for each activity by:

Slack = (Latest Start) – (Earliest Start), or

= (Latest Finish) – (Earliest Finish)

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 75

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Frank’s Fine Floats

Activity Slack Time

Activity ES EF LS LF Slack
A 0 3 0 3 0 (critical)
B 3 6 6 9 3
C 3 5 3 5 0 (critical)
D 6 9 9 12 3
E 5 12 5 12 0 (critical)
F 6 9 15 18 9
G 12 18 12 18 0 (critical)
H 5 7 16 18 11

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 76

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Frank’s Fine Floats

Determining the Critical Path

A critical path is a path of activities, from the Start node to the Finish
node, with 0 slack times.

Critical Path: A–C–E–G

The project completion time equals the maximum of the activities’ earliest
finish times.

Project Completion Time: 18 days

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 77

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Frank’s Fine Floats

Critical Path

B 3 6 D 6 9
3 6 9 3 9 12 G 12 18
F 6 9 6 12 18

A 0 3 3 15 18
Start 0 3 Finish
3 E 5 12
3 5 7 5 12
C H 5 7
2 3 5 2 16 18

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 78

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
Optimization and Decision Models:
Convex Optimization
Week 9
CLO Outcomes

Outcomes: CLO4

• Determine use of convex optimization in operations

• Integrate convex optimization concepts in optimization

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 2

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Review of network model

A Network model is one which can be represented by a set of nodes, a set of

arcs, and functions (e.g. costs, supplies, demands, etc.) associated with the
arcs and/or nodes.
1 d1
Example of one type of network problem:
c11
A Transportation Problem
s1 1 c12

Where: c13
xij = number of units shipped from origin i to destination j 2 d2
c21
cij = cost per unit of shipping from origin i to destination j
si = supply or capacity in units at origin i c22
s2 2
dj = demand in units at destination j c23
3 d3

Sources Destinations
PRESENTATION TITLE GOES HERE | SLIDE NUMBER 3
ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
Types of Optimization Problems

• Optimization of resources for specific type of problems

• ”Optimization” still refers to minimization of costs or maximization of profit

• “Network” Models
• Transportation problems
• Assignment problems
• Transshipment problems
• Shortest-route problems
• Minimal span problems
• Maximal flow problems
• Project management
PRESENTATION TITLE GOES HERE | SLIDE NUMBER 4
ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Convex Optimization

First, what are convex functions?

?

To have a convex function, IF any two points on the

function are joined by a straight line, then no part
of that line will be below the function.

It can also be verified with the 2nd derivative.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 5
ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Convex Optimization

Sample convex functions?

Sample convex functions are:

- quadratic, absolute value, exponential

In Convex Optimization, the objective function needs to be

convex

In what business context can we have such a function?

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 6

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Convex Optimization Problems in Business

Sample convex functions?

Inventory management: determining the quantity of product to store to minimize overall

costs of ordering, holding, and shortage while maintaining stocks within a target level.

Others: Scheduling of airplane flights, facility location, fleet management,

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 7

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
Inventory Management Problem

Basic popular model is the Economic Order Quantity (EOQ) Model

The study of inventory models is concerned with two basic questions:

How much should be ordered each time?
When should the reordering occur?

The objective is to minimize total variable cost over a specified time period (normally annual)

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 8

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
Inventory Management Problem

Ordering cost – salaries and expenses of processing an order, regardless of the order
quantity
Holding cost – usually a percentage of the value of the item assessed for keeping an
item in inventory (including finance costs, insurance, security costs, taxes, warehouse
overhead, and other related variable expenses)
Backorder cost – costs associated with being out of stock when an item is demanded
(including lost goodwill)
Purchase cost – the actual price of the items

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 9

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
Economic Order Quantity Model

The most basic of the deterministic inventory models is the economic order quantity
(EOQ).

The variable costs in this model are annual holding cost and annual ordering cost.

