Chapter 1

Introduction to Quantitative
Analysis
 Learning Objectives
After completing this chapter, students will be able to:
1. Describe the quantitative analysis approach
2. Understand the application of quantitative analysis
in a real situation
3. Describe the use of modeling in quantitative analysis
4. Discuss possible problems in using quantitative
analysis
5. Perform a break-even analysis

1-2
 Chapter Outline

1.1 Introduction
1.2 What Is Quantitative Analysis?
1.3 The Quantitative Analysis Approach
1.4 How to Develop a Quantitative Analysis Model
1.5 Possible Problems in the Quantitative Analysis
Approach
1.6 Implementation

1-3
 Introduction

• Mathematical tools have been used for

thousands of years.
• Quantitative analysis can be applied to a wide
variety of problems.
– It’s not enough to just know the mathematics of a
technique.
– One must understand the specific applicability of
the technique, its limitations, and its assumptions.

1-4
 Examples of Quantitative Analyses
• In the mid 1990s, Taco Bell saved over $150 million
using forecasting and scheduling quantitative analysis
models.
• NBC Television increased revenues by over $200
million between 1996 and 2000 by using quantitative
analysis to develop better sales plans.
• Continental Airlines saved over $40 million in 2001
using quantitative analysis models to quickly recover
from weather delays and other disruptions.
• for further understanding visit
www.scienceofbetter.org
1-5
 What is Quantitative Analysis?
Quantitative analysis is a scientific approach to managerial
decision making in which raw data are processed and
manipulated to produce meaningful information.
• uses a scientific approach to decision making
• Whim, emotions, and guesswork are not part of
the quantitative analysis approach

Quantitative Meaningful
Raw Data Analysis Information

1-6
 What is Quantitative Analysis?

• Quantitative factors are data that can be accurately

calculated.
• Examples include:
– Different investment alternatives
– Interest rates
– Inventory levels
– Demand
– Labor cost
• Qualitative factors are more difficult to quantify but affect
the decision process.
• Examples include:
– The weather
– State and federal legislation
– Technological breakthroughs.
1-7
The Quantitative Analysis Approach

Defining the Problem

Developing a Model

Acquiring Input Data

Developing a Solution

Testing the Solution

Analyzing the Results

Implementing the Results

1-8
 Defining the Problem
Develop a clear and concise statement that gives
direction and meaning to subsequent steps.
– This may be the most important and difficult step.
– It is essential to go beyond symptoms and identify true
causes.
– It may be necessary to concentrate on only a few of the
problems – selecting the right problems is very
important
– Specific and measurable objectives may have to be
developed.

1-9
 Developing a Model
Quantitative analysis models are realistic, solvable,
and understandable mathematical representations
of a situation.

b + b 1X
Y=
$ Sales

$ Advertising
There are different types of models:

Scale models Schematic

models

1-10
 Developing a Model

Models generally contain variables (controllable

and uncontrollable) and parameters.
– Controllable variables are the decision variables and
are generally unknown.
• How many items should be ordered for inventory?
– Parameters are known quantities that are a part of
the model.
• What is the holding cost of the inventory?

1-11
 Acquiring Input Data

Input data must be accurate – GIGO rule:

Garbage In

Process

Garbage Out

Data may come from a variety of sources such as company reports, company
documents, interviews, on-site direct measurement, or statistical sampling.

1-12
 Developing a Solution
The best (optimal) solution to a problem is found
by manipulating the model variables until a
solution is found that is practical and can be
implemented.
Common techniques are
– Solving equations.
– Trial and error – trying various approaches and
picking the best result.
– Complete enumeration – trying all possible values.
– Using an algorithm – a series of repeating steps to
reach a solution.

1-13
 Testing the Solution

Both input data and the model should be tested for

accuracy before analysis and implementation.
– New data can be collected to test the model.
– Results should be logical, consistent, and represent the
real situation.

1-14
 Analyzing the Results
Determine the implications of the solution:
– Implementing results often requires change in an
organization.
– The impact of actions or changes needs to be studied
and understood before implementation.

Sensitivity analysis determines how much the

results will change if the model or input data
changes.
 Sensitive models should be very thoroughly tested.

1-15
 Implementing the Results
Implementation incorporates the solution into the
company.
– Implementation can be very difficult.
– People may be resistant to changes.
– Many quantitative analysis efforts have failed
because a good, workable solution was not properly
implemented.

Changes occur over time, so even successful

implementations must be monitored to determine
if modifications are necessary.
1-16
 Modeling in the Real World

Quantitative analysis models are used

extensively by real organizations to solve real
problems.
– In the real world, quantitative analysis models can
be complex, expensive, and difficult to sell.
– Following the steps in the process is an important
component of success.

1-17
How To Develop a Quantitative Analysis Model

A mathematical model of profit:

Profit = Revenue – Expenses

1-18
 How To Develop a Quantitative Analysis Model
Expenses can be represented as the sum of fixed and variable costs.

Variable costs are the product of unit costs times the number of units.

Profit = Revenue – (Fixed cost + Variable cost)

Profit = (Selling price per unit)(number of units sold) – [Fixed cost +

(Variable costs per unit)(Number of units sold)]

Profit = sX – [f + vX]

Profit = sX – f – vX

where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold
1-19
 How To Develop a Quantitative Analysis Model
Expenses can be represented as the sum of fixed and variable costs and variable
costs are the product of unit costs times the number of units
The parameters of this model are f, v, and s as
these are the inputs inherent in the model
The decision variable of interest is X
Profit = Revenue – (Fixed cost + Variable cost)
Profit = (Selling price per unit)(number of units sold) – [Fixed cost +
(Variable costs per unit)(Number of units sold)]
Profit = sX – [f + vX]
Profit = sX – f – vX

where
s = selling price per unit v = variable cost per unit
f = fixed cost X = number of units sold
1-20
 Example
The company buys, sells, and repairs old clocks. Rebuilt springs sell for $10 per
unit. Fixed cost of equipment to build springs is $1,000. Variable cost for spring
material is $5 per unit.

s = 10 f = 1,000 v=5
Number of spring sets sold = X

Profits = sX – f – vX

If sales = 0, profits = -f = –$1,000.

If sales = 1,000, profits = [(10)(1,000) – 1,000 – (5)(1,000)]
= $4,000
1-21
 Example
Companies are often interested in the break-even point (BEP). The BEP is the
number of units sold that will result in $0 profit.

0 = sX – f – vX, or 0 = (s – v)X – f
Solving for X, we have
f = (s – v)X

f
X= s–v

Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)
1-22
 Example
Companies are often interested in their break-even point (BEP). The BEP is the
number of units sold that will result in $0 profit.
BEP for this example

BEP = $1,000/($10 – $5) = 200 units

0 = sX – f – vX, or 0 = (s – v)X – f
Sales
Solving forofX,less
we than
have200 units of rebuilt springs will result in a loss.
Sales of over 200 units of rebuilt
f = (s –springs
v)X will result in a profit.

f
X= s–v

Fixed cost
BEP =
(Selling price per unit) – (Variable cost per unit)
1-23
 Advantages of Mathematical Modeling

1. Models can accurately represent reality.

2. Models can help a decision maker formulate
problems.
3. Models can give us insight and information.
4. Models can save time and money in decision making
and problem solving.
5. A model may be the only way to solve large or
complex problems in a timely fashion.
6. A model can be used to communicate problems and
solutions to others.
1-24
 Models Categorized by Risk

• Mathematical models that do not involve

risk are called deterministic models.
– All of the values used in the model are
known with complete certainty.
• Mathematical models that involve risk,
chance, or uncertainty are called
probabilistic models.
– Values used in the model are estimates
based on probabilities.
1-25
Possible Problems in the Quantitative Analysis Approach

Defining the problem

– Problems may not be easily identified.
– There may be conflicting viewpoints
– There may be an impact on other departments.
– Beginning assumptions may lead to a particular
conclusion.
– The solution may be outdated.
Developing a model
– Manager’s perception may not fit a textbook model.
– There is a trade-off between complexity and ease of
understanding.
1-26
 Possible Problems in the Quantitative Analysis Approach

Acquiring accurate input data

– Accounting data may not be collected for quantitative
problems.
– The validity of the data may be suspect.
Developing an appropriate solution
– The mathematics may be hard to understand.
– Having only one answer may be limiting.
Testing the solution for validity
Analyzing the results in terms of the whole
organization 1-27
 Implementation –
Not Just the Final Step

There may be an institutional lack of

commitment and resistance to change.
– Management may fear the use of formal analysis
processes will reduce their decision-making
power.
– Action-oriented managers may want “quick and
dirty” techniques.
– Management support and user involvement are
important.

1-28
 Implementation –
Not Just the Final Step

There may be a lack of commitment by

quantitative analysts.
– Analysts should be involved with the
problem and care about the solution.
– Analysts should work with users and take
their feelings into account.

1-29
 Discussion Questions
• Define quantitative analysis. What are some
of the organizations that support the use of
the scientific approach?
• How can quantitative analysis techniques
inform and support decision making within
organizations?
• Briefly describe and discuss your
understanding of the phrase garbage in,
garbage out.
 Chapter 2

Linear Programming Models:

Graphical and Computer Methods

 Learning Objectives
After completing this chapter, students will be able to:
1. Understand the basic assumptions and properties of
linear programming (LP).
2. Graphically solve any LP problem that has only two
variables by both the corner point and isoprofit line
methods.
3. Understand special issues in LP such as infeasibility,
unboundedness, redundancy, and alternative
optimal solutions.
4. Understand the role of sensitivity analysis.
5. Use Excel spreadsheets to solve LP problems.
2-32
 Chapter Outline

2.1 Introduction
2.2 Requirements of a Linear Programming Problem
2.3 Formulating LP Problems
2.4 Graphical Solution to an LP Problem
2.5 Solving ABC Furniture’s LP Problem using QM in
Excel
2.6 Solving Minimization Problems
2.7 Four Special Cases in LP
2.8 Sensitivity Analysis

2-33
 Introduction

• Many management decisions involve trying to

make the most effective use of limited resources.
• Linear programming (LP) is a widely used
mathematical modeling technique designed to
help managers in planning and decision making
relative to resource allocation.
– This belongs to the broader field of mathematical
programming.
– In this sense, programming refers to modeling and
solving a problem mathematically.

2-34
 Requirements of a Linear Programming
Problem

• All LP problems have 4 properties in common:

1. All problems seek to maximize or minimize some
quantity (the objective function).
2. Restrictions or constraints that limit the degree
to which we can pursue our objective are
present.
3. There must be alternative courses of action from
which to choose.
4. The objective and constraints in problems must
be expressed in terms of linear equations or
inequalities. 2-35
 Basic Assumptions of LP
• We assume conditions of certainty exist and
– numbers in the objective and constraints are known with
certainty and
– do not change during the period being studied.
• We assume proportionality exists in the objective and
constraints.
• We assume additivity in that the total of all activities
equals the sum of the individual activities.
• We assume divisibility in that solutions need not be
whole numbers.
• All answers or variables are nonnegative.
2-36
LP Properties and Assumptions

PROPERTIES OF LINEAR PROGRAMS

1. One objective function
2. One or more constraints
3. Alternative courses of action
4. Objective function and constraints are linear
– proportionality and divisibility
5. Certainty
6. Divisibility
7. Nonnegative variables

2-37
 Formulating LP Problems
• Formulating a linear program involves developing a
mathematical model to represent the managerial problem.
• The steps in formulating a linear program are:
1. Completely understand the managerial problem being
faced.
2. Identify the objective and the constraints.
3. Define the decision variables.
4. Use the decision variables to write mathematical
expressions for the objective function and the
constraints.

2-38
 Formulating LP Problems
• One of the most common LP applications is the
product mix problem.
• Two or more products are produced using limited
resources such as personnel, machines, and raw
materials.
• The profit that the firm seeks to maximize is based on
the profit contribution per unit of each product.
• The company would like to determine how many units
of each product it should produce so as to maximize
overall profit given its limited resources.
2-39
 ABC Furniture Company
 The ABC Furniture Company produces inexpensive TABLES
and CHAIRS.
 Processes are similar in that both require a certain amount of
hours of CARPENTRY WORK and in the PAINTING AND
VARNISHING DEPARTMENT.
 Each TABLE takes 4 hours of carpentry and 2 hours of
painting and varnishing.
 Each CHAIR requires 3 of carpentry and 1 hour of painting
and varnishing.
 There are
 240 hours of carpentry time and
 100 hours of painting and varnishing time available.
 Each TABLE yields a profit of $70 and each CHAIR a profit of
$50. 2-40
 ABC Furniture Company Data
The company wants to determine the best
combination of tables and chairs to produce
to reach the maximum profit.
HOURS REQUIRED TO
PRODUCE 1 UNIT
(T) (C) AVAILABLE HOURS
DEPARTMENT TABLES CHAIRS THIS WEEK
Carpentry 4 3 240

Painting and varnishing 2 1 100

Profit per unit

$70 $50

2-41
 ABC Furniture Company
 The objective is to:
Maximize profit
 The constraints are:
1. The hours of carpentry time used cannot
exceed 240 hours per week.
2. The hours of painting and varnishing time used
cannot exceed 100 hours per week.
 The decision variables representing the actual
decisions we will make are:
T = number of tables to be produced per week.
C = number of chairs to be produced per week.
2-42
 ABC Furniture Company
 We create the LP objective function in terms of T and C:
Maximize profit = $70T + $50C
 Develop mathematical relationships for the two
constraints:
 For carpentry, total time used is:
(4 hours per table)(Number of tables produced)
+ (3 hours per chair)(Number of chairs
produced).
 We know that:
Carpentry time used ≤ Carpentry time available.
4T + 3C ≤ 240 (hours of carpentry time)

2-43
 ABC Furniture Company
 Similarly,

Painting and varnishing time used ≤ Painting and varnishing

time available.
2 T + 1C ≤ 100 (hours of painting and varnishing time)

This means that each table produced

requires two hours of painting and
varnishing time.
 Both of these constraints restrict production
capacity and affect total profit.

2-44
 ABC Furniture Company
The values for T and C must be nonnegative.
T ≥ 0 (number of tables produced is
greater than or equal to 0)
C ≥ 0 (number of chairs produced is
greater than or equal to 0)
The complete problem stated mathematically:
Maximize profit = $70T + $50C
4T + 3C ≤to
subject 240 (carpentry constraint)
2T + 1C ≤ 100 (painting and varnishing constraint)
T, C ≥ 0 (nonnegativity constraint)
2-45
 Graphical Solution to an LP Problem
 The easiest way to solve a small LP
problems is graphically.
 The graphical method only works when
there are just two decision variables.
 When there are more than two variables, a
more complex approach is needed as it is
not possible to plot the solution on a two-
dimensional graph.
 The graphical method provides valuable
insight into how other approaches work.
2-46
Graphical Representation of a Constraint

Quadrant Containing All Positive Values

C

100 –
– This Axis Represents the Constraint T ≥ 0
80 –
Number of Chairs

–
60 –
–
40 – This Axis Represents the
– Constraint C ≥ 0
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables
2-47
 Graphical Representation of a Constraint

• The first step in solving the problem is to identify a

set or region of feasible solutions.
• To do this we plot each constraint equation on a
graph.
• We start by graphing the equality portion of the
constraint equations:
4T + 3C = 240
• We solve for the axis intercepts and draw the line.

2-48
 Graphical Representation of a Constraint

• When ABC company produces no tables, the

carpentry constraint is:
4(0) + 3C = 240
3C = 240
C = 80
• Similarly for no chairs:
4T + 3(0) = 240
4T = 240
T = 60
• This line is shown on the following graph:

2-49
Graphical Representation of a Constraint

Graph of carpentry constraint equation

100 –
–
80 – (T = 0, C = 80)
Number of Chairs

–
60 –
–
40 –
–
(T = 60, C = 0)
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables 2-50
Graphical Representation of a Constraint
Region that Satisfies the Carpentry Constraint

C
 Any point on or below the
100 – constraint plot will not
– violate the restriction.
 Any point above the plot
80 –
Number of Chairs

–
will violate the restriction.
60 –
–
(30, 40) (70, 40)
40 –
–
20 –
– (30, 20)
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables
2-51
 Graphical Representation of a Constraint

• The point (30, 40) lies on the plot and exactly

satisfies the constraint
4(30) + 3(40) = 240.
• The point (30, 20) lies below the plot and satisfies
the constraint
4(30) + 3(20) = 180.
• The point (70, 40) lies above the plot and does not
satisfy the constraint
4(70) + 3(40) = 400.
2-52
Graphical Representation of a Constraint
Region that Satisfies the Painting and Varnishing Constraint

100 – (T = 0, C = 100)
–
80 –
Number of Chairs

–
60 –
–
40 –
–
(T = 50, C = 0)
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables 2-53
 Graphical Representation of a Constraint

• To produce tables and chairs, both departments must

be used.
• We need to find a solution that satisfies both
constraints simultaneously.
• A new graph shows both constraint plots.
• The feasible region (or area of feasible solutions) is
where all constraints are satisfied.
• Any point inside this region is a feasible solution.
• Any point outside the region is an infeasible solution.

2-54
Graphical Representation of a Constraint
Feasible Solution Region for the ABC Furniture Company
Problem
C

100 –
–
80 – Painting/Varnishing Constraint
Number of Chairs

–
60 –
–
40 –
–
Carpentry Constraint
20 – Feasible
Region
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables
2-55
 Graphical Representation of a Constraint

• For the point (30, 20)

Carpentry 4T + 3C ≤ 240 hours available

constraint (4)(30) + (3)(20) = 180 hours used
Painting 2T + 1C ≤ 100 hours available 
constraint (2)(30) + (1)(20) = 80 hours used

 For the point (70, 40)

Carpentry 4T + 3C ≤ 240 hours available
constraint (4)(70) + (3)(40) = 400 hours used 
Painting 2T + 1C ≤ 100 hours available
constraint (2)(70) + (1)(40) = 180 hours used 

2-56
 Graphical Representation of a Constraint

• For the point (50, 5)


Carpentry 4T + 3C ≤ 240 hours available
constraint (4)(50) + (3)(5) = 215 hours used

Painting 2T + 1C ≤ 100 hours available

constraint (2)(50) + (1)(5) = 105 hours used 

2-57
 Isoprofit Line Solution Method
• Once the feasible region has been graphed, we need to
find the optimal solution from the many possible solutions.
• The speediest way to do this is to use the isoprofit line
method.
• Starting with a small but possible profit value, we graph the
objective function.
• We move the objective function line in the direction of
increasing profit while maintaining the slope.
• The last point it touches in the feasible region is the
optimal solution.

2-58
 Isoprofit Line Solution Method
• For ABC Furniture, choose a profit of $2,100.
• The objective function is then
$2,100 = 70T + 50C
• Solving for the axis intercepts, we can draw the graph.
• This is obviously not the best possible solution.
• Further graphs can be created using larger profits.
• The further we move from the origin, the larger the profit
will be.
• The highest profit ($4,100) will be generated when the
isoprofit line passes through the point (30, 40).

2-59
Isoprofit Line Solution Method
Profit line of $2,100 Plotted for the ABC Furniture Company

100 –
–
80 –
Number of Chairs

–
60 –
–
(0, 42) $2,100 = $70T + $50C
40 –
–
(30, 0)
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables 2-60
Isoprofit Line Solution Method
Four Isoprofit Lines Plotted for ABC Furniture Company

100 –
–
$3,500 = $70T + $50C
80 –
Number of Chairs

– $2,800 = $70T + $50C

60 –
– $2,100 = $70T + $50C
40 –
– $4,200 = $70T + $50C
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables 2-61
Isoprofit Line Solution Method
Optimal Solution to ABC Furniture problem

100 –
–
80 –
Maximum Profit Line
Number of Chairs

–
60 – Optimal Solution Point
– (T = 30, C = 40)
40 –
– $4,100 = $70T + $50C
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables 2-62
 Corner Point Solution Method

• A second approach to solving LP problems employs

the corner point method.
• It involves looking at the profit at every corner point
of the feasible region.
• The mathematical theory behind LP is that the
optimal solution must lie at one of the corner points,
or extreme point, in the feasible region.
• For ABC Furniture, the feasible region is a four-sided
polygon with four corner points labeled 1, 2, 3, and 4
on the graph.
2-63
Corner Point Solution Method
Four Corner Points of the Feasible Region

100 –
2 –
80 –
Number of Chairs

–
60 –
–
3
40 –
–
20 –
–
1 |– | | | | | | | | | | |
0 20 40
4 60 80 100 T
Number of Tables 2-64
 Corner Point Solution Method

 To find the coordinates for Point 3 accurately we have to solve

for the intersection of the two constraint lines.
 Using the simultaneous equations method, we multiply the
painting equation by –2 and add it to the carpentry equation
4T + 3C = 240 (carpentry line)
– 4T – 2C = –200 (painting line)
C= 40

 Substituting 40 for C in either of the original equations allows us to

determine the value of T.
4T + (3)(40) = 240 (carpentry line)
4T + 120 = 240
T= 30

2-65
 Corner Point Solution Method

Point 1 : (T = 0, C = 0) Profit = $70(0) + $50(0) = $0

Point 2 : (T = 0, C = 80) Profit = $70(0) + $50(80) = $4,000
Point 4 : (T = 50, C = 0) Profit = $70(50) + $50(0) =
$3,500
3
Point : (T = 30, C = 40) Profit = $70(30) + $50(40) =
$4,100

Because Point 3 returns the highest profit,

this is the optimal solution.

2-66
 Slack and Surplus
• Slack is the amount of a resource that is not
used. For a less-than-or-equal constraint:
– Slack = Amount of resource available – amount
of resource used.
• Surplus is used with a greater-than-or-equal
constraint to indicate the amount by which
the right hand side of the constraint is
exceeded.
– Surplus = Actual amount – minimum amount.
2-67
 Summary of Graphical Solution Methods
ISOPROFIT METHOD

1. Graph all constraints and find the feasible region.

2. Select a specific profit (or cost) line and graph it to find the slope.
3. Move the objective function line in the direction of increasing profit (or decreasing
cost) while maintaining the slope. The last point it touches in the feasible region is
the optimal solution.

4. Find the values of the decision variables at this last point and compute the profit
(or cost).

CORNER POINT METHOD

1. Graph all constraints and find the feasible region.

2. Find the corner points of the feasible reason.

3. Compute the profit (or cost) at each of the feasible corner points.

4. Select the corner point with the best value of the objective function found in Step 3.
This is the optimal solution.
2-68
 Solving ABC Furniture’s LP Problem Using QM
for Windows and Excel
• Most organizations have access to software to solve
big LP problems.
• While there are differences between software
implementations, the approach each takes towards
handling LP is basically the same.
• Once you are experienced in dealing with
computerized LP algorithms, you can easily adjust to
minor changes.

269
 Using QM for Windows

 First select the Linear Programming

module.
 Specify the number of constraints (non-
negativity is assumed).
 Specify the number of decision variables.
 Specify whether the objective is to be
maximized or minimized.
 For ABC Furniture problem there are two
constraints, two decision variables, and the
objective is to maximize profit.
2-70
 Using QM for Windows

QM for Windows Linear Programming Computer

screen for Input of Data

2-71
 Using QM for Windows

QM for Windows Data Input for ABC

Furniture Problem

2-72
 Using QM for Windows

QM for Windows Output for ABC Furniture Problem

2-73
 Using QM for Windows
QM for Windows Graphical Output for ABC Furniture Problem

2-74
 Using Excel’s Solver Command to Solve LP Problems

 The Solver tool in Excel can be used to

find solutions to:
 LP problems.
 Integer programming problems.
 Noninteger programming problems.
 Solver is limited to 200 variables and
100 constraints.

