Paper 6: Management Information System

Module 19: Optimization Analysis

Prof. S P Bansal
Principal Investigator Vice Chancellor
Maharaja Agrasen University, Baddi

Prof Yoginder Verma

Co-Principal Investigator Pro–Vice Chancellor
Central University of Himachal Pradesh. Kangra. H.P.

Prof. Manu Sood

Paper Coordinator Chairman, Department of Computer Science,
H.P University, Summer Hill, Shimla.
.
Vinodini Kapoor
Content Writer Asst. Prof, Northern India Institute of Fashion Technology
Mohali, Punjab
 Items Description of Module
Subject Name Management
Paper Name Management Information System
Module Title Optimization Analysis
Module Id Module No 19
Pre- Requisites Basic knowledge of the use and importance of analytical modeling techniques
Objectives To understand the role of optimization analysis in decision making.
Keywords Linear programming, decision variable, constraint, objective function,
continuous, discrete, unconstrained, constrained, deterministic, stochastic
optimization.

QUADRANT-I

Module- 19 Optimization Analysis

1. Learning outcome
2. Introduction
3. Components of optimization
3.1 Complicating factors in optimization.
4. Why is optimization necessary?
5. Optimization modeling process.
6. Classification of the optimization model.
7. Summary

1. Learning Outcome:
After completing this module the students will be able to:
 Understand the basic concept of optimization.
 Understand the various components that form the optimization function.
 List the various complicating factors in optimization.
 Understand the importance of optimization.
 Analyze the optimization modeling process.
 Discuss classification of the optimization model.

2. Introduction
Fundamentally, the word optimization refers to the most effective use of resources. Resources at the
organizational level may refer to the 5 M’s namely men, material, machinery, money and minutes (time).
The ultimate aim for every organization is to utilize these resources diligently and yield best results.
Hence, the concept of optimization is linked to achieving result with the most efficient use of resources
while keeping in mind the limiting conditions or constraints attached. This implies the boundary to which
the use of each resource is confined. It removes redundant processes and focuses on relevant ones.
Thereby maximizing the potential of each activity. To simplify further, maximization implies to attain the
highest or maximum result but with regard to its underlying cost or expense. The practice of optimization
may also focus on minimizing the cost structure and overheads by restricting the amount of resources to
what is necessary.
Exhibit 1: Optimization
Image Source: http://www.trackvia.com/blog/wp-content/uploads/2014/07/optimizing_tables_blog_post.png

In the area of information systems, the decisions support systems (DSS) play a paramount role. They
support activities that facilitate decision making. These are very useful in analytical modeling where
mathematical equations help to set limits to a system. The DSS is able to analyze complex business data
and find solutions to problems with ease.
The four basic types of analytical modeling supported by DSS are what-if analysis, goal seeking analysis,
sensitivity analysis and optimization analysis (refer to exhibit 3).

Exhibit 2: Analytical Modeling Types

Image Source: https://image.slidesharecdn.com/dssfinal-170120153450/95/decision-support-systems-dss-21-
638.jpg?cb=1484926522

Since optimization analysis is a technique used to find ‘optimum value’ for a target variable under given
circumstances, the target or final outcome is not fixed. Rather, the target needs to be arrived at after
taking into consideration the constraints involved in achieving the result. In this analysis, one or more
variables are changed after taking the constraints into account until the best alternative or the optimal
value is found. This method is widely used for making decisions related to optimum utilization of
resources in an organization.

Exhibit 3: Optimization Analysis

Image Source: http://www.sitespect.com/sites/default/files/blog/08052015_2.png
Exhibit 3 gives a broad overview of the sequential process that is involved in the process of optimization,
from idea generation to support in decision making. During optimization analysis, the values for one or
more variables are changed in a repetitive manner keeping in mind the specific constraints, until the best
values for target variable are found. To exemplify, one can determine the highest level of production that
can be achieved by varying job assignments to workers, in terms of man-hours, considering that some
workers are skilled and their job assignment cannot be changed.
In a business quotation to be given to a vendor, the margin or discount can be repeatedly changed to see
the affect on the final price of the solution.
Optimization analysis when complex or dealing with more than one variable requires special purpose
software and techniques like linear programming. For instance, optimization analysis is used for finding
out the appropriate marketing expenditure on advertisement and promotions with the given constraints of
budget and use of print media. In this case, Solver, which is a what-if analysis tool in MS Excel, is useful
to conduct the analysis.
An organization needs to ensure the right people handle the right task. They should be doing the task
assigned in the right time frame. Information exchange is necessary between the stake holders of an
organization. These include internal workforce, vendors, suppliers and clients. However, it is equally
essential that the right information should be available to the right audience rather than transferring any
business related data in bulk. Hence, lays the need for optimization.

