Decision Modeling and Applications

Thomas Vossen
Associate professor of Operations Management
Leeds School of Business, University of Colorado
Todays Agenda
Intro/Review
Linear Programming Models (LPs)

Examples of LPs

Solving LPs using Excel

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Elements of LP Models
Quantities:
Decision variables How much/many to
produce/buy/hire/etc.
What we want to
decide?
Objective function Specified as
Linear Functions
How we will decide?
Constraints
What binds our
decision?

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Example
Blue Ridge Hot Tubs produces two types
of hot tubs: Aqua-Spas & Hydro-Luxes.
Aqua-Spa Hydro-Lux
Pumps 1 1
Labor 9 hours 6 hours
Tubing 12 feet 16 feet
Unit Profit $350 $300

There are 200 pumps, 1566 hours of

labor, and 2880 feet of tubing
available.
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Linear Programming Model
Ingredients:
Maximize 350X1 + 300X2 Objective
function
Subject to
1X1 + 1X2 200
9X1 + 6X2 1566 Constraints
12X1 + 16X2
2880

Decision
Variables
X1, X2 0
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 Using A Level Curve to Locate
the Optimal Solution
X2
25
0
objective
20 350X1function
+ 300X2 = 35000
0
15
0 optimal
10 solution
0 objective
function
350X 1 + 300X2 =

50 52500

0
0 10 15 20 25 X1
50 0 0 0 0
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Template Approach to formulating LPs
Common Templates:
Product mix problems
Transportation Problems
Blending problems
Covering/Packing problems (i.e. scheduling)
Problems that involve Decisions over Time
Network Problems

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 Gasoline Blending
A company must decide upon the blends to be used for gasoline production.
Two gasolines must be blended according to the characteristics listed below.
The characteristics of the stocks from which the gasoline can be blended
are also shown below

Vapor pressure and octane number of the gasoline blends may be

calculated as the weighted average of the corresponding
characteristics
of the stocks used in the blend. Unused blends can be sold to
independents for $ 9 per barrel.

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Workforce Planning
Consider a restaurant that is open seven days a
week. Based on past experience, the number of
workers needed on a particular day is given as
follows.

Every worker works five consecutive days, and

then takes 2 days off, repeating this pattern
indefinitely. How can we minimize the number of
workers that staff the restaurant?

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Financial Portfolio Selection Problem
Consider a mortgage team with $100,000,000 to
finance various investments. There are five
categories of loans, each with an associated
return and risk (1-10, 1 best):

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Financial Portfolio Selection (Ctd.)
Any uninvested money goes into a savings account with
no risk and 3% return. The goal for the mortgage team
is to allocate the money to the categories so as to:

(a) Maximize the average return per dollar

(b) Have an average risk of no more than 5 (all averages

and fractions taken over the invested money (not over
the saving account).

(c) Invest at least 20% in commercial loans

(d) The amount in second mortgages and personal loans

combined should be no higher than the amount in first
mortgages.

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Production over Time
SilComputer needs to meet the demand of its largest corporate
and educational customers for notebook computers over the
next four quarters (before its current model becomes obsolete).
SilComputer currently has 5,000 notebook computers in inventory.
Expected demand over the next four quarters for its notebook is
7,000; 15,000; 10,000; and 8,000.
SilComputer has sufficient capacity and material to produce up to
10,000 computers in each quarter at a cost of $2000 per notebook.
By using overtime, up to an additional 2,500 computers can be
produced at a cost of $2200 each.
Computers produced in a quarter can be used either to meet that
quarters demand, or be held in inventory for use later. Each
computer in inventory is charged $100 to reflect carrying costs.

How should SilComputer meet its demand for notebooks at

minimum cost?

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Investments over Time
We are going to manage an investment portfolio over a 6-year
time horizon. We begin with $1000, and at various times we can
invest in one or more of the following:

Savings account X, annual yield 5%.