2-75
 Using Solver to Solve the ABC Furniture Problem

 Recall the model for ABC Furniture is:

Maximize profit = $70T +$50C
Subject to 4T + 3C ≤ 240
2T + 1C ≤ 100
 To use Solver, it is necessary to enter
formulas based on the initial model.

2-76
 Using Solver to Solve the ABC Furniture Problem

1. Enter the variable names, the coefficients

for the objective function and constraints,
and the right-hand-side values for each of
the constraints.
2. Designate specific cells for the values of the
decision variables.
3. Write a formula to calculate the value of
the objective function.
4. Write a formula to compute the left-hand
sides of each of the constraints.
2-77
Using Solver to Solve the ABC Furniture Problem

Excel Data Input for the ABC Furniture Example

2-78
Using Solver to Solve the ABC Furniture Problem

Formulas for the ABC Furniture Example

2-79
Using Solver to Solve the ABC Furniture Problem

Excel Spreadsheet for the ABC Furniture Example

2-80
 Using Solver to Solve the ABC Furniture Problem

 Once the model has been entered, the following

steps can be used to solve the problem.

1. In the Set Objective box, enter the cell

address for the total profit.
2. In the By Changing Cells box, enter the
cell addresses for the variable values.
3. Click Max for a maximization problem
and Min for a minimization problem.
2-81
 Using Solver to Solve the ABC Furniture
Problem
4. Check the box for Make Unconstrained Variables
Non-negative.
5. Click the Select Solving Method button and select
Simplex LP from the menu that appears.
6. Click Add to add the constraints.
7. In the dialog box that appears, enter the cell
references for the left-hand-side values, the type
of equation, and the right-hand-side values.
8. Click Solve.

2-82
Using Solver to Solve the ABC Furniture
Problem
Starting Solver

2-83
 Using Solver to Solve ABC Furniture
Problem
Solver Parameters
Dialog Box

2-84
Using Solver to Solve ABC Furniture
Problem
Solver Add Constraint Dialog Box

2-85
Using Solver to Solve the ABC Furniture
Problem
Solver Results Dialog Box

2-86
Using Solver to Solve the ABC Furniture
Problem
Solution Found by Solver

2-87
 Solving Minimization Problems
• Many LP problems involve minimizing an objective
such as cost instead of maximizing a profit
function.
• Minimization problems can be solved graphically
by first setting up the feasible solution region and
then using either the corner point method or an
isocost line approach (which is analogous to the
isoprofit approach in maximization problems) to
find the values of the decision variables (e.g., X1
and X2) that yield the minimum cost.
2-88
 Holiday Meal Turkey Ranch
The Holiday Meal Turkey Ranch is considering buying two
different brands of turkey feed and blending them to provide
a good, low-cost diet for its turkeys

Let
X1 = number of pounds of brand 1 feed purchased
X2 = number of pounds of brand 2 feed purchased
Minimize cost (in cents) = 2X1 + 3X2
subject to:
5X1+ 10X2 ≥ 90 ounces (ingredient constraint A)
4X1 + 3X2 ≥ 48 ounces (ingredient constraint B)
0.5X1 ≥ 1.5 ounces (ingredient constraint C)
X1 ≥ 0 (nonnegativity constraint)
X2 ≥ 0 (nonnegativity constraint) 2-89
 Holiday Meal Turkey Ranch
Holiday Meal Turkey Ranch data

COMPOSITION OF EACH POUND

OF FEED (OZ.)
MINIMUM MONTHLY
REQUIREMENT PER
INGREDIENT BRAND 1 FEED BRAND 2 FEED TURKEY (OZ.)
A 5 10 90
B 4 3 48
C 0.5 0 1.5
Cost per pound 2 cents 3 cents

2-90
 Holiday Meal Turkey Ranch

• Use the corner point method.

• First construct the feasible solution
region.
• The optimal solution will lie at one
of the corners as it would in a
maximization problem.

2-91
Feasible Region for the Holiday Meal Turkey
Ranch Problem
X2
–

20 – Ingredient C Constraint
Pounds of Brand 2

15 – Feasible Region

a
10 –
Ingredient B Constraint

5– b Ingredient A Constraint

| | | | c | |
0–
5 10 15 20 25 X1
Pounds of Brand 1
2-92
 Holiday Meal Turkey Ranch
• Solve for the values of the three corner points.
• Point a is the intersection of ingredient constraints C and B.
4X1 + 3X2 = 48
X1 = 3
• Substituting 3 in the first equation, we find X2 = 12.
• Solving for point b with basic algebra we find X1 = 8.4 and
X2 = 4.8.
• Solving for point c we find X1 = 18 and X2 = 0.

2-93
 Holiday Meal Turkey Ranch
Substituting these value back into the objective
function we find
Cost = 2X1 + 3X2
Cost at point a = 2(3) + 3(12) = 42
Cost at point b = 2(8.4) + 3(4.8) = 31.2
Cost at point c = 2(18) + 3(0) = 36

The lowest cost solution is to purchase 8.4 pounds of

brand 1 feed and 4.8 pounds of brand 2 feed for a
total cost of 31.2 cents per turkey.
2-94
 Holiday Meal Turkey Ranch
Graphical Solution to the Holiday Meal Turkey Ranch Problem
Using the Isocost Approach
X2
–
Feasible Region

20 –
Pounds of Brand 2

15 – 54
¢=
Dir 2X
ecti 1 +
3X
on 2 Is
10 – of oco
31 D e st L
.2¢ cre i ne
=2 a sin
X gC
1 + ost
5– 3X
2

(X1 = 8.4, X2 = 4.8)

| | | | | |
0–
5 10 15 20 25 X1
2-95
Pounds of Brand 1
 Holiday Meal Turkey Ranch
Solving the Holiday Meal Turkey Ranch Problem
Using QM for Windows

2-96
 Holiday Meal Turkey Ranch
Excel 2010 Spreadsheet for the Holiday Meal Turkey Ranch
problem

2-97
 Holiday Meal Turkey Ranch
Excel 2010 Solution to the Holiday Meal Turkey Ranch
Problem

2-98
 Four Special Cases in LP

• Four special cases and difficulties arise

at times when using the graphical
approach to solving LP problems.
– No feasible solution
– Unboundedness
– Redundancy
– Alternate Optimal Solutions
2-99
 Four Special Cases in LP

No feasible solution
– This exists when there is no solution to
the problem that satisfies all the
constraint equations.
– No feasible solution region exists.
– This is a common occurrence in the real
world.
– Generally one or more constraints are
relaxed until a solution is found.
2-100
Four Special Cases in LP
A problem with no feasible solution
X2

8–
–
6–
– Region Satisfying
4– Third Constraint
–
2–
–
0– | | | | | | | | | |
2 4 6 8 X1
Region Satisfying First Two Constraints
2-101
 Four Special Cases in LP
Unboundedness
– Sometimes a linear program will not have a finite
solution.
– In a maximization problem, one or more solution
variables, and the profit, can be made infinitely
large without violating any constraints.
– In a graphical solution, the feasible region will be
open ended.
– This usually means the problem has been
formulated improperly.

2-102
 Four Special Cases in LP
A Feasible Region That is Unbounded to the Right
X2

X1 ≥ 5
15 –

X2 ≤ 10
10 –

Feasible Region
5–
X1 + 2X2 ≥ 15
| | | | |
0– 5 10 15 X1

2-103
 Four Special Cases in LP

Redundancy
– A redundant constraint is one that does not affect the
feasible solution region.
– One or more constraints may be binding.
– This is a very common occurrence in the real world.
– It causes no particular problems, but eliminating
redundant constraints simplifies the model.

2-104
 Four Special Cases in LP
Problem
X
with a Redundant Constraint
2

30 –

25 –
2X1 + X2 ≤ 30

20 –
Redundant
Constraint
15 –
X1 ≤ 25

10 – X1 + X2 ≤ 20
Feasible
5– Region

| | | | | |
0–
5 10 15 20 25 30 X1
2-105
 Four Special Cases in LP

Alternate Optimal Solutions

– Occasionally two or more optimal solutions may exist.
– Graphically this occurs when the objective function’s
isoprofit or isocost line runs perfectly parallel to one of
the constraints.
– This actually allows management great flexibility in
deciding which combination to select as the profit is
the same at each alternate solution.

2-106
 Four Special Cases in LP
Example of Alternate Optimal Solutions
X2

8–

7–
A
6– Optimal Solution Consists of All
Combinations of X1 and X2 Along the AB
5– Segment
4–

3– Isoprofit Line for $8

2–
B Isoprofit Line for $12 Overlays
1 – Feasible Line Segment AB
Region
0– | | | | | | | |
1 2 3 4 5 6 7 8 X1
2-107
 Sensitivity Analysis
• Optimal solutions to LP problems thus far have been found
under what are called deterministic assumptions.
• This means that we assume complete certainty in the data
and relationships of a problem.
• But in the real world, conditions are dynamic and
changing.
• We can analyze how sensitive a deterministic solution is to
changes in the assumptions of the model.
• This is called sensitivity analysis, postoptimality analysis,
parametric programming, or optimality analysis.

2-108
 Sensitivity Analysis
• Sensitivity analysis often involves a series of WHAT-IF?
questions concerning constraints, variable coefficients,
and the objective function.
• One way to do this is the trial-and-error method where
values are changed and the entire model is resolved.
• The preferred way is to use an analytic postoptimality
analysis.
• After a problem has been solved, we determine a
range of changes in problem parameters that will not
affect the optimal solution or change the variables in
the solution.
2-109
 High Note Sound Company
• The High Note Sound Company manufactures quality CD
players and stereo receivers.
• Products require a certain amount of skilled artisanship
which is in limited supply.
• The firm has formulated the following product mix LP
model.
Maximize profit = $50X1 + $120X2
Subject to 2X1 + 4X2 ≤ 80
(hours of electrician’s time
available)
3X1 + 1X2 ≤ 60
(hours of audio technician’s
time available)
X 1, X 2 ≥0
2-110
High Note Sound Company
The High Note Sound Company Graphical Solution
X2
(receivers)

60 –

– Optimal Solution at Point a

X1 = 0 CD Players
40 – X2 = 20 Receivers
Profits = $2,400
a = (0, 20) –
b = (16, 12)
20 –
Isoprofit Line: $2,400 = 50X1 + 120X2
10 –
| | | | | |
0–
10 20 30 40 50 60 X1
c = (20, 0) (CD players)
2-111
 Changes in the
Objective Function Coefficient

• In real-life problems, contribution rates in the objective

functions fluctuate periodically.
• Graphically, this means that although the feasible solution
region remains exactly the same, the slope of the isoprofit
or isocost line will change.
• We can often make modest increases or decreases in the
objective function coefficient of any variable without
changing the current optimal corner point.
• We need to know how much an objective function
coefficient can change before the optimal solution would
be at a different corner point.

2-112
 Changes in the
Objective Function Coefficient
Changes in the Receiver Contribution Coefficients
X2

40 – Profit Line for 50X1 + 80X2

(Passes through Point b)

30 –
Old Profit Line for 50X1 + 120X2
(Passes through Point a)
20 – b
a Profit Line for 50X1 + 150X2
(Passes through Point a)
10 –

c
| | | | | |
0– 10 20 30 40 50 60 X1

2-113
 QM for Windows and Changes in Objective
Function Coefficients
Input and Sensitivity Analysis for High Note Sound Data Using
QM For Windows

2-114
 Excel Solver and Changes in Objective
Function Coefficients
Excel 2010 Spreadsheet for High Note Sound Company

2-115
Excel Solver and Changes in Objective Function
Coefficients
Excel 2010 Solution and Solver Results Window for High Note Sound Company

2-116
 Excel Solver and Changes in Objective
Function Coefficients
Excel 2010 Sensitivity Report for High Note Sound Company

2-117
 Changes in the
Technological Coefficients

• Changes in the technological coefficients often reflect

changes in the state of technology.
• If the amount of resources needed to produce a product
changes, coefficients in the constraint equations will
change.
• This does not change the objective function, but it can
produce a significant change in the shape of the feasible
region.
• This may cause a change in the optimal solution.

2-118
 Changes in the
Technological Coefficients
Change in the Technological Coefficients for the High Note
Sound Company
(a) Original Problem (b) Change in Circled (c) Change in Circled
Coefficient Coefficient
X2 X2 X2

60 – 60 – 60 –
Stereo Receivers

3X1 + 1X2 ≤ 60 3X1 + 1X2 ≤ 60

2 X1 + 1X2 ≤ 60
40 – 40 – 40 –
Optimal Still Optimal
a Solution a Optimal Solution
20 – 20 – d 20 – 2X1 + 5 X2 ≤ 80
b
2X1 + 4X2 ≤ 80 2X1 + 4X2 ≤ 80 16 f g

|c | | | e | | | |c | |
0– 20 40 X1 0– 20 30 40 X1 0– 20 40 X1
CD Players

2-119
 Changes in Resources or Right-Hand-Side
Values

• The right-hand-side values of the constraints often

represent resources available to the firm.
• If additional resources were available, a higher
total profit could be realized.
• Sensitivity analysis about resources will help
answer questions about how much should be paid
for additional resources and how much more of a
resource would be useful.

2-120
 Changes in Resources or Right-Hand-Side
Values
• If the right-hand side of a constraint is changed, the
– feasible region will change (unless the constraint is
REDUNDANT).
– the optimal solution will change.
• The amount of change in the objective function value
that results from a unit change in one of the
resources available is called the dual price or dual
value .
• The dual price for a constraint is the improvement in
the objective function value that results from a one-
unit increase in the right-hand side of the constraint.
2-121
 Changes in Resources or Right-Hand-Side
Values
• However, the amount of possible increase in
the right-hand side of a resource is limited.
• If the number of hours increased beyond the
upper bound, then the objective function
would no longer increase by the dual price.
• There would simply be excess (slack) hours of
a resource or the objective function may
change by an amount different from the dual
price.
• The dual price is relevant only within limits.
2-122
Changes in the Electricians’ Time Resource for the
High Note Sound Company

X2 (a)

60 –

40 – Constraint Representing 60 Hours of Audio

Technician’s Time Resource
a
25 –
b Changed Constraint Representing 100 Hours of
20 – Electrician’s Time Resource

| c | | |
0– 20 40 50 60 X1

2-123
Changes in the Electricians’ Time Resource for the
High Note Sound Company

X2 (b)

60 –

40 – Constraint Representing 60 Hours of Audio

Technician’s Time Resource

Changed Constraint Representing 60 Hours of

20 – a Electrician’s Time Resource
15 –
b
c | | | |
0– 20 30 40 60 X1

2-124
Changes in the Electricians’ Time Resource for the
High Note Sound Company

X2 (c)

60 – Changed Constraint Representing 240 Hours of

Electrician’s Time Resource

40 –

Constraint
Representing
60 Hours of Audio
20 – Technician’s
Time Resource

| | | | | |
0– 20 40 60 80 100 120
X1

2-125
 QM for Windows and Changes in Right-Hand-
Side Values
Sensitivity Analysis for High Note Sound Company Using QM
for Windows

2-126
 Excel Solver and Changes in Right-Hand-
Side Values
Excel 2010 Sensitivity Analysis for High Note Sound Company

2-127
 Chapter 3

Linear Programming Applications

 Learning Objectives
After completing this chapter, students will be able to:
1. Model a wide variety of medium to large LP
problems.
2. Understand major application areas, including
marketing, production, labor scheduling, fuel
blending, transportation, and finance.
3. Gain experience in solving LP problems with QM for
Windows and Excel Solver software.

3-129
 Chapter Outline

3.1 Introduction
3.2 Marketing Applications
3.3 Manufacturing Applications
3.4 Employee Scheduling Applications
3.5 Financial Applications
3.6 Ingredient Blending Applications
3.7 Transportation Applications

3-130
 Introduction

• The graphical method of LP is useful

for understanding how to formulate
and solve small LP problems.
• There are many types of problems
that can be solved using LP.
• The principles developed here are
applicable to larger problems.
3-131
 Marketing Applications
• Linear programming models have been used in the advertising
field as a decision aid in selecting an effective media mix.
• Media selection problems can be approached with LP from
two perspectives:
– Maximize AUDIENCE EXPOSURE.
– Minimize ADVERTISING COSTS.
• For instance, consider the case of WIN BIG GAMBLING
CLUB having advertizing budget
• The money is to be allocated among four promotional
media:
– TV spots,
– newspaper ads, and
– two types of radio advertisements. 3-132
 Win BIG GAMBLING CLUB
• The WIN BIG GAMBLING Club promotes gambling
junkets to the Bahamas.
• It has $8,000 per week to spend on advertising.
• Its goal is to reach the largest possible high-
potential AUDIENCE.
• MEDIA TYPES and AUDIENCE figures are shown in
the following table.
• It needs to place AT LEAST FIVE radio spots per
week.
• No more than $1,800 can be spent on radio
advertising each week.
3-133
 Win Big Gambling Club
Advertising options

AUDIENCE COST PER MAXIMUM ADS

MEDIUM REACHED PER AD AD ($) PER WEEK
TV spot (1 minute) 5,000 800 12
Daily newspaper (full-
page ad) 8,500 925 5

Radio spot (30

2,400 290 25
seconds, prime time)
Radio spot (1 minute, 2,800 380 20
afternoon)

3-134
 Win Big Gambling Club
THE PROBLEM FORMULATION IS

X1 = number of 1-minute TV spots each week

X2 = number of daily paper ads each week
X3 = number of 30-second radio spots each week
X4 = number of 1-minute radio spots each week
Objective:
Maximize audience coverage = 5,000X1 + 8,500X2 + 2,400X3 + 2,800X4
Subject to X1 ≤ 12 (max TV spots/wk)
X2 ≤5 (max newspaper ads/wk)
X3 ≤ 25 (max 30-sec radio spots ads/wk)
X4 ≤ 20 (max newspaper ads/wk)
800X1 + 925X2 + 290X3 + 380X4 ≤ $8,000(weekly advertising
budget)
X3 + X4 ≥ 5 (min radio spots contracted)
290X3 + 380X4 ≤ $1,800(max dollars spent on radio)
3-135
X 1 , X 2 , X 3, X 4 ≥0
Win Big Gambling Club Solution in Excel 2010

3-136
 Marketing Research
• Linear programming has also been applied to
marketing research problems and the area of
consumer research.
• Statistical pollsters can use LP to help make
strategy decisions.
• For instance consider the research conducted by
Management Sciences Association

3-137
 Management Sciences Association
• Management Sciences Associates (MSA) is a marketing
research firm.
• MSA determines that it must fulfill several requirements in
order to draw statistically valid conclusions:
– Survey at least 2,300 U.S. households.
– Survey at least 1,000 households whose heads are 30 years of age
or younger.
– Survey at least 600 households whose heads are between 31 and
50 years of age.
– Ensure that at least 15% of those surveyed live in a state that
borders on Mexico.
– Ensure that no more than 20% of those surveyed who are 51
years of age or over live in a state that borders on Mexico.

3-138
 Management Sciences Association
• MSA decides that all surveys should be conducted in
person.
• It estimates the costs of reaching people in each age and
region category are as follows:

COST PER PERSON SURVEYED ($)

REGION AGE ≤ 30 AGE 31-50 AGE ≥ 51

State bordering Mexico $7.50 $6.80 $5.50

State not bordering Mexico $6.90 $7.25 $6.10

3-139
 Management Sciences Association
• MSA’s goal is to meet the sampling
requirements at the least possible cost.
• The decision variables are:

X1 = number of 30 or younger and in a border state

X2 = number of 31-50 and in a border state
X3 = number 51 or older and in a border state
X4 = number 30 or younger and not in a border state
X5 = number of 31-50 and not in a border state
X6 = number 51 or older and not in a border state
3-140
 Management Sciences Association

Objective function
Minimize total = $7.50X1 + $6.80X2 + $5.50X3
interview costs
+ $6.90X4 + $7.25X5 + $6.10X6
subject to
X1 + X2 + X3 + X4 + X5 + X6 ≥ 2,300 (total households)
X1 + X4 ≥ 1,000 (households 30 or younger)
X2 + X5 ≥ 600 (households 31-50)
X1 + X2 + X3 ≥ 0.15(X1 + X2+ X3 + X4 + X5 + X6) (border states)
X3 ≤ 0.20(X3 + X6) (limit on age group 51+ who can live in
border state)
X1, X2, X3, X4, X5, X6 ≥ 0
3-141
MSA Solution in Excel 2010

3-142
 Management Sciences Association
• The following table summarizes the results of the MSA
analysis.
• It will cost MSA $15,166 to conduct this research.

REGION AGE ≤ 30 AGE 31-50 AGE ≥ 51

State bordering Mexico 0 600 140

State not bordering Mexico 1,000 0 560

3-143
 Manufacturing Applications
• Production Mix
– LP can be used to plan the optimal mix of
products to manufacture.
– Company must meet a myriad of constraints,
ranging from financial concerns to sales
demand to material contracts to union labor
demands.
– Its primary goal is to generate the largest
profit possible.
3-144
 FIFTH AVENUE INDUSTRIES
• FIFTH AVENUE INDUSTRIES produces four varieties of ties:
– One is all-silk tie,
– one is an all-polyester tie,
– one is a blend of polyester and cotton, and
– one is a blend of silk and cotton.
• The table below shows the cost and availability of
the three materials used in the production
process:
MATERIAL COST PER YARD ($)
MATERIAL AVAILABLE PER
MONTH (YARDS)
Silk 24 1,200
Polyester 6 3,000
Cotton 9 1,600
3-145
 FIFTH AVENUE INDUSTRIES
• The firm has contracts with several major
department store chains to supply ties.
• Contracts require a minimum number of ties but
may be increased if demand increases.
• Fifth Avenue’s GOAL is to maximize monthly profit
given the following decision variables.

