Solving Nonlinear

Optimization Problems
with Excel Solver
for Microsoft Excel 2000

Denise Sakai Troxell (2000)

A Nonlinear Optimization Problem

a simple Inventory Model*
A manufacturer would like to produce
98,000 units of a certain product in a year,
in lots of a fixed size.

The fixed setup cost per lot is $500 and

the production cost per unit is $5.

The average inventory during a year is

half of the lot size and the average annual
inventory carrying cost per unit is $0.50.

What is the fixed lot size that minimizes

the balance between production and
inventory carrying costs?

* from Mathematics with Applications in Management and Economics

by Gordon Prichett and John Saber, Richard D. Irwin, Inc., 7th ed., 1994.

Denise Sakai Troxell (2000)

Formulate the Problem

obtain the function to be optimized
The objective is to find the lot size x, where 0 x 98,000,
that minimizes the balance between production and
inventory carrying costs given by the function
numbe
r of
lots

fixed
cost per
lot

f(x) = 98,000 (500) + 98,000 (5) + x (0.50)

x
2
Fixed Cost

Denise Sakai Troxell (2000)

Formulate the Problem

obtain the function to be optimized
The objective is to find the lot size x, where 0 x 98,000,
that minimizes the balance between production and
inventory carrying costs given by the function
production
cost per
unit

f(x) = 98,000 (500) + 98,000 (5) + x (0.50)

x
2
Fixed Cost

Denise Sakai Troxell (2000)

Variable Cost

Formulate the Problem

obtain the function to be optimized
The objective is to find the lot size x, where 0 x 98,000,
that minimizes the balance between production and
inventory carrying costs given by the function

Production
Cost

f(x) = 98,000 (500) + 98,000 (5) + x (0.50)

x
2
Fixed Cost

Denise Sakai Troxell (2000)

Variable Cost

Formulate the Problem

obtain the function to be optimized
The objective is to find the lot size x, where 0 x 98,000,
that minimizes the balance between production and
inventory carrying costs given by the function

Production
Cost

Carrying
Cost

f(x) = 98,000 (500) + 98,000 (5) + x (0.50)

x
2
average number
of units in
inventory
Denise Sakai Troxell (2000)

average
carrying cost
per unit

Formulate the Problem

obtain the function to be optimized
The objective is to find the lot size x, where 0 x 98,000,
that minimizes the balance between production and
inventory carrying costs given by the function

Production
Cost

Carrying
Cost

f(x) = 98,000 (500) + 98,000 (5) + x (0.50)

x
2
NOTE: We assume that x can be noninteger

Denise Sakai Troxell (2000)

Preparing the Worksheet for Solver

start with a blank sheet

Denise Sakai Troxell (2000)

Preparing the Worksheet for Solver

enter labels

Enter labels in cells

A1:B1

Denise Sakai Troxell (2000)

Preparing the Worksheet for Solver

enter labels

NOTE: These labels are not

essential for the use of
Solver
Denise Sakai Troxell (2000)

Preparing the Worksheet for Solver

enter the formula of the function to be optimized

Variable
values in cell
A2

f(x)

Function
formula in cell
B2

NOTE: These cells will be

colored to indicate that
they are essential for
Solver
Remember
f(x) = 98,000 (500) + 98,000 (5) + x (0.50)
x
2

Denise Sakai Troxell (2000)

Preparing the Worksheet for Solver

enter the formula of the function to be optimized

Click on cell B2

Remember
f(x) = 98,000 (500) + 98,000 (5) + x (0.50)
x
2

Denise Sakai Troxell (2000)

Preparing the Worksheet for Solver

enter the formula of the function to be optimized

Type in the formula

=(98000/A2)*500+98000*5+(A2/2)*0.50

Remember
f(x) = 98,000 (500) + 98,000 (5) + x (0.50)
x
2

Denise Sakai Troxell (2000)

