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MGMT 101: Management Science

Session Four Professor Shuya Yin

 Outline for today:

Applications of Linear Programming Models in other business settings

So far
 KARMA Computer problem  Galaxy Industries (space ray and zapper)  Golden Electronics (GE45 and GE60)  Advertising (Workday Ads and Sunday Ads)  Financing Strategy (Model Y and Model Z from internal or external investment)  Fabulous Nuts (regular, deluxe and holiday)

Production models

What else?
 Funds management problem  Staff scheduling problem (Chapter 3.3)  Transportation and distribution problem (Chapter 3.5)  Production and Inventory planning problem in multiple periods 

Example 1: Funds management problem

Tritech Mortgage specializes in making first, second, and even third trust deed loans on residential properties and first trust deeds on commercial properties. Any funds not invested in mortgages are invested in an interest-bearing savings account. The following table gives the rate of return and the company s risk level for each possible type of loans. Loan Type First Trust Deeds Second Trust Deeds Third Trust Deeds Commercial Trust Deeds Savings Account Rate of Return 7.75% 11.25% 14.25% 8.75% 4.45% Risk 4 6 9 3 0

Tritech wishes to invest $68,000K in available funding so that:  Yearly return is maximized  At least $5,000K is to be available in a savings account for emergencies  At least 80% of the money invested in trust deeds should be in residential properties  At least 60% of the money invested in residential properties should be in first trust deeds  The average risk should no exceed 5

Tritech Mortgage problem formulation

Example 2: Staff scheduling (chapter 3.3)

 A fast-food restaurant has daily staff needs that range from 12 to 19 students depending on varying work loads each day of the week as shown below:
Day Monday Tuesday Wednesday Thursday Friday Saturday Sunday  Staff Needs 18 16 15 16 19 14 12

 In addition, a labor requirement must be met that employees work a five consecutive days followed by two days off. Thus, the allowable shifts are Monday through Friday, Tuesday through Saturday, Wednesday through Sunday, etc. Each employee earns $200 per week.

As the personnel manager of the restaurant, how would you develop a feasible staff schedule that ensures that staff needs are covered at a minimal weekly cost?

Formulation staff scheduling

Mon (1)

Tue (2)

Wed (3)

Thu (4)

Fri (5)

Sat (6)

Sun (7)

 Shift 1 (starting on Mon) will work on:  Shift 2 (starting on Tue) will work on:  Shift 3 (starting on Wed) will work on:  Shift 4 (starting on Thu) will work on:  Shift 5 (starting on Fri) will work on:  Shift 6 (starting on Sat) will work on:  Shift 7 (starting on Sun) will work on:

Let us try it

In-class practice problem

 Handout will be distributed in class.

Example 3: Transportation (chapter 3.5)

 You are in charge of scheduling transportation of bottled water from 3 warehouses to 4 retail stores.

maximum supply

Retail store 90 1 70 2 3 4 40 50

200 80

$0.08 0.09 0.11 0.12 0.16 0.07 0.05 0.08 0.14 0.10 0.06

minimum demand

2 180 3


How would you schedule the transportation to minimize the total shipping cost?

Let us try it

Transportation extension
Warehouse 200


$0.08 0.09 0.11 0.12 0.16 0.07 0.05 0.08 0.14 0.10 0.06

Retail store 90 1 70 2 3 4 40 50



 Now, how should you schedule the production and transportation to minimize your total shipping and production costs?

What changes?

In-class practice problem

 Handout will be distributed in class.

Example 4: Distribution Unlimited Co. Problem (Ch 6)

 Each unit is a full truckload.  Minimum cost flow problem: figure out a best way to ship the product (meet the demand at the lowest cost).

A math model:

 Decision variables:

 Total cost (Objective function):


 (F1)  (F2)  (W1)  (W2)  (DC)

Example 5: GlobChem Production/Transportation

 A US-based multinational produces a specialty chemical in four dedicated plants, located in Newark, Los Angeles, Rotterdam and Kuala Lumpur.  The product is marketed worldwide, and the company has just instituted a sales organization with sales offices/distribution centers based in: Newark, Rotterdam, So Paulo and Tokyo.