3. Components of optimization
The purpose of optimization is to develop the optimal solution to a problem given a set of restrictions and
assumptions.
The three components of optimization are depicted in Fig 1 and explained in detail below:

Decisions made by decision Constraints or restrictions

A goal that needs to be
variables that limit the available
minimized or maximized
decision alternatives

Fig1. Components of Optimization

1. Decision Variable – The decision maker has control over this variable. This measures quantitatively the
resources allocated or activities to be performed.
In the simplest way, a decision variable determines what decision is to be taken? For example, in figure 2,
there are three car manufacturing units located in Manesar, Haryana. They have to distribute the
manufactured products between five warehouses in Delhi itself. This could be done in 3*5=15 ways.
Among these 15 ways, each one is representative of the products produced by the manufacturing firm.
Fig 2. 3x15 Network Image

Each plant caters to 4 different types of cars being manufactured. To optimize the shipping plan over the
next 6 months, the analysis will yield 3*4*5*6 = 360 decision variables. It can be seen how adding
further detail like product type can elaborate the analysis. The modeling techniques help to decide how
much detail is relevant to the analysis. The next step lies in defining the objective and outlining the
constraints.

2. Constraint – After the decision variable is outlined, the next phase includes highlighting the limiting
factors. Constraints refer to a limitation or a bottleneck imposed on the working of a system. A system
consists of interrelationships and interdependencies between various components. Therefore, there lies a
need to consider the limitations in a real world scenario. Such constraints are common in situations
concerning budgetary forecasts, demand, production, storage, pricing etc. A constraint is defined by
computing values using decision variables. It is equally, important to express a proper limit to the value
for better understanding such as (<=, =, >=). Constraints are of three types namely equality, inequality
and integer constraints. In case of equality the quantities assume the same value (A=B) while on the other
hand inequality implies the values that are not equal to each other (such as A ≠ B or A<B or A>B). The
integer constraints in case of linear programming assume only integer or whole values.

Considering the example stated above, for the movement of products out of the warehouse, for each time
period, there is a balance constraint stating,
Ending inventory = Beginning inventory + products received – products shipped.
This implies, the closing inventory of one time period becomes the beginning inventory for the other.

3. Objective Function – It outlines the main aim of the model. The target is to obtain the maximum or
minimum values of the function under a set of constraints using linear programming. Linear programming
is a computation technique for determining the maximum or minimum values from a mathematical model
that is stated in the form of linear equations.

The statement of an optimization problem is stated as:

For X = f[ x1, x2, x3 …………….xn], the lowest values of f(X) is subject to constraints i.e.,
ai(X) <= 0, where i = 1, 2, 3 …….m
bj(X) = 0, where j= 1,2,3……..p where f(X) is called the objective function and ai(X) and bj(X) are
known as inequality and equality constraints respectively.
3.1 Complicating factors in optimization

Exhibit 4: Optimization Complexity

Image Source: http://cdn2.hubspot.net/hubfs/207074/images/Process_Optimization_IoT.jpg

Though optimization techniques might be very useful, yet it might become difficult to solve these. Some
of these problems are discussed as under:

1. There could be a case of more than one decision variable. In firms with larger product portfolio, effect
of each product on the overall profit is to be considered as compared to firms that are offering a single
product.
2. There could be complex nature of the relationships between the decision variables and the associated
outcome. For example, in a government policy decision on opening bank accounts with zero balance, it
may become difficult to derive a direct relation between the fresh enrollments and its impact on bank
deposits. There could be a change due to availability of bio metric machines for identity verification,
awareness among locals and readiness for people to join.
3. There can be limiting conditions or constraints being imposed on decision variables. An organization
needs to work under controlled conditions by using its manpower, material, money diligently. These are
decision variables over which it can exercise control. The end motive of any organization is profit
maximization and cost minimization.
4. When each activity is known to lead to a certain outcome, there is less uncertainty. However, the
presence of uncertainty arises when constraints are imposed on resources to be used. It is important to
conduct risk assessment in such a case.

For example, if we wish to design the fuel efficient high mileage bike, the objective may be to maximize
the engine efficiency. The engine may be required to provide a specific power output with an upper limit
on the amount of engine emission. Certain parameters such as ignition ability, quick acceleration, over
size and wider tyre will serve as constraints for optimization. The design variables that are allowed to be
changed during optimization may be the compression ratio, fuel mixture ratio, etc.
4. Why is optimization necessary?

