ISDS 440 Dr. Z.

Goldstein

Notes on Sensitivity Analysis

INDRODUCTION The linear programming approach to optimization problems includes the assumption that input data is known and is not subject to changes. In real life this assumption may be found inaccurate. For example, cost estimates are sometimes subject to errors, and to changes over time due to dynamic behavior of the environment; Demand reflects market behavior, which in itself is unpredictable to some degree; Resource availability may change when management changes its preferences. So, a question about the sensitivity of the optimal solution to changes in input parameters seems to be valid, and important for the sake of making informed decisions. This is the topic dealt with in these notes. Sensitivity analysis allows for only one parameter change at a time. Since in reality several changes may occur simultaneously, well extend the discussion to the multiple changes case later. For now, two types of changes are considered within the framework of a linear programming model. (i) Changes in one objective-function coefficient. (ii) Changes in one constraint right-hand-side. First let us present a decision problem to be solved using linear programming. This problem will then serve as the vehicle with which we demonstrate the sensitivity analysis concepts. Example CPI manufactures a standard dining chair used in restaurants. The demand forecasts for chairs for quarter 1 and quarter 2 are 3700 and 4200, respectively. The chair contains an upholstered seat that can be produced by CPI or purchased from DAP. DAP currently charges $12.25 per seat, but has announced a new prices of $13.75 effective the second quarter. CPI can produce at most 3800 seats per quarter at a cost of $10.25 per seat. Seats produced or purchased in quarter 1 can be stored in order to satisfy demand in quarter 2. A seat cost CPI $1.50 each to hold in inventory, and maximum inventory cannot exceed 300 seats. Find the optimal make-or-buy plan for CPI. The problem is formulated as follows: X1 = Number of seats produced by CPI in quarter 1. X2 = Number of seats purchased from DAP in quarter 1. X3 = Number of seats carried in inventory from quarter 1 to 2. X4 = Number of seats produced by CPI in quarter 2. X5 = Number of seats purchased from DAP in quarter 2. The linear programming model is provided next: Minimize 10.25X1+12.5X2+1.5X3+10.25X4+13.75X5 Subject to: X1+ X2 = 3700+ X3 X3+ X4+X5=4200 X1 3800 X4 3800 X3 300 X1, X2, X3, X4, and X5 are non-negative

The linear programming model was run using SOLVER and the output results are given in the attached printout: a. What is the optimal solution including the optimal value of the objective function? X1 3800 X2 0 X3 100 X4 3800 X5 300

The total cost (objective function) = $82,175. Management is interested in the analysis of a few changes that might be needed for various reasons. For example, the per-unit inventory cost may change from $1.50 to $2.50 due to an expected increase in the interest rate and the insurance costs. How will this change affect the optimal production plan? In addition, if CPI is considering increasing storage space such that 100 more seats can be stored, what is the maximum it should be willing to pay for this additional space? Questions like these can be answered by performing sensitivity analysis. Let us discuss the relevant concepts and then return to this problem to answer a few interesting questions.

Changing the value of one objective - function coefficient

Changing the value of one coefficient in the objective function, makes the variable associated with this coefficient more attractive or less attractive for the optimization mechanism. For example, if we look for the solution that maximizes the objective 5X1 + 4X2, when the coefficient 4 becomes 6 (max 5X1 + 6X2), the variable X2 becomes more attractive. Therefore, one would expect the maximization mechanism to increase the value of X2 in the optimal solution. It turns out that it is not necessarily so. A change might occur in the structure of the optimal solution, but this depends on the amount by which the coefficient is changing. This is discussed next. Statement 1: The Range of Optimality The optimal solution of a linear programming model does not change if a single coefficient of some variable in the objective function changes within a certain range. This range is called the range of optimality. Note, that only one coefficient is allowed to change for the range of optimality to apply. We can find the range of optimality for each objective coefficient in the SOLVER output.
Adjustable Cells Cell $B$2 $C$2 $D$2 $E$2 $F$2 Name X1 X2 X3 X4 X5 Final Value 3800 0 100 3800 300 Reduced Cost 0 0.25 0 0 0 Objective Coefficient 10.25 12.5 1.5 10.25 13.75 Allowable Increase 2 1E+30 2 3.5 0.25 Allowable Decrease 1E+30 0.25 0.25 1E+30 2 Range of optimality: Upper bound = 10.25+2 = 12.25 Lower bound = 10.25 infinity = -infinity

Let us return to our example and answer a few sensitivity questions related to the range of optimality.