Prices and costs vary by region and plants

Each sales/distribution center is responsible for a distinct region; the maximum demand and the average selling price for a region are given below.
Office Region Market price ($/ton) Demands (tons/yr) Newark N. America 55,500 150 So Paulo S. America 61,100 75 Rotterdam Eu / Af / ME 57,800 200 Tokyo Asia 62,650 100

Plant design, factor costs, and exchange rates affect production costs and each plant Annual Fixed costs are incurred regardless of the production volume.
Plant Data Newark Los Angeles Rotterdam Kuala Lumpur Unit cost ($ per ton) 34,900 32,200 38,350 23,400 Fixed costs ($ 000) 1,800 2,750 2,100 1,950 Capacity (tons/yr) 100 200 120 250

Transportation costs include freight and tariffs.

$ per ton from plant to market Newark Los Angeles Rotterdam Kuala Lumpur Newark -4,500 9,150 21,450 So Paulo 12,225 16,500 12,600 18,450 Rotterdam 9,075 13,350 -15,150 Tokyo 21,450 17,850 12,525 5,925

GlobChem s problem statement

 GlobChem wants to determine its annual production and distribution schedule in order to maximize profits while observing the limits on each plant s capacity and the maximum sales possible in each region. In determining this production and distribution schedule, consider the locations and capacities of the plants to be fixed.

Prices and costs vary by region and plants

i=1 i=2 i=3 i=4

ai = available capacity at plant i (e.g., a2 = 200 tons) ci = unit cost at plant i (e.g., c3 = $38,350) tij = unit transportation cost from plant i to market j (e.g., t33 = 0, t42 = 18,450) dj = demand in market j (e.g., d1 = 150 tons)





pj = unit price in market j (e.g., p4 = $62,650)

The index i refers to plants, where 1 is Newark, 2 Los Angeles, 3 Rotterdam, and 4 Kuala Lumpur. The index j refers to markets, where 1 is Newark, 2 So Paulo, 3 Rotterdam, and 4 Tokyo.

Describe the problem in words

Problem Statement Maximize annual profit contribution by determining the annual production and transportation schedule, ensuring that plant capacity and market demand limits are not exceeded.

 Question: what are the decision variables?

Constraints in words
 Capacity constraints: production at each plant must be less than capacity
 (production at Newark plant) =  (production at Los Angeles) =  (production at Rotterdam) =  (production at Kuala Lumpur) =

 Demand constraints: cannot ship more than the demand in any market
 (total shipped to Newark) =  (total shipped to So Paulo) =  (total shipped to Rotterdam) =  (total shipped to Tokyo) =

 Non-negative constraints: all shipment quantities must be nonnegative

Objective function formulation in words

 Objective function in words: maximize the annual profit contribution
 Max profit contribution = revenues  Revenue =  Production cost =  Transportation cost =

production costs transportation costs

Complete LP formulation of the GlobChem problem

 Decision variables: xij = tons of products produced at plant i and shipped to market j  Objective function:
Maximize profit contribution = revenue production and transportation costs i.e., Max 55500(x11 + x21 +x31 + x41) (revenue at Newark) + 61100(x12 + x22 + x32 + x42) (revenue at So Paulo) (revenue at Rotterdam) + 57800(x13 + x23 + x33 + x43) + 62650(x14 + x24 + x34 + x44) (revenue at Tokyo) - 34900(x11 + x12 + x13 + x14) (production cost at Newark) - 32200(x21 + x22 + x23 + x24) (production cost at Los Angeles) - 38350 (x31 + x32 +x33 + x34) (production cost at Rotterdam) - 23400(x41 + x42 +x43 + x44) (production cost at Kuala Lumpur) - (0 x11 + 12225x12 + 9075x13 + 21450x14 + 4500x21 + +15150x43 + 5925x44) (transportation cost)

