BA 555 Practical Business Analysis

Agenda

Linear Programming (LP)

Examples
Integer Linear Programming
Sensitivity Analysis

Decision-making under Uncertainty

Decision-making under uncertainty entails

the selection of a course of action when we

do not know with certainty the results that
each alternative action will yield.
This type of decision problems can be solved
by statistical techniques along with good
judgment and experience.
Example: buying stocks/mutual funds.

Decision-making under Certainty

Decision-making under certainty entails the

selection of a course of action when we know the

results that each alternative action will yield.
This type of decision problems can be solved by
linear/integer programming technique.
Example: A company produces two different auto
parts A and B. Part A (B) requires 2 (2) hours of
grinding and 2 (4) hours of finishing. The company
has two grinders and three finishers, each of which
works 40 hours per week. Each Part A (B) brings a
profit of $3 ($4). How many items of each part
should be manufactured per week?
3

Steps in Quantifying and Solving a

Decision Problem Under Certainty
Formulate a mathematical model:
Define decision variables,
State an objective,
State the constraints.
Input the model to a LP/ILP solver, e.g., LINDO or

EXCEL Solver.

Obtain computer printouts and perform sensitivity

analysis.

Report optimal strategy.

Example 6 Blending (p.66)

Ajax Fuels, Inc., is developing a new additive for airplane fuels. The

additive is a mixture of three ingredients: A, B, and C. For proper

performance, the total amount of additive (amount of A + amount of B +
amount of C) must be at least 10 ounces per gallon of fuel. However,
because of safety reasons, the amount of additive must not exceed 15
ounces per gallon of fuel. The mix or blend of the three ingredients is
critical. At least 1 ounce of ingredient A must be used for every ounce
of ingredient B. The amount of ingredient C must be greater than onehalf the amount of ingredient A. If the costs per ounce for ingredients A,
B, and C are $0.10, $0.03, and $0.09, respectively, find the minimumcost mixture of A, B, and C for each gallon of airplane fuel.

American Steel Company

Material and shipping costs

shipping cost

processing cost

Japan

High-grade steel
A:B = 1:2

Low-grade steel
A:B = 1:3

Butte: supply grade

A ore up to 1000 tons

Korea

Pittsburgh: process up to
700 tons of ore with a lower
processing cost.

Taiwan

High-grade steel
A:B = 1:2

Low-grade steel
A:B = 1:3
Cheyenne: supply grade
B ore up to 2000 tons

Purchasing

Mexico

Youngstown: process up to
1500 tons of ore with a higher
processing cost.

Blending

Logistic

Example 7 Staff Scheduling (p.67)

Variation: Staff Scheduling

SHIFT

X1

X1

X1

X1

X1

X2

X2

X2

X2

X2

X3

X3

X3

X3

X3

X4

X4

X4

X4

X5

X5

X5

16

11

2
3
4

X4

X5

X5

Req

17

13

Different schedules
Different benefits
Full-time vs. part-time
Etc.

15

19

14

SA

SU

Staff Scheduling at the USPS

Example 9 Multi-period Financial

Planning (p.69)
Investment

Cash Flow at Time Period #

0
1
2
3

0.5

0.5

1.2

1.9

1.5

Constraints:
Balance cash inflow and cash outflow at all time periods.

10

Dedication / Cash Flow Matching

Dedication or cash flow matching is a

technique used to fund known liabilities in the

future. The intent is to form a portfolio of
assets such that cash inflows will exactly
offset the cash outflows of the liabilities.

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Integer LP: Example (p.75)

An airline owns an aging fleet of Boeing 727 airplanes. It is considering a major

purchase of up to 17 new Boeing 757 and 767 jets. The decision must take into
account numerous cost and capability factors, including the following:

the airline can finance up to $400 million in purchases;

each Boeing 757 will cost $35 million, while each Boeing 767 will cost $22
million;
at least one-third of the planes purchased should be the longer-ranged 757;
the annual maintenance budget is to be no more than $8 million;
the annual maintenance cost is estimated to be! $800,000
a 757, and
Decision for
variables:
$500,000 for a 767; and
!
B5 = # of Boeing 757 purchase
each 757 can carry 125,000 passengers per year, while each 767 can fly 81,000
!
B6 = # of Boeing 767 purchase
passengers annually.

