AEM412

Computational Methods for

Management and Economics
Carla P. Gomes
Module 1
Introduction

Overview of this Lecture

Course Administration
Course Themes, Goals, and Syllabus
Background on Mathematical Programming
The Impact of Information Technology on
Business Practice

Course Administration

AEM412 - Introduction to
Mathematical Programming
Lectures: Tuesday and Thursday - 11:40 - 12:55
Location: WN 245
Lecturer: Prof. Gomes
Office: 448 Warren Hall
Phone: 255 1679 or 255 9189
Email: cpg5@cornell.edu or gomes@cs.cornell.edu
TA: Vivian Eliza Hoffmann (veh4@cornell.edu)
Administrative Assistant: Dawn Vail (dmv9@cornell.edu)
147 Warren Hall, 254-6761
Web Site:
http://courseinfo.cit.cornell.edu/courses/aem412/

Office Hours
Prof. Gomes
Monday and Wednesday: 3:00p.m 4:00 p.m.

TA Vivian Hoffmann
Tuesday (WN360) and Wednesday (WN201):
1:30 p.m 2:30 p.m.

Grades
Midterm

(15%)

Homework

(35%)

Participation

(5%)

Final

(45%)

Note: The lowest homework grade will be dropped before the

final grade is computed.

Required Textbook

Introduction to Operations Research by

Frederick S. Hillier and
Gerald. J. Lieberman,
7th Edition

Overview of this Lecture

Course Administration
Course Themes, Goals, and Syllabus
Background on Mathematical Programming
The Impact of Information Technology on
Business Practice

Course Themes, Goals, and

Syllabus

Whats Mathematical Programming (MP)?

Main focus: Optimization
Optimization is pervasive in business and economics and
almost all aspects of human endeavor, including science and
engineering. Optimization is everywhere:
part of our language and the way we think!
Firms want to maximize value to shareholders
People want to make the best choices
We want the highest quality at the lowest price
In games, we want the best strategy
We want to optimize the use of our time,
etc

Optimization

Financial planning
Marketing
E-business
Telecommunications
Manufacturing
Operations Management
Production Planning
Transportation Planning
System Design
Health Care

Some of the themes of 412

Optimization!!!
Models, Models, Models
(insights not numbers)

Applications in business and economics

Algorithms, Algorithms, Algorithms
Efficient Algorithms --- whenever possible
Importance of factoring in computational issues in
business and economic applications: computational
limits and intractability

Whats Mathematical Programming?

Very broad discipline covering a variety of Optimization
topics such as:
Linear Programming

Non-linear Programming

Advanced Linear Programming

Models
Network Models
Integer Programming

Decision Making under Uncertainty

Dynamic Programming
Heuristic techniques
Simulated Annealing
Genetic Algorithms
Tabu Search
Neural Networks

Decision Making with Multiple

Objectives
Game Theory
etc

Syllabus 412
Linear Programming
Introduction
Simplex/Revised Simplex
Duality and Sensitivity Analysis
Other LP Algorithms

 Network Models
Transportation Problems
Assignment Problems
Network Optimization Models

Special Topics(*)
Integer Programming
Dynamic Programming
Heuristic techniques

Simulated Annealing
Genetic Algorithms
Tabu Search
Neural Networks

Computational complexity(*)

(*)time permitting

Goals in 412
Present a variety of models, algorithms, and tools for
optimization
Illustrate applications in business and economics, and other
fields.
Prepare students to recognize opportunities for
mathematical optimization as they arise
Prepare students to be aware of computational complexity
issues: importance of using efficient algorithms whenever
possible and the limits of computation that can affect the
validity of business and economic models.

Background on Mathematical
Programming

Origins of Operations Research (OR)

The roots of OR can be traced back many decades and
even centuries (Newton, Euler, Bernoulli, Bayes,
Lagrange, etc).
Beginning of the activity called Operations Research --attributed to the military services early in the World War
II (1937).
Need to allocate scarce resources to the various military operations in an
effective manner.
The British first and then the U.S military management called upon a large
number of scientists to apply a scientific approach to dealing with several
military problems

 End of war scientists understood that OR could

be applied outside the military as well.
The industrial boom following the war led to an
increasing complexity and specialization of
organizations scientific management
techniques became more and more crucial.
By the early 1950s, OR techniques were being
applied to a variety of organizations in business,
industry, and government.

