Phases of an OR study

The principal phases for implementing OR in practice include

1. Definition of the problem.
2. Construction of the model.
3. Solution of the model.
4. Validation of the model.
5. Implementation of the solution.

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 Linear Programming
In 1947, George B. Dantzig and his associates while working in the U.S. Department of Air
force, observed that a large number of military programming and planning problems could be
formulated as maximizing/minimizing a linear form of profit/ cost function whose variables
were restricted to values satisfying a system of linear constraints (a set of linear equations / or
in-equations).
Its name means that planning (programming)is being done with the mathematical model
where all the functions in the model are linear functions.
General form of LPP
In order to find the values of the n decision variables x , x ,..., x so as to maximize or
minimize the objective function 1 2 n
Z  c x  c x  ...  c x
11 2 2 n n
Subject to the constraints,

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 a x  a x  ...  a x ()b
11 1 12 2 1n n 1
a x  a x  ...  a x ()b
21 1 22 2 2n n 2
...
a x  a x  ...  a x ()b
m1 1 m2 2 mn n m
And the non-negativity restrictions x  0, x  0,..., x  0.
1 2 n
Applications of Linear Programming
Linear programming involve determining the best mix of activities, where the
decision variables represents the levels of the respective activities.
 In financial planning (portfolio selection, capital budgeting, financial mix
strategy)
Marketing analysis (market research in the segment of the market, advertising
planning etc)
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Production planning (product mix problem or blending problem)
In addition to manufacturing, these kinds of production planning
applications also arise in agricultural planning, health care
management, the planning of military operations, policy development
for the natural resources, etc.

Basic steps of the mathematical formulation of the linear programming problem

or.
Step-1: Write down the decision variable of the problem.
Step-2: Formulate the objective function to be optimized as a linear function of
the decision variables.
Step-3: Formulate the other conditions of the problem such as resource
limitations, market constraints, interrelation between variables etc. as linear
equations or in equations in terms of the decision variables.
Step-4: Add the non-negative constraints.
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 Linear Programming

The Summins Garment Company manufactures men shirts and

women blouses for Neelcent Discount stores. Neelcent will
accept all the production supplied by Summins. The production
process includes cutting, sewing and packaging. Summins
employs 25 workers in the cutting department, 35 in the sewing
department and 5 in the packaging department. The factory
works one 8 hour shift, 5 days a week . The following table gives
the time requirements and profits per unit for the two garments

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____________________________________________________
Minutes per unit
__________________________
Garment Cutting Sewing Packaging Unit Profit($)
_____________________________________________________
Product 1 (Shirts) 20 70 12 8.00
Product 2 (Blouses) 60 60 4 12.00
_____________________________________________________
(a) Determine the optimal weekly production schedule for Summins

(b) Determine the worth per unit of cutting, sewing and packaging.
© Suppose that overtime can be used in both the cutting and the sewing departments,
What is the maximum hourly rate Summins should pay for overtime?

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x =number of shirts, x =number of blouses
1 2
Max Z= 8 x  12 x
1 2
20 x  60 x  60000
Subject to, 1 2
70 x  60 x  84000
1 2
12 x  4 x  12000
1 2
x ,x  0
1 2

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 Ex-2. Modern equipment can advertise its products on local radio or television
(TV). The advertisement budget is limited to $10,000 a month. Each minute of
radio advertisement costs $15 and each minute of TV commercials costs $300.
Modern Equipment likes to use radio advertisement at least twice as much as TV.
In the meantime, it is not practical to use more than 400 minutes of radio
advertisement a month. Past experience shows that TV advertisement is
estimated to be 25 times more effective than that of radio.
a)Determine the optimum allocation of the budget to radio and TV
advertisements.
b)Determine the worth per unit of increasing the monthly limit on
radioadvertisement.
c)If the monthly budget is increased to $15,000, use the unit worth measure to
determine the resulting optimum measure of advertisement effectiveness.

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Formulation:
x =minutes of radio advertisement
1
x =minutes of TV advertisement
2
Max Z= cx  25cx
1 2
Subject to,

15 x  300 x  10000,
1 2
x
1  2,
x 1
2
x  400,
1
x , x  0.
1 2

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 Ex-3 .The Bank of West Asian is allocating a maximum of $200,000 for personal
and car loans during the next month. The bank charges 14% for personal loans
and 12% for car loans. Both types of loans are repaid at the end of a 1-year period.
Experience shows that about 3% of personal loans and 2% of car loans are never
repaid, both as principal and interest. The bank usually allocates at least twice as
much to car loans as to personal loans.
a)Determine the optimal allocation of funds between the two loans and the
net rate of return on all the loans.
b)Determine the optimality range for the ratio of car to personal interest rates
that will keep the solution in (a) unchanged.
c)Suppose that the percentages of unrepaid personal and car loans are
changed to 4% and 3% respectively; use the result in (b) to show if this
change will affect the optimum solution in (a).

