Linear Programming : Graphical Solution

LP Visualization
1400
1200
1000

# Mortgage
800
600
400
200

FEASIBLE REGION

0
0

100

200

300

400

500

600

700

800

900

# Special Risk
Underw riting

BackgroundCheck

Max Profit=
$3600
Profit=$2500
Sub-optimal
"solutions"

Finding an Optimal Solution

# M ortgage

# Spe cial Risk

Unde rw riting

Back groundCheck

Ris k Manage m ent

Finding an Optimal Solution

Linear Programming : Graphical Solution

# M ortgage

Q: Where is the "optimal" solution located in an LP problem?

# Spe cial Risk

Unde rw riting

x
0
100
200
300
400
500
600
700
800
600
600
600
600

Underwriti BackgrounRiskManagSub-optimaOptimal
1200
800
1250
1800
1050
800
1000
1550
900
800
750
1300
750
800
500
1050
600
250
800
450
0
550
300
300
150
50
0
0
100
200
300

Back groundCheck

Ris k Manage m ent

Optimization Template
Design Philosophy:

You are designing a template for a lay Management audience NOT for y
Asthetically, it must be Compact, Clean, Clear
e.g. Use colour & unique NAMES to guide your logic
(1) Define Decision Variables e.g. How many to sell?
(2) Define Objective eg Maximise Profit
(3) Define Constraints eg Total required of each resource

# Sales
Profit per unit

Special Risk Mortgage

600
300
$5
$2

Constraints (Work Hours / unit)

Underwriting
Background Check
Risk Management

3
0
2

2
1
0

3600 TotalProfit
Total Hours
2400
300
1200

After filling all the necessary formulae:

Excel : Data, SOLVER

Click options in Solver to indicate (1) LINEAR problem (2) NON-NEGATIVE solution
Good Practice: Reference cells by NAME

Excel : Type a name either on left, top, right or below the cells. Highlight all cells including

For matrices or cells within a matrix, highlight pertinent cells and

Alternatively, just highlight the cells and in the "Name Window" above cell A

Note: Use UNIQUE names (eg Sales1, Sales2 etc.) throughout workbo

ment audience NOT for yourself

Avoid IF function: It does NOT always work in SOLVER!

SOLVER is designed for smooth differentiable functions!

ch resource

TotalProfit
Limits
2400
800
1200

ALL formulae must be

indicated
in pertinent cells
e.g. e17, e20:e22
BEFORE opening SOLVER

NEGATIVE solution

hlight all cells including the name and on top ribbon, select Formulas, Create From Selection

ght pertinent cells and then

ame Window" above cell A1, type a name (Personally, I prefer above method where name is typed on worksheet

etc.) throughout workbook or else within Formulas, Define Name, select correct SCOPE

m Selection

s typed on worksheet!).

Outlet
A
B
C
D

y
8
3
8
14

2
10
15
13

# Daily Truck Deliveries Cost

8
$99.76
6
$87.68
2
$29.48
5
$64.77
Total Cost $281.70

Optim al location of Wareho

16
C

14
12
10

Low_Boundary

10

Warehouse Location

10 7.906

8
6
(10,6)

4
2

High_Boundary

12

10

A
0
2

10

12

Optim al location of Warehouse?

16
C

14

12
10

(12,10)

8
6
(10,6)

4
2
A
0
2

10

12

14

16

A
1

Another NON-LINEAR Optimization: Designing Stock Portfolio for minimizing chance of Loss

2
3

See Text p899-903 Example 14.12

4
5
6
7

Mean return
StDev of return

8
9

Correlations

10
11
12
13

Stock 1 Stock 2 Stock 3

0.14
0.11
0.1 ASSUME Stock 1 has NORMAL return distribution
0.2
0.15
0.08 with monthly mean 0.14% and standard deviation 0.2%.
Ditto for Stocks 2 & 3.