Question 1: If the per-unit inventory cost increased from $1.50 to $2.50, would the optimal solution change? Answer: First look for the changing parameter in the model. The coefficient 1.50 of the variable X3 in the objective function is changing to 2.5: (10.25X1+12.5X2+1.5X3+10.25X4+13.75X5). We need to look for the range of optimality of the coefficient 1.5. From the output (see below) the range of optimality is: Lower bound =1.5 0.25 = 1.25 Upper bound = 1.5 + 2 = 3.5
Objective Coefficient 1.5 Allowable Increase 2 Allowable Decrease 0.25

Interpretation: As long as the coefficient of X3 in the objective function (currently equals to 1.5) falls in the interval [1.25, 3.5] the current optimal solution does not change. Since the value 2.5 does fall in this range, there will be no change in the optimal solution (in terms of the variable values!). However, the objective value changes! New objective value = Current objective value + (Change in coefficient value)(the variable X3) = 82,175 + (2.5 1.5)(100)= 82,275. So, in spite of the increasing cost of holding inventory, it remains optimal to store 100 chairs at the end of quarter 1. Question 2: If DAP reduced the selling price per seat in quarter 1 from $12.50 to $12.20, should CPI consider the purchase of seats in quarter 1 (note that currently no seat is purchased in quarter 1)? Answer: The parameter changing is the coefficient of X2 (12.5) in the objective function. It is changing to 12.25. The range of optimality is: Lower bound = 12.5 0.25 = 12.25 Upper bound = 12.5 + infinity = Infinity
Objective Coefficient 12.5 Allowable Increase 1E+30 Allowable Decrease 0.25

Interpretation: Since $12.20 falls below the lower bound of the range of optimality, there will be a change in the optimal solution, and seats will be purchased at this price (to rephrase, X2 becomes sufficiently attractive, so the minimization mechanism will make it a part of the optimal plan). Notice, that the objective value is likely to change, because the variables are optimized at different values. However, we cannot calculate the new objective value without re-running the model. Comment: If the changing coefficient falls exactly on the boundary of the range of optimality, there will be more than one optimal solution with the same objective function value (called the multiple optimal or the alternate optimal solution case). For example, assume the coefficient 12.50 just discussed becomes 12.25. The two optimal solutions are: Solution 1: the current solution; Solution 2: a new solution, shown next: 4

X1 3800

X2 200

X3 300

X4 3800

X5 100

For both solutions the objective value is 82,175

Changing the value of a constraint right-hand-side.

The right hand side of a constraint (when the linear programming model is written in a standard form) is a constant that represents resource availability, minimum requirement of some property, activity level, etc. Changes in the right hand side value may occur, and sometimes affect the optimal solution. The effects that such changes may cause depend on whether the constraint is relaxed or is restricted more. Let us look at the following small example: Max 2X1 + 3X2 Subject to X1 + 2X2 15 2X1 + X2 5. Changing the right hand side of constraint 1 by +1 unit (making it X1 + 2X2 16) makes it more relaxed, because we allow more values of X1 and X2 participate in the search for the optimal solution. Thus, the objective value cannot suffer from this change; either it remain the same or becomes better. Changing the right hand side of constraint 1 by -1 unit (making it X1 + 2X2 14) makes it more restrictive, because values included before in the feasible region are not feasible anymore. Thus, the objective function value cannot improve; either it remains the same (because the missing values did not constitute the previous optimal solution), or it suffers since the previous optimal solution is now infeasible. The same observations (only of opposite directions) can be made for constraint 2. Since this constraint is of the type, reducing its right hand side (making it 2X1 + X2 4) relaxes the constraint (check yourself that more values of the decision variables are now feasible); while increasing its right hand side makes it more restrictive. To summarize we can state: Statement 2: (i) Increasing the right hand side of a type constraint, or decreasing the right hand side of a type constraint relaxes the constraint, thus the new objective value at the new optimal solution is either the same (no change) or better. For a maximization problem better means higher (a positive change in the objective value), and for a minimization problem better means lower (negative change in the objective value). (ii) Decreasing the right hand side of a type constraint, or increasing the right hand side of a type constraint restricts the constraint, thus the new objective value at the new optimal solution is either the same (no change) or worse. For a maximization problem worse means lower objective value (the change in the objective value has a negative sign), and for a minimization problem worse means a larger objective value (the change in the objective has a positive sign).