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 Ex-4.The Bank of Elkins is allocating a maximum of $200,000 for personal and
car loans during the next month. The bank charges 14% for personal loans and
12% for car loans. Both types of loans are repaid at the end of a 1-year period.
Experience shows that about 3% of personal loans and 2% of car loans are never
repaid, both as principal and interest. The bank usually allocates at least twice as
much to car loans as to personal loans.
a)Determine the optimal allocation of funds between the two loans and the
net rate of return on all the loans.
b)Determine the optimality range for the ratio of car to personal interest
rates that will keep the solution in (a) unchanged.
c)Suppose that the percentages of unrepaid personal and car loans are
changed to 4% and 3% respectively; use the result in (b) to show if this
change will affect the optimum solution in (a).
Formulation: x =personal loan and x =car loans
1 2
Maximize net return = 0.14(0.97)x +0.12(0.98)x -0.03x -0.02x
1 2 1 2
Subject to,
x  x  200000,
1 2
x
2  2, x , x  0.
x
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1 2 11

1
Exercise 5. Page 26
Ex: Levince grocery store sells two types of soft drinks : the brand name A1 cola
and the cheaper store brand Levince Cola. The margin of profit for A1 is about 5
cents per can and that of Levince is 7 cents per can. On the average, the store
sells no more than 500 cans of both colas a day. Although A1 is a recognized
brand name, customers tend to buy more Levince because it is considerably
cheaper. It is estimated that at least 100 cans of A1 are sold daily and that
Levince outsells A1 by a margin of at least 2.1.
a)How many cans per day of each brand should the store carry to maximize
profit ?
b)Determine the ratio of the profits per can of A1 and Levince that will keep
the optimum solution in (a) unchanged.

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Graphical Solution:
Determination of the solution space that defines all feasible solutions of the model.
Determination of the optimum solution from among all feasible points in the solution
space.
Step-1:The non-negativity constraint will restrict the solution space area to the first
quadrant.
Step-2: Consider the inequality constraints as equation. Plot the equation on the graph
Step3 : Shade the feasible region.
Step4: Choose the convenient value of Z (say=0) and plot the objective function line.
Step 5-Find out the direction of the OF in which it maximizes and take the at which the OF
is maximum and beyond that it will go out of the feasible region.
Similarly for minimization case consider the decreasing direction of Z and find out the
extreme point at which it is minimum.
Step-6: Read the co-ordinates of the extreme points selected at step5 and find the MAX or
MIN value of Z.

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Ex. 6 : Thriftem Bank: Bank Loan Policy
The Thriftem Bank, a full service facility, is in the process of formulating a loan policy
involving a maximum of $12 million. The following table provides the pertinent data about
the different types of loans the bank deals with:

_______________________________________________________
Type of loan Interest rate Probability of bad debt
_________________________________________________________________
Personal .140 .10
Car .130 .07
Home .120 .03
Farm .125 .05
Commercial .100 .02
__________________________________________________________________

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Bad debts are unrecoverable and hence produce no interest revenue.
Competition with other financial institutions in the area requires the bank to allocate at
least 40% of the funds to farm and commercial loans. To assist the housing industry in the
region, home loans must equal at least 50% of the personal,car, and home loans. The bank
also has a stated policy specifying that the overall ratio for bad debts on all loans may not
exceed 0.04

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Questions:
Construct the mathematical model.
Find the solution by using Tora
What is the effect of increasing one units in the allocated funds.
How far the increase in return is guaranteed over the present value?
Explain.
The highest objective function coefficient is happens to be equal to the dual price of
constraint 1. Can you conclude any interesting phenomenon from this?
Dual price of constraint 2 is negative. What conclusion you can make from this?
In the sensitivity analysis output, explain why the minimum value allowed for the right-
hand side of the first constraint equals $4.8 million. By the same token, explain why the
maximum value of the right-hand side of the second constraint equals 12.
Suppose that the bank allocates all $12 million to farm and commercial loans. Compute
the resulting net return for the bank.