The concept of optimization can be applied to a number of fields. It can help develop better range of
products, financial portfolios, analysis of expenditure, resource allocation, budgets etc.

Optimization is the act of achieving the best possible result under given limiting factors. The applications
can be seen in multi faceted disciplines such as design, construction, maintenance etc where engineers
have to take decisions. The goal of all such decisions is to maximize benefits with optimum resources.
This is evident from the basic principle that every business operates with the underlying objective of
profit maximization while minimizing overhead costs. The effort or the benefit can be usually expressed
as a function of certain design variables. Hence, optimization is the process of finding the conditions that
give the maximum or the minimum value of a function.

Exhibit 5: Process Optimization

Image Source: http://www.ursulahesselmann.com/wp-content/uploads/Process-optimization_Consulting_UrsulaHesselmann.jpg

The concept of optimization helps to solve a number of technical and design related problems such as
design considerations for aircrafts, trajectories for aerospace missions, shortest path, minimum processing
time, minimizing signal delay, optimal design of electric networks.

Cost
Reduction

Safety &
Saves the
Error
Time
Reduction
Optimization

Reproducability
Innovation &
Efficiency

Fig3. Benefits of Optimization

The necessity and importance of optimization can be observed since it helps find the answer that yields
the best result--the one that attains the highest profit, output or happiness, or the one that achieves the
lowest cost, waste or discomfort.

A number of factors can be listed (Fig 3.) that makes optimization analysis a key tool in mathematical
programming.
 Cost reduction – Proper planning and automation of processes removes duplication of time and
effort. It also helps to remove redundancies that may be present. Reengineering products as per
changing business and customer needs lead to optimization thus removing and reducing
unnecessary overheads.

 Safety & error reduction – Management best practices and quality control ensures process to be
mitigated with parameters that ensure quality with minimal defects and correction at each step.
This promises safety as per international standards and error reduction.

 Time efficiency – Removal of repetitive activities and planning is an essential step in ensuring
time efficiency.

 Reproducibility – Documenting procedures and archiving essential steps in the development and
production cycle ensures the knowledge behind it is not lost. Also, as experts move from
organizations, their intelligence and competence can be utilized by organizations by ensuring
effective product and service documentation. Optimization at this level ensures reproducibility
and rebuilding to be a less time consuming activity from a business standpoint.

 Innovation & efficiency – Optimization is the diligent method of ensuring business effectiveness
in terms of resourced employed and the final outcome. These efforts help organizations achieve
competent outcomes and high returns on investment—while delivering their mission in
unprecedented business climates.

Optimization necessitates the need for efficient use of resources like money, time, machinery, staff,
inventory and more. Optimization techniques are a powerful set of tools that are important in efficiently
managing an enterprise’s resources and thereby maximizing shareholder’s wealth. This is well explained
in exhibit 5.
Exhibit 5: Benefits of Optimization
Image Source: http://cdn2.hubspot.net/hub/20846/file-23713197-jpg/images/qls-business-process-optimization.jpg

5. Optimization Modeling Process

The process of optimization has to be carried over a particular time period as per business needs. For this,
the most important task is problem definition. This requires first describing a problem and then
highlighting a solution. The regular up gradation of the system is necessary to incorporate changes
wherever needed. It is necessary to have feedback and control loops between various steps.

The optimization process is shown in figure 4. Let us try to understand each of the steps one by one.

Managerial
Formulation of the Finding and Interpretations of
Problem Optimal Solution the Optimal
Solution

Importance of
Post Solution
Feedback &
Analysis
Control

Fig4. Optimization Process

1. Mathematical formulation of the problem: This stage refers to framing the mathematical formulation
algorithm. This must be reflective of the problem definition and should exclude the redundant
information.

2. Finding an optimal solution: This stage refers to consideration of all factors and formulating the
solution algorithm for proper implementation.

3. Managerial interpretations of the optimal solution: The next stage after formulating the algorithm is
the software package to use. The management intervention and help of consultants is essential here. The
result of the optimization process should be easy to interpret by the decision maker.

4. Post- solution analysis: The post solution analysis stage refers to timely updating of the optimization
solution. As business needs change, conditions under which the optimization solution was found may
change. The decision maker should closely observe changes with respect to changing business needs.