Stock 1
Stock 2
Stock 3

Stock 1 Stock 2 Stock 3

1
0.6
0.4 Further assume the stock returns are
0.6
1
0.7 inter-correlated.
0.4
0.7
1

14
15

Investment decision

16
17

Fractions to invest

Stock 1 Stock 2 Stock 3

1
0
0

TotalInvest Required
1 =
1

18
19

Expected portfolio return

0.14

20
21
22
23

Standard deviations times fractions invested

Stock 1 Stock 2 Stock 3
0.2
0
0

This formula is derived in

your Finance course.

24
25

Portfolio variance

0.04

Var(a X) = a Covariance Matrix(X) a'

26
27

Portfolio stdev

0.2000

= a Diag(b5:d5) Correlation Matrix Diag (b5:d5) a'

28
29

Probability of losing money

0.24196

Problem 6.39

Related Job Position

(In $1,000s)
Revenues
Bills
=> Net

Jul
Aug
Sep
$600
$900 $1,200
$1,600 $3,000 $2,300
-$1,000 -$2,100 -$1,100

Oct
$1,400
$1,200
$200

Nov
$2,800
$800
$2,000

Loan_6months
Loan_1month

$2,000
$0

$1,100

$2,200

$2,000

$0

Net+Loan-Reimbursement

$1,000

$0

$0

$0

$0

Total Interest (in $1,000)

$133 Suppose Hongguo has cash to pay interest due at the e

Dec
$3,500
$500
$3,000

Apple Users: Press Command when defining second set of Changing Variables in SOLVER

$0
$1,000 These cells do the "accounting": DO NOT TOUCH them!

pay interest due at the end of each month => Round numbers

Note:
For problems with MULTIPLE solutions,
SOLVER will only output ONE solution i.e. the first one it obtains.
This is a limitation of all optimization softwares.

Variables in SOLVER

Optimal Capital Projects Selection

Capital Expenditure
Project Selected? IRR
Yr1 Yr2 Yr3 Yr4 Yr5 Yr6
A
1
17%
5
6 20
0
0
0
B
1
10%
9
6
0
0
0
0
C
0
7% 12 10
5
5
0
0
D
0
11%
7
5 20 10 15
0
E
1
15% 20
0
0
0
0
0
F
0
9% 18 15 15 15
0
0
Total Expenditure
### ### ### ### ### ###
Budget
45 30 20 20
0
0

Excel2010 onwards: To ensure Binary / Integer solutions, within Solver click

I worked with McKinsey in its Atlanta office during this summer (Jun-Sep-05).
I did a project with one of the leading telecom operators in the U.S.
The project was about project portfolio optimization, identifying and selecting projects with the hig
The consultants had tried several traditional problem solving methods to solve this problem.
Unfortunately, due to the complexity and abundance of the parameters, they did not provide satisfa

I decided to use the optimization methods i.e. Solver you taught us

It took me a couple of days to structure the problem, prepare the objective function and come up w
I built, ran the model, and presented this sophisticated approach and beautiful solution to the clien

It was this CFO-level executive meeting at the client site that made me a hero this summer at McK
After my presentation, the CFO of the telecom operator was amazed with the answer and immediate
Since this job offer came in front of the other McKinsey partners and senior managers, immediately
Emre Gurkan, MIT Sloan MBA, writing to Prof Lawrence Wein

Yr1 Yr2 Yr3 Yr4 Yr5 Yr6

-5 -6 -16 12 14 15
-9 -6
6
4
5
5
-12 -10 -5 -5 25 15
-7 -5 -20 -10 -15 75
-20
6
6
6
6
6
-18 -15 -10 -10 35 35
### ### ### ### ### ###

29 Total Cash Flow

s, within Solver click Options and select ONLY "Automatic Scaling" and NOTHING else!

projects with the highest NPVs.

ve this problem.
d not provide satisfactory answers.

ction and come up with meaningful constraints.

solution to the client executives.

this summer at McKinsey.

nswer and immediately offered me a job!!
anagers, immediately after the meeting the partner talked to me about his future plans for me at McKinsey an

or me at McKinsey and tried to convince me to join McKinsey.