X1 = number of all-silk ties produced per month

X2 = number all-polyester ties
X3 = number of blend 1 polyester-cotton ties
X4 = number of blend 2 silk-cotton ties
3-146
 FIFTH AVENUE INDUSTRIES Data
SELLING MONTHLY
MATERIAL
REQUIRED
MATERIAL
VARIETY PRICE PER TIE CONTRACT MONTHLY PER TIE REQUIREME
OF TIE ($) MINIMUM DEMAND (YARDS) NTS
All silk 19.24 5,000 7,000 0.125
100% silk

All 100%
polyester 8.70 10,000 14,000 0.08 polyester

Poly – 50% polyester

cotton 9.52 13,000 16,000 0.10 50% cotton
blend 1

Silk- 60% silk -

cotton 10.64 5,000 8,500 0.11 40% cotton
blend 2

3-147
 FIFTH AVENUE INDUSTRIES
• Fifth Avenue also has to calculate profit per
tie for the objective function.
SELLING MATERIAL MATERIAL
VARIETY OF PRICE PER REQUIRED PER COST PER COST PER PROFIT
TIE TIE ($) TIE (YARDS) YARD ($) TIE ($) PER TIE ($)
All silk $19.24 0.125 $24 $3.00 $16.24
All polyester $8.70 0.08 $6 $0.48 $8.22
Poly-cotton $9.52 0.05 $6 $0.30
blend 1
0.05 $9 $0.45 $8.77
Silk – cotton $10.64 0.066 $1.58
blend 2 $24
0.044 $9 $0.40 $8.66
3-148
 FIFTH AVENUE INDUSTRIES
The complete Fifth Avenue Industries Model
Objective function
Maximize profit = $16.24X1 + $8.22X2 + $8.77X3 + $8.66X4
Subject to 0.125X1+ 0.066X4 ≤1200 (yds of silk)
0.08X2 + 0.05X3 ≤ 3,000 (yds of polyester)
0.05X3 + 0.044X4 ≤ 1,600 (yds of cotton)
X1 ≥ 5,000 (contract min for silk)
X1 ≤ 7,000 (contract min)
X2 ≥10,000 (contract min for all polyester)
X2 ≤14,000 (contract max)
X3 ≥13,000 (contract mini for blend 1)
X3 ≤16,000 (contract max)
X4 ≥ 5,000 (contract mini for blend 2)
X4 ≤ 8,500 (contract max) 3-149
Fifth Avenue Solution in Excel 2010

3-150
 MANUFACTURING APPLICATIONS
• Production Scheduling
– Setting a low-cost production schedule over a period of
weeks or months is a difficult and important
management task.
– Important factors include labor capacity, inventory and
storage costs, space limitations, product demand, and
labor relations.
– When more than one product is produced, the
scheduling process can be quite complex.
– The problem resembles the product mix model for
each time period in the future.
3-151
 Greenberg Motors
• GREENBERG MOTORS, INC. manufactures two different electric motors
for sale under contract to Drexel Corp.
• Drexel places orders three times a year for four months at a time.
• Demand varies month to month as shown below.
• Greenberg wants to develop its production plan for the next four
months.
MODEL JANUARY FEBRUARY MARCH APRIL
GM3A 800 700 1,000 1,100

GM3B 1,400 1,400

1,000 1,200
•There is room at the end of the month for only 3,300 units of the
GM3A and GM3B combined
•The company would like to have 450 units of the GM3A and 300
units of the GM3B in inventory at the end of April
3-152
 Greenberg Motors
• Production planning at Greenberg must consider four
factors:
– Desirability of producing the same number of
motors each month to simplify planning and
scheduling.
– Necessity to keep inventory carrying costs down.
– Warehouse limitations.
– Its no-lay-off policy.
• LP is a useful tool for creating a minimum total cost
schedule the resolves conflicts between these factors.
3-153
 Greenberg Motors
Ai = Number of model GM3A motors produced
in month i (i = 1, 2, 3, 4 for January – April)
Bi = Number of model GM3B motors produced
in month i

 It costs $20 to produce a GM3A and $15 to

produce a GM3B
 Both costs increase by 10% on March 1, thus

Cost of production = $20A1 + $20A2 + $22A3 +

$22A4 + $15B1 + $15B2 +
$16.50B3 + $16.50B4 3-154
 Greenberg Motors
• We can use the same approach to create the portion
of the objective function dealing with inventory
carrying costs.
IAi= Units of GM3A left in inventory at the end of month i
(i = 1, 2, 3, 4 for January – April)
IBi= Units of GM3B left in inventory at the end of month i
(i = 1, 2, 3, 4 for January – April)

 The carrying cost for GM3A motors is $0.36 per unit per
month and the GM3B costs $0.26 per unit per month.
 Monthly ending inventory levels are used for the average
inventory level.

ry = $0.36A1 + $0.36A2 + $0.36A3 + 0.36A4

+ $0.26B1 + $0.26B2 + $0.26B3 + $0.26B4
3-155
 Greenberg Motors
We combine these two for the objective function:

Minimize total cost =$20A1 + $20A2 + $22A3 + 22A4 + $15B1 +

$15B2 + $16.50B3 + $16.50B4 + $0.36IA1 +
$0.36IA2 + $0.36IA3 + 0.36IA4 + $0.26IB1 +
$0.26IB2 + $0.26IB3 + $0.26IB4
End of month inventory is calculated using this relationship:
Inventory Sales to
at the end + Current Inventory at Drexel this
month’s – the end of =
of last this month month
month production

3-156
 Greenberg Motors
• Greenberg is starting a new four-month production cycle
with a change in design specification that left no old
motors in stock on January 1.
• Given JANUARY DEMAND for both motors:

IA1 = 0 + A1 – 800
IB1 = 0 + B1 – 1,000
 Rewritten as January’s constraints:

A1 – IA1 = 800
B1 – IB1 = 1,000

3-157
 Greenberg Motors
Constraints for February, March, and April:
A2 + IA1 – IA2 = 700 February GM3A demand
B2 + IB1 – IB2 = 1,200 February GM3B demand
A3 + IA2 – IA3 = 1,000 March GM3A demand
B3 + IB2 – IB3 = 1,400 March GM3B demand
A4 + IA3 – IA4 = 1,100 April GM3A demand
B4 + IB3 – IB4 = 1,400 April GM3B demand
And constraints for April’s ending inventory:
IA4 = 450
IB4 = 300
3-158
 Greenberg Motors
• We also need constraints for warehouse space:
IA1 + IB1 ≤ 3,300
IA2 + IB2 ≤ 3,300
IA3 + IB3 ≤ 3,300
IA4 + IB4 ≤ 3,300
 No worker is ever laid off so Greenberg has a base
employment level of 2,240 labor hours per month.
 By adding temporary workers, available labor hours can be
increased to 2,560 hours per month.
 Each GM3A motor requires 1.3 labor hours and each
GM3B requires 0.9 hours.
3-159
 Greenberg Motors
Labor hour constraints:
1.3A1 + 0.9B1 ≥ 2,240 (January min hrs/month)

1.3A1 + 0.9B1 ≤ 2,560 (January max hrs/month)

1.3A2 + 0.9B2 ≥ 2,240 (February labor min)

1.3A2 + 0.9B2 ≤ 2,560 (February labor max)

1.3A3 + 0.9B3 ≥ 2,240 (March labor min)

1.3A3 + 0.9B3 ≤ 2,560 (March labor max)

1.3A4 + 0.9B4 ≥ 2,240 (April labor min)

1.3A4 + 0.9B4 ≤ 2,560 (April labor max)

All variables ≥0 Nonnegativity constraints
3-160
Greenberg Motors Solution in Excel 2010

3-161
 Greenberg Motors
Solution to Greenberg Motors Problem
PRODUCTION SCHEDULE JANUARY FEBRUARY MARCH APRIL

Units GM3A produced 223

1,277 1,758 792
Units GM3B produced
1,000 2,522 78 1,700
Inventory GM3A carried 0
477 758 450
Inventory GM3B carried 0
1,322 0 300
Labor hours required 2,560 2,560 2,355 2,560
 Total cost for this four month period is $169,294.90.
 Complete model has 16 variables and 22 constraints.

3-162
 Employee Scheduling Applications

 Labor Planning
These problems address staffing
needs over a particular time.
They are especially useful when
there is some flexibility in
assigning workers that require
overlapping or interchangeable
talents.
3-163
 Hong Kong Bank of Commerce and Industry
 HONG KONG Bank of Commerce and Industry
has requirements for between 10 and 18 tellers
depending on the time of day.
 Lunch time from noon to 2 pm is generally the
heaviest .
 The bank employs 12 full-time tellers but has
many part-time workers available.
 Part-time workers must put in exactly four
hours per day, can start anytime between 9 am
and 1 pm, and are inexpensive.
 Full-time workers work from 9 AM to 5 PM and
have 1 hour for lunch. 3-164
Hong Kong Bank of Commerce and Industry
Labor requirements for Hong Kong Bank
of Commerce and Industry
TIME PERIOD NUMBER OF TELLERS REQUIRED

9 AM – 10 AM 10
10 AM – 11 AM 12
11 AM – NOON 14
NOON – 1 PM 16
1 PM – 2 PM 18
2 PM – 3 PM 17
3 PM – 4 PM 15
4 PM – 5 PM 10 3-165
 Hong Kong Bank of Commerce and Industry
 Part-time hours are limited to a MAXIMUM
OF 50% of the day’s total requirements.
 Part-timers earn $8 per hour ($32 per day)
on average.
 Full-timers earn $100 per day on average.
 The bank wants a schedule that will
minimize total personnel costs.
 It will release one or more of its part-time
tellers if it is profitable to do so.
3-166
 Hong Kong Bank of Commerce and Industry
Let
F = full-time tellers
P1 = part-timers starting at 9 am (leaving at 1 pm)
P2 = part-timers starting at 10 am (leaving at 2 pm)
P3 = part-timers starting at 11 am (leaving at 3 pm)
P4 = part-timers starting at noon (leaving at 4 pm)
P5 = part-timers starting at 1 pm (leaving at 5 pm)

3-167
 Hong Kong Bank of Commerce and Industry

Objective: Minimize total daily personnel cost

= $100F + $32(P1 + P2 + P3 + P4 + P5)
subject to:
F + P1 ≥ 10 (9 am – 10 am needs)
F + P 1 + P2 ≥ 12 (10 am – 11 am needs)
0.5F + P1 + P2 + P3 ≥ 14 (11 am – noon needs)
0.5F + P1 + P2 + P3 + P4 ≥ 16 (noon – 1 pm needs)
F + P2 + P3 + P4 + P5 ≥ 18 (1 pm – 2 pm needs)
F + P3 + P4 + P5 ≥ 17 (2 pm – 3 pm needs)
F + P4 + P5 ≥ 15 (3 pm – 4 pm needs)
F + P5 ≥ 10 (4 pm – 5 pm needs)
F ≤ 12 (12 full-time tellers)
4P1 + 4P2 + 4P3 + 4P4 + 4P5 ≤ 0.50(112) (max 50% part-timers)3-168
 Hong Kong Bank of Commerce and Industry

 There are several alternate optimal

schedules Hong Kong Bank can follow:
 F = 10, P = 2, P = 7, P = 5, P , P = 0
2 3 4 1 5
 F = 10, P = 6, P = 1, P = 2, P = 5, P = 0
1 2 3 4 5
 The cost of either of these two policies is
$1,448 per day.

3-169
Labor Planning Solution in Excel 2010

3-170
 Financial Applications
• Portfolio Selection
– Bank, investment funds, and insurance
companies often have to select specific
investments from a variety of alternatives.
– The manager’s overall objective is generally
to maximize the potential return on the
investment given a set of legal, policy, or risk
restraints.

3-171
 International City Trust
• International City Trust (ICT) invests in short-term
trade credits, corporate bonds, gold stocks, and
construction loans.
• The board of directors has placed limits on how
much can be invested in each area:
MAXIMUM
INTEREST INVESTMENT ($
INVESTMENT EARNED (%) MILLIONS)
Trade credit 7 1.0
Corporate bonds 11 2.5
Gold stocks 19 1.5
Construction loans 15 1.8
3-172
 International City Trust
• ICT has $5 million to invest and wants to
accomplish two things:
– Maximize the return on investment over the
next six months.
– Satisfy the diversification requirements set by
the board.
The board has also decided that at least 55% of the
funds must be invested in gold stocks and construction
loans and no less than 15% be invested in trade credit.3-173
 International City Trust
The variables in the model are:

X1 = dollars invested in trade credit

X2 = dollars invested in corporate bonds
X3 = dollars invested in gold stocks
X4 = dollars invested in construction loans

3-174
 International City Trust
Objective:
Maximize dollars
of interest = 0.07X1 + 0.11X2 + 0.19X3 + 0.15X4
earned

subject to: X1 ≤ 1,000,000

X2 ≤ 2,500,000
X3 ≤ 1,500,000
X4 ≤ 1,800,000
X3 + X4 ≥ 0.55(X1 + X2 + X3 + X4)
X1 ≥ 0.15(X1 + X2 + X3 + X4)
X1 + X2 + X3 + X4 ≤ 5,000,000
3-175
 International City Trust
• The optimal solution to the ICT is to make the
following investments:
X1 = $750,000
X2 = $950,000
X3 = $1,500,000
X4 = $1,800,000
• The total interest earned with this plan is
$712,000.

3-176
ICT Portfolio Solution in Excel 2010

3-177
 Truck Loading Problem
• Truck Loading Problem
– The truck loading problem involves deciding which
items to load on a truck so as to maximize the value of
a load shipped.
– Goodman Shipping has to ship the following six items:

ITEM VALUE ($) WEIGHT (POUNDS)

1 7,500
22,500
2 24,000 7,500
3 8,000 3,000
4 9,500 3,500
5 4,000
11,500
3-178
6 9,750 3,500
 Goodman Shipping
• The objective is to maximize the value
of items loaded into the truck.
• The truck has a capacity of 10,000
pounds.
• The decision variable is:
Xi = proportion of each item i loaded on the
truck

3-179
 Goodman Shipping
Objective:
Maximize = $22,500X1 + $24,000X2 + $8,000X3
load value + $9,500X4 + $11,500X5 + $9,750X6

subject to 7,500X1 + 7,500X2 + 3,000X3

+ 3,500X4 + 4,000X5 + 3,500X6 ≤ 10,000 lb capacity
X1 ≤ 1
X2 ≤ 1
X3 ≤ 1
X4 ≤ 1
X5 ≤ 1
X6 ≤ 1
X1, X2, X3, X4, X5, X6 ≥ 0 3-180
Goodman Truck Loading Solution in Excel

3-181
 Goodman Shipping
• The Goodman Shipping problem raises an interesting
issue:
– The solution calls for one third of Item 1 to be loaded on the
truck.
– What if Item 1 cannot be divided into smaller pieces?
• Rounding down leaves unused capacity on the truck and
results in a value of $24,000.
• Rounding up is not possible since this would exceed the
capacity of the truck.
• Using integer programming, in which the solution is
required to contain only integers, the solution is to load
one unit of Items 3, 4, and 6 for a value of $27,250.
3-182
 Ingredient Blending Applications

• Diet Problems
– This is one of the earliest LP
applications, and is used to determine
the most economical diet for hospital
patients.
– This is also known as the FEED MIX
PROBLEM.

3-183
 Whole Food Nutrition Center
• The Whole Food Nutrition Center uses three bulk
grains to blend a natural cereal.
• It advertises that the cereal meets the U.S.
Recommended Daily Allowance (USRDA) for four
key nutrients.
• It wants to select the blend that will meet the
requirements at the minimum cost.
NUTRIENT USRDA
Protein 3 units
Riboflavin 2 units
Phosphorus 1 unit
Magnesium 0.425 unit
3-184
 Whole Food Nutrition Center
the total amount of the grains used will be 2
ounces, or 0.125 pound
Let
XA = pounds of grain A in one 2-ounce serving of cereal
XB = pounds of grain B in one 2-ounce serving of cereal
XC = pounds of grain C in one 2-ounce serving of cereal
Whole Food’s Natural Cereal requirements:
COST PER PROTEIN RIBOFLAVIN PHOSPHOROUS MAGNESIUM
GRAIN POUND (CENTS) (UNITS/LB) (UNITS/LB) (UNITS/LB) (UNITS/LB)
A 33 22 16 8 5
B 47 28 14 7 0
C 38 21 25 9 6

3-185
 Whole Food Nutrition Center

The objective is:

Minimize total cost of
mixing a 2-ounce serving = $0.33XA + $0.47XB + $0.38XC

subject to
22XA + 28XB + 21XC ≥ 3 (protein units)
16XA + 14XB + 25XC ≥ 2 (riboflavin units)
8XA + 7XB + 9XC ≥ 1 (phosphorous units)
5XA + 0XB + 6XC ≥ 0.425 (magnesium units)
XA + XB + XC = 0.125 (total mix)
X A, X B, X C ≥ 0

3-186
Whole Food Diet Solution in Excel 2010

3-187
 Ingredient Blending Applications

• Ingredient Mix and Blending Problems

– Diet and feed mix problems are special cases of a
more general class of problems known as
ingredient or blending problems.
– Blending problems arise when decisions must be
made regarding the blending of two or more
resources to produce one or more product.
– Resources may contain essential ingredients that
must be blended so that a specified percentage
is in the final mix.
3-188
 Low Knock Oil Company
EXAMPLE
• The Low Knock Oil Company produces two grades
of cut-rate gasoline for industrial distribution.
• The two grades, regular and economy, are created
by blending two different types of crude oil.
• The crude oil differs in cost and in its content of
crucial ingredients.
CRUDE OIL INGREDIENT INGREDIENT COST/BARREL
TYPE A (%) B (%) ($)
X100 35 55 30.00
X220 60 25 34.80

3-189
 Low Knock Oil Company
The firm lets
X1 = barrels of crude X100 blended to produce the refined
regular
X2 = barrels of crude X100 blended to produce the refined
economy
X3 = barrels of crude X220 blended to produce the refined
regular
X4 = barrels of crude X220 blended to produce the refined
economy
The objective function is

Minimize cost = $30X1 + $30X2 + $34.80X3 + $34.80X4

3-190
 Low Knock Oil Company
Problem formulation
At least 45% of each barrel of regular must be ingredient A
(X1 + X3) = total amount of crude blended to produce the
refined regular gasoline demand
Thus, 0.45(X1 + X3) = amount of ingredient A required

But: 0.35X1 + 0.60X3 = amount of ingredient A in refined regular gas

So 0.35X1 + 0.60X3 ≥ 0.45X1 + 0.45X3

or – 0.10X1 + 0.15X3 ≥ 0 (ingredient A in regular constraint)

3-191
 Low Knock Oil Company
Problem formulation
Minimize cost =30X1+ 30X2+ 34.80X3+ 34.80X4
subject to X1 + X3 ≥ 25,000
X2 + X4 ≥ 32,000
– 0.10X1 + 0.15X3 ≥0
0.05X2 – 0.25X4 ≤ 0
X1, X2, X3, X4 ≥ 0

3-192
Low Knock Oil Solution in Excel 2010

3-193
 Transportation Applications
• Shipping Problem
– The transportation or shipping problem involves
determining the amount of goods or items to be
transported from a number of origins to a number
of destinations.
– The objective usually is to minimize total shipping
costs or distances.
– This is a specific case of LP and a special algorithm
has been developed to solve it.

3-194
 Top Speed Bicycle Company
• The Top Speed Bicycle Co. manufactures and markets a line of
4-speed bicycles.
• The firm has final assembly plants in two cities where labor
costs are low.
• It has three major warehouses near large markets.
• The sales requirements for the next year are:
– New York – 10,000 bicycles
– Chicago – 8,000 bicycles
– Los Angeles – 15,000 bicycles
• The factory capacities are:
– New Orleans – 20,000 bicycles
– Omaha – 15,000 bicycles

3-195
 Top Speed Bicycle Company
The cost of shipping bicycles from the plants to the
warehouses is different for each plant and warehouse:

TO
FROM NEW YORK CHICAGO LOS ANGELES

New Orleans $2 $3 $5

Omaha $3 $1 $4

The company wants to develop a shipping schedule that will

minimize its total annual cost.

3-196
 Top Speed Bicycle Company
Network Representation of the Transportation Problem with Costs, Demands, and
Supplies

3-197
 Top Speed Bicycle Company
The double subscript variables will represent the origin factory
and the destination warehouse:
Xij = bicycles shipped from factory i to warehouse j

So:
X11 = number of bicycles shipped from New Orleans to New York
X12 = number of bicycles shipped from New Orleans to Chicago
X13 = number of bicycles shipped from New Orleans to Los Angeles
X21 = number of bicycles shipped from Omaha to New York
X22 = number of bicycles shipped from Omaha to Chicago
X23 = number of bicycles shipped from Omaha to Los Angeles
3-198
 Top Speed Bicycle Company
Objective:
Minimize total = 2X11 + 3X12 + 5X13 + 3X21 + 1X22 + 4X23
shipping costs

subject to X11 + X21 = 10,000 (New York demand)

X12 + X22 = 8,000 (Chicago demand)
X13 + X23 = 15,000 (Los Angeles demand)
X11 + X12 + X13 ≤ 20,000 (New Orleans factory supply)
X21 + X22 + X23 ≤ 15,000 (Omaha factory supply)
All variables ≥ 0

3-199
Top Speed Bicycle Company Solution in
Excel 2010

3-200
 Top Speed Bicycle Company
Top Speed Bicycle solution:
TO
FROM NEW YORK CHICAGO LOS ANGELES

New Orleans 10,000 0 8,000

Omaha 0 8,000 7,000

• Total shipping cost equals $96,000.

• Transportation problems are a special case of LP as the
coefficients for every variable in the constraint equations
equal 1.

3-201
 Chapter 4

Integer Programming, Goal

Programming, and Nonlinear
Programming
 Learning Objectives
After completing this chapter, students will be able to:

1. Understand the difference between LP and

INTEGER programming.
2. Understand and solve the THREE TYPES of
integer programming problems.
3. Formulate and solve GOAL programming
problems using Excel and QM for Windows.
4. Formulate NONLINEAR programming
problems and solve using Excel.
4-203
 Chapter Outline

4.1Introduction
4.2Integer Programming
4.3Modeling with 0-1 (Binary) Variables
4.4Goal Programming
4.5Nonlinear Programming

4-204
 Introduction
• Not every problem faced by businesses can easily
fit into a neat linear programming context.
• A large number of business problems can be
solved only if variables have integer values.
• Many business problems have multiple objectives,
and GOAL PROGRAMMING is an extension to LP
that can permit multiple objectives
• Linear programming requires linear models, and
nonlinear programming allows objectives and
constraints to be nonlinear.
4-205
 Integer Programming
• An integer programming model is one where one or
more of the decision variables has to take on an integer
value in the final solution.
• There are three types of integer programming problems:
1. PURE INTEGER programming where all variables have
integer values .
2. MIXED-INTEGER programming where some but not
all of the variables will have integer values.
3. ZERO-ONE INTEGER programming are special cases in
which all the decision variables must have integer
solution values of 0 or 1.
4-206
 HARRISON ELECTRIC COMPANY:
Example of Integer Programming
• The Company produces TWO PRODUCTS popular with HOME
RENOVATORS: OLD-FASHIONED CHANDELIERS and CEILING FANS.
• Both the CHANDELIERS and FANS require a two-step
production process involving wiring and assembly.
• It takes about 2 hours to wire each chandelier and 3
hours to wire a ceiling fan.
• Final assembly of the chandeliers and fans requires 6 and
5 hours, respectively.
• The production capability is such that only 1 2 h o u rs of
wiring time and 3 0 h o u rs of assembly time are
available.
Each chandelier produced nets π of $7 and each fan 4-207
$6.
 HARRISON ELECTRIC COMPANY:
Example of Integer Programming
• Harrison’s production mix decision can be formulated using
LP as follows:

Maximize profit = $7X1 + $6X2

subject to 2X1 + 3X2≤ 12(wiring hours)
6X1 + 5X2≤ 30 (assembly hours)
X1, X2 ≥ 0 (nonnegativity)
where
X1 = number of chandeliers produced
X2 = number of ceiling fans produced

4-208
Harrison Electric Problem

4-209
 HARRISON ELECTRIC COMPANY:
Example of Integer Programming
• The production planner recognizes this is an integer
problem.
• His first attempt at solving it is to round the values to
X1 = 4 and X2 = 2.
• However, this is not feasible.
• Rounding X2 down to 1 gives a feasible solution, but it
may not be optimal.
• This could be solved using the enumeration method,
but enumeration is generally not possible for large
problems.
4-210
Integer Solutions to the Harrison Electric Company Problem
CHANDELIERS (X1) CEILING FANS (X2) PROFIT
($7X1 + $6X2)
0 0 $0
1 0 7
2 0 14
3 0 21
4 0 28
5 0
35 Optimal solution to
0 1 6 integer programming
1 1 13 problem
2 1 20
3 1 27
4 1 34
0 2 12 Solution if rounding
is used
1 2 19
2 2 26
3 2 33
0 3 18
1 3 25 4-211
 HARRISON ELECTRIC COMPANY

• The rounding solution of X1 = 4, X2 = 1 gives a

profit of $34.
• The optimal solution of X1 = 5, X2 = 0 gives a profit
of $35.
• The optimal integer solution is less than the
optimal LP solution.
• An integer solution can never be better than the
LP solution and is usually a lesser solution.