Statement 3: The Shadow Price and the range of feasibility. (i) The shadow price for a constraint is defined as the change in the objective value when the right hand side of that constraint is increased by one unit. (ii) The shadow price value remains unchanged as long as the right hand side of the constraint in question remains within a certain range called Range of Feasibility. The shadow price and the range of feasibility for all the constraints appear in the computer output.
Final Name Demand Quart 1 Demand Quart 2 Capacity Quart 1 Capacity Quart 2 Value 3700 4200 3800 3800 Shadow Price 12.25 13.75 -2 -3.5 Constraint R.H. Side 3700 4200 3800 3800 Allowable Increase 100 1E+30 200 300 Allowable Decrease 200 300 100 Range of Feasibility: Upper bound = 3700+ 100 = 3800 Lower bound = 3700 200 = 3500

To illustrate, for constraint 1 the range of feasibility is [3500, Storage 100 0 300 1E+30 200 3800]. That is, if the right hand side of the constraint changes within this range the shadow price remains 12.25. What is the significance of this result? What economical implication does it have? The following two questions deal with this topic.
3800

Example continued Question 3: Management at CPI would like to understand the effects of different demand levels on the optimal solution and the total cost. Specifically, you are asked to find the total cost of meeting the demand, if in the first quarter well experience an increase of 50 units in the demand for chairs. Answer: The parameter changing is the right hand side of constraint 1. The new right hand side value is 3750, still in the range of feasibility. The shadow price remains 12.25, thus, for each unit increase in the demand of quarter 1 the total cost increases by $12.25. The new total cost = Current total cost + (Shadow price)(50) = 82,175 + 12.25(50) = $82,787.5 Question 4: How much is it worth for CPI to increase production capacity in quarter 2? Answer: The parameter changing is the right hand side of constraint 4. Observing the shadow price of constraint 4, for each unit increase in the production capacity in quarter 2 the objective reduces by $3.5. So each additional unit of production capacity saves CPI $3.5, and therefore, the worth of each additional unit of production capacity for CPI in quarter 2 is $3.5. Note that this is the maximum management at CPI should be willing to pay for one additional unit of production capacity in quarter 2 (to illustrate, suppose management considers the use of overtime, which results in production capacity increase. Then, every unit produced in overtime should not cost more than additional $3.5 that is 10.25 + 3.5 = $13.75 at most).

Question 5: How much is it worth for CPI to increase its inventory capacity from 300 to 400 chairs? Answer: The parameter changing is the right hand side of constraint 5 (X3 400). Its shadow price is zero. Thus, the total cost (the objective function) does not change when the space allocated to inventory increases (this should not surprise you because currently only 100 seats are stored at the end of quarter 1, while 300 more could be stored). It turns out that no saving is obtained by adding storage space, thus CPI should not be willing to pay anything for this additional storage.