Project Selected2?
A
B
C
D
E
F

Capital Expenditure
IRR
Yr1 Yr2 Yr3 Yr4 Yr5 Yr6
17%
5
6 20
0
0
0
10%
9
6
0
0
0
0
7% 12 10
5
5
0
0
11%
7
5 20 10 15
0
15% 20
0
0
0
0
0
9% 18 15 15 15
0
0
Yearly Expenditure
### ### ### ### ### ###
Available Budget
45 =
=
=
=
=
Yearly Allocation
30 20 20
0
0

If UNUSED budget can be carried forward, how would you now solve this pro

Yr1 Yr2 Yr3 Yr4 Yr5 Yr6

-5 -6 -16 12 14 15
-9 -6
6
4
5
5
-12 -10 -5 -5 25 15
-7 -5 -20 -10 -15 75
-20
6
6
6
6
6
-18 -15 -10 -10 35 35
### ### ### ### ### ###

ou now solve this problem?

0 Total Cash Flow2

DecisionTools software Download

Follow these instructions
When you are done, you should have the following shortcuts on your computer Desktop

We will use Precision Tree from Week 3, followe

If you encounter download problems, an IT specialist will provide assistance from 30

computer Desktop

om Week 3, followed by @Risk and StatTools.

We will NOT use these. Do explore them e.g.RiskOptimizer is quite

e assistance from 30 mins before class time on Week3.

RiskOptimizer is quite easy to use once you know @Risk and Solver.

All teams are to solve 4 problems from "AsiaPacConsulting" to "PeonyJade"

Before the start of the next class, each team to email (with cc to all team members) its Excel file titl
NO Memo is needed for this first assignment: Insert your comments / discussion within the pertine

At the start of class next week, Team1 will present its solution to AsiaPacConsulting
Present from your THUMBDRIVE or DESKTOP of the CLASS COMPUTER - Notebook
Presentation Guidance
Each team is to complete its presentation within 30 minutes: 2-3 will present (others will present the group
Every team member must present during the course: You will be rated after each presentation.
Imagine the class as a lay audience => Use simple and concise English even for complicated ideas!

Suggested Coverage:
(1) What is the problem about?
(2) Guide audience through your analysis e.g. your SOLVER window must show NAMES not cell addresses!
(4) Can problem be solved intuitively i.e. quick "System 1 thinking" (if so, outline the rationale) or is effortful
(5) X-factor: Anything interesting and related to this problem you wish to share.
Desired Outcome
Analytics plus Communications will contribute a synergistic leap to your career!

AsiaPac Consulting

Singfat CHU & APEX MBA Student

With globalization, the software consulting business has changed. Some key points to note are
1)To minimize costs, resources (eg software engineers) get hired in low cost countries and de
2)Also, to keep fixed cost down, rather than hiring own resources, companies have been outs
3)When working outside the home country, there will be travel and expense costs that need to
e.g. An in-house resource based in Singapore and sent to work in Sydney will require $2,000 in tr
$6,700 in monthly expense (ie lodging, transport and others) beyond its $10,000 monthly salary (s
Cost of Return Plane Ticket with start city in row and "work" city in column

Bangalore Mumbai
Shanghai
Bangalor
$0
$100
Mumbai
$200
$0
Shanghai
$600
$650
Singapore
$800
$700
Sydney
$1,400
$1,400
Office

SingaporeSydney
$700
$500 $1,100
$700
$600 $1,100
$0
$800 $1,200
$1,000
$0 $1,500
$1,300 $1,500
$0