4-212
Using Software to Solve the Harrison Integer Programming Problem

QM for Windows Input Screen for Harrison Electric Problem

4-213
Using Software to Solve the Harrison Integer Programming Problem

QM for Windows Solution Screen for Harrison Electric

Problem

4-214
Using Software to Solve the Harrison Integer Programming Problem

Excel 2010 Solver Solution for Harrison Electric Problem

4-215
 Mixed-Integer Programming Problem Example

• There are many situations in which some of the variables

are restricted to be integers and some are not.
• BAGWELL CHEMICAL COMPANY produces two industrial
chemicals.
• Xyline must be produced in 50-pound bags.
• Hexall is sold by the pound and can be produced in any
quantity.
• Both xyline and hexall are composed of three ingredients
– A, B, and C.
• BAGWELL sells xyline for $85 a bag and hexall for $1.50
per pound.
4-216
 Mixed-Integer Programming Problem Example

AMOUNT OF
AMOUNT PER 50-POUND AMOUNT PER POUND INGREDIENTS
BAG OF XYLINE (LB) OF HEXALL (LB) AVAILABLE
30 0.5 2,000 lb–
ingredient A
800 lb–
18 0.4
ingredient B
2 0.1 200 lb–
ingredient C

• Bagwell wants to maximize profit.

• Let X = number of 50-pound bags of xyline.
• Let Y = number of pounds of hexall.
• This is a mixed-integer programming problem as Y is not
required to be an integer.
4-217
 Mixed-Integer Programming Problem Example

The model is:

Maximize profit = $85X + $1.50Y
subject to 30X + 0.5Y ≤ 2,000
18X + 0.4Y ≤ 800
2X + 0.1Y ≤ 200
X, Y ≥ 0 and X integer 4-218
 Mixed-Integer Programming Problem Example

QM for Windows Solution for Bagwell Chemical Problem

4-219
 Mixed-Integer Programming Problem Example

Excel 2010 Solver Solution for Bagwell Chemical Problem

4-220
 Modeling With 0-1 (Binary) Variables

• We can demonstrate how 0-1 variables can be used

to model several diverse situations.
• Typically a 0-1 variable is assigned a value of 0 if a
certain condition is not met and a 1 if the condition is
met.
• This is also called a binary variable.

4-221
 Capital Budgeting Example
• A common capital budgeting problem is selecting from a set
of possible projects when budget limitations make it
impossible to select them all.
• A 0-1 variable is defined for each project.
• Quemo Chemical Company is considering three possible
improvement projects for its plant:
– A new catalytic converter.
– A new software program for controlling operations.
– Expanding the storage warehouse.
• It can not do them all
• It wants to maximize net present value of projects
undertaken.
4-222
Quemo Chemical Capital Budgeting
Quemo Chemical Company information

PROJECT NET PRESENT VALUE YEAR 1 YEAR 2

Catalytic Converter $25,000 $8,000 $7,000

Software $18,000
$6,000 $4,000

Warehouse expansion $32,000

$12,000 $8,000

Available funds $20,000 $16,000

The basic model is:
Maximize net present value of projects undertaken subject to

Total funds used in year 1 ≤ $20,000

Total funds used in year 2 ≤ $16,000
4-223
Quemo Chemical Capital Budgeting
The decision variables are:

X1 = 1 if catalytic converter project is funded

0 otherwise
X2 = 1 if software project is funded
0 otherwise
X3 = 1 if warehouse expansion project is funded
0 otherwise

The mathematical statement of the integer programming

problem becomes:
Maximize NPV = 25,000X1 + 18,000X2 + 32,000X3
subject to 8,000X1 + 6,000X2 + 12,000X3 ≤ 20,000
7,000X1 + 4,000X2 + 8,000X3 ≤ 16,000
X1, X2, X3 = 0 or 1
4-224
Quemo Chemical Capital Budgeting
Excel 2010 Solver Solution for Quemo Chemical Problem

4-225
Quemo Chemical Budgeting Capital
• This is solved with computer software, and the
optimal solution is X1 = 1, X2 = 0, and X3 = 1 with an
objective function value of 57,000.
• This means that Quemo Chemical should fund the
catalytic converter and warehouse expansion
projects only.
• The net present value of these investments will be
$57,000.

4-226
 Limiting the Number of Alternatives
Selected
• One common use of 0-1 variables involves limiting the
number of projects or items that are selected from a group.
• Suppose Quemo Chemical is required to select no more than
two of the three projects regardless of the funds available.
• This would require adding a constraint:
X1 + X2 + X3 ≤ 2
• If they had to fund exactly two projects the constraint would
be:
X1 + X2 + X3 = 2

4-227
 Dependent Selections
• At times the selection of one project depends on the
selection of another project.
• Suppose Quemo’s catalytic converter could only be
purchased if the software was purchased.
• The following constraint would force this to occur:
X1 ≤ X2 or X1 – X2 ≤ 0
• If we wished for the catalytic converter and software
projects to either both be selected or both not be selected,
the constraint would be:
X1 = X2 or X1 – X2 = 0

4-228
 Fixed-Charge Problem Example
• Often businesses are faced with decisions involving a fixed
charge that will affect the cost of future operations.
• Sitka Manufacturing is planning to build at least one new
plant and three cities are being considered in:
– Baytown, Texas
– Lake Charles, Louisiana
– Mobile, Alabama
• Once the plant or plants are built, the company wants to have
capacity to produce at least 38,000 units each year.

4-229
 Fixed-Charge Problem

Fixed and variable costs for Sitka Manufacturing

ANNUAL VARIABLE COST ANNUAL

SITE FIXED COST PER UNIT CAPACITY

Baytown, TX $340,000 $32 21,000

Lake Charles, LA $270,000 $33 20,000

Mobile, AL $290,000 $30 19,000

4-230
 Fixed-Charge Problem
Define the decision variables as:

X1 = 1 if factory is built in Baytown

0 otherwise

X2 = 1 factory is built in Lake Charles

0 otherwise

X3 = 1 if factory is built in Mobile

0 otherwise
X4 = number of units produced at Baytown plant

X5 = number of units produced at Lake Charles plant

X6 = number of units produced at Mobile plant

4-231
 Fixed-Charge Problem
The integer programming formulation becomes
Minimize cost =340,000X1 + 270,000X2 + 290,000X3 +
32X4 + 33X5 + 30X6
subject to X4+ X5+ X6 ≥ 38,000
X4 ≤ 21,000X1
X5 ≤ 20,000X2
X6 ≤ 19,000X3
The optimal solution is X1, X2, X3 = 0 or 1;
X4, X5, X6 ≥ 0 and integer
X1 = 0, X2 = 1, X3 = 1, X4 = 0, X5 = 19,000, X6 = 19,000
Objective function value = $1,757,000
4-232
 Fixed-Charge Problem
Excel 2010 Solver Solution for Sitka Manufacturing Problem

4-233
 Financial Investment Example
• Simkin, Simkin, and Steinberg specialize in recommending oil
stock portfolios for wealthy clients.
• One client has the following specifications:
– At least two Texas firms must be in the portfolio.
– No more than one investment can be made in a foreign oil company.
– One of the two California oil stocks must be purchased.
• The client has $3 million to invest and wants to buy large
blocks of shares.

4-234
 Financial Investment

Oil investment opportunities

EXPECTED ANNUAL COST FOR BLOCK
STOCK COMPANY NAME RETURN ($1,000s) OF SHARES ($1,000s)
1 Trans-Texas Oil 50 480

2 British Petroleum 80 540

3 Dutch Shell 90 680

4 Houston Drilling 120 1,000

5 Texas Petroleum 110 700

6 San Diego Oil 40 510

7 California Petro 75 900

4-235
 Financial Investment

Model formulation:

Maximize return = 50X1 + 80X2 + 90X3 + 120X4 + 110X5 + 40X6 + 75X7

subject to
X1 + X4 + X5 ≥ 2 (Texas constraint)
X 2+ X 3 ≤ 1 (foreign oil constraint)
X6 + X7 = 1 (California constraint)
480X1 + 540X2 + 680X3 + 1,000X4 + 700X5
+ 510X6 + 900X7 ≤ 3,000 ($3 million limit)

All variables must be 0 or 1

4-236
 Financial Investment

Excel 2010 Solver Solution for Financial Investment Problem

4-237
 Goal Programming
• Firms often have more than one goal.
• In LINEAR and INTEGER PROGRAMMING methods
the objective function
– measured in ONE DIMENSION ONLY.
• It is not possible for LP to have multiple goals
unless they are all measured in the same units,
and this is a highly unusual situation.
• An important technique that has been developed
to supplement LP is called GOAL PROGRAMMING.

4-238
 Goal Programming
• Typically goals set by management can be achieved
only at the expense of other goals.
• A hierarchy of importance needs to be established so
that higher-priority goals are satisfied before lower-
priority goals are addressed.
• It is not always possible to satisfy every goal so GOAL
PROGRAMMING attempts to reach a satisfactory
level of multiple objectives.
• The main difference is in the objective function
where GOAL PROGRAMMING tries to minimize the
DEVIATIONS between goals and what we can actually
achieve within the given constraints.
4-239
 Example of Goal Programming: Harrison Electric Company Revisited

The LP formulation for the Harrison Electric

problem is:
Maximize profit =$7X1+ $6X2
subject to 2X1 + 3X2 ≤ 12(wiring hours)
6X1 + 5X2 ≤ 30(assembly hours)
X1, X2 ≥ 0
where
X1 = number of chandeliers produced
X2 = number of ceiling fans produced 4-240
 Example of Goal Programming: Harrison Electric Company
Revisited

• Harrison is moving to a new location and feels that

maximizing profit is not a realistic objective.
• Management sets a profit level of $30 that would
be satisfactory during this period.
• The goal programming problem is to find the
production mix that achieves this goal as closely as
possible given the production time constraints.
• We need to define two deviational variables:
d1– = underachievement of the profit target
d1+ = overachievement of the profit target
4-241
 Example of Goal Programming: Harrison Electric Company Revisited

We can now state the Harrison Electric problem as a

single-goal programming model:

Minimize under or
overachievement of profit target = d1– + d1+

subject to $7X1+ $6X2 + d1– – d1+ = $30 (profit goal constraint)

2X1 + 3X2 ≤ 12 (wiring hours)
6X1 + 5X2 ≤ 30 (assembly hours)
X1, X2, d1–, d1+ ≥ 0

4-242
 Extension to Equally Important Multiple Goals

• Suppose Harrison’s management wants to

achieve several goals that are equal in priority:
Goal 1: to produce a profit of $30 if possible
during the production period.
Goal 2: to fully utilize the available wiring
department hours.
Goal 3: to avoid overtime in the assembly
department.
Goal 4: to meet a contract requirement to
produce at least seven ceiling fans.
4-243
 Extension to Equally Important Multiple Goals

The deviational variables are:

d1– = underachievement of the profit target
d1+ = overachievement of the profit target
d2– = idle time in the wiring department (underutilization)
d2+ = overtime in the wiring department (overutilization)
d3– = idle time in the assembly department (underutilization)
d3+ = overtime in the assembly department (overutilization)
d4– = underachievement of the ceiling fan goal
d4+ = overachievement of the ceiling fan goal
4-244
 Extension to Equally Important Multiple Goals

Because management is unconcerned about d1+, d2+, d3–, and

d4+ these may be omitted from the objective function.
• The new objective function and constraints are:

Minimize total deviation = d1– + d2– + d3+ + d4–

subject to 7X1 + 6X2 + d1– – d1+ = 30 (profit constraint)
2X1 + 3X2 + d2– – d2+ = 12 (wiring hours)
6X1 + 5X2 + d3– – d3+ = 30 (assembly hours)
X2 + d4– – d4+ = 7 (ceiling fan constraint)
All Xi, di variables ≥ 0
4-245
 Ranking Goals with Priority Levels
• In most goal programming problems, one goal
will be more important than another, which
will in turn be more important than a third.
• Higher-order goals are satisfied before lower-
order goals.
• PRIORITIES (Pi’s) are assigned to each
deviational variable with the ranking so that
• P1 is the most important goal,
• P2 the next most important,
• P3 the third, and so on.
4-246
 Ranking Goals with Priority Levels
Harrison Electric has set the following
priorities for their four goals:
GOAL PRIORITY
Reach a profit as much above $30 P1
as possible
Fully use wiring department hours P2
available
Avoid assembly department P3
overtime
Produce at least seven ceiling fans P4
4-247
 Ranking Goals with Priority Levels
• This effectively means that each goal is infinitely
more important than the next lower goal.
• With the ranking of goals considered, the new
objective function is:
Minimize total
deviation
= P1d1– + P2d2– + P3d3+ + P4d4–

Constraints remain identical to the

previous formulation.
4-248
 Goal Programming with Weighted Goals
• Normally priority levels in goal programming assume
that each level is infinitely more important than the
level below it.
• Sometimes a goal may be only two or three times more
important than another.
• Instead of placing these goals on different levels, we
place them on the same level but with different
weights.
• The coefficients of the deviation variables in the
objective function include both the priority level and
the weight.
4-249
 Goal Programming with Weighted Goals
• Suppose Harrison decides to add another goal of
producing at least two chandeliers.
• The goal of producing seven ceiling fans is considered
twice as important as this goal.
• The goal of two chandeliers is assigned a weight of 1
and the goal of seven ceiling fans is assigned a weight of
2 and both of these will be priority level 4.
• The new constraint and objective function are:
X1 + d5– – d5+ = 2 (chandeliers)
Minimize = P1d1– + P2d2– + P3d3+ + P4(2d4–) + P4d5–
4-250
 Using QM for Windows to Solve
Harrison’s Problem
Harrison Electric’s GOAL PROGRAMMING ANALYSIS
Using QM for Windows: Inputs

4-251
 Using QM for Windows to Solve
Harrison’s Problem
Summary Screen for Harrison Electric’s Goal Programming
Analysis Using QM for Windows

4-252
 Using QM for Windows to Solve
Harrison’s Problem
The solution, with an analysis of deviations and goal
achievement, is found.
 We see that the first two constraints have negative
deviational variables equal to 0, indicating full
achievement of those goals.
In fact, the positive deviational variables both have
values of 6, indicating overachievement of these goals
by six units each.
Goal (constraint) 3 has both overachievement
deviational variables
full
equal to 0, indicating complete achievement of achievement
of these goals by that
six units each
goal, whereas goal 4 has a negative deviational of those
goals
variable equal to 1, indicating underachievement
full achievement
those goals
of by
one unit. underachievement by
one unit
4-253
 Nonlinear Programming
• The methods seen so far have assumed that the objective
function and constraints are LINEAR.
• Terms such as X13, 1/X2, log X3, or 5X1X2 are not allowed.
• But there are MANY NONLINEAR RELATIONSHIPS in the
real world that would require the objective function,
constraint equations, or both to be nonlinear.
• Excel can be used to solve these nonlinear programming
(NLP) problems.
• One disadvantage of NLP is that the solution yielded may
only be a LOCAL OPTIMUM, rather than a global optimum.

– In other words, it may be an optimum over a particular

range, but not overall.
4-254
 Nonlinear Objective Function and Linear
Constraints
• THE GREAT WESTERN APPLIANCE COMPANY sells two
models of toaster ovens:
– the Microtoaster (X1) and
– the Self-Clean Toaster Oven (X2).
• They earn a profit of $28 for each Microtoaster no
matter the number of units sold.
• For the Self-Clean oven, profits increase as more units
are sold due to a fixed overhead.
• The profit function for the Self-Clean over may
be expressed as: 21X2 + 0.25X2 2
4-255
 Nonlinear Objective Function and Linear
Constraints

The objective function is nonlinear and there are

two linear constraints on production capacity and
sales time available.
Maximize profit = 28X1 + 21X2
+ 0.25X2
(units of production capacity)2
(hours of sales time available)
subject to X1 + X2 ≤ 1,000
When an objective function contains a squared term and the
0.5X1 + 0.4X2 ≤ 500
problem constraints are linear,
 it is called a QUADRATIC PROGRAMMING problem.
X1, X2 ≥ 0
4-256
 Nonlinear Objective Function and Linear
Constraints
Excel 2010 Solver Solution for Great Western Appliance NLP
Problem

PROFIT IS
271000

4-257
 Both Nonlinear Objective Function and
Nonlinear Constraints

• The annual profit at a medium-sized (200-400 beds)

Hospicare Corporation hospital depends on the number
of medical patients admitted (X1) and the number of
surgical patients admitted (X2).
• The OBJECTIVE FUNCTION for the hospital is nonlinear.
• They have identified three constraints, two of which are
nonlinear.
– Nursing capacity - nonlinear
– X-ray capacity - nonlinear
– Marketing budget required
4-258
 Both Nonlinear Objective Function and
Nonlinear Constraints
The objective function and constraint equations
for this problem are:

Max profit = $13X1 + $6X1X2 + $5X2 + $1/X2

ST 2X12 (nursing
+ 4X ≤ 90
capacity in thousands of labor-days)
2
(x-ray capacity in thousands)
X1 + X2 3
≤ 75
(marketing budget required in thousands of $)
8X1 – 2X2 ≤ 61

4-259
Both Nonlinear Objective Function and
Nonlinear Constraints
Excel 2010 Solution for Hospicare’s NLP Problem

4-260
 Linear Objective Function and
Nonlinear Constraints
• Thermlock Corp. produces massive rubber
washers and gaskets like the type used to seal
joints on the NASA Space Shuttles.
• It combines two ingredients, RUBBER (X1) and
OIL (X2).
• The cost of the industrial quality RUBBER is
$5 per pound and the cost of high viscosity
OIL is $7 per pound.
• Two of the three constraints are nonlinear. 4-261
 Linear Objective Function and Nonlinear
Constraints
The firm’s objective function and constraints are:

Minimize costs = $5X1 + $7X2

subject to
2 constraint)
3X1 + 0.25X
(hardness
1 + 4X2
(tensile strength)
+ 0.3X22 ≥
125
(elasticity)

13X1 + X13
≥
80 4-262
Linear Objective Function and Nonlinear
Constraints
Excel 2010 Solution for Thermlock NLP Problem

4-263
 Chapter 5

Transportation and Assignment

Models
 Learning Objectives
After completing this chapter, students will be able to:
1. Structure LP problems using the
transportation, transshipment and
assignment models.
2. Use the NORTHWEST CORNER and
STEPPING-STONE methods.
3. Solve facility location and other application
problems with transportation models.
4. Solve assignment problems with the
Hungarian (matrix reduction) method. 5-265
 Chapter Outline
5.1 Introduction
5.2 The Transportation Problem
5.3 The Assignment Problem
5.4 The Transshipment Problem
5.5 The Transportation Algorithm
5.6 Special Situations with the Transportation
Algorithm
5.7 Facility Location Analysis
5.8 The Assignment Algorithm
5.9 Special Situations with the Assignment Algorithm
5-266
 Introduction

• In this chapter we will explore three

special linear programming models:
– The transportation problem.
– The assignment problem.
– The transshipment problem.
• These problems are members of a
category of LP techniques called
NETWORK FLOW PROBLEMS.
5-267
 The Transportation Problem

• The TRANSPORTATION PROBLEM deals

with the distribution of goods from several
points of supply (SOURCES) to a number of
points of demand (DESTINATIONS).
• Usually we are given the capacity of goods at
each source and the requirements at each
destination.
• Typically the objective is to MINIMIZE total
transportation and production COSTS.
5-268
THE TRANSPORTATION PROBLEM
• The Executive Furniture Corporation
manufactures office desks at three
locations: Adama, Hawassa, and Dire
Dawa.
• The firm distributes the desks through
regional warehouses located in
Mekelle, Bahir Dar , and Semera.

5-269
 The Transportation Problem

Network Representation of a Transportation Problem, with Costs,

Demands and Supplies

Executive Furniture Company

Factories Warehouses
Supply (Sources) (Destinations) Demand
100 Units Adama $5 Bahir Dar 300 Units
$4
$3
300 Units
$8 200 Units
Hawassa $4 Mekelle
$3
$9 $7
300 Units Dire Dawa Semera 200 Units
$5

5-270
 Linear Programming for the
Transportation Example

• Let Xij = number of units shipped

from source i to destination j,
– Where:
• i = 1, 2, 3, with 1 = Adama, 2 = Hawassa, and 3 =
Dire Dawa
• j = 1, 2, 3, with 1 = Bahir Dar , 2 = Mekelle, and
3 = Semera.

5-271
 Linear Programming for the Transportation
Example
• Minimize total cost = 5X11 + 4X12 + 3X13 +
8X21 + 4X22 + 3X23
+ 9X31 +7X32 + 5X33
• Subject to:
– X11 + X12 + X13 ≤ 100 (Adama supply)
– X21 + X22 + X23 ≤ 300 (Hawassa supply)
– X31 + X32 + X33 ≤ 300 (Dire Dawa supply)
– X11 + X21 + X31 = 300 (Bahir Dar demand)
– X12 + X22 + X32 = 200 (Mekelle demand)
– X13 + X23 + X33 = 200 (Semera demand)
5-272
Executive Furniture Corporation Solution in
Excel 2010

5-273
 A General LP Model for Transportation
Problems
• Let:
– Xij = number of units shipped from
source i to destination j.
– cij = cost of one unit from source i to
destination j.
– si = supply at source i.
– dj = demand at destination j.
5-274
 A General LP Model for Transportation
Problems
Minimize cost =
Subject to:

i = 1, 2,…, m.

j = 1, 2, …, n.

xij ≥ 0 for all i and j.

5-275
 The Assignment Problem
• This type of problem determines
the most efficient assignment of
people to particular tasks, etc.
• Objective is typically to minimize
TOTAL COST or TOTAL TASK TIME.

5-276
 LINEAR PROGRAM FOR ASSIGNMENT
Example
• The FIX-IT SHOP has just received three new
repair projects that must be repaired quickly: a
radio, a toaster oven, and a coffee table.
• Three workers with different talents are able to
do the jobs.
• The owner estimates the cost in wages if the
workers are assigned to each of the three jobs.
• Objective: minimize total cost.

5-277
Example of an Assignment Problem in a
Transportation Network Format

5-278
 LINEAR PROGRAM FOR ASSIGNMENT
Example
Let: Xij = 1 if person i is assigned to
p r o j e c t j , or
0 otherwise.
Where: i = 1,2,3 with 1 = Adams, 2 = Brown, and
3 = Cooper
j = 1,2,3, with 1 = Project 1, 2 = Project 2, and
3 = Project 3.
5-279
 LINEAR PROGRAM FOR ASSIGNMENT
Example
Minimize total cost = 11X11 + 14X12 + 6X13 +
8X21 + 10X22 + 11X23 +
9X31 + 12X32 + 7X33
Subject to:
 X11 + X12 + X13 ≤ 1
 X21 + X22 + X23 ≤ 1
 X31 + X32 + X33 ≤ 1
 X11 + X21 + X31 = 1
 X12 + X22 + X32 = 1
 X13 + X23 + X33 = 1
5-280
Fix-it Shop Solution in Excel 2010

5-281
Linear Program for Assignment Example

• X13 = 1, so Adams is assigned to

project 3.
• X22 = 1, so Brown is assigned to
project 2.
• X31 = 1, so Cooper is assigned to
project 3.
• Total cost of the repairs is $25.
5-282
 Transshipment Applications
When the items are being moved from a SOURCE to a
DESTINATION through an INTERMEDIATE point
(a transshipment point), the problem is called a TRANSSHIPMENT
PROBLEM.
Distribution Centers
• Frosty Machines manufactures snow blowers in TORONTO and
DETROIT.
• These are shipped to regional distribution centers in Chicago and
Buffalo.
• From there they are shipped to supply houses in New York,
Philadelphia, and St Louis.
• Shipping costs vary by location and destination.
• Snow blowers cannot be shipped directly from the factories to the
supply houses. 5-283
Network Representation of Transshipment
Example

5-284
 Transshipment Applications
Frosty Machines Transshipment Data
TO
NEW YORK
FROM CHICAGO BUFFALO CITY PHILADELPHIA ST LOUIS SUPPLY
Toronto $4 $7 — — — 800

Detroit $5 $7 — — — 700

Chicago — — $6 $4 $5 —

Buffalo — — $2 $3 $4 —

Demand — — 450 350 300

Frosty would like to minimize the transportation costs

associated with shipping snow blowers to meet the
demands at the supply centers given the supplies
available. 5-285
 Transshipment Applications
A description of the problem would be to minimize
cost subject to:
1. The number of units shipped from Toronto is not more than
800.
2. The number of units shipped from Detroit is not more than
700.
3. The number of units shipped to New York is 450.
4. The number of units shipped to Philadelphia is 350.
5. The number of units shipped to St Louis is 300.
6. The number of units shipped out of Chicago is equal to the
number of units shipped into Chicago.
7. The number of units shipped out of Buffalo is equal to the
number of units shipped into Buffalo. 5-286
 Transshipment Applications
The decision variables should represent the number of units
shipped from each source to the transshipment points and
from there to the final destinations.