Multiple changes
All the changes considered above occurred one at a time (i.e. one objective coefficient changed while the others remained unchanged; one constraint right hand side changed while the other right hand sides remained unchanged); however, in many real world applications two or more changes need to be considered simultaneously. For example, in our example, DAP might announce purchase price changes in both quarters. To use the above results (that assume a single parameter change at a time) we turn to an empirical rule called The 100% percent rule. It deals with multiple changes in different objective coefficients and determine when would the optimal solution remains unchanged, as well as with multiple changes in constraints right hand sides and determine when would the shadow prices not change. The 100% Rule for objective-function coefficients: a. Define the objective function by C1X1+C2X2++ CnXn, and let more then one objective function coefficient change. Define the changes by 1, 2, ... , k. b. Calculate ratios as explained next: (i) If i is positive (that is the coefficient Ci increases) calculate the ratio { i/Max increase}. (Max increase appears in the SOLVER output for the range of optimality). (ii) If i is negative (that is the coefficient Ci decreases) calculate the ratio {| i|/Max decrease}. (Max decrease appears in the SOLVER output for the range of optimality). c. Add all the ratios calculated in part b. If the sum of ratios is less than 1 the optimal solution remains unchanged. If the sum of ratios is 1 or more it is unclear whether or not the optimal solution changes. To understand this rule let us return to our example. Question 6: If in quarter 2 the production cost per seat at CPI increases by $1.25; and DAP is changing its mind about the announced price increase leaving it at $12.50 per seat, would the optimal solution change? What would be the optimal total cost?

Answer: Two parameters are changing simultaneously: (i) the production unit cost in quarter 2 increases by DProd. = +1.25; (ii) the unit purchase price in quarter 2 decreases by DPurch. = 1.25 (note: we first used a unit purchase price of 13.75, but now we need to use12.5, so the parameter change is 12.5 13.75 = -1.25). To answer the question whether or not the solution changes, we must turn to the 100% rule since two parameters are changing simultaneously. By this rule we need to calculate two ratios and add them: {DProd./Max increase}+ {DPurch./Max decrease} = 1.25/3.5 +|(-1.25)|/2 = .982 Interpretation: Since the sum is less than 1, the optimal solution wont change. In spite of the changes that occur in favor of increasing the amount purchased from DAP while reducing the amount self-produced; the make-or-buy plan does not change. A new value of the objective function can now be calculated, in accordance with the changes in the unit cost. New Total Cost = Current Total Cost + (1.25)(X4) + (-1.25)(X5) = 82,175+1.25(3800)-1.25(300) = $86,550. The 100% Rule for constraints right hand side: d. Let the constraints right hand sides be called B1, B2, , Bm, and let more then one constraint Bi change. Define the changes by 1, 2, ... , k. e. Calculate ratios as explained next: (i) If i is positive (that is the coefficient Bi increases) calculate the ratio { i/Max increase}. (Max increase appears in the SOLVER output for the range of feasibility). (ii) If i is negative (that is the coefficient Bi decreases) calculate the ratio {| i|/Max decrease}. (Max decrease appears in the SOLVER output for the range of feasibility). f. Add all the ratios calculated in part b. If the sum of ratios is less than 1 the shadow prices remains unchanged. If the sum of ratios is 1 or more it is unclear whether or not the optimal solution changes. To understand this rule let us return again to our example. Question 7: If CPI increases its production capacity by 100 seats in both quarter 1 and 2, will there be any savings or total cost increase? Answer: Two constraints right hand sides are changing simultaneously. The production capacity of 3800 in quarters 1 and 2 increase by DQuart1 = DQuart2 = 100. By the 100% rule we have: {DQuart1/Max increase}+{DQuart2/Max increase} = {100/200 + 100/300) = .833. Since the sum is less than 1 the shadow prices remain unchanged, and thus can be used to find whether or not there going to be some savings. We need to calculate the change in the total cost. Change in total cost = (Shadow price Quarter 1)(100) + Shadow price in quarter 2)(100) = (-2)(100)+(-3.5)(100) = -$550. There will be a saving of $550 due to the production capacity increase (management should not pay more than $550 for the capacity increase in the two quarters combined). In our next topic, Parametric Analysis, we deal with multiple changes when the 100% rule is violated (possibly, when changes are greater than their maximum allowed).

Review Problems
1.