5. The importance of feedback and control: Feedback is of paramount importance in any optimization
solution. An optimum strategy is what takes into account all updated factors of the changing business
environment.

6. Classification of the Optimization Model

The optimization model can be classified in a number of ways. Different types of categorization
techniques are mentioned in Fig 5.

Discrete

Continuous Deterministic

Unconstrained Stochastic

One
Constrained Optimization /Many/None
Objectives

Fig 5. Types of Optimization Techniques

 Continuous optimization versus discrete optimization - It is easier to solve problems concerning

continuous optimization. This is because the function can yield results for every given point over
an interval or its neighborhood. Discrete values on the other hand, take input of only discrete set
of integers. Exhibit 6 shows one such case for discrete and continuous optimization in context of
visualization of storylines depicting social interactions. What is seen is that the discrete method
 showcases a graphic interpretation through alignment of entities and crossings, while the
continuous technique optimizes it and makes it more consistent.

Exhibit 6: Continuous and Discrete Optimization

Image Source: https://image.slidesharecdn.com/storyflowclean-131024221243-phpapp02/95/storyflow-visually-
tracking-evolution-of-stories-23-638.jpg?cb=1438533097

 Unconstrained optimization versus constrained optimization – An important aspect of the

unconstrained optimization is that the objective function has no limiting conditions and holds true
for all values over a specified range. On the other hand, constrained optimization refers to the
limits that are imposed on the objective function. Constraints could be of various types such as
linear, non linear or convex. Exhibit 7 exemplifies the way limits are imposed on function f(x,y).

Exhibit 7: Constrained Optimization Problem

Image Source: https://people.mech.kuleuven.be/~bruyninc/ecs/5COP-ConstrainedOptimizationProblem.png

Exhibit 8 explained various techniques in case of constrained optimization. Some of which

include basic linear programming, integer programming and multiple function programming.
 Exhibit 8: Techniques, Constrained Optimization
Image Source:
https://d112vpovu2xa8r.cloudfront.net/portal_simplilearn_curatasite_com/media/ED5SGpmPxbNEgPE.jpeg

 None, one or many objectives – Optimization problems vary in sense of having either one or more
objective function. However, in some cases there would be none at all. Most optimization
problems have a single optimization function. From multiple objective functions one infers that a
decision is dependent on multiple distinct complexities. In such cases, a weighted combination is
formed for ease of computation. Multi objective optimization occurs in many instances where the
decisions have to take into account conflicting objectives. Fields such as supply chain,
manufacturing, design etc are common examples.

 Deterministic Optimization versus Stochastic Optimization – Deterministic optimization implies

that the data corresponding to the situation is known clearly. Stochastic optimization on the other
hand, takes into account the uncertainty to be incorporated. In this case, for future time periods,
data cannot always be accurately forecasted as in case of discounts, product demand,
meteorological forecasts etc. Fig 6 highlights a number of models for deterministic and stochastic
optimization techniques.

Deterministic Models Stochastic Models

Linear Programming Chains Discrete Time Markov
Network Optimization Continuous Time Markov Chains
Integer Programming Queuing
Non Linear Programming Decision Analysis
Fig6. Deterministic & Stochastic Models

7. Summary
The aim of every decision maker in an organization is to find the best solution to a problem. The ‘best
solution’ in this regard has various attributes. An optimized solution is most accurate, profitable, cost
effective and timely implemented. At the organizational level, those who manage and control systems of
men, machines, markets and money face the problem of continuous improvement or rather optimizing
business performance. Any project in the organizational climate is itself a system which comprise a
network of elements (tasks) that are interconnected and interdependent, that work together to achieve a
specific goal. The problem may either be reducing operational cost on one hand and maintaining
competent service levels on the other. To maintain profits without increasing overhead cost within limits
imposed by government policies and regulations. Thus, optimization is focused on ensuring overall
product quality without reducing any other attribute. Simulation techniques and mathematical
computational models help to optimize functions and procedures and facilitate decision making.
Optimization models as part of decision support systems (DSS) help find the best fit solution in a
quantitative manner. Researchers have made it possible to possible to analyze even multiple variable
problems using optimization software’s such as CPLEX and OSL to find near optimal solutions. These
solutions can easily be obtained on desktops that use commercially available software packages that run
optimization algorithms.
To build optimization based DSS, management information systems develop interactive graphic user
interface for its software. This is integrated with database management software to work on multiple data
sets till the best fit solution is obtained. Optimization analysis is not limited to business information
systems but has numerous applications. Engineering design, statistics, market forecasting, budget
allocation to name a few.