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Business Analytics
Chapter 8

LINEAR OPTIMIZATION MODELS

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Introduction

3
 Optimization Problems
• Optimization problems:

• Can be used to support and improve managerial decision making.

• Maximize or minimize some function, called the objective

function, and have a set of restrictions known as constraints.

• Can be linear or nonlinear.

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 Applications of Optimization Problems
• Typical applications
• A manufacturer wants to develop a production schedule and an inventory policy
that will satisfy demand in future periods and at the same time minimize the
total production and inventory costs.
• A financial analyst would like to establish an investment portfolio from a variety
of stock and bond investment alternatives that maximizes the return on
investment.
• A marketing manager wants to determine how best to allocate a fixed advertising
budget among alternative advertising media such as web, radio, television,
newspaper, and magazine that maximizes advertising effectiveness.
(Contd.,)

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 Applications of Optimization Problems
• A company had warehouses in a number of locations. Given specific customer
demands, the company would like to determine how much each warehouse
should ship to each customer so that total transportation costs are minimized.

• Each example has a clear objective.

• Each problem has constraints that limit the degree to which the
objective can be pursued.

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 Linear Programming
• Linear optimization models are also known as linear programs.

• Linear programming:

• A problem-solving approach developed to help managers make better

decisions.

• Numerous applications in today’s competitive business environment.

• For instance, GE Capital uses linear programming to help determine

optimal lease structuring.

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A Simple Maximization Problem

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 A Simple Maximization Problem
• Problem formulation

• Mathematical model for the Par, Inc. problem

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 A Simple Maximization Problem
• Illustration

• Par, Inc. - A small manufacturer of golf equipment and supplies.

• Management has decided to move into the market for medium-

and high-priced golf bags.

• Par’s distributor to buy all the produced bags by the end of third
month.

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 A Simple Maximization Problem
• Operations involved in manufacturing a golf bag:
• Cutting and dyeing the material
• Sewing
• Finishing (inserting umbrella holder, club separators, etc.)
• Inspection and packaging

• Production requirement per golf bag:

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 A Simple Maximization Problem
• Estimated total time available for the next three months to
perform different operations:
Department Number of hours
Cutting and Dyeing 630
Sewing 600
Finishing 708
Inspection and Packaging 135

• Required Profit contribution

• Standard bag: $10/unit
• Deluxe bag: $9/unit
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 A Simple Maximization Problem
• Develop a mathematical model of the Par, Inc. problem to determine
the number of standard bags and the number of deluxe bags to produce
to maximize total profit contribution.
• Problem formulation or modeling: Process of translating the verbal
statement of a problem into a mathematical statement (or model).

• General guidelines for problem formulation:

• Understand the problem thoroughly.

• Describe the objective.

• Maximize total contribution to profit.

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 A Simple Maximization Problem
• General guidelines for problem formulation (Contd.)
• Describe each constraint
Constraint Constraint
1 Number of hours of cutting and dyeing time used must be
less than or equal to the number of hours of cutting and
dyeing time available.
2 Number of hours of sewing time used must be less than or
equal to the number of hours of sewing time available.
3 Number of hours of finishing time used must be less than or
equal to the number of hours of finishing time available.
4 Number of hours of inspection and packaging time used
must be less than or equal to the number of hours of
inspection and packaging time available.

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 A Simple Maximization Problem
• General guidelines for problem formulation (Contd.)
• Define the decision variables.
• S = number of standard bags
• D = number of deluxe bags
• Write the objective in terms of the decision variables.
• If Par makes $10 for every standard and $9 for every deluxe bag:
• Total profit contribution = 10S + 9D = Objective function

• Objective: Max 10S + 9D

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 A Simple Maximization Problem
•  General guidelines for problem formulation (Contd.)

• Write the constraints in terms of the decision variables.

• Constraint 1: ≤
S + 1D ≤ 630
• Constraint 2: ≤
S + D ≤ 600

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 A Simple Maximization Problem
• General guidelines for problem formulation (Contd.)
 
• Constraint 3: ≤
1S + D ≤ 708
• Constraint 4: ≤
S + D ≤ 135
• Nonnegativity constraints - based on the fact that the number of
standard or deluxe bags produced cannot be negative.
S ≥ 0 and D ≥ 0 or S, D ≥ 0

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 Mathematical Model for the Par, Inc. Problem
• Max 10S + 9D
 
• subject to(s.t) S + 1D ≤ 630 Cutting and dyeing
S + D ≤ 600 Sewing
1S + D ≤ 708 Finishing
S + D ≤ 135 Inspection and packaging
S, D ≥ 0

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 Mathematical Model for the Par, Inc. Problem

• This is a linear programming model because the objective

function and all constraint functions are linear functions of the
decision variables.

