Inc., 2003 4.1 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Chapter 4 (Linear Programming: Formulation and Applications) Advertising-Mix Problem (Section 4.1) Super Grain Corp | 4.24.5 Resource Allocation Problems (Section 4.2) Think-Big Capital Budgeting | 4.64.10 Cost-Benefit-Trade-Off Problems (Section 4.3) Union Airways | 4.114.15 Distribution-Network Problems (Section 4.4) Big M Co. | 4.164.20 Student Exercises Optimization The McGraw-Hill Companies, Inc., 2003 4.2 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Super Grain Corp. Advertising-Mix Problem Goal: Design the promotional campaign for Crunchy Start. The three most effective advertising media for this product are Television commercials on Saturday morning programs for children. Advertisements in food and family-oriented magazines. Advertisements in Sunday supplements of major newspapers. The limited resources in the problem are Advertising budget ($4 million). Planning budget ($1 million). TV commercial spots available (5). The objective will be measured in terms of the expected number of exposures. Question: At what level should they advertise Crunchy Start in each of the three media? Optimization The McGraw-Hill Companies, Inc., 2003 4.3 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Cost and Exposure Data 500,000 600,000 1,300,000 Expected number of exposures 40,000 30,000 90,000 Planning budget $100,000 $150,000 $300,000 Ad Budget Each Sunday Ad Each Magazine Ad Each TV Commercial Cost Category Costs Optimization The McGraw-Hill Companies, Inc., 2003 4.4 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Spreadsheet Formulation 3 4 5 6 7 8 9 10 11 12 13 14 15 B C D E F G H TV Spots Magazine Ads SS Ads Exposures per Ad 1,300 600 500 (thousands) Budget Budget Cost per Ad ($thousands) Spent Available Ad Budget 300 150 100 4,000 <= 4,000 Planning Budget 90 30 40 1,000 <= 1,000 Total Exposures TV Spots Magazine Ads SS Ads (thousands) Number of Ads 0 20 10 17,000 <= Max TV Spots 5 Optimization The McGraw-Hill Companies, Inc., 2003 4.5 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Algebraic Formulation Let TV = Number of commercials for separate spots on television M = Number of advertisements in magazines. SS = Number of advertisements in Sunday supplements. Maximize Exposure = 1,300TV + 600M + 500SS subject to Ad Spending: 300TV + 150M + 100SS 4,000 ($thousand) Planning Cost: 90TV + 30M + 30SS 1,000 ($thousand) Number of TV Spots: TV 5 and TV 0, M 0, SS 0. Optimization The McGraw-Hill Companies, Inc., 2003 4.6 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Think-Big Capital Budgeting Problem Think-Big Development Co. is a major investor in commercial real-estate development projects. They are considering three large construction projects Construct a high-rise office building. Construct a hotel. Construct a shopping center. Each project requires each partner to make four investments: a down payment now, and additional capital after one, two, and three years. Question: At what fraction should Think-Big invest in each of the three projects? 2 Optimization The McGraw-Hill Companies, Inc., 2003 4.7 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Financial Data for the Projects $50 million $70 million $45 million Net present value 60 million 70 million 10 million 3 20 million 80 million 90 million 2 50 million 80 million 60 million 1 $90 million $80 million $40 million 0 Shopping Center Hotel Office Building Year Investment Capital Requirements Optimization The McGraw-Hill Companies, Inc., 2003 4.8 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Spreadsheet Formulation 3 4 5 6 7 8 9 10 11 12 13 14 15 16 B C D E F G H Office Shopping Building Hotel Center Net Present Value 45 70 50 ($millions) Cumulative Cumulative Capital Capital Cumulative Capital Required ($millions) Spent Available Now 40 80 90 25 <= 25 End of Year 1 100 160 140 44.757 <= 45 End of Year 2 190 240 160 60.583 <= 65 End of Year 3 200 310 220 80 <= 80 Office Shopping Total NPV Building Hotel Center ($millions) Participation Share 0.00% 16.50% 13.11% 18.11 Optimization The McGraw-Hill Companies, Inc., 2003 4.9 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Algebraic Formulation Let OB = Participation share in the office building, H = Participation share in the hotel, SC = Participation share in the shopping center. Maximize NPV = 45OB + 70H + 50SC subject to Total invested now: 40OB + 80H + 90SC 25 ($million) Total invested within 1 year: 100OB + 160H + 140SC 45 ($million) Total invested within 2 years: 190OB + 240H + 160SC 65 ($million) Total invested within 3 years: 200OB + 310H + 220SC 80 ($million) and OB 0, H 0, SC 0. Optimization The McGraw-Hill Companies, Inc., 2003 4.10 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Summary of Formulation Procedure for Resource- Allocation Problems 1. Identify the activities for the problem at hand. 2. Identify an appropriate overall measure of performance (commonly profit). 