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Case: H
arleys Fine Wines Co.
I. Context
The Harleys family with a wine passion have successfully grabbed the chance to
flourish in the winery industry for over a couple of decades in Minneapolis,
Minnesota. In this venue, they pushed the envelope and found their own
audiences accepting of ever more esoteric but increasingly more compelling wines.
Their daughter, Cecilia Harley, followed her father’s step and soon, claimed her
gifted talent in strategically operating the business. After being promoted as the
company’s president, she makes a vital decision to improve the company’s
reputation, foster sustainable growth and innovation - produce two completely
new brands, brimming with the company’s core values and spirits, the Fein Wein
and Party Plonk.
Both brands are the unique combination of 2 types of wine, A and B. Both wines A
and B cost 0.80 and 0.20 pounds per liter, respectively. The Fein Wein consists of
60% wine A and 40% wine B while the Party Plonk has 20% wine A and 80% wine
B. The company sells 2 pounds per liter from Fein Wein and 1.20 pounds per liter
from Party Plonk. The processing, bottling and distribution cost 0.5 pounds per
liter for both brands.
For the time being, there are available 75.000 liters of wine A and 120.000 liters of
wine B in the wine-cellar.
II. Problem
Because of declining sales for certain wines, Cecilia has decided to revamp the
company product lines. Unprofitable products are being discontinued, launching
new wine brands if managements approve.
Cecilia now needs to address two issues:
1. Should the company go ahead with launching these new brands?
2. If so, how many liters of the two brands must the company produce this
year to maximize the profit?
Cecilia arranges a meeting with the Head of Manufacturing Department, Alma
Portca, and the Head of Marketing Department, Shei Bablicock, to discuss the
current issues.
Let’s look at the minute of the meeting.
Time Problem discussed Person in charge
8.00 - 8.30 -Discontinue 3 product lines: Bizzard, Merlot Alma Portca
and Synah.
-Capacity of the factories is sufficient for
manufacturing the new brands’ products.
8.30 - 9.00 -Media Campaign: Use television, social media Shei Bablicock
for advertising the two new brands.
-Distribution: High-end channels
At the outset, the Management Science Group spends considerable time with
Alma Portca to clarify the general problem and specific issues that management
want addressed. A particular concern is to ascertain the appropriate objective for
the problem from management’s viewpoint. Alma points out that determining
which mixture of the two brands is going to be the most profitable for the
company.
Therefore, with Alma’s concurrence, the group finally successfully defined the key
issue to be addressed as follows:
Question: Which combination of the production rates for the two new
brands would maximize the profit f rom both of them?
The group also concludes that since the capacity is sufficient, there is no need to
concern about it. The issue here is to choose the most profitable production rate.
Then, the group identifies the information needed to gather to conduct the study:
1. Available liters of each wine (A and B) in the cellar for the time being.
2. Profitability per liter of the two brands (Fein Wein and Party Plonk) after
eliminating cost of goods sold.
3. The ratio between wine A and B in each brand.
4. Price of each wine per liter and cost of processing, bottling and distribution.
Concrete data are not available for any of these quantity, so estimates have to be
made. The group develops the estimates that involve available liters of each wine.
Specifically, they estimate that the available amount of wine A and B is 75000 liters
and 120000 liters, respectively. For per liter of Fein Wein produced, the company
needs 60% wine A and 40% wine B while it is 20% wine A and 80% wine B for per
liter of Party Plonk. Both wines A and B cost 0.80 and 0.20 pounds per liter,
respectively. The processing, bottling and distribution cost 0.5 pounds per liter for
both brands.
Then, they defines the profit per liter of each brand by eliminating the cost of
goods sold in the price. We have the table 1.1, summarizing the gathered data:
Ratio between 2 wines for each brand per liter
Fein Wein Party Plonk Available liters
Wine A 0.6 per liter 0.2 per liter 75000 liter
Wine B 0.4 per liter 0.8 per liter 120000 liter
Profit per liter (= = £2 - £ 0.5 - £0.8x0.6 = £1.2 - £ 0.5 -
Price - Cost of goods - £0.2x0.4 £0.8x0.2 - £0.2x0.8
sold) = £0.94 = £ 0.38
III. Formulate the Harleys’ problem on the spreadsheet
We now focus on how to display the Harley problem with the popular spreadsheet
package Microsoft Excel.