X13 = the number of units shipped from Toronto to Chicago

X14 = the number of units shipped from Toronto to Buffalo
X23 = the number of units shipped from Detroit to Chicago
X24 = the number of units shipped from Detroit to Buffalo
X35 = the number of units shipped from Chicago to New York
X36 = the number of units shipped from Chicago to Philadelphia
X37 = the number of units shipped from Chicago to St Louis
X45 = the number of units shipped from Buffalo to New York
X46 = the number of units shipped from Buffalo to Philadelphia 5-287
 Transshipment Applications
The linear program is:

Minimize cost
= 4X13 + 7X14 + 5X23 + 7X24 + 6X35 + 4X36 + 5X37 + 2X45 + 3X46 + 4X47
subject to
X13 + X14 ≤ 800 (supply at Toronto)
X23 + X24 ≤ 700 (supply at Detroit)
X35 + X45 = 450 (demand at New York)
X36 + X46 = 350 (demand at Philadelphia)
X37 + X47 = 300 (demand at St Louis)
X13 + X23 = X35 + X36 + X37 (shipping through Chicago)
X14 + X24 = X45 + X46 + X47 (shipping through Buffalo)
Xij ≥ 0 for all i and j (nonnegativity) 5-288
Solution to Frosty Machines Transshipment
Problem

5-289
 THE TRANSPORTATION ALGORITHM

• This is an iterative procedure in which a

solution to a transportation problem is
found and evaluated using a special
procedure to determine whether the
solution is optimal.
– When the solution is optimal, the process
stops.
– If not, then a new solution is generated.
5-290
 Transportation Table for Executive Furniture
Corporation
Adama capacity
constraint

TO WAREHOUSE
WAREHOUSE WAREHOUSE
AT FACTORY
FROM AT Bahir Dar AT Semera
Mekelle CAPACITY
$5 $4 $3
Adama FACTORY 100

$8 $4 $3
Hawassa FACTORY 300

$9 $7 $5
Dire Dawa FACTORY 300

WAREHOUSE
300 200 200 700
REQUIREMENTS
Cell representing a source-
Total supply to-destination (Hawassa to
Cost of shipping 1 unit from Dire Semera Semera) shipping assignment
and demand
Dawafactory to Mekelle warehouse that could be made
warehouse demand 5-291
 Developing an Initial Solution:
Northwest Corner Rule
• Once we have arranged the data in a table, we must
establish an initial feasible solution.
• One systematic approach is known as the NORTHWEST
CORNER RULE.
• Start in the upper left-hand cell and allocate units to
shipping routes as follows:
1. Exhaust the supply (factory capacity) of each row before
moving down to the next row.
2. Exhaust the demand (warehouse) requirements of each
column before moving to the right to the next column.
3. Check that all supply and demand requirements are met.
• This problem takes five steps to make the initial shipping
assignments. 5-292
 Developing an Initial Solution: Northwest Corner
Rule
1. Beginning in the upper left hand corner, we assign 100
units from Adama to Bahir Dar . This exhaust the supply
from Adama but leaves Bahir Dar 200 desks short. We
move to the second row in the same column.

TO Mekelle FACTORY
Bahir Dar (A) Semera (C)
FROM (B) CAPACITY

Adama $5 $4 $3
100 100
(D)

Hawassa $8 $4 $3
300
(E)

$9 $7 $5
Dire Dawa(F) 300

WAREHOUSE
300 200 200 700
REQUIREMENTS
5-293
 Developing an Initial Solution: Northwest Corner
Rule
2. Assign 200 units from Hawassa to Bahir Dar . This meets
Bahir Dar ’s demand. Hawassa has 100 units remaining so
we move to the right to the next column of the second
row.
TO Mekelle FACTORY
Bahir Dar (A) Semera (C)
FROM (B) CAPACITY

Adama $5 $4 $3
100 100
(D)

Hawassa $8 $4 $3
200 300
(E)

$9 $7 $5
Dire Dawa(F) 300

WAREHOUSE
300 200 200 700
REQUIREMENTS

5-294
 Developing an Initial Solution: Northwest Corner
Rule
3. Assign 100 units from Hawassa to Mekelle. The Hawassa
supply has now been exhausted but Mekelle is still 100
units short. We move down vertically to the next row in
the Mekelle column.
TO Mekelle FACTORY
Bahir Dar (A) Semera (C)
FROM (B) CAPACITY

Adama $5 $4 $3
100 100
(D)

Hawassa $8 $4 $3
200 100 300
(E)

$9 $7 $5
Dire Dawa(F) 300

WAREHOUSE
300 200 200 700
REQUIREMENTS

5-295
 Developing an Initial Solution: Northwest Corner
Rule
4. Assign 100 units from Dire Dawa to Mekelle. This fulfills
Mekelle’s demand and Dire Dawastill has 200 units
available.

TO Mekelle FACTORY
Bahir Dar (A) Semera (C)
FROM (B) CAPACITY

Adama $5 $4 $3
100 100
(D)

Hawassa $8 $4 $3
200 100 300
(E)

$9 $7 $5
Dire Dawa(F) 100 300

WAREHOUSE
300 200 200 700
REQUIREMENTS

5-296
 Developing an Initial Solution: Northwest Corner
Rule
5. Assign 200 units from Dire Dawa to Semera. This exhausts
Dire Dawa’s supply and Semera’s demand. The initial
shipment schedule is now complete.

TO Mekelle FACTORY
Bahir Dar (A) Semera (C)
FROM (B) CAPACITY

Adama $5 $4 $3
100 100
(D)

Hawassa $8 $4 $3
200 100 300
(E)

$9 $7 $5
Dire Dawa(F) 100 200 300

WAREHOUSE
300 200 200 700
REQUIREMENTS

5-297
 Developing an Initial Solution: Northwest Corner
Rule

The cost of this shipping assignment:

ROUTE

FROM TO UNITS PER UNIT TOTAL

SHIPPED x COST ($) = COST ($)
Adama Bahir Dar 100 5 500
Hawassa Bahir Dar 200 8 1,600
Hawassa Mekelle 100 4 400
DD Mekelle 100 7 700
DD Semera 200 5 1,000
4,200
This solution is feasible but we need to check to see if it is optimal.

5-298
 Stepping-Stone Method: Finding a Least
Cost Solution

• The stepping-stone method is an iterative technique

for moving from an initial feasible solution to an
optimal feasible solution.
• There are two distinct parts to the process:
– Testing the current solution to determine if improvement
is possible.
– Making changes to the current solution to obtain an
improved solution.
• This process continues until the optimal solution is
reached.
5-299
 Stepping-Stone Method: Finding a Least
Cost Solution
• There is one very important rule:
– The number of occupied routes (or squares) must
always be equal to one less than the sum of the
number of rows plus the number of columns
– In the Executive Furniture problem this means the
initial solution must have 3 + 3 – 1 = 5 squares used.

Occupied shipping
routes (squares) =
Number
of rows
Number of
columns -1

+
When the number of occupied rows is less than this, the
solution is called degenerate.
5-300
 Testing the Solution for Possible
Improvement

• The stepping-stone method works by

testing each unused square in the
transportation table to see what
would happen to total shipping costs if
one unit of the product were
tentatively shipped on an unused
route.
• There are five steps in the process.
5-301
Five Steps to Test Unused Squares with the
Stepping-Stone Method
1. Select an unused square to evaluate.
2. Beginning at this square, trace a closed path
back to the original square via squares that
are currently being used with only horizontal
or vertical moves allowed.
3. Beginning with a plus (+) sign at the unused
square, place alternate minus (–) signs and
plus signs on each corner square of the closed
path just traced.
5-302
 Five Steps to Test Unused Squares with
the Stepping-Stone Method
4. Calculate an improvement index by adding
together the unit cost figures found in each
square containing a plus sign and then subtracting
the unit costs in each square containing a minus
sign.
5. Repeat steps 1 to 4 until an improvement index
has been calculated for all unused squares. If all
indices computed are greater than or equal to
zero, an optimal solution has been reached. If not,
it is possible to improve the current solution and
decrease total shipping costs. 5-303
 Five Steps to Test Unused Squares with the
Stepping-Stone Method

For the Executive Furniture Corporation data:

Steps 1 and 2. Beginning with Adama–Mekelle route
we trace a closed path using only currently occupied
squares, alternately placing plus and minus signs in
the corners of the path.

 In a closed path, only squares currently

used for shipping can be used in turning
corners.
 Only one closed route is possible for
each square we wish to test. 5-304
 Five Steps to Test Unused Squares with the
Stepping-Stone Method

Step 3. Test the cost-effectiveness of the

Adama–Mekelle shipping route by pretending
that we are shipping one desk from Adama to
Mekelle. Put a plus in that box.
 But if we ship one more unit out of Adama we will be
sending out 101 units.
 Since the Adama factory capacity is only 100, we must
ship fewer desks from Adama to Bahir Dar so place a
minus sign in that box.
 But that leaves Bahir Dar one unit short so increase the
shipment from Hawassa to Bahir Dar by one unit and so
on until the entire closed path is completed. 5-305
 Five Steps to Test Unused Squares with the
Stepping-Stone Method
Evaluating the unused Adama– Warehouse B Warehouse M

$5 $4
Mekelle shipping route Factory
A 100
– +

+ $8 – $4
Factory
H 200 100

TO
Bahir Dar Mekelle Semera FACTORY
FROM
CAPACITY
$5 $4 $3
Adama 100 100

$8 $4 $3
Hawassa 200 100 300

$9 $7 $5
Dire Dawa 100 200 300

WAREHOUSE
300 200 200 700
REQUIREMENTS
5-306
 Five Steps to Test Unused Squares with the
Stepping-Stone Method
Evaluating the unused Adama– Warehouse B Warehouse M

99 $5 $4
Mekelle shipping route Factory
A 100 1
– +

+ $8 – $4
Factory 201 99
H 200 100

TO FACTORY
Bahir Dar Mekelle Semera
FROM CAPACITY
$5 $4 $3
Adama 100 100

$8 $4 $3
Hawassa 200 100 300

$9 $7 $5
Dire Dawa 100 200 300

WAREHOUSE
300 200 200 700
REQUIREMENTS
5-307
 Five Steps to Test Unused Squares with the
Stepping-Stone Method
Evaluating the unused Adama– Warehouse A Warehouse B

99 $5 $4
Mekelle shipping route Factory
D 100 1
– +

+ $8 – $4
Factory 201 99
E 200 100

TO FACTORY
Bahir Dar Mekelle Semera
FROM Result of
CAPACITY Proposed Shift
$5 $4 $3 in Allocation
Adama 100 100
= 1 x $4
$8 $4 $3
– 1 x $5
Hawassa 200 100 300 + 1 x $8
– 1 x $4 = +$3
$9 $7 $5
Dire Dawa 100 200 300

WAREHOUSE
300 200 200 700
REQUIREMENTS
5-308
 Five Steps to Test Unused Squares with the
Stepping-Stone Method
Step 4. Now compute an improvement index (Iij) for
the Adama–Mekelle route.
Add the costs in the squares with plus signs and
subtract the costs in the squares with minus signs:

Adama–Mekelle
index = IAM = +$4 – $5 + $8 – $4 = + $3

This means for every desk shipped via the Adama–

Mekelle route, total transportation cost will increase
by $3 over their current level.

5-309
 Five Steps to Test Unused Squares with the
Stepping-Stone Method
Step 5. Now examine the Adama–Semera unused route.
 Again, only turn corners at squares that represent existing
routes.
 Pass through the Hawassa–Semera square but we can not
turn there or put a + or – sign.
 The closed path we will use is:
+ AS – AB + HB – HM + DM – DS
TO FACTORY
Bahir Dar Mekelle Semera
FROM CAPACITY
$5 $4 $3
Adama 100 100

$8 $4 $3
Hawassa 200 100 300

$9 $7 $5
Dire Dawa 100 200 300

WAREHOUSE
300 200 200 700
REQUIREMENTS 5-310
 Five Steps to Test Unused Squares with the
Stepping-Stone Method
Evaluating the Adama–Semera Shipping Route

TO FACTORY
Bahir Dar Mekelle Semera
FROM CAPACITY
$5 $4 Start $3
Adama 100 100
– +
$8 $4 $3
Hawassa 200 100 300
+ –
$9 $7 $5
Dire Dawa 100 200 300
+ –
WAREHOUSE
300 200 200 700
REQUIREMENTS

Adama–Semera improvement
index = IAS = + $3 – $5 + $8 – $4 + $7 – $5 = + $4

5-311
 Five Steps to Test Unused Squares with the
Stepping-Stone Method
Opening the Adama–Semera route will not lower our total
shipping costs.
Evaluating the other two routes we find:

Hawassa-Semera
= IHS = + $3 – $4 + $7 – $5 = + $1
index
The closed path is + HS – HM + DM – DS

. Dawa–Bahir Dar
Dire
index = IDB= + $9 – $7 + $4 – $8 = – $2

The closed path is + DB– DM + HM – HB

Opening the Dire Dawa-Bahir Dar route will lower our total
transportation costs 5-312
 Obtaining an Improved Solution

• In the Executive Furniture problem there is only one

unused route with a negative index (Dire Dawa-Bahir
Dar ).
– If there was more than one route with a negative index,
we would choose the one with the largest improvement
• We now want to ship the maximum allowable
number of units on the new route
• The quantity to ship is found by referring to the
closed path of plus and minus signs for the new
route and selecting the smallest number found in
those squares containing minus signs.
5-313
 Obtaining an Improved Solution
• To obtain a new solution, that number is added to all
squares on the closed path with plus signs and
subtracted from all squares the closed path with
minus signs.
• All other squares are unchanged.
• In this case, the maximum number that can be
shipped is 100 desks as this is the smallest value in a
box with a negative sign (DM route).
• We add 100 units to the AMand HM routes and
subtract 100 from DM and HB routes.
• This leaves balanced rows and columns and an
improved solution. 5-314
 Obtaining an Improved Solution

Stepping-Stone Path Used to Evaluate Route D-B

TO FACTORY
B M S
FROM CAPACITY
$5 $4 $3
A 100 100

$8 $4 $3
H 200 100 300
– +
$9 $7 $5
D 100 200 300
+ –
WAREHOUSE
300 200 200 700
REQUIREMENTS

5-315
 Obtaining an Improved Solution

Second Solution to the Executive Furniture Problem

TO FACTORY
B M S
FROM CAPACITY
$5 $4 $3
A 100 100

$8 $4 $3
H 100 200 300

$9 $7 $5
D 100 200 300

WAREHOUSE
300 200 200 700
REQUIREMENTS

Total shipping costs have been reduced by (100 units) x ($2 saved per unit) and
now equals $4,000.

5-316
 Obtaining an Improved Solution

• This second solution may or may not be optimal.

• To determine whether further improvement is possible, we
return to the first five steps to test each square that is now
unused.
• The four new improvement indices are:
A to M = IAM= + $4 – $5 + $8 – $4 = + $3
(closed path: + AM– DA + HB – HM)
A to S = IAS = + $3 – $5 + $9 – $5 = + $2
(closed path: + AS – AB + DB– DS)
H to S = IHS = + $3 – $8 + $9 – $5 = – $1
(closed path: + HS – HB + DB– DS)
D to M = IDM = + $7 – $4 + $8 – $9 = + $2
(closed path: + DM – HM + HB – DB)
5-317
 Obtaining an Improved Solution

Path to Evaluate the H-S Route

TO FACTORY
B M S
FROM CAPACITY
$5 $4 $3
A 100 100

H 100
$8
200
$4 Start $3
300
– +
$9 $7 $5
D 100 200 300
+ –
WAREHOUSE
300 200 200 700
REQUIREMENTS

An improvement can be made by shipping the maximum allowable

number of units from H to S.
5-318
 Obtaining an Improved Solution

Total cost of third solution:

ROUTE
TOTAL
FROM TO DESKS PER UNIT COST
SHIPPED x COST ($) = ($)
A B 100 5 500
H M 200 4 800
H S 100 3 300
D B 200 9 1,800
D S 100 5 500
3,900

5-319
 Obtaining an Improved Solution

Third and optimal solution:

TO FACTORY
B M S
FROM CAPACITY
$5 $4 $3
A 100 100

$8 $4 $3
H 200 100 300

$9 $7 $5
D 200 100 300

WAREHOUSE
300 200 200 700
REQUIREMENTS

5-320
 Obtaining an Improved Solution
This solution is optimal as the improvement
indices that can be computed are all greater than
or equal to zero.
A to M = IAM= + $4 – $5 + $9 – $5 + $3 – $4 = + $2
(closed path: + AM– AB + DB – DS + HS– HM)
A to S = IAS = + $3 – $5 + $9 – $5 = + $2
(closed path: + AS – AB + DB – DS)
H to B = ISB = + $8 – $9 + $5 – $3 = + $1
(closed path: + HB – DB + DS – HS)
D to M = IFB = + $7 – $5 + $3 – $4 = + $1
(closed path: + DM – DS + HS – SM) 5-321
 Summary of Steps in Transportation Algorithm
(Minimization)
1. Set up a balanced transportation table.
2. Develop initial solution using the northwest corner
method .
3. Calculate an improvement index for each empty cell using
the stepping-stone method.
If improvement indices are all nonnegative, stop as the optimal
solution has been found.
If any index is negative, continue to step 4.
4. Select the cell with the improvement index indicating the
greatest decrease in cost.
 Fill this cell using the stepping-stone path and go to step 3.
5-322
 UNBALANCED TRANSPORTATION PROBLEMS
• In real-life problems, total demand is frequently
not equal to total supply.
• These unbalanced problems can be handled easily
by introducing dummy sources or dummy
destinations.
• If total supply is greater than total demand, a
dummy destination (warehouse), with demand
exactly equal to the surplus, is created.
• If total demand is greater than total supply, we
introduce a dummy source (factory) with a supply
equal to the excess of demand over supply. 5--323
 Special Situations with the
Transportation Algorithm
• Unbalanced Transportation Problems
– In either case, shipping cost coefficients of
zero are assigned to each dummy location or
route as no goods will actually be shipped.
– Any units assigned to a dummy destination
represent excess capacity.
– Any units assigned to a dummy source
represent unmet demand.

5-324
 Demand Less Than Supply
• Suppose that the Adama factory increases its rate of
production from 100 to 250 desks.
• The firm is now able to supply a total of 850 desks each
period.
• Warehouse requirements remain the same (700) so the
row and column totals do not balance.
• We add a dummy column that will represent a fake
warehouse requiring 150 desks.
• This is somewhat analogous to adding a slack variable.
• We use the stepping-stone method to find the optimal
solution.

5-325
 Demand Less Than Supply

Initial Solution to an Unbalanced Problem Where Demand is

Less Than Supply
TO DUMMY TOTAL
FROM
B M S WAREHOUSE AVAILABLE
$5 $4 $3 0
A 250 250

$8 $4 $3 0
H 50 200 50 300

$9 $7 $5 0
D 150 150 300

WAREHOUSE
300 200 200 150 850
REQUIREMENTS

Total cost = 250($5) + 50($8) + 200($4) +

50($3) + 150($5) + 150(0) New Adama
= $3,350 capacity
5-326
 Demand Greater than Supply

 The second type of unbalanced condition

occurs when total demand is greater than
total supply.
 In this case we need to add a dummy row
representing a fake factory.
 The new factory will have a supply exactly
equal to the difference between total
demand and total real supply.
 The shipping costs from the dummy
factory to each destination will be zero.
5-327
 Demand Greater than Supply
Unbalanced Transportation Table for Happy Sound Stereo Company

TO WAREHOUSE WAREHOUSE WAREHOUSE

FROM A B C PLANT SUPPLY
$6 $4 $9
PLANT W 200

$10 $5 $8
PLANT X 175

$12 $7 $6
PLANT Y 75

Totals do
WAREHOUSE
250 100 150
450 not
DEMAND 500
balance

5-328
 Demand Greater than Supply
Initial Solution to an Unbalanced Problem in Which Demand is Greater Than
Supply

TO WAREHOUSE WAREHOUSE WAREHOUSE

PLANT SUPPLY
FROM A B C

$6 $4 $9
PLANT W 200 200

$10 $5 $8
PLANT X 50 100 25 175

$12 $7 $6
PLANT Y 75 75

0 0 0
PLANT Y 50 50

WAREHOUSE
250 100 150 500
DEMAND

Total cost of initial solution = 200($6) + 50($10) + 100($5) + 25($8) + 75($6)

+ $50(0) = $2,850

5-329
 Degeneracy in Transportation Problems

• Degeneracy occurs when the number of occupied squares

or routes in a transportation table solution is less than the
number of rows plus the number of columns minus 1.
• Such a situation may arise in the initial solution or in any
subsequent solution.
• Degeneracy requires a special procedure to correct the
problem since there are not enough occupied squares to
trace a closed path for each unused route and it would be
impossible to apply the stepping-stone method.

5-330
 Degeneracy in Transportation Problems

• To handle degenerate problems, create an artificially

occupied cell.
• That is, place a zero (representing a fake shipment) in one
of the unused squares and then treat that square as if it
were occupied.
• The square chosen must be in such a position as to allow
all stepping-stone paths to be closed.
• There is usually a good deal of flexibility in selecting the
unused square that will receive the zero.

5-331
 Degeneracy in an Initial Solution

• The Martin Shipping Company example

illustrates degeneracy in an initial solution.
• It has three warehouses which supply three
major retail customers.
• Applying the northwest corner rule the initial
solution has only four occupied squares
• To correct this problem, place a zero in an
unused square, typically one adjacent to the
last filled cell.
5-332
 Degeneracy in an Initial Solution

Initial Solution of a Degenerate Problem

TO WAREHOUSE
CUSTOMER 1 CUSTOMER 2 CUSTOMER 3
FROM SUPPLY
$8 $2 $6
WAREHOUSE 1 100 0 100

$10 $9 $9
WAREHOUSE 2 0 100 20 120

$7 $10 $7
WAREHOUSE 3 80 80

CUSTOMER
100 100 100 300
DEMAND

Possible choices of cells

to address the
degenerate solution
5-333
 Degeneracy During Later
Solution Stages
• A transportation problem can become
degenerate after the initial solution stage if
the filling of an empty square results in two or
more cells becoming empty simultaneously.
• This problem can occur when two or more
cells with minus signs tie for the lowest
quantity.
• To correct this problem, place a zero in one of
the previously filled cells so that only one cell
becomes empty. 5-334
 Degeneracy During Later
Solution Stages

Bagwell Paint Example

– After one iteration, the cost analysis at Bagwell Paint
produced a transportation table that was not
degenerate but was not optimal.
– The improvement indices are:
factory A – warehouse 2 index = +2
factory A – warehouse 3 index = +1
factory B – warehouse 3 index = –15
factory C – warehouse 2 index = +11

Only route with a

negative index

5-335
 Degeneracy During Later
Solution Stages

Bagwell Paint Transportation Table

TO WAREHOUSE WAREHOUSE WAREHOUSE
FROM 1 2 3 FACTORY
CAPACITY
$8 $5 $16
FACTORY A 70 70

$15 $10 $7
FACTORY B 50 80 130

$3 $9 $10
FACTORY C 30 50 80

WAREHOUSE
150 80 50 280
REQUIREMENT

5-336
 Degeneracy During Later
Solution Stages
Tracing a Closed Path for the Factory B – Warehouse 3 Route

TO
WAREHOUSE 1 WAREHOUSE 3
FROM

$15 $7
FACTORY B 50
– +
$3 $10
FACTORY C 30 50
+ –

 This would cause two cells to drop to zero.