• Linear function: Mathematical function in which each variable

appears in a separate term and is raised to the first power.

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Solving the Par, Inc. Problem

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 Solving the Par, Inc. Problem
• The geometry of the Par, Inc. problem

• Solving linear programs with Excel Solver

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 Solving the Par, Inc. Problem
• To find the optimal solution to the problem modeled as a linear
program:
• The optimal solution must have the highest objective function
value.
• The optimal solution must be a feasible solution.
• A feasible solution is a setting of the decision variables that satisfies all
of the constraints of the problem.
• Search over the feasible region which is a set of all possible
solutions.
• Find the solution that gives the best objective function value.

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 Solving Linear Programs with Excel Solver
• The first step is to construct the relevant what-if model.
• A what-if model for optimization allows the user to try different
values of the decision variables and see:

• Whether that trial solution is feasible.

• The value of the objective function for that trial solution.

• Convey to Excel Solver the structure of the linear optimization
model.

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Figure 8.3 - What-If Spreadsheet Model for Par, Inc.

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Figure 8.4 - Solver Dialog Box and Solution to the
Par, Inc. Problem

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Solving Linear Programs with Excel Solver
• Using Solver:
• The optimal solution:
• To make 540 Standard bags and 252 Deluxe bags for a profit of $7,668.
• Using all the cutting and dyeing time as well as all finishing time, from
cells B19:B22 compared to C19:C22.
• The results are consistent with the results obtained in the Figures
8.1 and 8.2.

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Figure 8.5 - The Solver Answer Report for the Par,
Inc. Problem

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A Simple Minimization Problem

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 A Simple Minimization Problem
• Problem formulation

• Solution for the M&D Chemicals Problem

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 A Simple Minimization Problem
• Illustration
• Production requirements for M&D Chemicals:
• The combined production for products A and B must total at least
350 gallons.
• Separately a major customer’s order for 125 gallons of product A
must also be satisfied.
• Processing time:
• Product A: 2 hours/gallon
• Product B: 1 hour/gallon
• For the coming month, 600 hours of processing time are available.
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 A Simple Minimization Problem
• Production cost:
• Product A: $2/gallon; Product B: $3/gallon
• Objective: Minimizing the total production cost
• Problem formulation: To find the minimum-cost production
schedule.
• Define the decision variables and the objective function.
• Let A = number of gallons of product A
• B = number of gallons of product B
• Objective function = 2A + 3B

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 A Simple Minimization Problem
• Linear program for the M&D Chemicals problem:
• Min 2A + 3B
• s.t.
1A ≥ 125 - Demand for product A
1A + 1B ≥ 350 - Total production
2A + 1B ≤ 600 - Processing time
A, B ≥ 0

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Figure 8.6 - Solver Dialog Box and Solution to
the M&D Chemical Problem

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Special Cases of Linear Program Outcomes

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 Special Cases of Linear Program Outcomes

• Alternative optimal solutions

• Infeasibility

• Unbounded

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 Special Cases of Linear Program Outcomes

• Alternative optimal solutions: A special case

• Where the optimal objective function contour line coincides with
one of the binding constraint lines on the boundary of the feasible
region.
• In these situations, more than one solution provides the optimal
value for the objective function.

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 Special Cases of Linear Program Outcomes
• Illustration using the Par, Inc. problem
• Original objective function: 10S + 9D
• Assume the profit for the standard golf bag decreased to $6.30.
• Revised objective function: 6.3S + 9D
• The optimal solution occurs at two extreme points:
• Extreme point 4 (S = 300, D = 420) and
• Extreme point 3 (S = 540, D = 252)

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 Figure 8.8 - Par, Inc. Problem with an Objective
Function of 6.3S + 9D (Alternative Optimal Solutions)

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 Special Cases of Linear Program Outcomes
• Infeasibility:
• Means no solution to the linear programming problem.
• No points satisfy all the constraints and the nonnegativity conditions
simultaneously.
• Graphically, a feasible region does not exist.
• Infeasibility occurs because
• Management’s expectations are too high.
• Or, because too many restrictions have been placed on the problem.

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 Figure 8.9 - No Feasible Region for the Par, Inc. Problem with
Minimum Production Requirements of 500 Standard and 360 Deluxe
Bags

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 Special Cases of Linear Program Outcomes
• Interpretation of Infeasibility for the Par, Inc. problem
• Let the management know that the resources available are not
sufficient to make 500 standard bags and 360 deluxe bags.
• Provide details to the management on:
• Minimum amounts of resources that must be available.
• The amounts currently available.
• Additional amounts that would be required to accomplish this
level of production.