Eli Orchid can manufacture its newest pharmaceutical product in any of three processes. One costs
$14,000 per batch, requires 3 tons of one major ingredient and 1 ton of the other, and yields 2 tons of an output product. The second process costs $30,000 per batch, requires 2 and 7 ton of the ingredients, respectively, and yields 5 ton of the product. The third process costs $11,000 per batch, requires 9 and 2 tons of the ingredients, respectively, and yields 1 ton of the product. Orchid wants to find the least costly way to produce at least 50 ton of the new product, given that there are 75 tons of ingredient 1 and 60 tons of ingredient 2 on hand. The following LP model solves the problem Min 14x1 + 30x2 + 11x3 S.T. 2x1 + 5x2 + 1x3 >= 50 3x1 + 2x2 + 9x3 <= 75 lx1 + 7x2+ 2x3 <= 60 x1, x2, x3 >= 0 Answer each of the following sensitivity questions after running the model in SOLVER. (a) What is the marginal cost of production per ton of output? [by how much is the total cost going to increase if one more ton of the product is produced?]

(b)
(c)

How much would it cost to produce 70 tons of the new pharmaceutical products? How much would it cost to produce 100 tons of the new pharmaceutical products?

(d) How much should Orchid be willing to pay to obtain additional 20 tons of ingredient 1? How about ingredient 2? (e) How cheap would the third process have to become before it might be used in an optimal solution? (f) How much would the cost of the 50 tons of product increase if process 2 actually cost (i) $32,000 per batch? (ii) $39,000 per batch? (g) How much would the cost of the 50 tons of product decrease if process 1 cost $13,000 per batch? If it cost $10.000 per batch? (h) If additional 10 tons of ingredient 1 and 5 tones of ingredient 2 become available, what will happen to the total cost?

(i) (j)

Challenge: Suppose that the engineering department is thinking about a new process that produces 6 tons of the product using 3 tons of each of the two original ingredients. At what cost would this new process be economic to use? Challenge: Suppose that the three processes actually use 0.1. 0.3, and 0.2 ton per batch of a third ingredient but we do not know exactly how much of it is available. Determine the minimum amount needed if the optimal solution is not to change (the current optimal quantities used of each ingredient remain unchanged).

2.

Resource Allocation in Broadcasting

The program manager for Channel 10 wants to determine the best way to allocate the time for the 11:00-11:30 evening news broadcast. Specifically, she would like to determine the number of minutes of broadcast time to devote to local news, national news, weather, and sports. Over the 30-minute broadcast, 10 minutes are set aside for advertising. The station's broadcast policy states that at least 15% of the time available should be devoted to local news coverage; the time devoted to local news or national news combined must be at least 50% of the total broadcast time; the time devoted to the weather segment must not exceed the time devoted to the sports segment; the time devoted to the sports segment should not be more than the total time spent on the local and national news; and at least 20% of the time should be devoted to the weather segment. The production costs per minute are $300 for local news, $200 for national news, $100 for weather, and $100 for sports. a. Formulate and solve a linear program that can determine how the 20 minutes available should be used. Sensitivity analysis b. Interpret the shadow price for the constraint corresponding to the 20 minutes available time. c. Interpret the shadow price for the constraint corresponding to the requirement that at least 15% of the available time should be devoted to local coverage. What advice would you give the station manager given this shadow price? d. The fourth constraint expresses the requirement that sports coverage will last at least as much as weather coverage (see the Solver run provided). As far as total cost is concerned, is it necessary to set up such a requirement or there is some flexibility? In other words does sports-time really need to last at least as much as weather-time if the cost is to remain the same (particularly, how much can we deviate from this requirement without changing the total cost)? e. Suppose production cost for local news per minute decreases by $A while the production cost for national news per minute increases by the same amount. Find the largest A that still keeps the current optimal solution unchanged. f. Exchange the changes indicated in part e.