For the EOQ, annual holding and ordering costs are equal

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 10

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Economic Order Quantity

Assumptions
Demand is constant throughout the year at D items per year.
Ordering cost is €Co per order.
Holding cost is €Ch per item in inventory per year.
Purchase cost per unit is constant (no quantity discount).
Delivery time (lead time) is constant.
Planned shortages are not permitted.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 11

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Economic Order Quantity

Formulas

Optimal order quantity: Q * = 2DCo/Ch

Number of orders per year: D/Q *

Time between orders (cycle time): Q */D years

Total annual cost: [(1/2)Q *Ch] + [DCo/Q *]. (holding + ordering)

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 12

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Economic Order Quantity: Example

Formulas

Optimal order quantity: Q * = 2DCo/Ch

Number of orders per year: D/Q *

Time between orders (cycle time): Q */D years

Total annual cost: [(1/2)Q *Ch] + [DCo/Q *]. (holding + ordering)

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 13

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Bart’s Barometer Business

Bart's Barometer Business is a retail outlet that deals exclusively with weather
equipment. Bart is trying to decide on an inventory and reorder policy for
home barometers.

Barometers cost Bart €50 each and demand is about 500 per year, distributed
fairly evenly throughout the year.

PRESENTATION TITLE GOES HERE | SLIDE NUMBER 14

ADSM-Quality-TMP-BAPPT-013-18.06.20.RA
 Example: Bart’s Barometer Business

Reordering costs are €80 per order and holding costs are figured at 20% of the
cost of the item. BBB is open 300 days a year (6 days a week and closed 2
weeks in August). Lead time is 60 working days.

Solve using Excel Solver

- What is the impact of changing re-ordering costs by 20 euro more per order?

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 Example: Bart’s Barometer Business

Total Variable Cost Model

Total Costs = (Holding Cost) + (Ordering Cost)

TC = [Ch(Q/2)] + [Co(D/Q)]
= [.2(50)(Q/2)] + [80(500/Q)]
= 5Q + (40,000/Q)

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 Example: Bart’s Barometer Business

Optimal Reorder Quantity

Q * = 2DCo /Ch = 2(500)(80)/10 = 89.44  90

Optimal Reorder Point

Lead time is m = 60 days and daily demand is d = 500/300 or 1.667.
Thus the reorder point r = (1.667)(60) = 100. Bart should reorder 90 barometers when his inventory position reaches 100
(that is 10 on hand and one outstanding order).

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 Example: Bart’s Barometer Business

Number of Orders Per Year

Number of reorder times per year = (500/90) = 5.56 or once every (300/5.56) = 54 working days (about every 9 weeks).

Total Annual Variable Cost

TC = 5(90) + (40,000/90) = 450 + 444 = €894.

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Optimization and Decision Models:
Non-linear Optimization
Week 10
CLO Outcomes

Outcomes: CLO4
• Investigate use of non-linear optimization in business application
• Solve pooling problem using non-linear optimization
• Holistic review and integration of knowledge, skills, and competences developed
during the course.
• Link to next steps in education and employment

Chapter 8, 10, 11, 12

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Non-linear optimization

-Objective function does not only

contain variables that are without
exponents

Example on the right has what

component that is non-linear?

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Non-linear optimization

And this one?

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Examples

Various techniques depending on

characteristics of problem.

Simulation and Heuristics are also

used to solve complex non-linear
optimization problems

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Non-linear optimization problems in Business

Almost all linear optimization problems can be extended to NL optimization problems

Examples

- Portfolio optimization in Finance, Product Development

- Optimal use of resources
- Transportation problem where we minimize the Euclidean distance (uses exponent in calculation of
distance)

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Queuing for Optimization

In Business, queuing theory and optimization is often related to optimizing service levels

For example:

- Waiting lines at banks

- Waiting lines at amusement parks

What is the optimization problem? Minimize which resources?

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Queuing Theory

Queuing theory is the study of waiting lines.

Four characteristics of a queuing system are:
• the manner in which customers arrive
• the time required for service
• the priority determining the order of service
• the number and configuration of servers in the system.

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 Structure of a Waiting Line System

Distribution of Arrivals
Generally, the arrival of customers into the system is a random
event.
Frequently the arrival pattern is modeled as a Poisson process.

Distribution of Service Times

Service time is also usually a random variable.
A distribution commonly used to describe service time is the
exponential distribution.

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 Structure of a Waiting Line System

Queue Discipline
Most common queue discipline is first come, first served (FCFS).

An elevator is an example of last come, first served (LCFS) queue

discipline.

Other disciplines assign priorities to the waiting units and then

serve the unit with the highest priority first.