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 Special Cases of Linear Program Outcomes
• Resources needed to manufacture 500 standard bags and 360
deluxe bags:

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 Special Cases of Linear Program Outcomes

• An infeasible problem when solved in Excel Solver:

• Will return a message indicating that no feasible solutions exists.
• Indicating no solution to the linear programming problem will satisfy
all constraints.
• Careful inspection is necessary to identify why the problem is
infeasible.
• One of the approaches is to drop one or more constraints and re-
solve the problem.
• If we find an optimal solution for this revised problem then
• The constraint(s) that were omitted, in conjunction with the others,
are causing the problem to be infeasible.
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 Special Cases of Linear Program Outcomes
• Unbounded: The situation in which the value of the solution
• May be made infinitely large - for a maximization linear
programming.
• May be made infinitely small - for a minimization linear
programming.
• Without violating any of the constraints.

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 Special Cases of Linear Program Outcomes

• Illustration
• Consider the following linear program with two decision
variables, X and Y:
• Max 20X + 10Y
• s.t. 1X ≥2
1Y ≤ 5
X, Y ≥ 0

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Figure 8.10 - Example of an Unbounded Problem

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 Special Cases of Linear Program Outcomes

• Solving an unbounded problem using Excel Solver:

• Returns a message “Objective Cell values do not converge”.

• In linear programming models of real problems:

• The occurrence of an unbounded solution means that the problem

has been improperly formulated.

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Sensitivity Analysis

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 Sensitivity Analysis
• Sensitivity Analysis: The study of how the changes in the input
parameters of an optimization model affect the optimal solution.

• It helps in answering the questions:

• How will a change in a coefficient of the objective function affect
the optimal solution?
• How will a change in the right-hand-side value for a constraint
affect the optimal solution?

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 Sensitivity Analysis
• Interpreting Excel Solver sensitivity report
• Consider the M&D chemicals problem:
A = number of gallons of product A
B = number of gallons of product B
• Min 2A + 3B
• s.t. 1A ≥ 125 - Demand for product A
1A + 1B ≥ 350 - Total production
2A + 1B ≤ 600 - Processing time
A, B ≥ 0
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Figure 8.11 - Solver Sensitivity Report for the M&D
Chemicals Problem

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 Sensitivity Analysis
• Classical sensitivity analysis:
• Based on the assumption that only one piece of input data has
changed.
• It is assumed that all other parameters remain as stated in the
original problem.
• When interested in what would happen if two or more pieces of
input data are changed simultaneously:
• The easiest way to examine the effect of simultaneous changes is
to make the changes and rerun the model.

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General Linear Programming Notation
and More Examples

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 General Linear Programming Notation and More
Examples

• Investment portfolio selection

• Transportation planning

• Advertising campaign planning

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 General Linear Programming Notation and More
Examples
• The general notation for linear programs uses the letter x with a
 
subscript.
• In the Par, Inc. problem the decision variables could be denoted as:
• = number of standard bags
• = number of deluxe bags
• Advantage - Formulating a mathematical model for a problem that
involves a large number of decision variables is much easier.
• Disadvantage - Not being able to easily identify what the decision
variables actually represent in the mathematical model.

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 General Linear Programming Notation and More
Examples
• Par, Inc. model using the general notation:
 
• Max 10 + 9
• s.t.
+ 1 ≤ 630 Cutting and dyeing
+ ≤ 600 Sewing
1 + ≤ 708 Finishing
+ ≤ 135 Inspection and packaging
, ≥0

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 General Linear Programming Notation and More
Examples
• Investment portfolio selection - portfolio selection problems
involve situations:
• In which a financial manager must select specific investments—for
example, stocks and bonds—from a variety of investment
alternatives.

• Objective - Maximization of expected return or minimization of

risk.

• Constraints - Restrictions on the type of permissible investments,

state laws, company policy, and so on.
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 General Linear Programming Notation and More
Examples

• Illustration
• Welte Mutual Funds, Inc., located in New York City is looking for
investment opportunities for $100,000.
• The firm’s top financial analyst identified five investment opportunities
and projected their annual rates of return:

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 General Linear Programming Notation and More
Examples

• Investment guidelines:

• Neither industry (oil or steel) should receive more than $50,000.

• Amount invested in government bonds should be at least 25

percent of the steel industry investments.