Formulate this problem as an integer programming problem to maximize the

annual passenger-carrying capacity.
MAX 125000 B5 + 81000 B6

! Decision variables:
!
B5 = # of Boeing 757 purchased
!
B6 = # of Boeing 767 purchased
MAX 125000 B5 + 81000 B6
SUBJECT TO
35 B5 + 22 B6 <= 400

SUBJECT TO
35 B5 + 22 B6 <= 400
2 B5 - B6 >= 0
0.8 B5 + 0.5 B6 <= 8
B5 + B6 <= 17
END
GIN 2

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Integer LP: Example 11 (p.75)

Project
Plant Expansion
Warehouse Expansion
Project
New Machinery
Plant
Expansion
New Product
Research
Warehouse
Expansion
Available Capital funds
New Machinery
New Product Research
Let decision variables:
Available Capital funds

Estimated
Present Value ($)
90,000
Estimated
40,000
Present
Value ($)
10,000
90,000
37,000
40,000
10,000
37,000

BINARY decision variables

Capital Requirements ($)

Year 1 Year 2 Year 3 Year 4
15,000 20,000 20,000 15,000
Capital
Requirements
10,000
15,000
20,000 ($) 5,000
Year
1 Year 20 Year 30 Year
4
10,000
4,000
15,000
15,000 20,000
10,000 20,000
10,000 15,000
10,000
10,000
15,000
20,000
5,000
40,000 50,000 40,000 35,000
10,000
0
0
4,000
15,000 10,000 10,000 10,000
40,000 50,000 40,000 35,000

X1 = 1 if the plant expansion project is accepted;

Let decision
X = 1variables:
if the warehouse expansion project is accepted;
2

X3 = 1 if the new machinery project is accepted;

X
expansion
project
is accepted;
X14 =
= 11 if
if the
the plant
new product
research
project
is accepted;
X2 = 1 if the warehouse expansion project is accepted;
X3 = 1 if the new machinery project is accepted;
X4 = 1 if the new product research project is accepted;

0, if rejected,
0, if rejected,
0, if rejected,
0,
0, if
if rejected,
rejected.
0, if rejected,
0, if rejected,
0, if rejected.

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Common Types of Logical Constraints

(p.76)
Mutual Exclusion: either A or B, but not both, can be implemented.
write down a constraint to express the restriction that, due to limited
budget, either New Machinery project or New Product Research
project can be implemented, but not both.
Conditional: if B is implemented, then A must be implemented

also.

write down a constraint to express the restriction that if the plant is

expanded, the warehouse must also be expanded.

Corequisite: if B is implemented, then A must be implemented

also, and vice versa.

write down a constraint to express the restriction that if the plant is

expanded, then New Machinery project must be carried out and vice
versa.

k out of n: at most/least k out of n alternatives can be

implemented.

at most 3 projects have to be implemented next year.

at least 2 projects have to be implemented next year.

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Binary Decision Variables: Example

12 (p.76)
Kilroy Manufacturing is establishing plants in six cities (cities 1-

6). The company must decide in which of these cities to

procure space for storing inventory. The company wants to
ensure that at least one inventory site is within 150 miles of
each plant. The distance required to drive between the cities
are shown in the table below:
Formulate an ILP model to determine how many inventory sites
must be built, and where they should be located.
FROM
City 1
City 2
City 3
City 4
City 5
City 6

City 1
0
100
200
300
300
200

City 2
100
0
250
350
200
100

TO
City 3 City 4
200
300
250
350
0
150
150
0
300
150
200
250

City 5
300
200
300
150
0
140

City 6
200
100
200
250
140
0

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Binary Decision Variables (Example

12, p.76)
! Decision Variables
!
Xj = 1 if an inventory site is built in City j.
MIN X1 + X2 + X3 + X4 + X5 + X6
SUBJECT TO
X1 + X2 >= 1
X1 + X2 + X6 >= 1
X3 + X4 >= 1
X3 + X4 + X5 >= 1
X4 + X5 + X6 >= 1
X2 + X5 + X6 >= 1
END
INT 6

