MBAD 6122 Decision Modeling and Analysis via Spreadsheets

Dr. Cem Saydam

Main Campus: Friday Building 266B saydam@uncc.edu

 Introductions Course objectives - syllabus Intro to Management Science - Chap. 1 Intro to Optimization and LP - Chap. 2 Modeling and solving LP problems via spreadsheets

Outline

Management Science
Management Science (a.k.a. analytics) is the scientific approach to decision making. Mgt. Sci. uses mathematical models to make sound decisions. The focal point of analysis is the problem and mathematical (quantitative) models are the vehicles by which solutions are obtained. Mgt. Science uses a systematic and logical approach to problem solving.

Models
A model is an abstraction of reality. Models can be: Prescriptive

functional relationships are well-known solutions prescribe (advise, recommend) a set of values for the decision variables in order to maximize (or minimize) an objective

Predictive

explanatory variables affect the outcome(s) functional relationship can be derived

describe the outcome or behavior of a system functional relationships might be well-known but are either too complex to tackle analytically or are highly stochastic

Descriptive

Mathematical Programming (MP)

MP, a.k.a. optimization, is a field of management science that finds the optimal, or most efficient, way of using limited resources to achieve the objectives of an individual or a business. Is this part of analytics? What is analytics?
http://www.sas.com/news/sascom/analytics_levels.pdf

General form of an Math Prog. Model

Every optimization problem involves the following: decisions that must be made objective(s) (or goal(s)) a set of restrictions (or constraints)
MAX (or MIN): Subject to: f0(X1, X2, , Xn) f1(X1, X2, , Xn) <= b1 : fk(X1, X2, , Xn) >= bk : fm(X1, X2, , Xn) = bm

Note: If all the functions in an optimization are linear(ized), the problem is a

Linear Programming (LP) problem

Intro to LP
An example: Blue Ridge Hot Tubs, Inc. Blue Ridge Hot Tubs produces two types of hot tubs: Aqua-Spas & Hydro-Luxes. Pumps Labor Tubing Unit Profit Aqua-Spa 1 9 hours 12 feet $350 Hydro-Lux 1 6 hours 16 feet $300

There are 200 pumps, 1566 hours of labor, and 2880 feet of tubing available.
7

Formulating LP Models
Given a problem, first, determine the objective or goal. Maximize (or minimize) what? Maximize profits Identify & define the decision variables (unknowns).

What should they represent and how many do we need?

X1=number of Aqua-Spas to produce X2=number of Hydro-Luxes to produce

Xi = no. of product i to make i=1,2 State the objective as a linear function of the decision variables. Max 350 X1 + 300 X2
8
or abbreviate as follows

Formulating LP Models
Translate the requirements, restrictions, or wishes, that are in narrative form to linear functions. 1X1 + 1X2 <= 200 9X1 + 6X2 <= 1566 12X1 + 16X2 <= 2880 } pumps } labor } tubing

Identify any lower or upper bounds on the decision variables (non-negativity constraints are v. common). X1 >= 0 X2 >= 0

or

Xi >= 0 i=1,2
9

The Complete LP Model

MAX: 350X1 + 300X2 S.T.: 1X1 + 1X2 <= 200 9X1 + 6X2 <= 1566 12X1 + 16X2 <= 2880 X1 , X2 >= 0
The general form of an LP model:
MAX (or MIN): c1X1 + c2X2 + + cnXn Subject to: a11X1 + a12X2 + + a1nXn <= b1 : ak1X1 + ak2X2 + + aknXn >= bk : am1X1 + am2X2 + + amnXn = bm 10

X2
250

Graphical solution approach

boundary line of pump constraint X1 + X2 = 200 boundary line of labor constraint 9X1 + 6X2 = 1566

261

200
180

150 boundary line of tubing constraint

100
Feasible Region

12X1 + 16X2 = 2880

50

50

100

174

240

150

200

250

X1
11

Enumerating the corner points

X2
250 o.f.v. = $54,000 200

(0, 180)
o.f.v. = $64,000

150

(80, 120)

Final/optimal o.f.v. = $66,100

100 (122, 78) o.f.v. = $60,900
o.f.v. = $0 (0, 0)

50

(174, 0)

0 0 50 100 150 o.f.v. = $15,000 200 250

X1
12

Another Graphical Solution Problem

Min $10A + $20B ST 4A + 6B >= 120 B <= 30 A - 2B <= 5 A, B >= 0

13

Excel 2007 Standard Solver Add-In

14

Excel 2010 Standard Solver Add-In

15

How Excel 2007 standard solver views the model

Target cell - the cell in the spreadsheet that represents the objective function Changing cells - the cells in the spreadsheet representing the decision variables Constraint cells - the cells in the spreadsheet representing the LHS formulas on the constraints Click on Options and check Assume Linear Model and Assume Non-negative, then, click OK, then click Solve! 16

How Excel 2010 standard solver views the model

Target cell - the cell in the spreadsheet that represents the objective function Changing cells - the cells in the spreadsheet representing the decision variables

Constraints - the cells in the spreadsheet representing the LHS formulas on the constraints and the RHS values (could be formulas also but
should not include decision variables in them.) For non-negativity constraints check and for Linear models select Simplex LP then, click OK, then click Solve!

17

Expanded Blue Ridge Hot Tubs Problem

BRHT has added another product line: Deck-Spa Each Deck-Spa uses 1 pump, 7 hours of labor and 14 ft. of tubing. Profit margin is estimated as $315/unit. 1. Expand the formulation 2. Setup in Excel and solve via solver 3. Interpret the solution

What is the product mix? What is the optimal profit (objective function)? Other observations from investigating the solution provided by solver.

18

Another Starter Formulation Exercise

The Pyrotec Company produces three electrical products clocks, radios, and toasters. The products have the following resource requirements:
Product Clock Radio Toaster Cost/Unit $7 10 5 Labor hours/Unit 2 3 2

The manufacturer has a daily budget of $2,000 and a maximum of 660 hours of labor. Maximum daily demand for radios is 300. The marketing department requires that at least 15 percent of the total products must be toasters. Clocks sell for $15, radios for $20, and toasters for $12. Formulate as an LP. Solve using solver. 19

Can we be so lucky, every time?

When we attempt to solve an LP, one of the following will occur: Unique optimal solution Multiple (alternate) optimal solutions Unbounded solutions Infeasible solution

20

Unbounded solutions
Always result of an error; a typo, misspecification etc. Example:
Max 3x1 + 5x2 ST x1 + x2 >= 100 x1 <= 40 x1, x2 >= 0

21

Infeasible solution
Suppose the Pyrotec Co. problem has the following additional requirement:

Management wants at least 350 Clocks. Therefore we need to add one more constraint: x1 >= 350

22

Practice
Two practice problems from Chap 3:
#22 (#27 in the Intl ed.) A trust officer #24 (#23 in the Intl ed.) A manufacturer of Formulate Setup and Solve using the standard solver in 2007 or 2010

Study Chapters 2 and 3

Q & A session

23