 We need to place an artificial zero in one of these cells to avoid degeneracy.

5-337
 More Than One Optimal Solution
• It is possible for a transportation problem to have multiple
optimal solutions.
• This happens when one or more of the improvement
indices is zero in the optimal solution.
– This means that it is possible to design alternative shipping routes
with the same total shipping cost.
– The alternate optimal solution can be found by shipping the most
to this unused square using a stepping-stone path.
• In the real world, alternate optimal solutions provide
management with greater flexibility in selecting and using
resources.

5-338
 Maximization Transportation Problems

• If the objective in a transportation problem is to maximize

profit, a minor change is required in the transportation
algorithm.
• Now the optimal solution is reached when all the
improvement indices are negative or zero.
• The cell with the largest positive improvement index is
selected to be filled using a stepping-stone path.
• This new solution is evaluated and the process continues
until there are no positive improvement indices.

5-339
 Unacceptable Or Prohibited Routes

• At times there are transportation problems in

which one of the sources is unable to ship to one
or more of the destinations.
– The problem is said to have an unacceptable or
prohibited route.
• In a minimization problem, such a prohibited route
is assigned a very high cost to prevent this route
from ever being used in the optimal solution.
• In a maximization problem, the very high cost used
in minimization problems is given a negative sign,
turning it into a very bad profit. 5-340
 Facility Location Analysis
• The transportation method is especially useful
in helping a firm to decide where to locate a
new factory or warehouse.
• Each alternative location should be analyzed
within the framework of one overall
distribution system.
• The new location that yields the minimum
cost for the entire system is the one that
should be chosen.
5-341
 Locating a New Factory for Hardgrave
Machine Company
• Hardgrave Machine produces computer components
at three plants and ships to four warehouses.
• The plants have not been able to keep up with
demand so the firm wants to build a new plant.
• Two sites are being considered, Seattle and
Birmingham.
• Data has been collected for each possible location.
Which new location will yield the lowest cost for the
firm in combination with the existing plants and
warehouses?
5-342
 Locating a New Factory for Hardgrave
Machine Company
Hardgrave’s Demand and Supply Data
MONTHLY
DEMAND PRODUCTION MONTHLY COST TO PRODUCE
WAREHOUSE (UNITS) PLANT SUPPLY ONE UNIT ($)
Detroit Cincinnati 48
10,000 15,000
Dallas Salt Lake 50
12,000 6,000
New York Pittsburgh 52
15,000 14,000
Los Angeles
9,000 35,000

46,000
ESTIMATED PRODUCTION COST
Supply needed from new
PERplant
UNIT= 46,000 – 35,000 = 11,000
AT PROPOSED PLANTSunits per month

Seattle $53

Birmingham $49

5-343
 Locating a New Factory for Hardgrave
Machine Company

Hardgrave’s Shipping Costs

TO LOS
FROM DETROIT DALLAS NEW YORK ANGELES
CINCINNATI $25 $55 $40 $60
SALT LAKE 35 30 50 40
PITTSBURGH 36 45 26 66
SEATTLE 60 38 65 27
BIRMINGHAM 35 30 41 50

5-344
 Locating a New Factory for Hardgrave
Machine Company
Birmingham Plant Optimal Solution: Total Hardgrave Cost is
$3,741,000
TO LOS FACTORY
FROM DETROIT DALLAS NEW YORK ANGELES CAPACITY
73 103 88 108
CINCINNATI 10,000 1,000 4,000 15,000

85 80 100 90
SALT LAKE 1,000 5,000 6,000

88 97 78 118
PITTSBURGH 14,000 14,000

84 79 90 99
BIRMINGHAM 11,000 11,000

WAREHOUSE
10,000 12,000 15,000 9,000 46,000
REQUIREMENT

5-345
 Locating a New Factory for Hardgrave
Machine Company
Seattle Plant Optimal Solution: Total Hardgrave Cost is $3,704,000.

TO LOS FACTORY
FROM DETROIT DALLAS NEW YORK ANGELES CAPACITY
73 103 88 108
CINCINNATI 10,000 4,000 1,000 15,000

85 80 100 90
SALT LAKE 6,000 6,000

88 97 78 118
PITTSBURGH 14,000 14,000

113 91 118 80
SEATTLE 2,000 9,000 11,000

WAREHOUSE
10,000 12,000 15,000 9,000 46,000
REQUIREMENT

5-346
 Locating a New Factory for Hardgrave
Machine Company
• By comparing the total system costs of the two
alternatives, Hardgrave can select the lowest
cost option:
– The Birmingham location yields a total system cost
of $3,741,000.
– The Seattle location yields a total system cost of
$3,704,000.
• With the lower total system cost, the Seattle
location is favored.
• Excel QM can also be used as a solution tool.
5-347
Excel QM Solution for Facility Location
Example

5-348
 The Assignment Algorithm
• The second special-purpose LP algorithm is the
assignment method.
• Each assignment problem has associated with it a table,
or matrix.
• Generally, the rows contain the objects or people we
wish to assign, and the columns comprise the tasks or
things to which we want them assigned.
• The numbers in the table are the costs associated with
each particular assignment.
• An assignment problem can be viewed as a
transportation problem in which the capacity from each
source is 1 and the demand at each destination is 1. 5-349
 Assignment Model Approach
• The Fix-It Shop has three rush projects to repair.
• The shop has three repair persons with different
talents and abilities.
• The owner has estimates of wage costs for each
worker for each project.
• The owner’s objective is to assign the three
project to the workers in a way that will result in
the lowest cost to the shop.
• Each project will be assigned exclusively to one
worker. 5-350
 Assignment Model Approach
Estimated Project Repair Costs for the Fix-It Shop Assignment
Problem

PROJECT

PERSON 1 2 3

Adams $11 $14 $6

Brown 8 10 11

Cooper 9 12 7

5-351
 Assignment Model Approach
Summary of Fix-It Shop Assignment Alternatives and Costs

PRODUCT ASSIGNMENT
LABOR TOTAL
1 2 3 COSTS ($) COSTS ($)
Adams Brown Cooper 11 + 10 + 7 28
Adams Cooper Brown 11 + 12 + 11 34
Brown Adams Cooper 8 + 14 + 7 29
Brown Cooper Adams 8 + 12 + 6 26
Cooper Adams Brown 9 + 14 + 11 34
Cooper Brown Adams 9 + 10 + 6 25

5-352
 The Hungarian Method (Flood’s Technique)

• The Hungarian method is an efficient method of finding

the optimal solution to an assignment problem without
having to make direct comparisons of every option.
• It operates on the principle of matrix reduction.
• By subtracting and adding appropriate numbers in the
cost table or matrix, we can reduce the problem to a
matrix of opportunity costs.
• Opportunity costs show the relative penalty associated
with assigning any person to a project as opposed to
making the best assignment.
• We want to make assignment so that the opportunity cost
for each assignment is zero. 5-353
 Three Steps of the Assignment Method

1. Find the opportunity cost table by:

(a) Subtracting the smallest number in each row of
the original cost table or matrix from every
number in that row.
(b) Then subtracting the smallest number in each
column of the table obtained in part (a) from
every number in that column.
2. Test the table resulting from step 1 to see whether an
optimal assignment can be made by drawing the
minimum number of vertical and horizontal straight
lines necessary to cover all the zeros in the table. If
the number of lines is less than the number of rows
or columns, proceed to step 3. 5-354
 Three Steps of the Assignment Method

3. Revise the opportunity cost table by

subtracting the smallest number not
covered by a line from all numbers not
covered by a straight line.
 This same number is also added to every number
lying at the intersection of any two lines.
 Return to step 2 and continue the cycle until an
optimal assignment is possible.

5-355
Steps in the
Assignment
Method

5-356
 The Hungarian Method (Flood’s
Technique)

• Step 1: Find the opportunity cost table.

– We can compute row opportunity costs and
column opportunity costs.
– What we need is the total opportunity cost.
– We derive this by taking the row
opportunity costs and subtract the smallest
number in that column from each number
in that column.

5-357
 The Hungarian Method (Flood’s
Technique)
Cost of Each Person-Project Row Opportunity Cost Table for the
Fix-it Shop Step 1, Part (a)
Assignment for the Fix-it Shop
Problem
PROJECT PROJECT
PERSON 1 2 3 PERSON 1 2 3

Adams $11 $14 $6 Adams $5 $8 $0

Brown 8 10 11 Brown 0 2 3

Cooper 9 12 7 Cooper 2 5 0

The opportunity cost of assigning Cooper to project 2 is $12 – $7 = $5.

5-358
 The Hungarian Method (Flood’s
Technique)
Derive the total opportunity costs by taking the costs in Table
and subtract the smallest number in each column from each
number in that column.
Total Opportunity Cost Table for the Fix-it Shop Step 1, Part (b)

PROJECT
PERSON 1 2 3

Adams $5 $6 $0

Brown 0 0 3

Cooper 2 3 0

5-359
 The Hungarian Method (Flood’s Technique)
• Step 2: Test for the optimal assignment.
– We want to assign workers to projects in such a way
that the total labor costs are at a minimum.
– We would like to have a total assigned opportunity
cost of zero.
– The test to determine if we have reached an
optimal solution is simple.
– We find the minimum number of straight lines
necessary to cover all the zeros in the table.
– If the number of lines equals the number of rows or
columns, an optimal solution has been reached.
5-360
 The Hungarian Method (Flood’s
Technique)
Test for Optimal Solution to Fix-it Shop Problem

PROJECT
PERSON 1 2 3

Adams $5 $6 $0

Brown 0 0 3 Covering line 1

Cooper 2 3 0

Covering line 2

This requires only two lines to cover the zeros so the solution is not optimal.

5-361
 The Hungarian Method (Flood’s
Technique)

• Step 3: Revise the opportunity-cost table.

– We subtract the smallest number not
covered by a line from all numbers not
covered by a straight line.
– The same number is added to every number
lying at the intersection of any two lines.
– We then return to step 2 to test this new
table.

5-362
 The Hungarian Method (Flood’s
Technique)
Revised Opportunity Cost Table for the Fix-it Shop Problem

PROJECT
PERSON 1 2 3

Adams $3 $4 $0

Brown 0 0 5

Cooper 0 1 0

5-363
 The Hungarian Method (Flood’s
Technique)
Optimality Test on the Revised Fix-it Shop Opportunity Cost Table

PROJECT
PERSON 1 2 3

Adams $3 $4 $0

Brown 0 0 5 Covering line 2

Cooper 0 1 0

Covering line 1 Covering line 3

This requires three lines to cover the zeros so the solution is optimal.

5-364
 Making the Final Assignment
• The optimal assignment is Adams to project 3,
Brown to project 2, and Cooper to project 1.
• For larger problems one approach to making
the final assignment is to select a row or
column that contains only one zero.
– Make the assignment to that cell and rule out its
row and column.
– Follow this same approach for all the remaining
cells.
5-365
 Making the Final Assignment
Total labor costs of this assignment are:

ASSIGNMENT COST ($)

Adams to project 3 6

Brown to project 2 10

Cooper to project 1 9

Total cost 25

5-366
 Making the Final Assignment
Making the Final Fix-it Shop Assignments

(A) FIRST (B) SECOND (C) THIRD

ASSIGNMENT ASSIGNMENT ASSIGNMENT

1 2 3 1 2 3 1 2 3

Adams 3 4 0 Adams 3 4 0 Adams 3 4 0

Brown 0 0 5 Brown 0 0 5 Brown 0 0 5

Cooper 0 1 0 Cooper 0 1 0 Cooper 0 1 0

5-367
Excel QM Solution for Fix-It Shop Assignment Problem

5-368
 Unbalanced Assignment Problems
• Often the number of people or objects to be assigned does
not equal the number of tasks or clients or machines listed in
the columns, and the problem is unbalanced.
• When this occurs, and there are more rows than columns,
simply add a dummy column or task.
• If the number of tasks exceeds the number of people
available, we add a dummy row.
• Since the dummy task or person is nonexistent, we enter
zeros in its row or column as the cost or time estimate.

5-369
 Unbalanced Assignment Problems
• Suppose the Fix-It Shop has another worker available.
• The shop owner still has the same basic problem of
assigning workers to projects, but the problem now needs
a dummy column to balance the four workers and three
projects.

PROJECT
PERSON 1 2 3 DUMMY
Adams $11 $14 $6 $0
Brown 8 10 11 0
Cooper 9 12 7 0
Davis 10 13 8 0
5-370
 Maximization Assignment Problems

• Some assignment problems are phrased in terms of

maximizing the payoff, profit, or effectiveness.
• It is easy to obtain an equivalent minimization problem by
converting all numbers in the table to opportunity costs.
• This is brought about by subtracting every number in the
original payoff table from the largest single number in that
table.
• Transformed entries represent opportunity costs.
• Once the optimal assignment has been found, the total
payoff is found by adding the original payoffs of those cells
that are in the optimal assignment.

5-371
 Maximization Assignment Problems

• The British navy wishes to assign four

ships to patrol four sectors of the
North Sea.
• Ships are rated for their probable
efficiency in each sector.
• The commander wants to determine
patrol assignments producing the
greatest overall efficiencies.
5-372
Maximization Assignment Problems

Efficiencies of British Ships in Patrol Sectors

SECTOR
SHIP A B C D
1 20 60 50 55
2 60 30 80 75
3 80 100 90 80
4 65 80 75 70

5-373
Maximization Assignment Problems

Opportunity Costs of British Ships

SECTOR
SHIP A B C D
1 80 40 50 45
2 40 70 20 25
3 20 0 10 20
4 35 20 25 30

5-374
 Maximization Assignment Problems

• Convert the maximization efficiency table into a

minimizing opportunity cost table by subtracting
each rating from 100, the largest rating in the
whole table.
• The smallest number in each row is subtracted
from every number in that row and the smallest
number in each column is subtracted from every
number in that column.
• The minimum number of lines needed to cover
the zeros in the table is four, so this represents an
optimal solution.
5-375
 Maximization Assignment Problems

Row Opportunity Costs for the British Navy Problem

SECTOR
SHIP A B C D
1 40 0 10 5
2 20 50 0 5
3 20 0 10 20
4 15 0 5 10

5-376
 Maximization Assignment Problems

Total Opportunity Costs for the British Navy Problem

SECTOR
SHIP A B C D
1 25 0 10 0
2 5 50 0 0
3 5 0 10 15
4 0 0 5 5

5-377
Maximization Assignment Problems

The overall efficiency

ASSIGNMENT EFFICIENCY

Ship 1 to sector D 55

Ship 2 to sector C 80

Ship 3 to sector B 100

Ship 4 to sector A 65

Total efficiency 300

5-378
 Chapter 6

Network Models
 Learning Objectives
After completing this chapter, students will be able to:
1. Connect all points of a network while minimizing
total distance using the minimal-spanning tree
technique.
2. Determine the maximum flow through a network
using the maximal-flow technique and linear
programming.
3. Find the shortest path through a network using the
shortest-route technique and linear programming.
4. Understand the important role of software in solving
network problems.
6-380
 Chapter Outline

6.1 Introduction
6.2 Minimal-Spanning Tree Problem
6.3 Maximal-Flow Problem
6.4 Shortest-Route Problem

6-381
 Introduction
• This chapter covers three network models that can
be used to solve a variety of problems.
• The minimal-spanning tree technique determines a
path through a network that connects all the points
while minimizing the total distance.
• The maximal-flow technique finds the maximum flow
of any quantity or substance through a network.
• The shortest-route technique can find the shortest
path through a network.

6-382
 Introduction
• Large scale problems may require hundreds or
thousands of iterations making efficient
computer programs a necessity.
• All types of networks use a common
terminology.
• The points on a network are called nodes and
may be represented as circles of squares.
• The lines connecting the nodes are called arcs.

6-383
 Minimal-Spanning Tree Technique

• The minimal-spanning tree technique involves

connecting all the points of a network together while
minimizing the distance between them.
• FOR INSTANCE, The Lauderdale Construction
Company is developing a housing project.
• It wants to determine the least expensive way to
provide water and power to each house.
• There are eight houses in the project and the
distance between them is shown in Figure .

6-384
Network for Lauderdale Construction

3
2 5
4
3
5
3 7
7
1 2 2
3
3 8
5 1
2 6
6
4

Gulf

6-385
 Steps for the Minimal-Spanning Tree
Technique
1. Select any node in the network.
2. Connect this node to the nearest node that
minimizes the total distance.
3. Considering all the nodes that are now
connected, find and connect the nearest node
that is not connected. If there is a tie, select one
arbitrarily. A tie suggests there may be more than
one optimal solution.
4. Repeat the third step until all nodes are
connected.
6-386
 Lauderdale Construction Company
• Start by arbitrarily selecting node 1.
• The nearest node is node 3 at a distance of 2 (200
feet) and we connect those nodes.
• Considering nodes 1 and 3, we look for the next
nearest node.
• This is node 4, the closest to node 3.
• We connect those nodes.
• We now look for the nearest unconnected node to
nodes 1, 3, and 4.
• This is either node 2 or node 6.
• We pick node 2 and connect it to node 3. 6-387
 Minimal-Spanning Tree Technique
• Following this same process we connect from
node 2 to node 5.
• We then connect node 3 to node 6.
• Node 6 will connect to node 8.
• The last connection to be made is node 8 to
node 7.
• The total distance is found by adding up the
distances in the arcs used in the spanning tree:
2 + 2 + 3 + 3 + 3 + 1 + 2 = 16 (or 1,600 feet)
6-388
Minimal-Spanning Tree Technique
First Iteration for Lauderdale Construction

6-389
 Minimal-Spanning Tree Technique
Second and Third Iterations for Lauderdale Construction

6-390
 Minimal-Spanning Tree Technique
Fourth and Fifth Iterations for Lauderdale Construction

6-391
 Minimal-Spanning Tree Technique
Sixth and Seventh (Final) Iterations for Lauderdale Construction

6-392
 Summary of Steps in Lauderdale Construction
Minimal-Spanning Tree Problem
Step Connected Unconnected Closest Un- Arc Arc Total
Nodes Nodes connected Selected Length Distance
Node
1 1 2,3,4,5,6,7,8 3 1-3 2 2
2 1,3 2,4,5,6,7,8 4 3-4 2 4
3 1,3,4 2,5,6,7,8 2 or 6 2-3 3 7
4 1,2,3,4 5,6,7,8 5 or 6 2-5 3 10
5 1,2,3,4,5 6,7,8 6 3-6 3 13
6 1,2,3,4,5,6 7,8 8 6-8 1 14
7 1,2,3,4,5,6,8 7 7 7-8 2 16

6-393
QM for Windows Solution for Lauderdale Construction
Company Minimal Spanning Tree Problem

6-394
 Maximal-Flow Technique
• The maximal-flow technique allows us to determine the
maximum amount of a material that can flow through a
network.
• Waukesha, Wisconsin is in the process of developing a road
system for the downtown area.
• Town leaders want to determine the maximum number of
cars that can flow through the town from west to east.
• The road network is shown in Figure .
• The numbers by the nodes indicate the number of cars that
can flow from the node.

6-395
 Maximal-Flow Technique
Road network for Waukesha
Capacity in Hundreds of
Cars per Hour

2
1 2 2 East
1 1 6 Point
3 0
West 2
Point 1
10 0 1 1
4
1
6
1
3 5
0 2
3

6-396
 Maximal-Flow Technique
Four steps of the Maximal-Flow Technique
1. Pick any path from the start (source) to the finish
(sink) with some flow. If no path with flow exists, then
the optimal solution has been found.
2. Find the arc on this path with the smallest flow
capacity available. Call this capacity C. This represents
the maximum additional capacity that can be
allocated to this route.

6-397
 Maximal-Flow Technique
Four steps of the Maximal-Flow Technique
3. For each node on this path, decrease the flow
capacity in the direction of flow by the amount C. For
each node on the path, increase the flow capacity in
the reverse direction by the amount C.
4. Repeat these steps until an increase in flow is no
longer possible.

6-398
 Maximal-Flow Technique
• We start by arbitrarily picking the path 1–2–6 which is at
the top of the network.
• The maximum flow is 2 units from node 2 to node 6.
• The path capacity is adjusted by adding 2 to the
westbound flows and subtracting 2 from the eastbound
flows.
• The result is the new path in Figure which shows the
new relative capacity of the path at this stage.

6-399
Maximal-Flow Technique
Capacity Adjustment for Path 1–2–6 Iteration 1
Add 2
2
1 2 2
6
3
1 Subtract 2
Old Path

0
3 2 4
6
1
1
New Path

6-400
 Maximal-Flow Technique
• We repeat this process by picking the path 1–2–4–6.
• The maximum capacity along this path is 1.
• The path capacity is adjusted by adding 1 to the
westbound flows and subtracting 1 from the eastbound
flows.
• The result is the new path in Figure
• We repeat this process by picking the path 1–3–5–6.
• The maximum capacity along this path is 2.
• The Figure shows this adjusted path.

6-401
 Maximal-Flow Technique
Second Iteration for Waukesha Road System
3 Add 1
2
1 1 6
1
1
1 1 0
4 2 4
4 0 6
2
0 0
Subtract 1
1 2
Old Path 0 2 0
10
4
1
6
1
3 5
0 2
3
New Network
6-402
 Maximal-Flow Technique
Third and Final Iteration for Waukesha Road System

0
4 2 4
0 2 6
0 2
1 2
8 0 2 0
4
1
4
3
3 5
2 0
3

6-403
 Maximal-Flow Technique
• There are no more paths from nodes 1 to 6 with unused
capacity so this represents a final iteration.
• The maximum flow through this network is 500 cars.

PATH FLOW (CARS PER HOUR)

1–2–6 200

1–2–4–6 100

1–3–5–6 200

Total 500

6-404
 Linear Programming for Maximal Flow
• Define the variables as:
– Xij = flow from node i to node j.