LP formulation of the GlobChem problem (cont d)


Production capacity may not be exceeded x11 + x12 + x13 + x14 100 (capacity at Newark) x21 + x22 + x23 +x24 200 (capacity at Los Angeles) x31 + x32 + x33 + x34 120 (capacity at Rotterdam) x41 + x42 + x43 + x44 250 (capacity at Kuala Lumpur) Maximum demand may not be exceeded x11 + x21 + x31 + x41 150 (demand at Newark) x12 + x22 + x32 + x42 75 (demand at So Paulo) x13 + x23 + x33 + x43 200 (demand at Rotterdam) x14 + x24 + x34 + x44 100 (demand at Tokyo) Non-negativity xij 0 for all plants i and markets j

For the mathematically inclined, in compact notation

 The following formulation represents the problem in a generic form. As before, we use the indices i and j for plants and markets, respectively. N represents the number of plants and M the number of markets.

GlobChem sensitivity analysis

 Which plant provides the most return from increased production capacity?

 Which regional market affords the greatest benefit from increased demand?

Example 6: Production + Inventory in multi periods


Foresight Co. must meet fluctuating demand for its product. Demand for a month may be met either through production in that month and/or inventory carried from the previous month. Production capacity, unit production cost, and unit holding cost vary from month to month:
Month Demand (lb.) Production capacity Unit production cost Unit holding cost per month Jan 9,000 10,000 $14.50 $0.60 Feb 7,500 10,000 $15.25 $0.65 Mar 12,500 11,000 $16.00 $0.65 Apr 9,000 10,000 $16.70 $0.65 May 8,000 11,000 $17.25 $0.70 Jun 11,500 10,000 $17.00 $0.65


Holding costs apply to the amount left in inventory at the end of each month Backlogs are not allowed. The beginning inventory in Jan. is zero. Problem: Determine the production schedule that minimizes total production and holding cost while meeting demand in each month (from current production and/or inventory). Production in any month must not exceed capacity.

LP formulation of Foresight s problem

 Decision variables
 We need to determine

Pt = production (in lb.) in month t (t = 1, ,6)  Any other?

 Objective function (in words) Minimize total production cost + holding cost over the 6-month horizon

( Note that total production cost can be easily expressed as: 14.5P1 + 15.25P2 + 16.00P3 + 16.70P4 + 17.25P5 + 17.00P6 We ll return to total holding cost later. )

LP formulation of Foresight s problem (cont d)

 Constraints (in words)
 Production in each month must NOT exceed capacity in that month  The demand for each month must be met from production that month and

/or inventory carried from the previous month (no backlogging of demand)
 Production quantity must be nonnegative in each month

Expressing the constraints algebraically

 Production in each month must not exceed capacity in that month. These are straightforward:
P1 10000; P2 10000; P3 11000; ; P6 10000

 The demand for each month must be met from production that month and /or inventory carried from the previous month.
This is easy for the first month (Jan) since there is no beginning inventory: (Month 1) In month 2, we need to include the amount left over (if any) from month 1: (Month 2) Similarly in month 3, we need to include the ending inventory of month 2: (Month 3) Though we can carry on in this fashion, it becomes evident that we would gain considerable convenience by introducing additional (definitional) variables to represent the ending inventory for each month.

Introducing definitional variables for inventory

 Define It = ending inventory for month t, t = 1,2, , 6  Constraints that the demand for each month must be met from production that month and/or inventory carried from the previous month:
I0 + P1 = 9000 + I1 (Month 1) I1 + P2 = 7500 + I2 (Month 2) I2 + P3 = 12500 + I3 (Month 3) I3 + P4 = 9000 + I4 (Month 4) I4 + P5 = 8000 + I5 (Month 5) I5 + P6 = 11500 + I6 (Month 6)

 Constraints to disallow backlogging of demand:

I1 0, I2 0, , I6 0
(Can you see why it isn t enough for just the Pt to be nonnegative?)

