Classical Optimization

Maxima & Minima EOQ

Maximum & Minimum Value of a function

It is not practical to plot the graph of a function in order to determine the point(s) at which it achieves a local minimum or local maximum. Y = 1.5X2 42x + 300 Take some values of X say X = 1,2,3,4,5,..)and find out value of Y

X
0 1 2 3

Y = 1.5X2 42X + 300

4
5 6

Instead use Differential Calculus (derivative dY/dX) Y = aXn dY/dX = anXn-1

Differential Calculus
Y = 1.5X2 42x + 300 dY/dX = 3X 42 (First Derivative) dY/dX = 0 3X 42 = 0 (Equate First Derivative to 0) X = 14 d(dY/dX)/dX = 3 (positive) Y has a minimum at 14

Y = (1/3)X3 - 6X2 + 27X

Take First Order Derivative

dY/dX = X2 - 12X + 27
Equate dY/dX = 0

X2 - 12X + 27= 0 (X-9)(X-3) = 0

X = 9 or X = 3
Take Second Order Derivative

d(dY/dX)/dX = 2X - 12
At X = 9

d(dY/dX)/dX = 2*9 - 12 = 6 (positive)

Y has a minimum at X = 9
At X = 3

d(dY/dX)/dX = 2*3 - 12 = -6 (negative)

Y has a maximum at X = 3

Y = (1/3)X3 - 6X2 + 27X Take First Order Derivative dY/dX = X2 - 12X + 27 Equate dY/dX = 0 X2 - 12X + 27= 0 (X-9)(X-3) = 0
Y Value
40 35
30

Maximum Minimum

X = 9 or X = 3 Take Second Order Derivative d(dY/dX)/dX = 2X - 12 At X = 9 d(dY/dX)/dX = 2*9 - 12 = 6 (positive) Y has a minimum at X = 9 At X = 3 d(dY/dX)/dX = 2*3 - 12 = -6 (negative) Y has a maximum at X = 3

25 20
15

10 5
0 1 2 3 4 5 6 X Value 7 8 9 10

X 1 2 3 4 5 6 7 8 9 10

Y 21.33333 32.66667 36 33.33333 26.66667 18 9.333333 2.666667 0 3.333333

Maxima & Minima

Steps for Finding Maxima & Minima For a given function y = f(x), take the first derivative wrt (x) ie dy/dx. Equate dy/dx to 0 Get values of X Take the second derivative d(dy/dx) If its negative, then maxima If its positive, then minima Calculate min and max value of function

Maxima & Minima

Local Minima/Maxima Global Minima/Maxima If there is only one minima, the local minima is the global minima If there is only one maxima, the local maxima is the global maxima

More Examples
Y =(1/3) X3 5X2 + 21X + 100 Y =(1/3) X3 6X2 + 27X + 100 Y = 4X2 + 30X + 40 Y = 5X2 + 4X + 2

Economic Order Quantity EOQ

Demand (D) = 100000 units, r = Order Cost/order = 10/-, c = carrying cost/unit = 2/Q = Order Size p = Purchase price/unit = 8/What is the Best Order Size?

D/Q

rD/Q

Q/2

cQ/2 rD/Q + cQ/2

Order

Demand

No of

Ordering

Average

Carryin g

Total

Purchas e

Total

Size

Orders

Cost

Inventory

Cost

Incremental

Cost

Inventory

r = 10/-

c = 2/-

Cost (TIC)

p = 8/-

Cost

D/Q

r(D/Q) (A)

Q/2

c(Q/2) (B)

r(D/Q) + c(Q/2) (A) + (B)

pD (D) A+B+D

100
250 500 1000 2000 2500 5000 10000 25000 50000

100000
100000 100000 100000 100000 100000 100000 100000 100000 100000

1000
400 200 100 50 40 20 10 4 2

10000
4000 2000 1000 500 400 200 100 40 20

50
125 250 500 1000 1250 2500 5000 12500 25000

100
250 500 1000 2000 2500 5000 10000 25000 50000

10100
4250 2500 2000 2500 2900 5200 10100 25040 50020

800000
800000 800000 800000 800000 800000 800000 800000 800000 800000

810100
804250 802500 802000 802500 802900 805200 810100 825040 850020

EOQ TIC min

SQRT(2*r*D/c) SQRT(2*r*c*D)

1000 2000

Price

p = 8/-

Q < 1500

Discounts

p = 6/-

Q > 1500

Price Discounts
EOQ = 1000 units Min Ordering + Carrying Cost = Rs 2000/Purchase Cost = Rs 800000/- (p=8/-) Total Cost = Rs 802000/Now Vendor gives price discounts as: p = 6/- for Q>= 1500, p=8/- for Q< 1500 To avail discount, p =6/- and Q = 1500. Increase in Ordering + Carrying Cost, but savings in Purchase Cost. Calculate Total Cost = Ordering + Carrying + Purchase Cost

Price Discount
p = 8/-, Q = 1000 TC = rD/Q + cQ/2 + pD Order Cost = 1000/ Carry Cost = 1000/ Purchase Cost = Rs 800000/ Total Cost = 802000/ p = 6/-, Q = 1500 TC = rD/Q + cQ/2 + pD Order Cost = 667/ Carry Cost = 1500/ Purchase Cost = Rs 600000/ Total Cost = 602167/ Savings in Total Cost

Order Size

Dema nd

No of Orders

Orderin g Cost r = 10/-

Average Inventory

Carryi ng Cost c = 2/-

Total Incremental Cost (TIC) r(D/Q) + c(Q/2)

Purcha se Cost p = 8/pD

Total Inventory Cost

D/Q

r(D/Q)

Q/2

c(Q/2)

(A)

(B)

(A) + (B)

(D)

A+B+D

1500

100000

67

667

750

1500

2167

800000

802167

1500 2000

100000 100000

67 50

667 500

750 1000

1500 2000

2167 2500

600000 600000

602167 602500

EOQ Formula
Total Cost = Ordering Cost + Carrying Cost + Purchase Cost p = Purchase price per unit TC = r(D/Q) + c(Q/2) + pD d(TC)/dQ = -rD/Q2 +(c/2) = 0 c/2 = rD/Q2 Q2 = crD/2 Q = SQRT(crD/2) Put value of Q in TC TC = SQRT(2crD)

Avg Inv = ((600 + 200)/2) = 400 600 Inv Levels

Surplus Inventory
Surplus

200

Min Inventory

Order Received

Order Placed

Order Point

0 Reorder Cycle Time T