(Technical) Operation Research Case Study:

Analysis of Shipping Wood to Market

OPERATIONS RESEARCH I

AY2012/2013 Term Paper

Case Study: Analysis of Shipping Wood to Market

Contents
1. INTRODUCTION
2. TRANSPORTATION PROBLEM
3. PROBLEM CHOSEN
4. PROBLEM FORMATION & CALCULATION
4.1.OPTION 1
4.2.OPTION 2
4.3.OPTION 3
5. PROBLEM RESULT & CONCLUSION
6. REFERENCES
7. APPENDIX
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1. INTRODUCTION
The transportation model is a special class of the linear programming
problem. It deals with the situation in which a commodity is shipped from
sources, like factories to destinations (warehouses and inventory).
This objective is to determine the amounts shipped from each source to
each destination that minimize the total shipping cost while satisfying both
the supply limits and the demand requirement.
The model assumes that the shipping cost on a given route is directly
proportional to the number of units shipped on that route. In general, the
transportation model can be extended to areas other than the direct
transportation of a commodity, including inventory control, employment
scheduling, and personnel assignment and so on.
more2. TRANSPORTATION PROBLEM
The Transportation Problem was one of the original applications of linear
programming models. It deals with the determination of a minimum-cost
plan for transporting a commodity from a number of sources to a number
of destinations. To be more specific, let there be m sources (or origins) that
produce the commodity and n destinations (or sinks) that demand the
commodity.
A set of m supply points from which a good is shipped. Supply point i can
supply at most Si units.
A set of n demand points to which the good is shipped. Demand point j
must receive at least dj units of the shipped good.
Each unit produced at supply point i and shipped to demand point j incurs
a variable cost of Cij.
That means is that, at the ith source, i=1, 2, 3….m, there are Si units of the
commodity available. The demand at the jth destination, j = 1, 2, 3….n, is
denoted by dj. The cost of transporting one unit of the commodity from the
ith source to the jth destination is Cij.
Define Xij = number of units of goods shipped from supply point i to
demand point j.
Thus, our problem becomes to determine the Xij that will minimize the
overall transportation cost. According to the above, the optimal solution Xij
is to the problem is called transportation problems.
If total supply equals to total demand, the problem is said to be a balanced
transportation problem.
Usually, the total supply does not equal the total demand:
▪ Such a transportation model is said to be unbalanced
▪ If total supply exceeds to total demand, we can balance the problem by adding
dummy demand points. Since shipments to the dummy demand points are not
real, they are assigned a cost of zero.
▪ If a transportation problem has a total supply that is strictly less than total demand, the
problem has no feasible solution in such a case, one or more of the demands will
be left unmet. Generally in such situations, a penalty cost is often associated with
unmet demand through adding dummy supply points.
more3. PROBLEM CHOSEN
We had finalized the case study for illustration from our supplementary
reading material “Introduction to Operations Research” 8th edition by
Author: Frederick S. Hillier & Gerald J. Lieberman (2005), Case Study 8.1
Shipping Wood to Market (Page 372). The problem states as follows:
Alabama Atlantic is a lumber company that has three sources of wood and
five markets to be supplied. The annual availability of wood at sources 1, 2,
and 3 is 15, 20, and 15 million board feet, respectively. The amount that can
be sold annually at markets 1, 2, 3, 4, and 5 is 11, 12, 9, 10, and 8 million
board feet, respectively.
In the past the company has shipped the wood by train. However, because
shipping costs have been increasing, the alternative of using ships to make
some of the deliveries is being investigated. This alternative would require
the company to invest in some ships. Except for these investment costs, the
shipping costs in thousands of dollars per million board feet by rail and by
water (when feasible) would be the following for each route:
Source Unit Cost By Rail Unit Cost By Ship
($1,000’s) Mark ($1,000’s) Marke
et t
1 2 3 4 5 1 2 3 4 5
1 61 72 45 55 66 31 38 24 – 35
2 69 78 60 49 56 36 43 28 24 31
3 59 66 63 61 47 – 33 36 32 26
The capital investment (in thousands of dollars) in ships required for each
million board feet to be transported annually by ship along each route is
given as follows:
Source Investment for Ships
($1,000’s)
Market
1 2 3 4 5
1 275 303 238 – 285
2 293 318 270 250 265
3 – 283 275 268 240
Considering the expected useful life of the ships and the time value of
money, the equivalent uniform annual cost of these investments is one-
tenth the amount given in the table. The objective is to determine the
overall shipping plan that minimizes the total equivalent uniform annual
cost (including shipping costs).
You are the head of the OR team that has been assigned the task of
determining this shipping plan for each of the following three options.
Option 1: Continue shipping exclusively by rail.
Option 2: Switch to shipping exclusively by water (except where only rail is
feasible).
Option 3: Ship by either rail or water, depending on which is less expensive
for the particular route.
Present your results for each option. Compare.
Finally, consider the fact that these results are based on current shipping
and investment costs, so that the decision on the option to adopt now
should take into account management’s projection of how these costs are
likely to change in the future.
For each option, describe a scenario of future cost changes that would
justify adopting that option now.
more4. PROBLEM FORMATION & CALCULATION
Option 1
Decision Variables
Xij = Amount of Woods Shipped from Source i to Market j (i = 1,2,3; j =
1,2,3,4,5)
Objective
Minimize z = 61 x11 + 72 x12 + 45 x13 + 55 x14 + 66 x15 + 69 x21 + 78 x22 + 60
x23 + 49 x24 +56 x25 + 59 x31 + 66 x32 + 63 x33 + 61 x34 + 47 x35
Constraints
▪ Supply
Demand
x11 + x12 + x13 + x14 + x15 ≤ 15 x11 + x21 + x31 ≥ 11
x21 + x22 + x23 + x24 +x25 ≤ 20 x12 + x22 + x32 ≥ 12
x31 + x32 + x33 + x34 + x35 ≤ 15 x13 + x23 + x33 ≥ 9
x14 + x24 + x34 ≥ 10
x15 + x25 + x35 ≥ 8
▪ Non-negativity xij ≥ 0, for i = 1,2,3; j = 1,2,3,4,5