Impact of
Operations
Research

Key Factors for Rapid Growth of

OR
Substantial progress was made early in
improving the techniques in OR
Simplex, Dynamic Programming, Integer
Programming, Inventory Theory, Queing
Theory, etc

Computer revolution - 1980s the PC further

boosted this trend.

Timeline

Operations Research Over the Years

1947
Project Scoop (Scientific Computation of Optimum
Programs) with George Dantzig and others.
Developed the simplex method for linear programs.

1950's
Lots of excitement, mathematical developments,
queuing theory, mathematical programming.
cf. A.I. in the 1960's

1960's
More excitement, more development and grand plans.
cf. A.I. in the 1980's.
Source: J. Orlin (MIT) 2003

Operations Research Over the Years

1970's
Disappointment, and a settling down. NPcompleteness. More realistic expectations.

1980's
Widespread availability of personal computers.
Increasingly easy access to data. Widespread
willingness of managers to use models.

1990's
Improved use of O.R. systems.
Further inroads of O.R. technology, e.g., optimization
and simulation add-ins to spreadsheets, modeling
languages, large scale optimization. More intermixing
of A.I. and O.R.

Operations Research in the 00s

LOTS of opportunities for OR as a field
Data, data, data
E-business data (click stream, purchases, other transactional
data, E-mail and more)
The human genome project and its outgrowth
Need for more automated decision making
Need for increased coordination for efficient use of resources
(Supply chain management)

The Impact of Information

Technology on Business Practice

Advances in information technology are

increasingly impacting on business and
business practices.
Exciting new opportunities (and some risks).
Examples of applications

Driving Force
Exponential Growth
a) Compute power
b) Data storage
c) Networking
Combined with algorithmic advances
(software)

Compute power: Doubling every 18 months

100,000,000
transistors
per processor

4,000 transistors
per processor

How much can be stored in one Terabyte?

Yr 06, 1 Terabyte for $200.
Storage
for
$200

video

1
Gigabyte/hour

1000 hours

scanned
color
images

1 Megabyte
each

1 million
images

text pages

3300
bytes/page

300 million
pages (Library
of Congress)

Wal-Mart customer data: 200 terabyte --- daily data mining for customer trends

Microsoft already working on a PC where nothing is ever deleted.

You will have a personal Google on your PC.

The Network: The Internet

This new level of connectivity

allows for much
faster, and more substantive
interactions between
companies/suppliers/customers
(e.g. electronic markets)

1981 --- 200 computers

1990 --- 300,000
1995 --- 6.5M
1997 --- 25M
2002 --- 300M

Examples of business impact

1) Supply-chain-management
2) Electronic markets
3) Beyond traditional scheduling application

Dell premier example of integration of information

technology into the business model.
Direct business-to-consumer model

1984 -- Michael Dell founds Dell

1996 Dell starts selling computers via Internet at www.dell.com
1999 "E-Support Direct from Dell" online technical support

2001 Company sales via Internet exceed $40 M per day

Dell ranks No 1 in global market share
2003 Revenue $32.1 Billion

Direct business-to-consumer model

Power of Virtual Integration

Supply Chain Strategy and Processes

Reporting
Solution

DELL manages relationships with over

80% of suppliers through the Internet.

Report Users

Legacy
Systems

Over half of Dell customers use Webenabled support (over 40,000 Premier
Pages-10,000 in Europe).

Factory
Planner
Users

Factory
Planner

Supply
Logistics
Center
Collaboration
Suppliers

Supply
Chain
Planning
Supply Chain
Planning Users

Supplier
Collaboration

Internet

Real-time Access
and Transactions

Supply Hubs

Product configuration tools

Efficient supply chain:

Online design of made-to-order system.