At AsiaPac Consulting, there is a resource management team which continually focuses on matching supp
The table below details the cities where AsiaPac has a presence. The resource (i.e. staff) available in Bang
But in the 3 S-cities ie Singapore, Shanghai and Sydney, both in-house and subcontracted resources are a
The monthly cost per resource and the capacity for each city-resource type combination are then listed in t
For the upcoming month, Bangalore requires 100 resources, Mumbai requires 20, and Sydney requires
At least 40% / 70% / 50% of the resource required in Bangalore / Sydney / Shanghai must come within the
Since the current capacity (=330 PersonMonths) at the 5 offices will not meet the Total Demand (=470 Per
The policy of AsiaPac Consulting is that all company employees must be deployed before resorting to subc

City

Resource Cost/Mont Capacity PersonMonths

Bangalore
Mumbai
Shanghai
Singapore
Sydney
Shanghai
Singapore
Sydney

Own
Own
Own
Own
Own
Subcontract
Subcontract
Subcontract

$1,500
$2,000
$6,000
$10,000
$16,000
$4,500
$7,000
$12,000

BangalorMumbai
150
70
50
40
20

Total Demand PersonMo

MinOwnResource

100

20

40

Complete the above optimization template which will inform Management on the Supply Chain of re
In particular, you will have to advise from which cities subcontracted help will be sourced, how man
Hint: Complete the Monthly Cost Matrix first!

members) its Excel file titled "FM2_Ass1_Team #.xlsx" to

ussion within the pertinent worksheet.

bizchucl@nus.edu.sg

to AsiaPacConsulting & MBATeams. Team 2 will lead on BondPortfolio & PeonyJade.

OMPUTER - Notebook connection etc. is detrimental to time management !

others will present the group project at the end of the semester)
ch presentation.
or complicated ideas!

w NAMES not cell addresses!

ne the rationale) or is effortful "System 2 thinking" required e.g. SOLVER?

ints to note are

n low cost countries and deployed in high cost countries where billing rates are higher.
companies have been outsourcing the work to subcontractors
expense costs that need to considered
ney will require $2,000 in travel ticket and another
s $10,000 monthly salary (see table below).
Per Month Expense Costs

Lodging Transport Others Total

$1,000
$100 $200
$1,300
$1,250
$200 $200
$1,650
$2,000
$300 $300
$2,600
$3,000
$400 $800
$4,200
$5,000
$500 $1,200
$6,700
.

y focuses on matching supply demand with own/subcontract resources.

(i.e. staff) available in Bangalore and Mumbai are solely in-house.
contracted resources are available.
bination are then listed in the next 2 columns.
20, and Sydney requires 190 resources.
nghai must come within the company i.e. they may be company employees from other locations if necessary.
e Total Demand (=470 PersonMonths), subcontracted help will be needed
ed before resorting to subcontracted help.

Monthly Resource Cost Matrix

ShanghaSingaporSydney

60
30

100

BangaloMumbaiShanghaSingapoSydney
$1,500 $3,250 $4,800 $6,200 $9,300
$3,500 $2,000 $5,300 $6,800 $9,800
$7,900 $8,300 $6,000 $11,000 $13,900
$12,100 $12,350 $13,600 $10,000 $18,200
$18,700 $19,050 $19,900 $21,700 $16,000
$6,400 $6,800 $4,500 ?
?
$9,100 $9,350 $10,900 ?
?
$14,700 $15,050 $15,900 ?
?

190
133

on the Supply Chain of resources which will meet the demand in each city at minimum cost.
will be sourced, how many to hire from them and where to deploy them.

bizchucl@nus.edu.sg

PeonyJade.

ons if necessary.

MBA Teams Formation

At many business schools, students within a section are split into teams which work together on all the cor
Experience indicates that DIVERSITY is key to a team's success. Thus often, the MBA Office will form "div
Consider the class below with 40 students which is to be split into 5 teams of 8. The desired characteristics
" at least 2 CPA, 2 Quants, 2 Female and 2 Foreign". Design an optimization template to build 5 such te

Note: Wheras the constraints are clear, it is not clear what the objective should be? SOLVER requires an o
A generic or "quick and dirty" approach is to maximixe / minimize ANYTHING eg sum of the number of stu
Alternatively, you can DEFINE a more sensible objective which say calculates rewards if you can beat the
Student
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38

CPA?
0
0
1
0
0
1
0
0
0
0
1
0
0
1
0
0
0
0
0
0
0
0
0
0
1
0
1
0
0
0
1
0
0
1
0
1
1
0

Quant? Female? Foreign?