3. For each activity, estimate the contribution per unit of the activity to the overall measure of performance. 4. Identify the resources that must be allocated. 5. For each resource, identify the amount available and then the amount used per unit of each activity. 6. Enter the data in steps 3 and 5 into data cells. 7. Designate changing cells for displaying the decisions. 8. In the row for each resource, use SUMPRODUCT to calculate the total amount used. Enter and the amount available in two adjacent cells. 9. Designate a target cell. Use SUMPRODUCT to calculate this measure of performance. Optimization The McGraw-Hill Companies, Inc., 2003 4.11 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Union Airways Personnel Scheduling Union Airways is adding more flights to and from its hub airport and so needs to hire additional customer service agents. The five authorized eight-hour shifts are Shift 1: 6:00 AM to 2:00 PM Shift 2: 8:00 AM to 4:00 PM Shift 3: Noon to 8:00 PM Shift 4: 4:00 PM to midnight Shift 5: 10:00 PM to 6:00 AM Question: How many agents should be assigned to each shift? Optimization The McGraw-Hill Companies, Inc., 2003 4.12 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Schedule Data $195 $180 $175 $160 $170 Daily cost per agent 15 Midnight to 6 AM 52 10 PM to midnight 43 8 PM to 10 PM 82 6 PM to 8 PM 73 4 PM to 6 PM 64 2 PM to 4 PM 87 Noon to 2 PM 65 10 AM to noon 79 8 AM to 10 AM 48 6 AM to 8 AM Minimum Number of Agents Needed 5 4 3 2 1 Time Period Time Periods Covered by Shift 3 Optimization The McGraw-Hill Companies, Inc., 2003 4.13 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Spreadsheet Formulation 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 B C D E F G H I J 6am-2pm 8am-4pm Noon-8pm 4pm-midnight 10pm-6am Shift Shift Shift Shift Shift Cost per Shift $170 $160 $175 $180 $195 Total Minimum Time Period Shift Works Time Period? (1=yes, 0=no) Working Needed 6am-8am 1 0 0 0 0 48 >= 48 8am-10am 1 1 0 0 0 79 >= 79 10am- 12pm 1 1 0 0 0 79 >= 65 12pm-2pm 1 1 1 0 0 118 >= 87 2pm-4pm 0 1 1 0 0 70 >= 64 4pm-6pm 0 0 1 1 0 82 >= 73 6pm-8pm 0 0 1 1 0 82 >= 82 8pm-10pm 0 0 0 1 0 43 >= 43 10pm-12am 0 0 0 1 1 58 >= 52 12am-6am 0 0 0 0 1 15 >= 15 6am-2pm 8am-4pm Noon-8pm 4pm-midnight 10pm-6am Shift Shift Shift Shift Shift Total Cost Number Working 48 31 39 43 15 $30,610 Optimization The McGraw-Hill Companies, Inc., 2003 4.14 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Algebraic Formulation Let S i = Number working shift i (for i = 1 to 5), Minimize Cost = $170S 1 + $160S 2 + $175S 3 + $180S 4 + $195S 5 subject to Total agents 6AM8AM: S 1 48 Total agents 8AM10AM: S 1 + S 2 79 Total agents 10AM12PM: S 1 + S 2 65 Total agents 12PM2PM: S 1 + S 2 + S 3 87 Total agents 2PM4PM: S 2 + S 3 64 Total agents 4PM6PM: S 3 + S 4 73 Total agents 6PM8PM: S 3 + S 4 82 Total agents 8PM10PM: S 4 43 Total agents 10PM12AM: S 4 + S 5 52 Total agents 12AM6AM: S 5 15 and S i 0 (for i = 1 to 5) Optimization The McGraw-Hill Companies, Inc., 2003 4.15 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Summary of Formulation Procedure for Cost-Benefit-Tradeoff Problems 1. Identify the activities for the problem at hand. 2. Identify an appropriate overall measure of performance (commonly cost). 3. For each activity, estimate the contribution per unit of the activity to the overall measure of performance. 4. Identify the benefits that must be achieved. 5. For each benefit, identify the minimum acceptable level and then the contribution of each activity to that benefit. 6. Enter the data in steps 3 and 5 into data cells. 7. Designate changing cells for displaying the decisions. 8. In the row for each benefit, use SUMPRODUCT to calculate the level achieved. Enter and the minimum acceptable level in two adjacent cells. 