• The investment in Pacific Oil, the high-return but high-risk

investment, cannot be more than 60 percent of the total oil
industry investment.

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 General Linear Programming Notation and More
Examples

•  Define the following decision variables:

= dollars invested in Atlantic Oil
= dollars invested in Pacific Oil
= dollars invested in Midwest Steel
= dollars invested in Huber Steel
= dollars invested in government bonds
• Specify the objective - Maximizing return
Max 0.073 + 0.103 + 0.064 + 0.075 + 0.045

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 General Linear Programming Notation and More
Examples

•  Define the constraints:

• Constraint 1: + + + + = 100,000
• Constraint 2: + ≤ 50,000
+ ≤ 50,000
• Constraint 3: + )
• Constraint 4: + )
• Nonnegativity constraints: , , , , 0

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 General Linear Programming Notation and More
Examples
• Linear programming model for the Welte Mutual Funds
 
investment problem:
• Max 0.073 + 0.103 + 0.064 + 0.075 + 0.045
• s.t.
+ + + + = 100,000 Available funds
+ ≤ 50,000 Oil industry maximum
+ ≤ 50,000 Steel industry maximum
+) Government bonds minimum
+) Pacific Oil restriction
,,,, 0

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Figure 8.12 - The Solution for the Welte Mutual
Funds Problem

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 General Linear Programming Notation and More
Examples

• Transportation planning
• Transportation problem arises in planning for the distribution of
goods and services from several supply locations to several
demand locations.
• Quantity of goods available at each supply location (origin) is
limited.
• Quantity of goods needed at each of several demand locations
(destinations) is known.
• Objective - Minimize the cost of shipping goods from the origins to
the destinations.

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 General Linear Programming Notation and More
Examples

• Illustration using Foster Generators problem

• Involves the transportation of a product from three plants to four

distribution centers.

• To determine how much of its production should be shipped from

each plant to each distribution center.

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 General Linear Programming Notation and More
Examples
• Production capacities over the next three-month planning period for
one type of generator:

• The three-month forecast of demand for the distribution centers:

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 General Linear Programming Notation and More
Examples
• Objective:
• To determine the routes to be used and
• The quantity to be shipped via each route
• That provides the minimum total transportation cost

• Let xij = number of units shipped from origin i to destination j

where i = 1, 2, . . . , m and j = 1, 2, . . . , n

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 General Linear Programming Notation and More
Examples
• Transportation cost per unit for the Foster Generators
transportation problem ($):
Destination
Origin Boston Chicago St. Louis Lexington
Cleveland 3 2 7 6
Bedford 6 5 2 3
York 2 5 4 5

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 General Linear Programming Notation and More
Examples
• Supply constraints
x11 + x12 + x13 + x14 ≤ 5000 Cleveland supply
x21 + x22 + x23 + x24 ≤ 6000 Bedford supply
x31 + x32 + x33 + x34 ≤ 2500 York supply
• Demand constraints
x11 + x21 + x31 = 6000 Boston demand
x12 + x22 + x32 = 4000 Chicago demand
x13 + x23 + x33 = 2000 St. Louis demand
x14 + x24 + x34 = 1500 Lexington demand
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 General Linear Programming Notation and More
Examples
• A 12-variable, 7-constraint linear programming formulation of the
Foster Generators transportation problem:
Min 3x11 + 2x12 + 7x13 + 6x14 + 6x21 + 5x22 + 2x23 + 3x24 + 2x31 + 5x32 + 4x33 + 5x34
s.t. x11 + x12 + x13 + x14 ≤5000
x21 + x22 + x23 + x24 ≤6000
x31 + x32 + x33 + x34 ≤2500
x11 + x21 + x31 =
6000
x12 + x22 + x32 =
4000
x13 + x23 + x33 = 2000

x14 + x24 +x34 = 70

Figure 8.14 - Spreadsheet Model and Solution for
the Foster Generator Problem

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 General Linear Programming Notation and More
Examples

• Advertising Campaign Planning:

• Designed to help marketing managers allocate a fixed advertising

budget to various advertising media.

• Objective - Maximize reach, frequency, and quality of exposure

• Restrictions - Company policy, contract requirements, and media

availability

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 General Linear Programming Notation and More
Examples

• Illustration
• Relax-and-Enjoy Lake Development Corporation:
• Developing a lakeside community at a privately owned lake.
• Primary market includes all middle- and upper-income families
within approximately 100 miles of the development.
• Employed the advertising firm of Boone, Phillips, and Jackson
(BP&J) to design the promotional campaign.