Innovative product design,

Constraint-based reasoning tools (knowledge

about allowable system configurations)

An Internet order-taking process,

Customer-to-Knowledge

An innovative assembly system,

Customers search Dell databases

Close cooperation with suppliers.

Knowledge content for typical responses

Personalization tools

Optimization is everywhere

Electronic Markets
Combinatorial Auctions

Why Combinatorial Auctions?

More expressive power to bidders
In combinatorial auctions bidders have preferences not just for particular
items but for sets or bundles of Items due because of complementarities
or substitution effects.
Example Bids:
Airport time slots

[(take-off right in NYC @ time slot X ) AND

(landing right in LAX @ time slot y)]
for $9,750.00
Delivery routes (lanes)

[(NYC - Miami ) AND

[((Miami Philadelphia) AND (Philadelphia NYC)) OR
((Miami Washington) AND (Washington NYC))]] for $700.00

Procurement Transportation Services on the web.

OPTIBID - software for combinatorial auctions
Managing over 100,000 trucks a day (June 2002),
>$8 billion worth of transportation services.

FCC auctions spectrum licenses

( geographic regions and various frequency bands).

Raised billions of dollars
Currently licenses are sold in separate auctions
USA Congress mandated that the next spectrum
auction be made combinatorial.

FCC Auction #31 700 MHz

Winner Determination Problem $12e6 + $16e6 +$8e6 =
Choose among a set of bids such that:
Revenue to the FCC is maximized

$22e6 + $8e6 =

Each license is awarded no more than once

$30e6
Bid

Bid amt.

$22e6

$12e6

$30e6

$16e6

$8e6

$11e6

$10e6

$7e6

Package

ABD

ABC

AD

BC

Example: 4 licenses, 8 bids

Max
x

x1

x1

+ x3
+ x2

BidAmt

x1

b 1

+ x4
+ x5

Computational
Problem

<=

+ x6

<=

+ x6

<=

<=

+ x4

xb 0,1

DHard

xb

+ x7

+ x3
x3

C
D

$36e6

+ x8

for all bids

(source: Hoffman)

Combinatorial Auctions cont.

There exists a combinatorial auction mechanism (Generalized

Vickrey Auction), which guarantees that the best each bidder can do
is bid its true valuation for each bundle of items. (Truth revealing).
However, finding the optimal allocation to the bids is a hard
computational problem. No guarantees that an optimal solution can
be found in reasonable time.

What about a near-optimal solution? Does this matter?

Yes! Problem: if the auctioneer cannot compute the optimal
allocation, no guarantee for truthful bidding.
So, computational issues have direct consequences for the feasibility
and design of new electronic market mechanisms.
A very active area in discrete optimization. (Bejar, Gomes 01)

Beyond Traditional Scheduling

Applications
Enforcing Safety Constraints

Nuclear Power Plant Outage Management

ACTIVITY
Activity Name
EST
LST
Duration
Predecessors

[ Gomes et al, 1996, 1997, 1998 ]

SCHEDULE
impacts

impacts

ROME LABORATORY OUTAGE MANAGER (ROMAN)

Parameters
Parameters Load
Load

RunRun Gantt
Gantt
Charts
Charts Utilities
Utilities Exit
Exit

Name: D21-1 Affects: ACPLOSS DIV1

Predecessors
EST: 65
LST: 65 DURATION: 15 START: 65 FINISH: 80 PECO

ROME LABORATORY OUTAGE MANAGER (ROMAN)

Parameters
Parameters Load
Load RunRun Gantt
Gantt
Charts
ChartsUtilities
Utilities Exit
Exit
Name: D21-1 Affects: ACPLOSS DIV1
Predecessors
EST: 65
LST: 65 DURATION: 15 START: 65 FINISH: 80 PECO
0
10
20
30
40
50
60
70
80
90
100
110
120
D23-3
RHRB-1
D23-2
D21BUS-1