As Total Supply = Total Demand, Constraints are usually expressed in

equality form.
Transportation Tableau
Source Unit Cost By Rail ($1,000’s) Market
1 2 3 4 5
1 61 72 45 55 66
X11 X12 X13 X14 X15
2 69 78 60 49 56
X21 X22 X23 X24 X25
3 59 66 63 61 47
X31 X32 X33 X34 X35
Total 11 12 9 10 8
Step1: Initial BFS by using the Minimum Cost Method
Source Unit Cost By Rail ($1,000’s) Market
1 2 3 4 5
1 61 72 45 55 66
4 2 9 0 0
2 69 78 60 49 56
0 10 0 10 0
3 59 66 63 61 47
7 0 0 0 8
Total 11 12 9 10 8
Step2: Transportation Simplex Method
From Complementary Slackness Property,
u1 + v1 = 61; u1 + v2 = 72; u1 + v3 = 45; u2+ v2 = 78; u2 + v4 = 49; u3 + v1 =
59; u3 + v5 = 47
Set u1 = 0, then v1 = 61, v2 = 72, v3 = 45, u2 = 6, v4 = 43, u3 = -2, v5 = 49.
Then Computing ui + vj – cij for non-basic variables:
We get X14 = -12; X15 = -17; X21 = -2; X23 = -9, X25 = -1, X32 = 4, X33 = -20,
X34 = -20.
So X32 isthe entering variable & X35 is the leaving variable
Source Unit Cost By Rail ($1,000’s) Market
1 2 3 4 5
1 61 72 45 55 66
4 2 9 -12 -17
2 69 78 60 49 56
-2 10- -9 10 +8 -1
8
3 59 66 63 61 47
7 +8 4 -20 -20 8-
8
Total 11 12 9 10 8
Source Unit Cost By Rail ($1,000’s) Market
1 2 3 4 5
1 61 7 45 55 66
2
4+ 2-2 9
2
2 69 7 60 49 56
8
2 10 8
3 59 6 63 61 47
6
7-2 8+2
Total 11 12 9 10 8
Source Unit Cost By Rail ($1,000’s) Market
1 2 3 4 5
1 61 7 45 55 66
2
6 9 -12
 2 69 7 60 49 56
8
+2 2-2 10 8
3 59 6 63 61 47
6
5-2 10+2
Total 11 12 9 10 8