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Structure of a Waiting Line System

Single Service Channel System

Customer Waiting line Customer
arrives S1 leaves

Multiple Service Channels System

S1
Customer Waiting line Customer
arrives S2
leaves

S3

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 Queuing Systems

A three part code of the form A/B/k is used to describe various

queuing systems.

A identifies the arrival distribution, B the service (departure)

distribution and k the number of channels for the system.

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 Queuing Systems

 Symbols used for the arrival and service processes are: M –

Markov distributions (Poisson/exponential), D – Deterministic
(constant) and G – General distribution (with a known mean and
variance).

 For example, M/M/k refers to a system in which arrivals occur

according to a Poisson distribution, service times follow an
exponential distribution and there are k servers working at
identical service rates.

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 Queuing System Input Characteristics

 = the average arrival rate

1/ = the average time between arrivals
µ = the average service rate for each server
1/µ = the average service time
 = the standard deviation of the service time

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 Queuing System Operating Characteristics

P0 = probability the service facility is idle

Pn = probability of n units in the system
Pw = probability an arriving unit must wait for service
Lq = average number of units in the queue awaiting service
L = average number of units in the system
Wq = average time a unit spends in the queue awaiting service
W = average time a unit spends in the system

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 Analytical Formulas

For nearly all queuing systems, there is a relationship between the

average time a unit spends in the system or queue and the average
number of units in the system or queue.

These relationships, known as Little's flow equations, are:

L = W and Lq = Wq

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 Analytical Formulas

When the queue discipline is FCFS, analytical formulas have been derived
for several different queuing models including the following:
M/M/1
M/M/k
M/G/1
M/G/k with blocked customers cleared
M/M/1 with a finite calling population
Analytical formulas are not available for all possible queuing systems. In
this event, insights may be gained through a simulation of the system.

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 M/M/1 Queuing System

Single channel
Poisson arrival-rate distribution
Exponential service-time distribution
Unlimited maximum queue length
Infinite calling population
Examples:
Single-window theatre ticket sales booth
Single-scanner airport security station

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 Example: SJJT, Inc. (A)

M/M/1 Queuing System

Joe Ferris is a stock trader on the floor of the New York Stock
Exchange for the firm of Smith, Jones, Johnson, and Thomas, Inc.
Stock transactions arrive at a mean rate of 20 per hour.

Each order received by Joe requires an average of 2 minutes to

process.

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 Example: SJJT, Inc. (A)

 M/M/1 Queuing System

Orders arrive at a mean rate of 20 per hour

or one order every 3 minutes.
Therefore, in a 15-minute interval the average
number of orders arriving will be
 = 15/3 = 5.

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 Example: SJJT, Inc. (A)

Arrival Rate Distribution

Question
What is the probability that no orders are received within a 15-
minute period?

Answer
P (x = 0) = (50e -5)/0! = e -5 = .0067

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 Example: SJJT, Inc. (A)

Arrival Rate Distribution

Question

What is the probability that exactly 3 orders are received within a

15-minute period?

Answer
P (x = 3) = (53e -5)/3! = 125(.0067)/6 = .1396

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 Example: SJJT, Inc. (A)

Arrival Rate Distribution

Question
What is the probability that more than 6 orders arrive within a 15-
minute period?

Answer
P (x > 6) = 1 - P (x = 0) - P (x = 1) – P (x = 2)
- P (x = 3) - P (x = 4) – P (x = 5)
- P (x = 6)
= 1 - .762 = .238

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 Example: SJJT, Inc. (A)

Service Rate Distribution

Question

What is the mean service rate per hour?

Answer

Since Joe Ferris can process an order in an average time of 2 minutes (= 2/60
hr.), then the mean service rate, µ, is µ = 1/(mean service time) or 60/2.

m = 30/hr
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Example: SJJT, Inc. (A)

Formula Spreadsheet

A B C D E F G H
1 Poisson Arrival Rate  20
2 Exponential Service Rate m 30
3 Operating Characteristics
4 Probability of no orders in system Po =1-H1/H2
5 Average number of orders waiting Lg =H1^2/(H2*(H2-H1))
6 Average number of orders in system L =H5+H1/H2
7 Average time an order waits Wq =H5/H1
8 Average time an order is in system W =H7+1/H2
9 Probability an order must wait Pw =H1/H2