Preparing the Worksheet for Solver

enter the formula of the function to be optimized

Hit Enter

NOTE: The formula in cell B2

is not defined if cell A2
contains the value 0 or it is
blank.
Remember
f(x) = 98,000 (500) + 98,000 (5) + x (0.50)
x
2

Denise Sakai Troxell (2000)

Preparing the Worksheet for Solver

enter the formula of the function to be optimized

NOTE: Avoid the error message #DIV/0! in cell

B2 by typing in an initial value different from 0
in cell A2

Denise Sakai Troxell (2000)

Using Solver
invoke Solver
Click on Tools

Denise Sakai Troxell (2000)

Using Solver
invoke Solver

Click on Solver

Denise Sakai Troxell (2000)

Using Solver
invoke Solver

Denise Sakai Troxell (2000)

Using Solver
complete the Solver Parameters dialog box

Click on cell B2

NOTE: The cell displayed in the Set Target Cell: box must
contain the formula of the function being optimized
(minimize cell B2)
Denise Sakai Troxell (2000)

Using Solver
complete the Solver Parameters dialog box

Check the
Min: circle

NOTE: The cell displayed in the Set Target Cell: box must
contain the formula of the function being optimized
(minimize cell B2)
Denise Sakai Troxell (2000)

Using Solver
complete the Solver Parameters dialog box

Click on the By
Changing Cells:
box

Denise Sakai Troxell (2000)

Using Solver
complete the Solver Parameters dialog box

Click on cell A2

NOTE: The cell displayed in the By Changing Cells:

box must be the cell containing variable values
(cell A2)
Denise Sakai Troxell (2000)

Using Solver
complete the Solver Parameters dialog box

Click on Add

NOTE: The Subject to the Constraints: box must

contain the constraints on the variable values (x
98,000)
Denise Sakai Troxell (2000)

Using Solver
complete the Solver Parameters dialog box

Click on cell A2

Click on the Cell

Reference: box

NOTE: The Subject to the Constraints: box must

contain the constraints on the variable values (x
98,000)
Denise Sakai Troxell (2000)

Using Solver
complete the Solver Parameters dialog box

Make sure <= is

displayed

NOTE: The Subject to the Constraints: box must

contain the constraints on the variable values (x
98,000)
Denise Sakai Troxell (2000)

Using Solver
complete the Solver Parameters dialog box

Click on the
Constraint: box
and type in 98000

NOTE: The Subject to the Constraints: box must

contain the constraints on the variable values (x
98,000)
Denise Sakai Troxell (2000)

Using Solver
complete the Solver Parameters dialog box

Click on OK

NOTE: The Subject to the Constraints: box must

contain the constraints on the variable values (x
98,000)
Denise Sakai Troxell (2000)

Using Solver
set the Options

Click on Options

Denise Sakai Troxell (2000)

Using Solver
set the Options

Check the box

Assume NonNegative

NOTE: The formula (in the Target Cell B2) is

non-linear on the non-negative variable (x
in A2)
Denise Sakai Troxell (2000)

Using Solver
set the Options

Accept the
remaining default
options by clicking
on OK

NOTE: The formula (in the Target Cell B2) is

non-linear on the non-negative variable (x
in A2)
Denise Sakai Troxell (2000)

Using Solver
execute Solver

Click on Solve

Denise Sakai Troxell (2000)

Using Solver
read solution

A lot size of
14,000 units
minimizes the balance
between production
and inventory carrying
costs at $497,000.00.

NOTE: Solver uses a method

known as GENERALIZED REDUCED
GRADIENT
Denise Sakai Troxell (2000)

Using Solver
end execution

Click on OK

Denise Sakai Troxell (2000)

Using Solver
end execution

Denise Sakai Troxell (2000)

Final Comments
Solver might not find the solution

Try to enter different initial lot sizes (in cell A2), for
example, 1, 49000, or 98000 tand
execute Solver.
o

w
Ho dle
han

ms
e
l
b
pr o i th
w er?
lv
So

Click on the
button if you want
some tips now

Denise Sakai Troxell (2000)