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Sensitivity Analysis (p.70)

How will a change in a coefficient of the

objective function affect the optimal

solutions?
How will a change in the right-hand-side
value for a constraint affect the optimal
solution?
MAX
3 A + 4 B
SUBJECT TO
2)
2 A + 2 B <=
3)
2 A + 4 B <=
END

80
120

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Glossary (p.77)
SLACK: A variable added to the left-hand side of a

less-than-or-equal-to () constraint to convert the

constraint into an equality. The value of this variable
can usually be interpreted as the amount of unused
resource.
SURPLUS: A variable subtracted from the left-hand
side of a greater-than-or-equal-to () constraint to
convert the constraint into an equality. The value of
this variable can usually be interpreted as the amount
over and above some required minimum level.
BINDING/NON-BINDING: A constraint is binding if it
is satisfied as a strict equality in the optimal solution;
otherwise, it is nonbinding. If a constraint is binding,
its corresponding slack/surplus variable equals to 0.
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Slack/Surplus/Binding/Non-Binding
(p.70)
MAX
3 A + 4 B
SUBJECT TO
2)
2 A + 2 B <=
3)
2 A + 4 B <=
END

80
120

OBJECTIVE FUNCTION VALUE

1)
VARIABLE
A
B
ROW
2)
3)

140.0000
VALUE
20.000000
20.000000
SLACK OR SURPLUS
.000000
.000000

REDUCED COST
.000000
.000000
DUAL PRICES
1.000000
.500000

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Sensitivity Analysis (p.70)

How will a change in a coefficient of the

objective function affect the optimal

solutions?
How will a change in the right-hand-side
value for a constraint affect the optimal
solution?
MAX
3 A + 4 B
SUBJECT TO
2)
2 A + 2 B <=
3)
2 A + 4 B <=
END

80
120

20

Range of Optimality (p.70)

The range of values over which an objective

function coefficient may vary without causing

any change in the values of the decision
variables in the optimal solution.
MAX
3 A + 4 B
SUBJECT TO
2)
2 A + 2 B <=
3)
2 A + 4 B <=
END
VARIABLE
A
B

CURRENT
COEF
3.000000
4.000000

80
120

OBJ COEFFICIENT RANGES

ALLOWABLE
ALLOWABLE
INCREASE
DECREASE
1.000000
1.000000
2.000000
1.000000

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Range of Feasibility (p.70)

The range of values over which an objective function coefficient

may vary without causing any change in the values of the

decision variables in the optimal solution.

MAX
3 A + 4 B
SUBJECT TO
2)
2 A + 2 B <=
3)
2 A + 4 B <=
END

OBJECTIVE FUNCTION VALUE

80 1)
120
VARIABLE
A
B

140.0000
VALUE
REDUCED COST
OBJECTIVE
FUNCTION VALUE
20.000000
.000000
20.000000
.000000
1)
140.0000

VARIABLE
VALUE
REDUCED
ROW
SLACK OR SURPLUS
DUAL PRICES
A
20.000000
2)
.000000
1.000000.0
B
20.000000
3)
.000000
.500000.0

ROW
2
3

CURRENT
RHS
80.000000
120.000000

RIGHTHAND SIDE RANGES

ALLOWABLE
INCREASE
40.000000
40.000000

ROW
SLACK OR SURPLUS
2)
.000000
ALLOWABLE
3)
.000000

DECREASE
20.000000
40.000000

DUAL P
1.0
.5

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Reduced Cost (p.70)

The amount by which an objective function coefficient

would have to improve (increase for a maximization

problem, decrease for a minimization problem),
before it would be possible for the corresponding
variable to assume a positive value in the optimal
solution.
OBJECTIVE FUNCTION VALUE
1)
VARIABLE
A
B
ROW
2)
3)

140.0000
VALUE
20.000000
20.000000
SLACK OR SURPLUS
.000000
.000000

REDUCED COST
.000000
.000000
DUAL PRICES
1.000000
.500000

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