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Table 8.5 - Advertising Media Alternatives for the
Relax-and-Enjoy Lake Development Corporation

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 General Linear Programming Notation and More
Examples

• Problem Formulation:

• Budget: $30,000

• Restrictions imposed

• At least 10 television commercials must be used.

• At least 50,000 potential customers must be reached.

• No more than $18,000 may be spent on television advertisements.

• The decision to be made is how many times to use each medium.

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 General Linear Programming Notation and More
Examples

• Define the decision variables:

• DTV = number of times daytime TV is used
• ETV = number of times evening TV is used
• DN = number of times daily newspaper is used
• SN = number of times Sunday newspaper is used
• R = number of times radio is used
• Objective - Maximizing the total exposure quality units for the
overall media selection plan.

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 General Linear Programming Notation and More
Examples
• Linear programming model for the Relax-and-Enjoy advertising
campaign planning problem:
• Max 65DTV + 90ETV + 40DN + 60SN + 20R Exposure quality
DTV ≤ 15
ETV ≤ 10
DN ≤ 25 Availability of
media
SN ≤ 4
R ≤ 30
1500DTV + 3000ETV + 400DN + 1000SN +100R ≤ 30,000 Budget

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 General Linear Programming Notation and More
Examples
• Linear programming model for the Relax-and-Enjoy advertising
campaign planning problem (Contd.):

DTV + ETV ≥ 10 Television

1500DTV + 3000ETV ≤ 18,000 restrictions
1000DTV + 2000ETV + 1500DN + 2500SN + 300R ≥ 50,000 Customers
reached

DTV, ETV, DN, SN, R ≥ 0

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Figure 8.15 - A Spreadsheet Model and the Solution for the
Relax-and-Enjoy Lake Development Corporation Problem

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Figure 8.16 - The Excel Sensitivity Report for the Relax-
and-Enjoy Lake Development Corporation Problem

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Generating an Alternative Optimal
Solution for a Linear Program

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 Generating an Alternative Optimal Solution for a
Linear Program

• Illustration
• Consider the Foster Generators transportation problem:
• From Figure 8.14, the optimal solution:
x11 = 1000, x12 = 4000, x13 = 0, x14 = 0
x21 = 2500, x22 = 0, x23 = 2000, x24 = 1500
x31 = 2500, x32 = 0, x33 = 0, x34 = 0
• Optimal cost: $39,500
• For the revised model to be optimal, the solution must give a
total cost of $39,500.

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 Generating an Alternative Optimal Solution for a
Linear Program

• From Figure 8.14:

• x13 = x14 = x22 = x32 = x33 = x34 = 0

• If the sum of these variables is maximized and if the optimal

objective function value of the revised problem is positive.

• A different feasible solution that is also optimal is found.

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 Generating an Alternative Optimal Solution for a
Linear Program
• Revised model:
Max x13 + x14 + x22 + x32 + x33 + x34
s.t. x11 + x12 + x13 + x14 ≤ 5,000
x21 + x22 + x23 + x24 ≤ 6,000
x31 + x32 + x33 + x34 ≤ 2,500
x11 + x21 + x31 =
6,000
x12 + x22 + x32 =
4,000
x13 + x23 + x33 = 2,000

x14 + x24 +x34 =

1,500 84
Table 8.6 - An Alternative Optimal Solution to
the Foster Generators Transportation Problem

85
 Generating an Alternative Optimal Solution for a
Linear Program
• In the original solution (Figure 8.14):
• Boston distribution center is sourced from all three plants, whereas each of the
other distribution centers is sourced by one plant.
• Hence, the manager in the Boston distribution center has to deal with three
different plant managers, whereas each of the other distribution center
managers has only one plant manager.
• The alternative solution (Table 8.6) provides a more balanced solution.
• Managers in Boston and Chicago each deal with two plants, and those in St. Louis
and Lexington, which have lower total volumes, deal with only one plant.
• Because the alternative solution seems to be more equitable, it might be
preferred.
• Both the solutions give a total cost of $39,500.

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 Generating an Alternative Optimal Solution for a
Linear Program
• General approach to find an alternative optimal solution to a
linear program:
• Step 1 - Solve the linear program.
• Step 2 - Make a new objective function to be maximized. It is the
sum of those variables that were equal to zero in the solution from
Step 1.
• Step 3 - Keep all the constraints from the original problem. Add a
constraint that forces the original objective function to be equal to
the optimal objective function value from step 1.
• Step 4 - Solve the problem created in steps 2 and 3. If the objective
function value is positive, an alternative optimal solution is found.

87
QUESTIONS/CLARIFICATIONS