Optimum Solution as shown below:

Source Unit Cost By Rail ($1,000’s) Market

1 2 3 4 5
1 61 72 45 55 66
6 9
2 69 78 60 49 56
2 10 8
3 59 66 63 61 47
3 12
Total 11 12 9 10 8

Now that, z = 61(6) + 69(2) + 59(3) + 66(12) + 45(9) + 49(10) + 56(8) =

$2,816 (1,000’s)

Option 2
Decision Variables
Xij = Amount of Woods Shipped from Source i to Market j (i = 1,2,3; j =
1,2,3,4,5)
Cij = Unit Cost Needed from Source i to Market j (i = 1,2,3; j = 1,2,3,4,5)
Yij = Unit Cost Needed for investment from Source i to Market j (i = 1,2,3; j
= 1,2,3,4,5)
Objective
Minimize z = sum of all (cij + 0.1 Yij)
Constraints
▪ Supply
Demand
x11 + x12 + x13 + x14 + x15 ≤ 15 x11 + x21 + x31 ≥ 11
x21 + x22 + x23 + x24 +x25 ≤ 20 x12 + x22 + x32 ≥ 12
x31 + x32 + x33 + x34 + x35 ≤ 15 x13 + x23 + x33 ≥ 9
x14 + x24 + x34 ≥ 10
x15 + x25 + x35 ≥ 8
▪ Cost Note: c14 &c31 using Rail ways due to water unavailability
c11 = 31 c12 = 38 c13 = 24 c15 = 35
c21 = 36 c22 = 43 c23 = 28 c24 = 24
c25 = 31 c32 = 33 c33 = 36 c34 = 32
c35 = 26 c14 = 55 c31 = 59 y11 = 275
y12 = 303 y13 = 238 y15 = 285 y21 = 293
y22 = 318 y23 = 270 y24 = 250 y25 = 265
y32 = 283 y33 = 275 y34 = 268 y35 = 240
▪ Non-negativity xij , yij, cij ≥ 0, for i = 1,2,3; j = 1,2,3,4,5

As Total Supply = Total Demand, Constraints are usually expressed in

equality form.
Solving Using Ms Excel Solver

Source Unit Cost By Ship ($1,000’s) Market

1 2 3 4 5
1 31 38 24 55 35
2 36 43 28 24 31
3 59 33 36 32 26
Source Investment for Ships ($1,000’s) Market
1 2 3 4 5
1 275 303 238 – 285
2 293 318 270 250 265
3 – 283 275 268 240
Source Annual Investment ($1,000’s) Market
1 2 3 4 5
1 27.5 30.3 23.8 – 28.5
2 29.3 31.8 27.0 25.0 26.5
3 – 28.3 27.5 26.8 24.0

By Formulating Problem as Below & Please Find Details inside Appendix

Excel File
Final Solution Shown as Below:

Source Unit Needed By Ship

 ($1,000,000’s) Market
1 2 3 4 5 Total
1 6 0 9 0 0 15
2 5 0 0 10 5 20
3 0 12 0 0 3 15
Total 11 12 9 10 8 50\50
With This Method the Object, z = $2,770.8 (1,000’s)

Option 3
Decision Variables
Xij = Amount of Woods by Rail from Source i to Market j (i = 1,2,3; j =
1,2,3,4,5)
Sij = Amount of Woods by Ship from Source i to Market j (i = 1,2,3; j =
1,2,3,4,5)
Dij = Unit Cost Needed for Rail from Source i to Market j (i = 1,2,3; j =
1,2,3,4,5)
Cij = Unit Cost Needed for Ship from Source i to Market j (i = 1,2,3; j =
1,2,3,4,5)
Yij = Unit Cost Needed for investment from Source i to Market j (i = 1,2,3; j
= 1,2,3,4,5)

Objective
Minimize z = sum of all (Min[Xij Dij; Sij (Cij + 0.1Yij)])