10

20

30

40

50

60

70

80

90

100

110

DIV4DC-1
RHR
D21-1
A-1

D23-3
RHRB-1
D23-2
D21BUS-1
DIV4DC-1
RHRA-1
D21-1

impacts
ROME LABORATORY OUTAGE MANAGER (ROMAN)

STATE-Of-PLANT

Parameters
Parameters Load
Load

RunRun Gantt
Gantt
Charts
Charts Utilities
Utilities Exit
Exit

31 - 45: ACPOWER? 0 NUM-UNAV-RESS 1

UNAV-RES-MAP (DIV2 D24BUS-3 D24-2 D24-1) (ACPLOSS D24BUS-3 D24-2 D24-1)
LIST-AV-RESS (DIV1 DIV3 DIV4 SU10 SU20)
0

10

20

30

40

50

60

70

80

90

100

110

AC-POWER Status
AC Power
DIV1
DIV2
DIV3
DIV4
SU10
SU20

Given:
activities for refueling and maintenance
resources
technological constraints

Find a schedule that minimizes the

duration of the outage while safely
performing all the activities
(up to 45,000 activities).
Cost of shutdown - $1M per day.

Main risk
The residual heat produced by the
nuclear materials can melt the
fuel and breach the reactor nvessel
Examples of Monitored Safety Systems
ac power control system
primary containment system
shutdown cooling system

Limitations of Traditional Approaches

Rely heavily on manual procedures;
Current procedures PERT/CPM
Outage Risk Assessment Methodology,
simulation performed to assess
the risks inherent to a schedule.

Nuclear Power Plant Outage Management

Example of decision tree for a
safety function for AC-Power

Activity with
AC Power loss
Potential?

no

Offsite
sources
available

yes

Operable
emergency
Safeguard
bus

Operable
emergency
Safeguard
bus

()
ROME LABORATORY OUTAGE MANAGER (ROMAN)

Parameters
Parameters Load
Load

RunRun GanttGantt
Charts
ChartsUtilities
Utilities ExitExit

Name: D21-1 Affects: ACPLOSS DIV1

Predecessors
EST: 65
LST: 65 DURATION: 15 START: 65 FINISH: 80 PECO

10

20

30

40

50

60

70

80

90

100

110

>3
2
1
0

Safety
threshold

>3
2
1

Time

Roman extends the functionality of

traditional project management tools

D23-3

It

incorporates the technological constraints,

automatically enforcing safety constraints

RHRB-1
D23-2
D21BUS-1
DIV4DC-1
RHRA-1
D21-1

ROME LABORATORY OUTAGE MANAGER (ROMAN)

Parameters
Parameters Load
Load

RunRun GanttGantt
Charts
ChartsUtilities
Utilities ExitExit

31 - 45: ACPOWER? 0 NUM-UNAV-RESS 1

UNAV-RES-MAP (DIV2 D24BUS-3 D24-2 D24-1) (ACPLOSS D24BUS-3 D24-2 D24-1)
LIST-AV-RESS (DIV1 DIV3 DIV4 SU10 SU20)

AC-POWER Status
AC Power
DIV1
DIV2
DIV3
DIV4
SU10
SU20

10

20

30

40

50

60

70

80

90

100

110

Robust schedules guaranteeing feasibility

over time-windows
Fast schedules
Solutions better than manual solutions

Syllabus 412
Linear Programming
Introduction
Simplex/Revised Simplex
Duality and Sensitivity Analysis
Other LP Algorithms

 Network Models
Transportation Problems
Assignment Problems
Network Optimization Models

Special Topics(*)
Integer Programming
Dynamic Programming
Heuristic techniques

Simulated Annealing
Genetic Algorithms
Tabu Search
Neural Networks

Computational complexity(*)

(*)time permitting

Goals in 412
Present a variety of models, algorithms, and tools for
optimization
Illustrate applications in business and economics, and other
fields.
Prepare students to recognize opportunities for
mathematical optimization as they arise
Prepare students to be aware of computational complexity
issues: importance of using efficient algorithms whenever
possible and the limits of computation that can affect the
validity of business and economic models.