Security Y, 2-year maturity, total yield 12% if bought now, 11%
thereafter.
Security Z, 3-year maturity, total yield 18%.
Security W, 4-year maturity, total yield 24%.

To keep things simple we will assume that each security can be

bought
in any denomination. We can make savings deposits or
withdrawals
anytime. We can buy Security Y any year but year 3. We can buy
Security Z anytime after the first year. Security W, now available,
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one-time opportunity.
Cutting Stock Problems
The Papyrus Company prints various types of brochures for its
customers. The raw material for these brochures comes in 50-
inch width rolls, which cost $500/roll and are 1,000 feet long.
Papyrus currently has 3 orders:
A brochure which is 16 wide with a run-length of 400,000
feet
A brochure which is 30 wide with a run-length of 80,000 feet
A brochure which is 24 wide with a run-length of 120,000
feet

The question is how to slit the larger raw material rolls into
widths suitable for the brochures, using its paper as efficiently
as possible.

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Another Example: Regression

Fit a linear trendline to data to

minimize mean absolute deviation (not
usual lse).

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Solving LPs using Excel Solver

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Spreadsheet Solvers
The company that makes the Solver
in Excel is Frontline Systems, Inc.
Check out their web site:
http://www.solver.com

Otherpackages for solving MP

problems:
AMPL, LINDO, CPLEX, Gurobi
Opensolver

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The Steps in Implementing
an LP Model in a Spreadsheet
1. Organize the data for the model on
the spreadsheet.
2. Reserve separate cells in the
spreadsheet for each decision
variable in the model.
3. Create a formula in a cell in the
spreadsheet that corresponds to the
objective function.
4. For each constraint, create a formula
in a separate cell in the spreadsheet
that corresponds to the left-hand side
(LHS) of the constraint.
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How Solver Views the Model
Target cell - the cell in the spreadsheet
that represents the objective function

Changing cells - the cells in the

spreadsheet representing the decision
variables

Constraint cells - the cells in the

spreadsheet representing the LHS
formulas on the constraints

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Lets do it
Create a spreadsheet model
for
Example 1: Diet Problem
Example 2: Transportation
Problem
Example 3: Workforce Planning

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Goals For Spreadsheet Design
Communication - A spreadsheet's primary business
purpose is communicating information to managers.

Reliability - The output a spreadsheet generates

should be correct and consistent.

Auditability - A manager should be able to retrace

the steps followed to generate the different outputs
from the model in order to understand and verify
results.

Modifiability - A well-designed spreadsheet should

be easy to change or enhance in order to meet
dynamic user requirements.
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Hazards of Spreadsheet Design
$24-million spreadsheet "clerical error

June 03, 2003 TORONTO (Reuters) - TransAlta Corp. said on

Tuesday it will take a $24 million charge to earnings after a
bidding snafu landed it more U.S. power transmission hedging
contracts than it bargained for, at higher prices than it wanted
to pay.
[...] the company's computer spreadsheet contained
mismatched bids for the contracts, it said. "It was literally a
cut-and-paste error in an Excel spreadsheet that we did not
detect when we did our final sorting and ranking bids prior to
submission," TransAlta chief executive Steve Snyder said in a
conference call. "I am clearly disappointed over this event. The
important thing is to learn from it, which we've done."
As New York ISO rules did not allow for a reversal of the bids,
the contracts went ahead.
- http://eusprig.org/horror-stories.htm

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Spreadsheet Design Guidelines - I
Organize the data, then build the
model around the data
Do not embed numeric constants in
formulas
Things which are logically related
should be physically related
Use formulas that can be copied
Column/rows totals should be close to
the columns/rows being totaled

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Spreadsheet Design Guidelines - II
The English-reading eye scans left
to right, top to bottom.
Use color, shading, borders and
protection to distinguish
changeable parameters from other
model elements.
Use text boxes, cell notes and
names to document various
elements of the model.
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Next Session
Case Study:
Kuwaits Al-Manakh Stock Market

Read: Chapter 3 of textbook, Case

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