Constraints
▪ Supply
x11 + x12 + x13 + x14 + x15 + s11 + s12 + s13 + s14 + s15 ≤ 15
x21 + x22 + x23 + x24 +x25 +s21 + s22 + s23 + s24 +s25 ≤ 20
x31 + x32 + x33 + x34 + x35 +s31 + s32 + s33 + s34 + s35 ≤ 15
▪ Demand
x11 + x21 + x31 +s11 + s21 + s31 ≥ 11
x12 + x22 + x32 +s12 + s22 + s32 ≥ 12
x13 + x23 + x33 + s13 + s23 + s33 ≥ 9
x14 + x24 + x34 + s14 + s24 + s34 ≥ 10
x15 + x25 + x35 + x15 + x25 + x35 ≥ 8
▪ Cost d11 = 61
d12 = 72 d13 = 45 d15 = 66 d21 = 69
d22 = 78 d23 = 60 d24 = 49 d25 = 56
d32 = 66 d33 = 63 d34 = 61 d35 = 47
c11 = 31 c12 = 38 c13 = 24 c15 = 35
c21 = 36 c22 = 43 c23 = 28 c24 = 24
c25 = 31 c32 = 33 c33 = 36 c34 = 32
c35 = 26 d14 = 55 d31 = 59 y11 = 275
y12 = 303 y13 = 238 y15 = 285 y21 = 293
y22 = 318 y23 = 270 y24 = 250 y25 = 265
y32 = 283 y33 = 275 y34 = 268 y35 = 240
▪ Non-negativity xij , sij , yij, cij , dij ≥ 0, for i = 1,2,3; j = 1,2,3,4,5

As Total Supply = Total Demand, Constraints are usually expressed in

equality form.
Solving With the Minimum Unit Cost For Either Rail or Ship Methods
Source Minimal Cost By Rail / Ship
($1,000’s) Market
1 2 3 4 5
1 58.5 (S) 68.3 (S) 45.0 (R) 55.0 (R) 63.5 (S)
2 65.3 (S) 74.8 (S) 55.0 (S) 49.0 (R) 56.0 (R)
3 59.0 (R) 61.3 (S) 63 (R) 58.8 (S) 47.0 (R)
And Optimum Solution Get From Solver:
Source Unit Needed By Ship
($1,000,000’s) Market
1 2 3 4 5 Total
1 6 0 9 0 0 15
2 5 0 0 10 5 20
3 0 12 0 0 3 15
Total 11 12 9 10 8 50\50
And the objective z = = $2,729.1 (1,000’s)
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5. PROBLEM RESULT & CONCLUSION
Comparison For Three Options
Options Exclusively by Rail Exclusively by Depending on Cost
Ship
Total Cost $2,816.0 $2,770.8 $2,729.1
(1,000’s)

In conclusion, with rigorous checking for the accuracy of above optimum

solution, the final optimal solution obtained by this OR team, we can
conclude that the shipping method for different route case by case was
needed and depending on the unit cost needed; we can have a more
economical solution if we adopt new investment and also keep some
tradition shipping method at the same time.
During this term paper, the objective is always minimizing the cost for
business purpose, methods applied including problem formation, and
transportation minimum cost method, simplex method, linear
programming problem formation and solving. Due to the restrictions of
limited pages & scenarios, solving with duality and sensitivity testing was
not able to apply, and due to the problem property, solutions using
graphical & non-linear methods have to be forfeited. Problem linearity was
assumed for this problem and unpredictable parameters ignored, such as
weather, inflations, etc. After all, complexity of the transportation system
was minimized to the most by the OR team.
In the end, this is a very realistic template for those transportations
forecasting problems, especially without sufficient data on the complexity
of the whole system, formulation with unit cost would be the safest choice.
Special thanks to the lecturer and tutors for their effort and help on this
problem and also to the team member for smooth work flow and cost
saving for the business.
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6. REFERENCES

▪ “Introduction To Operations Research” 8th edition by Author: Frederick S. Hillier &

Gerald J. Lieberman (2005)
▪ “Introduction To Mathematical Programming” 4th edition by Author: Wayne L.Winston
& Munirpallam Venkataramanan (2003)
▪ “Introduction To Management Science” 9th edition by Author: Bernard W. Taylor III
(2007)
▪ IE2110E Operations Research AY2012/2013 Semester 1 Lecture Notes
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7. APPENDIX
Please See Attached Excel File for Detailed Working
Excel Spreadsheet solution for Option 2
Excel Spreadsheet Solution for Option 3
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