The output shows that the net (optimum) interest income from all loans is .9965 million
dollars, which translates as an average interest of 9065/12 = .083. This amount is less than
the dual price (worth per unit) of the first constraint (=.0864). Reconcile the difference
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between the two values.
Case 1 : Personnel Scheduling Problem.
A private hospital authority needs to know how many nurses are
actually required in each shift to give the patients a satisfactory level
of service. Management recognizes the need for the cost control
while also consistently providing a satisfactory level of service to the
patients. Therefore a study is needed to schedule the nurses to
provide satisfactory service within the cheapest personnel cost.

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 Time period covered

Time 6AM-2PM 8AM-4PM 12AM-8PM 4PM-12PM 10PM-6AM Minimum

Period no. of nurses
needed
6AM-8AM
. c1
8AM-10AM
. . c2
10AM-12PM
. . c3
12PM-2PM
. . . c4
2PM-4PM
. . c5
4PM-6PM
. . c6
6PM-8PM
. . c7
8PM-10PM
. c8
10PM-12AM
. . c9
12AM-6PM
. c10
Average cost
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per nurse
w1 w2 w3 w4 w5 18
Case 2: Media Planning.
Media planning involves selecting appropriate media for carrying the
advertiser’s messages to the target markets. The problem is to select
the number of advertisements in the proper media such that within
minimum cost it should reach to the maximum number of target
audiences. The maximum limit of the advertisement budget is fixed,
the size of the advertisement is also fixed. The relative importance of
the reader’s choice for choosing the media are given.

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 Media Planning
Step-1: Choose the criteria for the readers to whom your advertisement should reach.
Age: Between 20 – 30 years.
Education: Graduation and above.
Income: Family annual income 5 lakh and above.
Step-2: Relative importance to the selected criteria.
Age (20-30) W1
Education W2
Income W3
These relative importance are based on previous data, management’s decision that is fully on decision
makers choice. AHP model can be used to solve the problem.
Step-3: Choosing the target newspaper and budget.
The budget of the advertisement cost is fixed say 1% of the total turn over based on management’s decision.

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 Telegraph
 H. Times
 Hindu
 E.T.
 Samaj
Step-4: Advertisement cost
Advertisement cost=Advertisement size  Advertisement cost per column centimeter.
Step-5: Find out the daily circulation (audience size) of the target newspapers.
K1 , K 2 , K 3 , K 4 , K 5

Step-6: Take a random sample of size n after preparing a questionnaire. Find the following readers
characteristic matrix.

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 Telegra H.T Hindu E.T Samaj
ph

Readers
Age
p11 p15
W1

Edu.
W2 Level p21 p25

Income
p31 p35
W3

K1 K2 K3 K4 K5
Let x , x , x , x , x
1 2 3 4are decision variables of how many ad will be
5

published in different newspapers.

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The effectiveness coefficient of a target audience for one advertisement in each news paper is as
follows.
a1  ( w1 p11  w2 p21  w3 p31 )
b1=
c1=
d1=
e1=
Effective exposure of one ad for diff newspapers are . This is the reach to the target audience for one
advertisement
a=a1K1, b=b1k2,c=c1k3,d=d1k4,e=e1k5.
Objective Function is maximize the total effective exposures
Maximize Z= ax1  bx2  cx3  dx4  ex5
Subject to,
(One ad cost of tele)x1+(one ad cost in HT)x2+(one ad cost in Hindu)x3+(one ad cost in ET)x4+(one
ad cost in samaj) x5 <= Total budget
x1  3, x2  2, x3  1, x4  3, x5  1.

x1 ,..., x5  0, int eger

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 Capital Budgeting Problem

 Ex 7
The ICE Cold Refrigerator Company is considering investing in
several projects that have varying capital requirements over the
next four years. Faced with limited capital each year, management
would like to select the most profitable projects for capital
expenditure. The estimated net present value for each projects, the
capital requirements, and the available capital over the four-year
period are given below.

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 Project net present value, capital requirements and available capital.
________________________________________________________
  Project
  Plant Warehouse New New
Expansion Expansion Machinery Product Research

Estimated $90,000 $40,000 $10,000 $37,000 Capital

Net present available
Value

 Year1 Capital $15,000 $10,000 $10,000 $15,000 $40,000

Year2 Capital $20,000 $15,000 $10,000 $50,000
Year3 Capital $20,000 $20,000 $10,000 $40,000
Year4 Capital $15,000 $5,000 $4,000 $10,000 $35,000

Maximize the net present value over all projects accepted.

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