The data cells in the Harleys Fine Wines Co. are given the range names Profit per
liter (£) (B4:C4), Ratio between 2 wines needed for each brand per liter (B9:D10),
Liters Available (F9:F10).
Three questions needed to be answer to begin the process using the spreadsheet to
formulate a linear programming model for the problem.
1. What are the d ecisions to be made?
2. What are the c onstraints on these decisions?
3. What is the overall measure of performance for these decisions?
The discussion between the Head of Manufacturing Department and the Harleys’s
Management Science Group provided the following answers to these questions:
1. The decisions: p roduction rates for two new brands.
2. The constraints: the liters of 2 wines used to produce both brands can not
exceeds the available liters in the cellar.
3. The overall measure of performance: t otal profit this year from the 2 brands.
Figure 1.2 shows how these answers can be incorporated into the spreadsheet. The
production rates of the two brands are placed into cells B13 and C13. Since we
don’t know yet what the production rates should be, they are just entered as zeroes
in the figure 1.2. Later, these numbers will be changed while seeking the best mix
of production rates. Therefore, these cells are called the changing cells and shaded
bright yellow to highlight them.
The data in cells B9:C10 are used to calculate the total liters of each wine used to
produce both brands this year.
Liters of Wine A used: 0.6 (# of Fein Wein) + 0.2 (# of Party Plonk)
Liters of Wine B used: 0.4 (# of Fein Wein) + 0.8 (# of Party Plonk)
Consequently, the Excel equation for them are
D9 = SUMPRODUCT(B9:C9,B13:C13)
D10 = SUMPRODUCT(B10:C10,B13:C13)
Next, <= signs are entered into cells E9 and E10 to indicate that each total value to
their left can not be allowed to exceed the corresponding number in column F.
Figure 1.2: The complete spreadsheet for the Harleys’s problem
Finally, the total profit from the two brands is entered in the cell F13, we have an
equation:
Total profit = £0.94x(# of Fein Wein) + £0.38x(# of Party Plonk)
Hence, the equation for cell F13 is
F13 = SUMPRODUCT(B13:C13,B4:C4)
Therefore, the Total Profit (F13) is referred to as objective cell. This cell is shaded
orange with heavy border.
Now, using Solver of Excel, we calculate the production rates and total profit. We
can see from the figure 1.3 that:
1. F13 is set as objective.
2. To maximize profit: we choose Max
3. Changing variables are B13:C13.
4. Subject to the constraints:
D9 <= F9
D10 <= F10
5. Solving method: Simplex LP
Figure 1.3
Now, let’s look at the result.
Figure 1.4 shows the spreadsheet when the production rates are set at 90000 liters
of Fein Wein and 105000 liters of Party Plonk this year. Cell F13 shows that this
yields a total profit of £124500 this year. Also note that D9 = F9, D10 = F10, so the
<= signs in column E are all satisfied. Thus, this solution is feasible.
Figure 1.4
IV. Algebraic Model
We have the following quantitative expressions for the constraints:
Liters of Wine A used: 0.6 (# of Fein Wein) + 0.2 (# of Party Plonk) <= 75000
Liters of Wine B used: 0.4 (# of Fein Wein) + 0.8 (# of Party Plonk) <= 120000
In addition, negative production rates are impossible, so two other constraints on
the decisions are:
(# of Fein Wein) >= 0
(# of Party Plonk) >= 0
The overall measure of performance has been identified as the total profit from
the two brands, so the expression obtained is:
Total profit = £0.94x(# of Fein Wein) + £0.38x(# of Party Plonk)
The goal is to find out the production rates so as to maximize the total profit.,
subject to satisfying all the constraints below.