• Goal: Maximize Flow = X61

6-405
Linear Programming for Maximal Flow
Constraints
X12 ≤ 3 X13 ≤ 10 X14 ≤ 2
X21 ≤ 1 X24 ≤ 1 X26 ≤ 2
X34 ≤ 3 X35 ≤ 2 X42 ≤ 1
X43 ≤ 1 X46 ≤ 1 X53 ≤ 1
X56 ≤ 1 X62 ≤ 2 X64 ≤ 1

6-406
 Linear Program for Maximal Flow
Constraints continued:
X61 = X12 + X13 + X14 or X61 – X12 – X13 – X14 =0
X12+X42+X62 = X21+X24+X26 or X12+X42+X62-X21-X24-X26 = 0
X13+X43+X53 = X34 +X35 or X13+X43+X53-X34-X35 =0
X14+X24+
X34+X64 = X42 + X43 + X46 or X14+X24 +X34+X64
– X42 – X43 – X53 =0
X35 = X56 + X53 or X35 – X53 – X56 =0
X26+X46+X56 = X61 or X26 + X46 + X56 – X61 =0
Xij ≥0 and integer

This problems can now be solved in QM for Windows or using Excel Solver.
6-407
QM for Windows Solution for Waukesha Road Network
Maximal Flow Problem

6-408
 Shortest-Route Problem
• The shortest-route technique identifies how a person or item
can travel from one location to another while minimizing the
total distance traveled.
• It finds the shortest route to a series of destinations.
• Ray Design, Inc. transports beds, chairs, and other furniture
from the factory to the warehouse.
• The company would like to find the route with the shortest
distance.
• The road network is shown in Figure

6-409
 Shortest-Route Problem
Roads from Ray’s Plant to Warehouse

200
2 4
Plant
0 100
10

10
50 0 150
1 6

20 0
0 10
40
3 5 Warehouse

6-410
 Shortest-Route Problem
Steps of the shortest-route technique:
1. Find the nearest node to the origin (plant). Put the
distance in a box by the node.
2. Find the next-nearest node to the origin and put the
distance in a box by the node. Several paths may have to
be checked to find the nearest node.
3. Repeat this process until you have gone through the
entire network. The last distance at the ending node will
be the distance of the shortest route.

6-411
 Shortest-Route Technique
• We can see that the nearest node to the plant is node 2.
• We connect these two nodes.
• After investigation, we find node 3 is the next nearest
node but there are two possible paths.
• The shortest path is 1–2–3 with a distance of 150.
• We repeat the process and find the next node is node 5 by
going through node 3.
• The next nearest node is either 4 or 6 and 6 turns out to
be closer.
• The shortest path is 1–2–3–5–6 with a distance of 290
miles.

6-412
 Shortest-Route Problem
First Iteration for Ray Design
100
200
2 4
Plant
0 100
10

10
50 0 150
1 6

20 0
0 10
40
3 5 Warehouse

6-413
 Shortest-Route Technique
Second Iteration for Ray Design
100
200
2 4
Plant
0 100
10

10
50 0 150
1 6

200 0
10
40
150
3 5 Warehouse

6-414
 Shortest-Route Technique
Third Iteration for Ray Design
100
200
2 4
Plant
0 100
10

10
50 0 150
1 6

20 0
0 10
40
3 5 Warehouse
190
150

6-415
 Shortest-Route Technique
Fourth and Final Iteration for Ray Design
100
200
2 4
Plant
0 100 290
10

10
50 0 150
1 6

20 0
0 10
40
3 5 Warehouse

150 190

6-416
Linear Program for Shortest-Route Problem

• Objective is to minimize the total distance

(cost) from the start to finish.
• Variables:
Xij = 1 if arc from node i to node j is selected
= 0 otherwise.
• It is helpful to view this as a transshipment
problem.

6-417
Linear Program for Shortest-Route Problem
Minimize distance =
100X12 + 200X13 + 50X23 + 50X32 + 200X24 + 200X42 + 100X25
+ 100X52 + 40X35 + 40X53 + 150X45 + 150X54 + 100X46 +
100X56
Subject to:

X12 + X13 =1 Node 1

X12 + X32 – X23 – X24 – X25 =0 Node 2
X13 + X23 – X32 – X35 =0 Node 3
X24 + X54 – X42 – X45 – X46 =0 Node 4
X25 + X35 + X45 – X52 – X53 – X54 – X56 =0 Node 5
X46 + X56 =1 Node 6
All variables = 0 or 1

This problems can now be solved in QM for Windows or using Excel Solver.
6-418
QM for Windows Input Screen for Ray Design,
Inc., Shortest-Route Problem

6-419
QM for Windows Solution Screen for Ray Design, Inc.,
Shortest-Route Problem

6-420
 Chapter 7

Project Management
 Learning Objectives
After completing this chapter, students will be able to:
1. Understand how to plan, monitor, and control
projects with the use of PERT and CPM.
2. Determine earliest start, earliest finish, latest start,
latest finish, and slack times for each activity, along
with the total project completion time.
3. Reduce total project time at the least total cost by
crashing the network using manual or linear
programming techniques.
4. Understand the important role of software in project
management.
7-422
 Chapter Outline

7.1 Introduction
7.2 PERT/CPM
7.3 PERT/Cost
7.4 Project Crashing
7.5 Other Topics in Project Management

7-423
 Introduction

• Managing large-scale, complicated projects

effectively is a difficult problem and the stakes
are high.
• The first step in planning and scheduling a
project is to develop the work breakdown
structure.
• Time, cost, resource requirements,
predecessors, and people required are
identified for each activity.
• A schedule for the project then can be
developed. 7-424
 Introduction

• The program evaluation and review technique

(PERT) and the critical path method (CPM) are two
popular quantitative analysis techniques to help
plan, schedule, monitor, and control projects.
• Originally the approaches differed in how they
estimated activity times.
– PERT used three time estimates to develop a probabilistic estimate
of completion time.
– CPM was a more deterministic technique.
• They have become so similar they are commonly
considered one technique, PERT/CPM.

7-425
 Six Steps of PERT/CPM
1. Define the project and all of its significant activities or tasks.
2. Develop the relationships among the activities and decide
which activities must precede others.
3. Draw the network connecting all of the activities.
4. Assign time and/or cost estimates to each activity.
5. Compute the longest time path through the network; this is
called the critical path.
6. Use the network to help plan, schedule, monitor, and
control the project.
The critical path is important since any delay in these activities can delay the
completion of the project.

7-426
 PERT/CPM
Given the large number of tasks in a project, it is
easy to see why the following questions are
important:
1. When will the entire project be completed?
2. What are the critical activities or tasks in the project,
that is, the ones that will delay the entire project if
they are late?
3. Which are the non-critical activities, that is, the ones
that can run late without delaying the entire project’s
completion?
4. If there are three time estimates, what is the
probability that the project will be completed by a
specific date? 7-427
 PERT/CPM
5. At any particular date, is the project on
schedule, behind schedule, or ahead of
schedule?
6. On any given date, is the money spent
equal to, less than, or greater than the
budgeted amount?
7. Are there enough resources available to
finish the project on time?

7-428
 General Foundry Example of PERT/CPM
• General Foundry, Inc. has long been trying to avoid
the expense of installing air pollution control
equipment.
• The local environmental protection group has
recently given the foundry 16 weeks to install a
complex air filter system on its main smokestack.
• General Foundry was warned that it will be forced
to close unless the device is installed in the allotted
period.
• They want to make sure that installation of the
filtering system progresses smoothly and on time.
7-429
 General Foundry Example of PERT/CPM

Activities and immediate predecessors for General Foundry

ACTIVITY DESCRIPTION IMMEDIATE

PREDECESSORS
A Build internal components —
B Modify roof and floor —
C Construct collection stack A
D Pour concrete and install frame B
E Build high-temperature burner C
F Install control system C
G Install air pollution device D, E
H Inspect and test F, G

7-430
 Drawing the PERT/CPM Network

• There are two common techniques for drawing PERT

networks.
• Activity-on-node (AON) where the nodes represent activities.
• Activity-on-arc (AOA) where the arcs are used to represent
the activities.
• The AON approach is easier and more commonly found in
software packages.
• One node represents the start of the project, one node for
the end of the project, and nodes for each of the activities.
• The arcs are used to show the predecessors for each activity.

7-431
General Foundry Example of PERT/CPM

Network for General Foundry

7-432
 Activity Times
• In some situations, activity times are known with
certainty.
• The CPM assigns just one time estimate to each
activity and this is used to find the critical path.
• In many projects there is uncertainty about activity
times.
• PERT employs a probability distribution based on
three time estimates for each activity, and a
weighted average of these estimates is used for the
time estimate and this is used to determine the
critical path.
– PERT often assumes time estimates follow a beta
probability distribution. 7-433
 Activity Times
The time estimates in PERT are:
Optimistic time (a) = time an activity
will take if everything goes as well as
possible. There should be only a small
probability (say, 1/100) of this occurring.
Pessimistic time (b) = time
an activity would take assuming very
unfavorable conditions. There should
also be only a small probability that the
activity will really take this long.
Most likely time (m) = most
realistic time estimate to complete the
activity

7-434
 Activity Times
Beta Probability Distribution with Three Time Estimates

7-435
 Activity Times
To find the expected activity time (t), the beta
distribution weights the estimates as follows:
a  4m  b
t
6
To compute the dispersion or variance of activity
completion time, we use the formula:
2
 b a
Variance  
 6 

7-436
 Activity Times
Time estimates (weeks) for General Foundry

OPTIMISTIC, MOST PROBABLE, PESSIMISTIC, EXPECTED TIME, VARIANCE,

ACTIVITY a m b t = [(a + 4m + b)/6] [(b – a)/6]2
A 1 2 3 2 4/36

B 2 3 4 3 4/36

C 1 2 3 2 4/36

D 2 4 6 4 16/36

E 1 4 7 4 36/36

F 1 2 9 3 64/36

G 3 4 11 5 64/36

H 1 2 3 2 4/36

25

7-437
 How to Find the Critical Path
• We accept the expected completion time for each
task as the actual time for now.
• The total of 25 weeks in Table does not take into
account the obvious fact that some of the tasks could
be taking place at the same time.
• To find out how long the project will take we perform
the critical path analysis for the network.
• The critical path is the longest path through the
network.

7-438
 How to Find the Critical Path
General Foundry’s Network With Expected Activity Times

7-439
 How to Find the Critical Path
To find the critical path, we need to determine the
following quantities for each activity in the network.
1. Earliest start time (ES): the earliest time an activity
can begin without violation of immediate
predecessor requirements.
2. Earliest finish time (EF): the earliest time at which an
activity can end.
3. Latest start time (LS): the latest time an activity can
begin without delaying the entire project.
4. Latest finish time (LF): the latest time an activity can
end without delaying the entire project. 7-440
 How to Find the Critical Path
In the nodes, the activity time and the early and late start
and finish times are represented in the following manner.

ACTIVITY t
ES EF
LS LF

Earliest times are computed as:

Earliest finish time =

Earliest start time
+ Expected activity time
EF = ES + t
Earliest start = Largest of the earliest finish times of
immediate predecessors
ES = Largest EF of immediate predecessors
7-441
 How to Find the Critical Path
• At the start of the project we set the time to zero.
• Thus ES = 0 for both A and B.

A t =2
ES = 0 EF = 0 + 2 = 2

Start

B t =3
ES = 0 EF = 0 + 3 = 3

7-442
 How to Find the Critical Path
General Foundry’s Earliest Start (ES) and Earliest Finish (EF)
times

7-443
 How to Find the Critical Path
Latest times are computed as
Latest start time = Latest finish time
– Expected activity time
LS = LF – t

Latest finish time = Smallest of latest start times

for following activities
LF = Smallest LS of following activities

For activity H:

LS = LF – t = 15 – 2 = 13 weeks

7-444
 How to Find the Critical Path
General Foundry’s Latest Start (LS) and Latest Finish (LF) times

7-445
 How to Find the Critical Path
• Once ES, LS, EF, and LF have been determined, it is a
simple matter to find the amount of slack time that each
activity has:
Slack = LS – ES, or Slack = LF – EF
• From Table we see activities A, C, E, G, and H have no slack
time.
• These are called critical activities and they are said to be
on the critical path.
• The total project completion time is 15 weeks.
• Industrial managers call this a boundary timetable.

7-446
 How to Find the Critical Path
General Foundry’s Schedule and Slack Times

EARLIEST EARLIEST LATEST LATEST ON

START, FINISH, START, FINISH, SLACK, CRITICAL
ACTIVITY ES EF LS LF LS – ES PATH?
A 0 2 0 2 0 Yes
B 0 3 1 4 1 No
C 2 4 2 4 0 Yes
D 3 7 4 8 1 No
E 4 8 4 8 0 Yes
F 4 7 10 13 6 No
G 8 13 8 13 0 Yes
H 13 15 13 15 0 Yes

7-447
How to Find the Critical Path
General Foundry’s Critical Path

7-448
 Probability of Project Completion

• The critical path analysis helped determine the expected

project completion time of 15 weeks.
• But variation in activities on the critical path can affect
overall project completion, and this is a major concern.
• If the project is not complete in 16 weeks, the foundry will
have to close.
• PERT uses the variance of critical path activities to help
determine the variance of the overall project.

∑
variances of activities on the
Project variance = critical path

7-449
 Probability of Project Completion
• From Table we know that
ACTIVITY VARIANCE
A 4/36
C 4/36
E 36/36
G 64/36
H 4/36

 Hence, the project variance is

Project variance = 4/36 + 4/36 + 36/36 + 64/36 + 4/36 = 112/36 = 3.111

7-450
 Probability of Project Completion

• We know the standard deviation is just the square root of

the variance, so:
Project standard deviation  T  Project variance
 3.11 1.76 weeks
 We assume activity times are independent and that total project completion
time is normally distributed.

7-451
Probability Distribution for Project
Completion Times

7-452
 Probability of Project Completion
The standard normal equation can be applied as follows:

Due date  Expected date of completion

Z
T
16 weeks  15 weeks
 0.57
1.76 weeks
 From Appendix A we find the probability of 0.71566 associated with this Z
value.
 That means the probability this project can be completed in 16 weeks or less
is 0.716.

7-453
Probability of General Foundry Meeting the
16-week Deadline

7-454
 What PERT Was Able to Provide
• PERT has been able to provide the project manager with
several valuable pieces of information.
• The project’s expected completion date is 15 weeks.
• There is a 71.6% chance that the equipment will be in
place within the 16-week deadline.
• Five activities (A, C, E, G, H) are on the critical path.
• Three activities (B, D, F) are not critical but have some
slack time built in.
• A detailed schedule of activity starting and ending dates
has been made available.

7-455
 Using Excel QM in the General Foundry
Example
Excel QM Initialization Screen for General Foundry Example with Three Time
Estimates

7-456
 Using Excel QM in the General Foundry
Example
Excel QM Input Screen and Solution for General Foundry Example with Three
Time Estimates

7-457
 Sensitivity Analysis and
Project Management
• The time required to complete an activity can vary from
the projected or expected time.
• If the activity is on the critical path, the completion time
of the project will change.
• This will also have an impact on ES, EF, LS, and LF times for
other activities.
• The exact impact depends on the relationship between
the various activities.
• A predecessor activity is one that must be accomplished
before the given activity can be started.
• A successor activity is one that can be started only after
the given activity is finished.
7-458
 Sensitivity Analysis and
Project Management
Impact of an Increase (Decrease) in an Activity Time for a
Critical Path Activity
SUCCESSOR PARALLEL PREDECESSOR
ACTIVITY TIME ACTIVITY ACTIVITY ACTIVITY
Earliest start Increase (decrease) No change No change

Earliest finish Increase (decrease) No change No change

Latest start Increase (decrease) Increase (decrease) No change

Latest finish Increase (decrease) Increase (decrease) No change

Slack No change Increase (decrease) No change

7-459
 PERT/COST
• Although PERT is an excellent method of
monitoring and controlling project length, it
does not consider the very important factor of
project cost.
• PERT/Cost is a modification of PERT that
allows a manager to plan, schedule, monitor,
and control cost as well as time.
• Using PERT/Cost to plan, schedule, monitor,
and control project cost helps accomplish the
sixth and final step of PERT. 7-460
 Planning and Scheduling Project Costs: Budgeting
Process

• The overall approach in the

budgeting process of a project is
to determine how much is to be
spent every week or month.
• This can be accomplished in four
basic budgeting steps:
7-461
 Four Steps of the Budgeting Process
1. Identify all costs associated with each of the activities then
add these costs together to get one estimated cost or
budget for each activity.
2. In large projects, activities can be combined into larger work
packages. A work package is simply a logical collection of
activities.
3. Convert the budgeted cost per activity into a cost per time
period by assuming that the cost of completing any activity
is spent at a uniform rate over time.
4. Using the ES and LS times, find out how much money
should be spent during each week or month to finish the
project by the date desired.
7-462
 Budgeting for General Foundry
• The Gantt chart in Figure illustrates this
process.
• The horizontal bars shown when each activity
will be performed based on its ES-EF times.
• We determine how much will be spent on
each activity during each week and fill these
amounts into a chart in place of the bars.
• The following two tables show the activity
costs and budgeted cost for the General
Foundry project.
7-463
Budgeting for General Foundry
Gantt chart General Foundry project

7-464
 Budgeting for General Foundry
Activity costs for General Foundry, Inc.
EARLIEST LATEST TOTAL BUDGETED
START, START, EXPECTED BUDGETED COST PER
ACTIVITY ES LS TIME, t COST ($) WEEK ($)
A 0 0 2 22,000 11,000
B 0 1 3 30,000 10,000
C 2 2 2 26,000 13,000
D 3 4 4 48,000 12,000
E 4 4 4 56,000 14,000
F 4 10 3 30,000 10,000
G 8 8 5 80,000 16,000
H 13 13 2 16,000 8,000
Total 308,000

7-465
 Budgeted Cost (Thousands of Dollars) for General
Foundry, Inc., Using Earliest Start Times

WEEK
ACTIVITY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 TOTAL
A 11 11 22

B 10 10 10 30

C 13 13 26

D 12 12 12 12 48

E 14 14 14 14 56

F 10 10 10 30

G 16 16 16 16 16 80

H 8 8 16

308

Total per week 21 21 23 25 36 36 36 14 16 16 16 16 16 8 8

Total to date 21 42 65 90 126 162 198 212 228 244 260 276 292 300 308

7-466
 Budgeting for General Foundry
• It is also possible to prepare a budget based on the
latest starting time.
• This budget will delay the expenditure of funds until
the last possible moment.
• The following table shows the latest start budget for
the General Foundry project.
• The two tables form a budget range.
• Any budget can be chosen between these two values
depending on when the company wants to actually
spend the money.
• The budget ranges are plotted in Figure
7-467
 Budgeted Cost (Thousands of Dollars) for General
Foundry, Inc., Using Latest Start Times
WEEK

ACTIVITY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 TOTAL

A 11 11 22
B 10 10 10 30
C 13 13 26
D 12 12 12 12 48
E 14 14 14 14 56
F 10 10 10 30
G 16 16 16 16 16 80
H 8 8 16
308
Total per 11 21 23 23 26 26 26 26 16 16 26 26 26 8 8
week
Total to 11 32 55 78 104 130 156 182 198 214 240 266 292 300 308
date
7-468
Budget Ranges for General Foundry

7-469
 Monitoring and Controlling Project Costs

• Costs are monitored and controlled to ensure

the project is progressing on schedule and
that cost overruns are kept to a minimum.
• The status of the entire project should be
checked periodically.
• The following table shows the state of the
project in the sixth week.
• It can be used the answer questions about the
schedule and costs so far.
7-470
 Monitoring and Controlling Budgeted Cost

VALUE OF
TOTAL WORK ACTIVITY
BUDGETED PERCENT OF COMPLETED ACTUAL DIFFERENCE
ACTIVITY COST ($) COMPLETION ($) COST ($) ($)

A 22,000 100
22,000 20,000 –2,000

B 30,000 100
30,000 36,000 6,000

C 26,000 100
26,000 26,000 0

D 48,000 10
4,800 6,000 1,200

E 56,000 20
11,200 20,000 8,800

F 30,000 20
6,000 4,000 –2,000

G 80,000 0 Overrun
0 0 0

H 16,000 0 7-471
0 0 0
 Monitoring and Controlling Project Costs

The value of work completed, or the cost to date for any

activity, can be computed as follows:
Value of work (Percentage of work complete)
completed = x (Total activity budget)

The activity difference is also of interest:

Activity difference = Actual cost

– Value of work completed

A negative activity difference is a cost underrun and a positive activity difference

is a cost overrun.

7-472
 Project Crashing
• Projects will sometimes have deadlines that
are impossible to meet using normal
procedures.
• By using exceptional methods it may be
possible to finish the project in less time than
normally required at a greater cost.
• Reducing a project’s completion time is called
crashing.

7-473
 Project Crashing
• Crashing a project starts with using the normal
time to create the critical path.
• The normal cost is the cost for completing the
activity using normal procedures.
• If the project will not meet the required
deadline, extraordinary measures must be
taken.
– The crash time is the shortest possible activity time
and will require additional resources.
– The crash cost is the price of completing the activity
in the earlier-than-normal time. 7-474
 Four Steps to Project Crashing
1. Find the normal critical path and identify the
critical activities.
2. Compute the crash cost per week (or other time
period) for all activities in the network using the
formula:

Crash cost/Time period = Crash cost – Normal cost

Normal time – Crash time

7-475
 Four Steps to Project Crashing
3. Select the activity on the critical path with the
smallest crash cost per week and crash this
activity to the maximum extent possible or to
the point at which your desired deadline has
been reached.
4. Check to be sure that the critical path you were
crashing is still critical. If the critical path is still
the longest path through the network, return to
step 3. If not, find the new critical path and
return to step 2.
7-476
 General Foundry
• Suppose that General Foundry has been given 14 weeks
instead of 16 weeks to install the new equipment.
• The critical path for the project is 15 weeks.
• What options does the firm have?
– The normal and crash times and costs are shown in Table .
– Crash costs are assumed to be linear and Figure shows the crash
cost for activity B.
• Crashing activities B and A will shorten the completion
time to 14 but it creates a second critical path.
• Any further crashing must be done to both critical paths.

7-477
 General Foundry
Normal and Crash Data for General Foundry, Inc.
TIME (WEEKS) COST ($)
CRASH
COST PER CRITICAL
ACTIVITY NORMAL CRASH NORMAL CRASH WEEK ($) PATH?
A 2 1 22,000 23,000 1,000 Yes
B 3 1 30,000 34,000 2,000 No
C 2 1 26,000 27,000 1,000 Yes
D 4 3 48,000 49,000 1,000 No
E 4 2 56,000 58,000 1,000 Yes
F 3 2 30,000 30,500 500 No
G 5 2 80,000 86,000 2,000 Yes
H 2 1 16,000 19,000 3,000 Yes

7-478
 General Foundry
Crash and Normal Times and Costs for Activity B

7-479
 Project Crashing with
Linear Programming

• Linear programming is another approach

to finding the best project crashing
schedule.
• The data needed are derived from the
normal and crash data for General
Foundry and the project network with
activity times.

7-480
 Project Crashing with
Linear Programming
General Foundry’s Network With Activity Times

7-481
 Project Crashing with
Linear Programming
The decision variables for the problem are:
XA = EF for activity A
XB = EF for activity B
XC = EF for activity C
XD = EF for activity D
XE = EF for activity E
XF = EF for activity F
XG = EF for activity G
XH = EF for activity H
Xstart = start time for project (usually 0)
Xfinish = earliest finish time for the project

7-482
 Project Crashing with
Linear Programming
• Additional decision variables for the problem are:

Y= the number of weeks that each activity is crashed.

YA = the number of weeks activity A is crashed and so forth up to YH.