 It is now easy to express the total holding cost in the objective function:
0.60 I1 + 0.65 I2 + 0.65 I3 + 0.65 I4 + 0.70 I5 + 0.65 I6

Complete LP formulation
Min 14.5P1 + 15.25P2 + 16.00P3 + 16.70P4 + 17.25P5 + 17.00P6 (production cost) + 0.60 I1 + 0.65 I2 + 0.65 I3 + 0.65 I4 + 0.70 I5 + 0.65 I6 (holding cost) S.t. P1 P4
10000; P2 10000; P3 11000; 10000; P5 11000; P6 10000 (production capacity)

I0 + P1 = 9000 + I1 (Month 1 inventory balance) I1 + P2 = 7500 + I2 (Month 2 inventory balance) I2 + P3 = 12500 + I3 (Month 3 inventory balance) I3 + P4 = 9000 + I4 (Month 4 inventory balance) I4 + P5 = 8000 + I5 (Month 5 inventory balance) I5 + P6 = 11500 + I6 (Month 6 inventory balance) I1 0, I2 0, , I6 0 P1 0, P2 0, , P6 0
(no backlogging allowed) (production must be nonnegative)

 Can you see why the optimal solution will always set the last It variable to zero?

Inventory balance constraints arise in many other applications

 The inventory balance equation:
Starting inventory + production = demand + ending inventory It-1 + Pt = St + It

This is similar to flow balance constraints that arise in other applications, particularly those involving cash flows.
 There can be growth or spoilage in the inventory from t to t+1

Inventories of invested cash in multi-period financial models Negative inventories of borrowings, which need to be repaid, with interest

Exam 1 Review

Exam Time, Location, Office Hours

 Exam 1:
 Time: Tuesday August 16, 2:00  Location: classroom SSL 290

3:30 (90 minutes)

 Office hours: Tuesday August 16

 Time: 10:30am to 11:30am in my office SB 309  11:30am to 12:30pm in SB 410 (TA will be present)  1:00pm to 2:00pm Q&A time in classroom.

 4 6 computational questions, each may have several sub questions  Open book and notes  Ruler, calculator, textbook and class notes allowed  No laptop  No discussion with one another  No cell phone  Refer to the sample exam 1 on EEE

Need to know
 Problem formulation
 All the examples that were covered in the lectures except the last example on

production and inventory planning in multi periods discussed today

 Problem solving using graphs (for problems with two-decision variables)  Interpretation of the info on the answer and sensitivity reports generated by Excel  In the textbook:
 Chapters 1, 2, 3 and 5

 Three steps:

Define decision variables Objective function (do not forget to specify maximize or minimize ) Constraints

 Some guidance for defining decision variables:

Production problem Staff scheduling problem Transportation problem

Graphical analysis
 Plot constraints and draw the feasible region  Identify extreme points (one or more of them will be the optimal solution)  Identify the optimal point:
 Use the objective function

Set the objective function to an arbitrary value and move the line toward improvement direction Identify the optimal point and solve constraints which intersect at this point simultaneously

 Plug values of optimal point into objective function the optimal OF value.

Sensitivity analysis
 Type I change: coefficients (net profit, revenue or cost) in objective function
 Calculate Range of Optimality  Range of Optimality: predict the changes in the optimal solution and optimal

objective function value if one coefficient changes (others remain unchanged)

 Interpret Reduced Cost of a decision variable

Sensitivity analysis
 Type II change: the RHS of a constraint
 Interpret Shadow Price of a constraint

Change in objective function due to a unit increase in RHS of a constraint

 Range of Feasibility: an interval in which the shadow price in the Sensitivity

Report is valid

Interpret Answer Report

Optimal objective function value

Optimal solution
2X1 + 1X2 <= 1000 3X1 + 4X2 <= 2400 X1 + X2 <= 700 X1 - X2 <= 350

LHS of constraints at the optimal solution

Difference b/w RHS and LHS

Sensitivity Report
Optimal solution

LHS of constraints at the optimal solution

RHS of constraints