To state this objective in a algebraic model, we introduce algebraic symbols. Let
P = total profit (objective value)
FW: # of Fein Wein (Liters of Fein Wein produced this year) (decision variable)
PP: # of Party Plonk (Liters of Party Plonk produced this year) (decision variable)
Substituting the symbols into the above expressions, the linear programming
model now can be written in algebraic form as show below.
Algebraic Model
Choose the values of FW and PP so as to maximize
P = 0.94FW + 0.38PP (objective function)
subject to satisfying all the following constraints:
0.6FW + 0.2PP <= 75000 (functional constraint)
0.4FW + 0.8PP <= 120000 (functional constraint)
and
FW >= 0 PP >= 0 (nonnegativity constraints)
V. Solution
Optimal Solution
FW = 90000
PP = 105000
These values can be substituted into the objective function to find the value of P.
P = 0.94FW + 0.38PP = 0.94(90000) + 0.38(105000) = 124500
VI. Suggestions
To maximize the profit, the company should produce 90000 liters of Fein Wein
and 105000 liters of Party Plonk this year.
VII. Advantages and Limitations
Advantages:
1. Linear programming helps in attaining the optimum use of productive
resources. It also indicates how a decision-maker can employ his productive
factors effectively by selecting and distributing (allocating) these resources.
2. Linear programming techniques improve the quality of decisions. The
decision-making approach of the user of this technique becomes more
objective and less subjective.
3. Linear programming techniques provide possible and practical solutions
since there might be other constraints operating outside the problem which
must be taken into account. Just because we can produce so many units not
mean that they can be sold. Thus, necessary modification of its
mathematical solution is required for the sake of convenience to the
decision-maker.
4. Highlighting of bottlenecks in the production processes is the most
significant advantage of this technique. For example, when a bottleneck
occurs, some machines cannot meet demand while other remains idle for
some of the time.
5. Linear programming also helps in re-evaluation of a basic plan for changing
conditions. If conditions change when the plan is partly carried out, they
can be determined so as to adjust the remainder of the plan for best results.
Limitations:
1. There should be an objective which should be clearly identifiable and
measurable in quantitative terms. It could be, for example, maximisation of
sales, of profit, minimisation of cost, and so on, which is not possible in real
life.
2. The activities to be included should be distinctly identifiable and measurable
in quantitative terms, for instance, the products included in a production
planning problem and all the activities can’t be measured in quantitative
terms for example if labour is sick, which will decrease his performance
which can’t be measured.
3. The relationships representing the objective as also the resource limitation
considerations, represented by the objective function and the constraint
equations, respectively must be linear in nature, which is not possible.
4. There should be a series of feasible alternative courses of action available to
the decision makers, which are determined by the resource constraints.
5. While solving an LP model, there is no guarantee that we will get integer
valued solutions. For example, in finding out how many men and machines
would be required lo perform a particular job, a non-integer valued solution
will be meaningless. Rounding off the solution to the nearest integer will
not yield an optimal solution.
6. Linear programming model does not take into consideration the effect of
time and uncertainty. Thus, the LP model should be defined in such a way
that any change due to internal as well as external factors can be
incorporated.
7. Parameters appearing in the model are assumed to be constant but in
real-life situations, they are frequently neither known nor constant.
8. Parameters like human behaviour, weather conditions, stress of employees,
demotivated employee can’t be taken into account which can adversely
affect any organisation
9. Only one single objective is dealt with while in real life situations, problems
come with multi-objectives.
VIII. Conclusion
Linear programming is a powerful technique for aiding managerial decision
making for certain kinds of problems. The basic approach is to formulate a
mathematical model called a linear programming model to represent the decisions
to be made, constraints to represent restrictions on the feasible values of the
decision variables, and an objective function that express the overall measure of
performance for the problem. Spreadsheets provide a flexible and intuitive way of
formulating and solving a linear programming model. However, the managers
should consider the preciseness of this model when solving the problems including
non-quantitative variables.