 The objective function is

Minimize crash cost =1,000YA + 2,000YB + 1,000YC + 1,000YD + 1,000YE + 500YF

+ 2,000YG + 3,000YH

7-483
 Project Crashing with
Linear Programming
• Crash time constraints  This completion constraint
ensure activities are not specifies that the last event must
crashed more than is take place before the project
deadline:
allowed.
YA ≤ 1
YB ≤ 2 Xfinish ≤ 12
YC ≤ 1  This constraint indicates the
YD ≤ 1 project is finished when
activity H is finished:
YE ≤ 2
YF ≤ 1 Xfinish ≥ XH
YG ≤ 3 7-484
 Project Crashing with
Linear Programming
Constraints describing the network have the form:

EF time ≥ EF time for predecessor + Activity time

EF ≥ EFpredecessor + (t – Y), or
X ≥ Xpredecessor + (t – Y)
For activity A, XA ≥ Xstart + (2 – YA) or XA – Xstart + YA ≥ 2
For activity B, XB ≥ Xstart + (3 – YB) or XB – Xstart + YB ≥ 3
For activity C, XC ≥ XA + (2 – YC) or XC – XA + YC ≥ 2
For activity D, XD ≥ XB + (4 – YD) or XD – XB + YD ≥ 4
For activity E, XE ≥ XC + (4 – YE) or XE – XC + YE ≥ 4
For activity F, XF ≥ XC + (3 – YF) or XF – XC + YF ≥ 3
For activity G, XG ≥ XD + (5 – YG) or XG – XD + YG ≥ 5
For activity G, XG ≥ XE + (5 – YG) or XG – XE + YG ≥ 5
For activity H, XH ≥ XF + (2 – YH) or XH – XF + YH ≥ 2 7-485
Solution to Crashing Problem Using Solver in
Excel

7-486
 Other Topics in Project Management
• Subprojects
– For extremely large projects, an activity may be
made of several smaller sub-activities which can
be viewed as a smaller project or subproject of
the original .
• Milestones
– Major events in a project are often referred to
as milestones and may be reflected in Gantt
charts and PERT charts to highlight the
importance of reaching these events. 7-487
 Other Topics in Project Management
• Resource Leveling
– Resource leveling adjusts the activity start away from the
early start so that resource utilization is more evenly
distributed over time.
• Software
– There are many project management software packages
on the market for both personal computers and larger
mainframe machines.
– Most of these create PERT charts and Gantt charts and
can be used to develop budget schedules, adjust future
start times, and level resource utilization.
7-488
 Chapter 8

Waiting Lines and Queuing

Theory Models
 Learning Objectives
After completing this chapter, students will be able to:
1. Describe the trade-off curves for cost-of-waiting time
and cost of service.
2. Understand the three parts of a queuing system: the
calling population, the queue itself, and the service
facility.
3. Describe the basic queuing system configurations.
4. Understand the assumptions of the common models
dealt with in this chapter.
5. Analyze a variety of operating characteristics of
waiting lines.
8-490
 Chapter Outline

8.1 Introduction
8.2 Waiting Line Costs
8.3 Characteristics of a Queuing System
8.4 Single-Channel Queuing Model with Poisson
Arrivals and Exponential Service Times (M/M/1)
8.5 Multichannel Queuing Model with Poisson Arrivals
and Exponential Service Times (M/M/m)

8-491
 Chapter Outline

8.6 Constant Service Time Model (M/D/1)

8.7 Finite Population Model (M/M/1 with
Finite Source)
8.8 Some General Operating Characteristic
Relationships
8.9 More Complex Queuing Models and the
Use of Simulation

8-492
 Introduction

• Queuing theory is the study of waiting lines.

• It is one of the oldest and most widely used
quantitative analysis techniques.
• The three basic components of a queuing
process are arrivals, service facilities, and the
actual waiting line.
• Analytical models of waiting lines can help
managers evaluate the cost and effectiveness
of service systems.
8-493
 Waiting Line Costs
• Most waiting line problems are focused
on finding the ideal level of service a firm
should provide.
• In most cases, this service level is
something management can control.
• When an organization does have control,
they often try to find the balance
between two extremes.
8-494
 Waiting Line Costs
• There is generally a trade-off between cost of
providing service and cost of waiting time.
– A large staff and many service facilities generally
results in high levels of service but have high costs.
– Having the minimum number of service facilities
keeps service cost down but may result in
dissatisfied customers.
• Service facilities are evaluated on their total expected
cost which is the sum of service costs and waiting
costs.
• Organizations typically want to find the service level
that minimizes the total expected cost.
8-495
Queuing Costs and Service Levels

8-496
 Three Rivers Shipping Company

• Three Rivers Shipping operates a docking facility on the

Ohio River.
• An average of 5 ships arrive to unload their cargos each
shift.
• Idle ships are expensive.
• More staff can be hired to unload the ships, but that is
expensive as well.
• Three Rivers Shipping Company wants to determine the
optimal number of teams of stevedores to employ each
shift to obtain the minimum total expected cost.
8-497
 Three Rivers Shipping Company Waiting Line
Cost Analysis
NUMBER OF TEAMS OF STEVEDORES
WORKING
1 2 3 4
(a) Average number of ships arriving
per shift 5 5 5 5
(b) Average time each ship waits to
be unloaded (hours) 7 4 3 2
(c) Total ship hours lost per shift
(a x b) 35 20 15 10
(d) Estimated cost per hour of idle
ship time $1,000 $1,000 $1,000 $1,000
(e) Value of ship’s lost time or
waiting cost (c x d) $35,000 $20,000 $15,000 $10,000
(f) Stevedore team salary or service
cost $6,000 $12,000 $18,000 $24,000
(g) Total expected cost (e + f)
$41,000 $32,000 $33,000 $34,000
Optimal cost

8-498
 Characteristics of a Queuing System

• There are three parts to a queuing system:

1. The arrivals or inputs to the system (sometimes
referred to as the calling population).
2. The queue or waiting line itself.
3. The service facility.
• These components have their own
characteristics that must be examined before
mathematical models can be developed.

8-499
 Characteristics of a Queuing System

Arrival Characteristics have three major

characteristics: size, pattern, and behavior.
– The size of the calling population can be either
unlimited (essentially infinite) or limited (finite).
– The pattern of arrivals can arrive according to a
known pattern or can arrive randomly.
• Random arrivals generally follow a Poisson
distribution.

8-500
 Characteristics of a Queuing System

Behavior of arrivals
– Most queuing models assume customers are
patient and will wait in the queue until they are
served and do not switch lines.
– Balking refers to customers who refuse to join the
queue.
– Reneging customers enter the queue but become
impatient and leave without receiving their service.
– That these behaviors exist is a strong argument for
the use of queuing theory to managing waiting
lines. 8-501
 Characteristics of a Queuing System

Waiting Line Characteristics

– Waiting lines can be either limited or unlimited.
– Queue discipline refers to the rule by which customers in
the line receive service.
• The most common rule is first-in, first-out (FIFO).
• Other rules are possible and may be based on other important
characteristics.
– Other rules can be applied to select which customers
enter which queue, but may apply FIFO once they are in
the queue.

8-502
 Characteristics of a Queuing System

Service Facility Characteristics

– Basic queuing system configurations:
• Service systems are classified in terms of the number of
channels, or servers, and the number of phases, or
service stops.
• A single-channel system with one server is quite common.
• Multichannel systems exist when multiple servers are fed
by one common waiting line.
• In a single-phase system, the customer receives service
form just one server.
• In a multiphase system, the customer has to go through
more than one server.
8-503
 Four
basic
queuing
system
configur
ations

8-504
 Characteristics of a Queuing System
Service time distribution
– Service patterns can be either constant or
random.
– Constant service times are often machine
controlled.
– More often, service times are randomly
distributed according to a negative exponential
probability distribution.
– Analysts should observe, collect, and plot service
time data to ensure that the observations fit the
assumed distributions when applying these
models.
8-505
 Identifying Models Using
Kendall Notation
• D. G. Kendall developed a notation for queuing models
that specifies the pattern of arrival, the service time
distribution, and the number of channels.
• Notation takes the form:

Arrival Service time Number of service

distribution distribution channels open
 Specific letters are used to represent probability distributions.
M = Poisson distribution for number of occurrences
D = constant (deterministic) rate
G = general distribution with known mean and
variance
8-506
 Identifying Models Using
Kendall Notation
• A single-channel model with Poisson arrivals and exponential
service times would be represented by:
M/M/1
• If a second channel is added the notation would read:
M/M/2
• A three-channel system with Poisson arrivals and constant
service time would be
M/D/3
• A four-channel system with Poisson arrivals and normally
distributed service times would be
M/G/4
8-507
 Single-Channel Model, Poisson Arrivals,
Exponential Service Times (M/M/1)

Assumptions of the model:

– Arrivals are served on a FIFO basis.
– There is no balking or reneging.
– Arrivals are independent of each other but the arrival
rate is constant over time.
– Arrivals follow a Poisson distribution.
– Service times are variable and independent but the
average is known.
– Service times follow a negative exponential distribution.
– Average service rate is greater than the average arrival
rate.
8-508
 Single-Channel Model, Poisson Arrivals,
Exponential Service Times (M/M/1)

• When these assumptions are met, we can

develop a series of equations that define
the queue’s operating characteristics.
• Queuing Equations:
Let

= mean number of arrivals per time period

= mean number of customers or units served per time period

The arrival rate and the service rate must be defined for the same time
period.
8-509
 Single-Channel Model, Poisson Arrivals,
Exponential Service Times (M/M/1)
1. The average number of customers or units in the system, L:

L
 
2. The average time a customer spends in the system, W:
1
W 
 
3. The average number of customers in the queue, Lq:
2
Lq 
(   )
8-510
 Single-Channel Model, Poisson Arrivals,
Exponential Service Times (M/M/1)

4.The average time a customer spends

waiting in the queue, Wq:

Wq 
(   )
5. The utilization factor for the system, , the probability
the service facility is being used:



8-511
 Single-Channel Model, Poisson Arrivals,
Exponential Service Times (M/M/1)
6. The percent idle time, P0, or the probability no one is in the
system:

P0 1 


7. The probability that the number of customers in

the system is greater than k, Pn>k:

k 1

Pn k  


8-512
 ARNOLD’S MUFFLER SHOP
Example
• Arnold’s mechanic can install mufflers at a rate of 3 per
hour.
• Customers arrive at a rate of 2 per hour.
• So:
 = 2 cars arriving per hour
 = 3 cars serviced per hour
 2 2
L    2 cars in the system
   3 2 1
on average
1 1
W    1 hour that an average
   3 2
car spends in the system 8-513
 ARNOLD’S MUFFLER SHOP
Example
2 22 4
Lq     1.33 cars waiting in line on
 (    ) 3(3  2) 3(1) average
 2
Wq   hour  40 minutes average
(   ) 3 waiting time per car
 2
   0.67  percentage of time
 3 mechanic is busy
 2
P0 1  1  0.33  probability that there are 0
 3 cars in the system

8-514
 ARNOLD’S MUFFLER SHOP
Example
Probability of more than k cars in the system

k Pn>k = (2/3)k+1

0 0.667 Note that this is equal to 1 – P0 = 1 – 0.33 = 0.667

1 0.444
2 0.296
3 0.198 Implies that there is a 19.8% chance that more
than 3 cars are in the system
4 0.132
5 0.088
6 0.058
7 0.039

8-515
Excel QM Solution to Arnold’s Muffler
Example

8-516
 ARNOLD’S MUFFLER SHOP
Example
• Introducing costs into the model:
– Arnold wants to do an economic analysis of the
queuing system and determine the waiting cost and
service cost.
– The total service cost is:
Total service = (Number of channels)
cost x (Cost per channel)
Total service
cost = mCs

8-517
 ARNOLD’S MUFFLER SHOP
Example
Waiting cost when the cost is based on time in the system:

Total waiting (Total time spent waiting by all

=
cost arrivals) x (Cost of waiting)
(Number of arrivals) x (Average wait
=
per arrival)Cw

Total waiting
cost = (W)Cw

If waiting time cost is based on time in the queue:

Total
= (Wq)Cw
waiting cost 8-518
 ARNOLD’S MUFFLER SHOP
Example
So the total cost of the queuing system when based
on time in the system is:

Total cost = Total service cost + Total waiting cost

Total cost = mCs + WCw

And when based on time in the queue:

Total cost = mCs + WqCw

8-519
 ARNOLD’S MUFFLER SHOP
Example
• Arnold estimates the cost of customer waiting time in line
is $50 per hour.

Total daily = (8 hours per day)WqCw

waiting cost = (8)(2)(2/ )($50) = $533.33
3
 Arnold has identified the mechanics wage $7 per hour as the service cost.

Total daily = (8 hours per day)mCs

service cost = (8)(1)($15) = $120
 So the total cost of the system is:
Total daily cost of
= $533.33 + $120 = $653.33
the queuing system 8-520
 ARNOLD’S MUFFLER SHOP
Example
• Arnold is thinking about hiring a different mechanic who
can install mufflers at a faster rate.
• The new operating characteristics would be:
 = 2 cars arriving per hour
 = 4 cars serviced per hour
 2 2
L    1 car in the system on
   4 2 2 the average

1 1
W    1/2 hour that an average car
   4 2 spends in the system

8-521
 ARNOLD’S MUFFLER SHOP
Example
2 22 4
Lq     1/2 car waiting in line on
 (    ) 4( 4  2) 8(1) the average
 1
Wq   hour  15 minutes average
(   ) 4 waiting time per car
 2
   0.5  percentage of time
 4 mechanic is busy
 2
P0 1  1  0.5  probability that there are 0
 4 cars in the system

8-522
 ARNOLD’S MUFFLER SHOP
Example
Probability of more than k cars in the system

k Pn>k = (2/4)k+1

0 0.500
1 0.250
2 0.125
3 0.062

4 0.031
5 0.016
6 0.008
7 0.004

8-523
 ARNOLD’S MUFFLER SHOP
Example
• The customer waiting cost is the same $50 per hour:

Total daily = (8 hours per day)WqCw

waiting
cost = (8)(2)( 1
/4)($50) = $200.00
 The new mechanic is more expensive at $20 per hour:

Total daily = (8 hours per day)mCs

service cost
= (8)(1)($20) = $160
 So the total cost of the system is:
Total daily cost of the
queuing system = $200 + $160 = $360
8-524
 ARNOLD’S MUFFLER SHOP
Example
• The total time spent waiting for the 16 customers per day
was formerly:
(16 cars per day) x (2/3 hour per car) = 10.67 hours
• It is now:
(16 cars per day) x (1/4 hour per car) = 4 hours
• The total daily system costs are less with the new
mechanic resulting in significant savings:
$653.33 – $360 = $293.33

8-525
 Enhancing the Queuing Environment

• Reducing waiting time is not the only way to reduce

waiting cost.
• Reducing the unit waiting cost (Cw) will also reduce
total waiting cost.
• This might be less expensive to achieve than reducing
either W or Wq.

8-526
 Multichannel Queuing Model with Poisson Arrivals
and Exponential Service Times (M/M/m)

Assumptions of the model:

– Arrivals are served on a FIFO basis.
– There is no balking or reneging.
– Arrivals are independent of each other but the arrival
rate is constant over time.
– Arrivals follow a Poisson distribution.
– Service times are variable and independent but the
average is known.
– Service times follow a negative exponential distribution.
– The average service rate is greater than the average
arrival rate.
8-527
Multichannel Queuing Model with Poisson Arrivals and
Exponential Service Times (M/M/m)
• Equations for the multichannel queuing model:
• Let
m = number of channels open
 = average arrival rate
 = average service rate at each channel

1. The probability that there are zero customers in

the system is:
1
P0  for m  
 n m 1 1    n
 1    m
m

       
 n 0 n!     m!    m  
8-528
 Multichannel Model, Poisson Arrivals, Exponential
Service Times (M/M/m)
2. The average number of customers or units in the system

 ( /  )  m
L P 
2 0
( m  1)! ( m    ) 
3. The average time a unit spends in the waiting line or being served, in the system

m
 ( /  ) 1 L
W P  
2 0
( m  1)! ( m   )  
8-529
Multichannel Model, Poisson Arrivals, Exponential
Service Times (M/M/m)
4. The average number of customers or units in line waiting
for service

Lq L 

5. The average number of customers or units in line waiting for service

1 Lq
Wq W  
 
6. The average number of customers or units in line waiting for service



m
8-530
 ARNOLD’S MUFFLER SHOP
Example Revisited
• Arnold wants to investigate opening a second garage bay.
• He would hire a second worker who works at the same
rate as his first worker.
• The customer arrival rate remains the same.

1
P0  for m  
 n m  1
1
n
 1  m
m
   
n!   
   
 n 0  m!    m  

1
P0  0.5
 1  2
1 n
 1  2  2(3)
2

     
 n 0 n!  3   2!  3  2(3)  2
 probability of 0 cars in the system 8-531
 ARNOLD’S MUFFLER SHOP
Example Revisited
• Average number of cars in the system
 ( /  ) m 
L P 
2 0
(m  1)!(m   ) 

2(3)(2 / 3) 2 1 2
L 2
( )  0.75
(1)![2(3)  2] 2 3

 Average time a car spends in the system

L 3
W   hour 22 1 minutes
 8 2
8-532
 ARNOLD’S MUFFLER SHOP
Example Revisited
• Average number of cars in the queue
 3 2 1
Lq  L     0.083
 4 3 12

 Average time a car spends in the queue

1
0.083 Lq
Wq W    0.0415 hour 2 1 minutes
  2 2

8-533
 ARNOLD’S MUFFLER SHOP
Example Revisited
• Adding the second service bay reduces the waiting time in
line but will increase the service cost as a second
mechanic needs to be hired.
Total daily waiting cost = (8 hours per day)WqCw
= (8)(2)(0.0415)($50) = $33.20

Total daily service cost = (8 hours per day)mCs

= (8)(2)($15) = $240
 So the total cost of the system is

Total system cost = $33.20 + $240 = $273.20

 This is the cheapest option: open the second bay and hire a second worker at
the same $15 rate.
8-534
Effect of Service Level on Arnold’s Operating
Characteristics
LEVEL OF SERVICE

ONE TWO ONE FAST

OPERATING MECHANIC MECHANICS MECHANIC
CHARACTERISTIC =3  = 3 FOR BOTH =4
Probability that the system
0.33 0.50 0.50
is empty (P0)
Average number of cars in
2 cars 0.75 cars 1 car
the system (L)
Average time spent in the
60 minutes 22.5 minutes 30 minutes
system (W)
Average number of cars in
1.33 cars 0.083 car 0.50 car
the queue (Lq)
Average time spent in the
40 minutes 2.5 minutes 15 minutes
queue (Wq)

8-535
Excel QM Solution to Arnold’s Muffler
Multichannel Example

8-536
 Constant Service Time Model (M/D/1)

• Constant service times are used when customers or

units are processed according to a fixed cycle.
• The values for Lq, Wq, L, and W are always less than
they would be for models with variable service time.
• In fact both average queue length and average
waiting time are halved in constant service rate
models.

8-537
 Constant Service Time Model (M/D/1)

1. Average length of the queue

2
Lq 
2 (    )

2. Average waiting time in the queue


Wq 
2 (    )

8-538
 Constant Service Time Model (M/D/1)

3. Average number of customers in the system


L  Lq 


4. Average time in the system

1
W Wq 


8-539
 GARCIA-GOLDING RECYCLING, INC.
Example
• The company collects and compacts aluminum cans
and glass bottles.
• Trucks arrive at an average rate of 8 per hour (Poisson
distribution).
• Truck drivers wait about 15 minutes before they
empty their load.
• Drivers and trucks cost $60 per hour.
• A new automated machine can process truckloads at
a constant rate of 12 per hour.
• A new compactor would be amortized at $3 per truck
unloaded.
8-540
 Constant Service Time Model (M/D/1)
Analysis of cost versus benefit of the purchase
Current waiting cost/trip = (1/4 hour waiting time)($60/hour cost)
= $15/trip
New system:  = 8 trucks/hour arriving
 = 12 trucks/hour served
Average waiting
time in queue = Wq = 1/12 hour
Waiting cost/trip
with new compactor = (1/12 hour wait)($60/hour cost) = $5/trip
Savings with
new equipment = $15 (current system) – $5 (new system)
= $10 per trip
Cost of new equipment
amortized = $3/trip
Net savings = $7/trip

8-541
Excel QM Solution for Constant Service Time Model
with Garcia-Golding Recycling Example

8-542
 Finite Population Model
(M/M/1 with Finite Source)
• When the population of potential customers is limited,
the models are different.
• There is now a dependent relationship between the
length of the queue and the arrival rate.
• The model has the following assumptions:
1. There is only one server.
2. The population of units seeking service is finite.
3. Arrivals follow a Poisson distribution and service
times are exponentially distributed.
4. Customers are served on a first-come, first-served
basis.
8-543
 Finite Population Model
(M/M/1 with Finite Source)
Equations for the finite population model:
Using  = mean arrival rate,  = mean service rate, and N
= size of the population, the operating characteristics
are:

1. Probability that the system is empty:

1
P0  n
N
N!   
  
n 0 ( N  n )!   

8-544
 Finite Population Model
(M/M/1 with Finite Source)
2. Average length of the queue:
 
Lq  N    1  P0 
  

3. Average number of customers (units) in the system:

L  Lq  1  P0 

4. Average waiting time in the queue:

Lq
Wq 
( N  L)
8-545
 Finite Population Model
(M/M/1 with Finite Source)
5. Average time in the system:

1
W Wq 


6. Probability of n units in the system:

n
N!   
Pn    P0 for n 0,1,..., N
N  n !   

8-546
 Department of Commerce

• The Department of Commerce has five printers that each

need repair after about 20 hours of work.
• Breakdowns will follow a Poisson distribution.
• The technician can service a printer in an average of about
2 hours, following an exponential distribution.
• Therefore:
 = 1/20 = 0.05 printer/hour
 = 1/2 = 0.50 printer/hour

8-547
 DEPARTMENT OF COMMERCE
Example
1. 1
P0  5 n
0.564
5!  0.05 

n 0 ( 5  n )!

 0 .5



2.
 0.05  0.5 
Lq 5    1  P0  0.2 printer
 0.05 

3. L 0.2  1  0.564  0.64 printer

8-548
 DEPARTMENT OF COMMERCE
Example
4. 0.2 0.2
Wq   0.91 hour
(5  0.64 )0.05  0.22

5. 1
W 0.91  2.91 hours
0.50
If printer downtime costs $120 per hour and the technician is paid $25 per hour,
the total cost is:

Total (Average number of printers down)

hourly = (Cost per downtime hour)
cost + Cost per technician hour
= (0.64)($120) + $25 = $101.80

8-549
Excel QM For Finite Population Model with Department
of Commerce Example

8-550
 Some General Operating Characteristic
Relationships
• Certain relationships exist among specific operating
characteristics for any queuing system in a steady state.
• A steady state condition exists when a system is in its
normal stabilized condition, usually after an initial
transient state.
• The first of these are referred to as Little’s Flow Equations:

L = W (or W = L/)
Lq = Wq (or Wq = Lq/)

 And

W = Wq + 1/

8-551
 More Complex Queuing Models and the Use of
Simulation
• In the real world there are often variations from basic queuing
models.
• Computer simulation can be used to solve these more
complex problems.
• Simulation allows the analysis of controllable factors.
• Simulation should be used when standard queuing models
provide only a poor approximation of the actual service
system.

8-552
 Thanks
Comments
Areas of enhancement
Areas of separation
Areas of addition
 Coincident or Not ?
If, ABC D EFGHI J K L M N O PQ R S T U V W X Y Z

Equals,
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Then,
K+ N +O +W+ L +E+D+G+E
11 + 14 + 15 + 23 + 12 + 5 + 4 + 7 + 5 = 96%

H+A+R +D+W+ O+ R +K
8 + 1 + 18 + 4 + 23 + 15 + 18 + 11 = 98%

Both are important, but the total falls just short of 100%

But,
A+T +T + I+T + U +D+E
1 + 20 + 20 + 9 + 20 + 21 + 4 + 5 = 100%

Safety really is about attitude. Make 100% Safe Behavior your choice
both ON and OFF the job