3. Blending
La Jolla Beverage Products is considering producing a wine cooler that would be a blend of a white wine, a rose wine, and fruit juice. To meet taste specifications, the wine cooler must consist of at least 50% white wine, at least 20% and no more than 30% rose, and 20% fruit juice. La Jolla purchases the wine from local wineries and the fruit juice from a processing plant in San Francisco. For the current production period, 10,000 gallons of white wine and 8000 gallons of rose wine can be purchased; there is no limit on the amount of fruit juice that can be ordered. The costs for the wine are $1.00 per gallon for the white and $1.50 per gallon for the rose; the fruit juice can be purchased for $0.50 per gallon. La Jolla Beverage Products can sell all the wine cooler it can produce for $2.50 per gallon. a. Formulate a linear program to determine the blend of the three ingredients that will maximize the total profit contribution. Solve the linear program to determine the number of gallons of each ingredient La Jolla should purchase and the total profit contribution they will realize from this blend. Sensitivity analysis: b. If La Jolla could obtain additional amounts of the white wine, should they do so? If so, how much should they be willing to pay for each additional gallon and how many additional gallons would they want to purchase at this price? c. If La Jolla could obtain additional amounts of the rose wine, should they do so? If so, how much should they be willing to pay for each additional gallon and how many additional gallons would they want to purchase? d. Interpret the shadow price for the constraint corresponding to the requirement that the wine cooler must contain exactly 20% fruit juice. What is your advice to management given this shadow price?

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4. Paper can be made from new wood pulp, from recycled office paper, or from recycled newsprint. New
pulp costs $100 per ton, recycled office paper $50 per ton, and recycled newsprint, $20 per ton. Four different processes can be used to produce paper. To produce one ton of paper: Process 1 uses 3 tons of wood pulp Process 2 uses 1 ton of wood pulp and 4 tons of recycled office paper Process 3 uses 1 ton of wood pulp and 12 tons of recycled newsprint Process 4 uses 8 tons of recycled office paper. At the moment only 80 tons of pulp is available. We wish lo produce 100 tons of new paper at minimum total cost. a) s.t. Explain why this problem can be modeled as the LP min 100x1+ 50x2 +20x3 x1 = 3y1 +y2 +y3 x2 = 4y2 + 8y4 x3 = 12y3 x1 <=80 y1+y2+y3+y4 >=100 All the variables are non-negative

b) Use your computer output to determine the marginal cost of paper production at optimality. That
is, the cost of increasing demands by one unit. .

c) How much we should be willing to pay to obtain an additional ton of pulp. d) Determine or bound as well as possible how much the optimal cost would change if the price of
pulp increased to $150 per ton.

e) Determine or bound as well as possible how much the optimal cost would change if the price of
recycled office paper decreased to $20 per ton.

f) Determine or bound as well as possible how much the optimal cost would change if the price of
recycled office paper increased to $75 per ton. g) Determine or bound as well as possible how much the optimal cost would change if the amount of new paper wood pulp needed decreased to 60 tons. h) Determine or bound as well as possible how much the optimal cost would change if the number of tons of new paper wood pulp needed increased to 200. i) Determine how cheap recycled newsprint would have to become before the primal solution could change. j) Use your computer output to determine whether a limit of 400 tons on recycled office paper would change the optimal solution. k) Use your computer output to determine whether a limit of 400 tons on recycled newsprint would change the optimal solution.

5. State the dual of each of the following LPs. (a) Min 17x1 +29x2 + x4 2x1 + 3x2 + 2x3 +3x4 40 4x1 +4x2 + x4 10 3x3 x4 = 0 x1, x2, x3, x4 0 (b) Max 44x1 - 3x2 + 15x3 + 56x4 1x1+1x2 + 1x3 + 1x4 = 20 1x1 -1x2 0 11

9x1 -3x2+ 1x3 1x4 25 x1,, x4 >= 0 (c) Write the dual model of the primal model formulated in problem 1 above, and interpret the dual
variable.

(d) State the dual of the primal LP given in problem 4 above, and perform the following tasks:
a. b.

c.
d.

Enter and solve the given LP with the class optimization software. Use your computer output to determine a corresponding optimal dual solution. Verify that your computer dual solution is feasible in the stated dual and that it has the same optimal solution objective value as the primal. Interpret the values of the dual variables.

Solutions

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