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Example: SJJT, Inc. (A)

Spreadsheet Solution

A B C D E F G H
1 Poisson Arrival Rate  20
2 Exponential Service Rate m 30
3 Operating Characteristics
4 Probability of no orders in system Po 0.333
5 Average number of orders waiting Lg 1.333
6 Average number of orders in system L 2.000
7 Average time an order waits Wq 0.067
8 Average time an order is in system W 0.100
9 Probability an order must wait Pw 0.667

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Simulation for optimization

• Advantages and Disadvantages of Using Simulation Modelling

• Random Variables and Pseudo-Random Numbers
• Time Increments
• Simulation Languages
• Validation and Statistical Considerations

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 Simulation

Simulation is one of the most frequently employed management science

techniques.

It is typically used to model random processes that are too complex to be

solved by analytical methods.

See example with Simio simulation software

https://www.youtube.com/watch?v=ueSlM0itqM0 (clinic)
https://www.youtube.com/watch?v=XMBpCqcEvqs (airport operations)
https://www.youtube.com/watch?v=_AOP2GwzVLY. (airport)
https://www.youtube.com/watch?v=yITr127KZtQ (traffic)
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 Advantages of Simulation

Among the advantages of simulation is the ability to gain insights

into the model solution which may be impossible to attain through
other techniques.

Also, once the simulation has been developed, it provides a

convenient experimental laboratory to perform "what if" and
sensitivity analysis.

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 Disadvantages of Simulation

A large amount of time may be required to develop the simulation.

There is no guarantee that the solution obtained will actually be optimal.

Simulation is, in effect, a trial and error method of comparing different policy
inputs.

It does not determine if some input which was not considered could have
provided a better solution for the model.

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 Simulation Modeling

One begins a simulation by developing a mathematical statement of the problem.

The model should be realistic yet solvable within the speed and storage
constraints of the computer system being used.

Input values for the model as well as probability estimates for the random
variables must then be determined.

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 Random Variables

Random variable values are utilized in the model through a technique known as
Monte Carlo simulation.

Each random variable is mapped to a set of numbers so that each time one
number in that set is generated, the corresponding value of the random
variable is given as an input to the model.

The mapping is done in such a way that the likelihood that a particular number
is chosen is the same as the probability that the corresponding value of the
random variable occurs.

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 Pseudo-Random Numbers

Because a computer program generates random numbers for the

mapping according to some formula, the numbers are not truly
generated in a random fashion.

However, using standard statistical tests, the numbers can be

shown to appear to be drawn from a random process.
These numbers are called pseudo-random numbers.

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 Time Increments

In a fixed-time simulation model, time periods are incremented by a

fixed amount. For each time period a different set of data from the
input sequence is used to calculate the effects on the model.

In a next-event simulation model, time periods are not fixed but are
determined by the data values from the input sequence.

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 Simulation Programs

The computer program that performs the simulation is called a simulator.

Flowcharts can be useful in writing such a program.

While this program can be written in any general purpose language (e.g. BASIC,
FORTRAN, C++, etc.) special languages which reduce the amount of code which
must be written to perform the simulation have been developed.

Special simulation languages include SIMSCRIPT, SPSS, DYNAMO, and SLAM.

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 Model Verification/Validation

Verification/validation of both the model and the method used by the

computer to carry out the calculations is extremely important.

Models which do not reflect real world behavior cannot be expected to

generate meaningful results.

Likewise, errors in programming can result in nonsensical results.

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 Model Verification/Validation

Validation is generally done by having an expert review the model

and the computer code for errors.

Ideally, the simulation should be run using actual past data.

Predictions from the simulation model should be compared with

historical results.

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 Experimental Design

Experimental design is an important consideration in the simulation process.

Issues such as the length of time of the simulation and the treatment of initial
data outputs from the model must be addressed prior to collecting and analyzing
output data.

Normally one is interested in results for the steady state (long run) operation of
the system being modeled.

The initial data inputs to the simulation generally represent a start-up period for
the process and it may be important that the data outputs for this start-up
period be neglected for predicting this long run behaviour.

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 Experimental Design

For each policy under consideration by the decision maker, the simulation
is run by considering a long sequence of input data values (given by a
pseudo-random number generator).

Whenever possible, different policies should be compared by using the

same sequence of input data.

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