Lecture Notes

Lecture Notes
Optimisation
Optimisation Application Areas
Optimisation is nothing but utilisation of the resources at hand in the best possible manner. Because of its
ubiquitous nature, it is an indispensable tool in businesses and finds application in the following areas:
• Minimising cost
• Maximising profit
• Minimising error
• Design optimisation
• Management optimization
Some of the relevant industry examples where optimization is used are:
• Google AdWords bidding

• Airlines revenue management
• Project estimate based on NPV (Net Present Value)
Optimisation Terminologies
You learnt about the following terms related to optimisation:
• Objective Function: It essentially explains the entity that we want to maximise or minimise as per
the given business situation.
• Decision Variables: These are the quantities that the decision-makers control to optimise the
objective function.
• Constraints: These are the restrictions that we put on the decision variables to limit the values that
they can take.
• Sensitivity Analysis: It is a comparison of the different optimal solutions that you would obtain for
different constraints.
Optimisation in Excel
Next, you solved a simple optimization problem using Excel.
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The problem at hand was that the airline company XYZ wanted to maximise its revenue for a particular
Delhi to Bangalore flight by allocating the regular and discounted seats judiciously. The prices of the tickets
are:
• Discounted: 1190 INR

• Regular (Non-Discounted): 3085 INR
Your objective function for this problem thus became 3085x + 1190y.
You saw that using the SUMPRODUCT() function, you could simply implement the function '3085x + 1190y'
in Excel.
The cells C6 and C7 contain the price of the regular and discounted tickets respectively. The cells E6 and E7
are the ones where we will fill in the seats that we decide to allocate in order to get the optimal revenue.
Basically, these cells are the decision variables, i.e., the variables that need to be changed to arrive at the
optimal solution.
Then you filled in the constraints in Excel in the following format of LHS, sign, and RHS.
Finally, once you had all the data in the Excel in a proper format, you input all this information in the Solver
as shown below.

Finally, you saw how you can visualise the constraints and results of the graph.

The yellow polygon highlights the feasible solution region in the graph. And in the graph below, the purple
line showcases the optimal solution.
Airline Revenue Optimisation – Sensitivity Analysis
You started off by performing a sensitivity analysis on the airline optimisation problem when marketing
came into the picture. You understood that even though you would get the optimal revenue by selling all the
tickets at a regular price, you wouldn't do it to lose out on a customer segment.
Next, you performed another sensitivity analysis - this time for different capacities. There you saw that the
166-seater gave you the maximum marginal revenue and the 218 seater gave you the maximum market share
(since its capacity is the highest) along with a decent marginal revenue. You then understood that based on
the business situation - increasing profitability or increasing the market share, you would make the
appropriate decision.
Finally, you saw another example of connecting flight where the flight from Delhi to Bangalore had a stop at
Mumbai and understood that the main skill to have while solving any optimisation problem is the ability to
define the objective function, identify the decision variables, and formulate the constraints.

You should be able to:
• Understand the terminologies related to optimisation

• Understand the objective function, identify the decision variables, and formulate the constraints for
any optimisation problem at hand
• Solve the optimisation problem in Excel using the Solver Add-in

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Optimisation Application Areas

Some of the relevant industry examples where optimization is used are:

• Google AdWords bidding

You learnt about the following terms related to optimisation:

Next, you solved a simple optimization problem using Excel.

© Copyright 2018. UpGrad Education Pvt. Ltd. All rights reserved

• Discounted: 1190 INR

© Copyright 2018. UpGrad Education Pvt. Ltd. All rights reserved

© Copyright 2018. UpGrad Education Pvt. Ltd. All rights reserved

Airline Revenue Optimisation – Sensitivity Analysis

© Copyright 2018. UpGrad Education Pvt. Ltd. All rights reserved

• Understand the terminologies related to optimisation

© Copyright 2018. UpGrad Education Pvt. Ltd. All rights reserved

© Copyright 2018. UpGrad Education Pvt. Ltd. All rights reserved

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