9. Designate a target cell. Use SUMPRODUCT to calculate this measure of performance. Optimization The McGraw-Hill Companies, Inc., 2003 4.16 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson The Big M Distribution-Network Problem The Big M Company produces a variety of heavy duty machinery at two factories. One of its products is a large turret lathe. Orders have been received from three customers for the turret lathe. Question: How many lathes should be shipped from each factory to each customer? Optimization The McGraw-Hill Companies, Inc., 2003 4.17 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Some Data 9 lathes 8 lathes 10 lathes Order Size 15 lathes 700 900 800 Factory 2 12 lathes $800 $900 $700 Factory 1 Output From Customer 3 Customer 2 Customer 1 To Shipping Cost for Each Lathe Optimization The McGraw-Hill Companies, Inc., 2003 4.18 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson The Distribution Network F1 C2 C3 C1 F2 12 lathe produced 15 lathes produced 10 lathes needed 8 lathes needed 9 lathes needed $700/lathe $900/lathe $800/lathe $800/lathe $900/lathe $700/lathe 4 Optimization The McGraw-Hill Companies, Inc., 2003 4.19 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Spreadsheet Formulation 3 4 5 6 7 8 9 10 11 12 13 14 15 B C D E F G H Shipping Cost (per Lathe) Customer 1 Customer 2 Customer 3 Factory 1 $700 $900 $800 Factory 2 $800 $900 $700 Total Shipped Units Shipped Customer 1 Customer 2 Customer 3 Out Output Factory 1 10 2 0 12 = 12 Factory 2 0 6 9 15 = 15 Total To Customer 10 8 9 = = = Total Cost Order Size 10 8 9 $20,500 Optimization The McGraw-Hill Companies, Inc., 2003 4.20 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Algebraic Formulation Let S ij = Number of lathes to ship from i to j (i = F1, F2; j = C1, C2, C3). Minimize Cost = $700S F1-C1 + $900S F1-C2 + $800S F1-C3 + $800S F2-C1 + $900S F2-C2 + $700S F2-C3 subject to Factory 1: S F1-C1 + S F1-C2 + S F1-C3 = 12 Factory 2: S F2-C1 + S F2-C2 + S F2-C3 = 15 Customer 1: S F1-C1 + S F2-C1 = 10 Customer 2: S F1-C2 + S F2-C2 = 8 Customer 3: S F1-C3 + S F2-C3 = 9 and S ij 0 (i = F1, F2; j = C1, C2, C3). Optimization The McGraw-Hill Companies, Inc., 2003 4.21 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Types of Functional Constraints * LHS = Left-hand side (a SUMPRODUCT function). RHS = Right-hand side (a constant). Resource-allocation problems and mixed problems For some resource, Amount used Amount available LHS RHS Resource constraint Distribution-network problems and mixed problems For some quantity, Amount provided = Required amount LHS = RHS Fixed-requirement constraint Cost-benefit-trade-off problems and mixed problems For some benefit, Level achieved Minimum Acceptable LHS RHS Benefit constraint Main Usage Typical Interpretation Form* Type Optimization The McGraw-Hill Companies, Inc., 2003 4.22 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Formulating an LP Spreadsheet Model Enter all of the data into the spreadsheet. Color code (blue). What decisions need to be made? Set aside a cell in the spreadsheet for each decision variable (changing cell). Color code (yellow with border). Write an equation for the objective in a cell. Color code (orange with heavy border). Put all three components (LHS, /=/, RHS) of each constraint into three cells on the spreadsheet. Some Examples: Production Planning Diet / Blending Workforce Scheduling Transportation / Distribution Assignment Optimization The McGraw-Hill Companies, Inc., 2003 4.23 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Product Mix Exercise Blue Ridge Hot Tubs manufactures and sells two models of hot tubs: the Aqua- Spa and the Hydro-Lux. Howie Jones, the owner and manager of the company needs to decide how many of each type of hot tub to produce during his next production cycle. Howie buys prefabricated fiberglass hot tub shells from a local supplier and adds the pump and tubing to the shells to create his hot tubs. (The supplier has the capacity to deliver as many hot tub shells as Howie needs.) Howie installs the same type of pump into both hot tubs. He will have only 200 pumps available during his next production cycle. From a manufacturing standpoint, the main difference between the two models of hot tubs is the amount of tubing and labor required. Each Aqua-Spa requires 9 hours of labor and 12 feet of tubing. Each Hydro-Lux requires 6 hours of labor and 16 feet of tubing. Howie expects