0
1
0
0
0
0
0
1
0
0
1
0
1
0
0
0
0
1
1
0
0
1
0
0
0
0
1
1
0
1
0
0
1
0
0
0
1
1
0
0
0
0
0
0
0
1
0
0
1
0
0
0
0
0
0
1
0
1
1
1
1
0
0
1
0
1
0
0
0
0
0
0
0
0
0
1
0
1
0
0
0
0
1
1
0
0
1
0
1
1
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
1
1
0
1
0
0
0
0

39
40

0
0

0
0

0
1

0
0

rk together on all the core courses.

MBA Office will form "diversified" teams.
he desired characteristics within each team are
mplate to build 5 such teams.

e? SOLVER requires an objective function (i.e. a mathematical formula) to optimize.

sum of the number of students in Team1 (which we know should be 8).
wards if you can beat the minimum requirements - Try to design such a reward objective.

Team 2 will present its solution to the problem below (as well as PeonyJade on the

PeonyJade on the next worksheet) to the class.

Bond CouponRate ShortMaturity HighRisk GovernmentBacked
A
6.00%
1
1
0
B
5.20%
0
1
0
C
4.65%
0
1
0
D
4.40%
0
0
0
E
4.40%
0
1
1
F
4.30%
1
1
0
G
3.88%
1
0
1
H
3.60%
1
0
0
I
3.00%
1
0
1
J
2.90%
0
0
1

Cost Efficiency @ Peony Jade Restaurant

Singfat CHU

Fortheupcomingmid-Autumnfestival,PeonyJadeRestauranthassolicitedbidsfrom5preferredsuppliers
for6yummypastesneededtofillitsfamousdeep-friedflakycrustmooncakes.

Thequantityrequiredforeachpastefillingandtheindicativelistpriceby5preferredsuppliersarelistedbelow.
Frompastexperience,PeonyJadeRestaurantestimatesthatitincurscostofabout$3,000perselected
supplierinordertoliasedelivery,checkonqualityofthegoodsetcetc.
Thiscostisindependentofthenumberoffillingssuppliedbytheselectedsupplierie$3000applieswhether1,2etc.
Thus,if4suppliersareselectedtosupplythe6fillings,totalcost=costofpaste+$12K"suppliermanagement"cost
Tomitigatesupplierrisk,PeonyJadeRestaurantappliesthefollowingprocurementprotocol:
Atmost50%ofapasterequirementcancomefromagivensupplier.
Advise Peony Jade Restaurant on how to optimise cost efficiency in this application i.e.
which suppliers to select and what/how much do they supply.
$3,000 Mngt Fee per Supplier

Required
Kgs
Filling
4500 Green Tea
6000 Durian
3000 Lotus
7000 Yam
2000 Pumpkin
3000 Sweet Potato

Price per kg
Supplier1 Supplier2 Supplier3 Supplier4 Supplier5
$8.09
$7.66
$6.53
$6.61
$6.53
$5.04
$4.66
$5.17
$4.98
$5.17
$7.58
$7.30
$7.68
$8.45
$8.26
$5.10
$5.52
$5.40
$4.80
$5.64
$6.75
$6.75
$6.75
$6.75
$6.75
$10.00
$9.60
$10.00
$10.00
$9.40

ChosenSuppliers

SupplyLimit

SupplyMatrix
Green Tea
Durian
Lotus
Yam
Pumpkin
Sweet Potato

Supplier1 Supplier2 Supplier3 Supplier4 Supplier5

?
?
?
?
?
?
?

redsuppliers

arelistedbelow.

plieswhether1,2etc.fillingsaresupplied.
iermanagement"cost

Total$