to have 1,566 production labor hours and 2,880 feet of tubing available during the next production cycle. Howie earns a profit of $350 on each Aqua-Spa he sells and $300 on each Hydro-Lux he sells. He is confident that he can sell all the hot tubs he produces. The question is, how many Aqua-Spas and Hydro-Luxes should Howie produce if he wants to maximize his profits during the next production cycle? Source: Ragsdale, Spreadsheet Modeling and Decision Analysis. Optimization The McGraw-Hill Companies, Inc., 2003 4.24 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Elements Common to Every Problem Decision variables: number of aqua-spas (A) to produce and number of hydro-luxes (H) to produce. Objective function: Max: Profit = 350 A + 300 H Constraints: Pump 1A + 1H <= 200 Labor 9A + 6H <= 1566 Tubing 12A + 16H <= 2880 5 Optimization The McGraw-Hill Companies, Inc., 2003 4.25 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson 0 1530456075 90 105120135150165180195210225240255270285300 0 15 30 45 60 75 90 105 120 135 150 165 180 195 210 225 240 255 270 HydroLux Payoff: 300.0H Optimal Decisions(HydroLux,AquaSpa): ( 0.0, 0.0) Pump: 1.0HydroLux + 1.0AquaSpa <= 200.0 Graphical Solution Using Graphic LP Optimizer Optimization The McGraw-Hill Companies, Inc., 2003 4.26 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson 0 1530 456075 90105120135150165180195210225240255270285300 0 15 30 45 60 75 90 105 120 135 150 165 180 195 210 225 240 255 270 285 300 AquaSpa HydroLux Payoff: 300.0HydroLux+ 350.0AquaSpa= Optimal Decisions(HydroLux,AquaSpa): ( 0.0, 0.0) Pump: 1.0HydroLux + 1.0AquaSpa <= 200.0 : 6.0HydroLux + 9.0AquaSpa <= 1566.0 Graphical Solution Using Graphic LP Optimizer Optimization The McGraw-Hill Companies, Inc., 2003 4.27 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson 0 9 18 27 36 45 54 63 72 81 90 99 108 117 126 135 144 153 162 171 180 0 8 16 24 32 40 48 56 64 72 80 88 96 104 112 120 128 136 144 152 160 168 AquaSpa HydroL Payoff: 300.0H Optimal Decisions(HydroLux,AquaSpa): ( 0.0, 0.0) Pump: 1.0HydroLux+ 1.0AquaSpa<= 200.0 : 6.0HydroLux+ 9.0AquaSpa <= 1566.0 : 16.0HydroLux+ 12.0AquaSpa <= 2880.0 Graphical Solution Using Graphic LP Optimizer Constraints Optimization The McGraw-Hill Companies, Inc., 2003 4.28 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson 0 9 18 27 36 45 54 63 72 81 90 99 108 117 126 135 144 153 162 171 180 0 8 16 24 32 40 48 56 64 72 80 88 96 104 112 120 128 136 144 152 160 168 AquaSpa HydroL Payoff: 300.0 H Optimal Decisions(HydroLux,AquaSpa): ( 0.0, 0.0) Pump: 1.0HydroLux+ 1.0AquaSpa<= 200.0 : 6.0HydroLux + 9.0AquaSpa <= 1566.0 : 16.0HydroLux+ 12.0AquaSpa<= 2880.0 Graphical Solution Using Graphic LP Optimizer Feasible Solution Space Optimization The McGraw-Hill Companies, Inc., 2003 4.29 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson 0 9 18 27 36 45 54 63 72 81 90 99 108 117 126 135 144 153 162 171 180 0 8 16 24 32 40 48 56 64 72 80 88 96 104 112 120 128 136 144 152 160 168 AquaSpa HydroL Payoff: 300.0HydroLux+ 350.0AquaSpa= 66100.0 Optimal Decisions(HydroLux,AquaSpa): (78.0, 122.0) Pump: 1.0HydroLux+ 1.0AquaSpa<= 200.0 : 6.0HydroLux+ 9.0AquaSpa<= 1566.0 : 16.0HydroLux+ 12.0AquaSpa<= 2880.0 Graphical Solution Using Graphic LP Optimizer Optimal Solution Optimization The McGraw-Hill Companies, Inc., 2003 4.30 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Organizing Spreadsheet & Entering Formulas D6. =SUMPRODUCT($B$5:$C$5,B6:C6) D9. =SUMPRODUCT($B$5:$C$5,B9:C9) D10. =SUMPRODUCT($B$5:$C$5,B10:C10) D11. =SUMPRODUCT($B$5:$C$5,B11:C11) Decision Variable Cells Decision Variable Coefficients Constraint Coefficients Constraint RHS Formulas Constraint RHS Limits 6 Optimization The McGraw-Hill Companies, Inc., 2003 4.31 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Tools | Solver Optimization The McGraw-Hill Companies, Inc., 2003 4.32 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson Sensitivity Analysis Optimization The McGraw-Hill Companies, Inc., 2003 4.33 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson A Classic Problem See In class handout. First, identify the decision variables, objective function and constraints. Second, think about spreadsheet layout. Third, implement and solve model. Optimization The McGraw-Hill Companies, Inc., 2003 4.34 McGraw-Hill/Irwin Modified for Quan 6610 by Dr. Jim Grayson In Class Exercise End of chapter problem 4.6