Spreadsheet Modeling & Decision Analysis: A Practical Introduction To Management Science

Spreadsheet Modeling
& Decision Analysis

A Practical Introduction to
Management Science
5th edition
Cliff T. Ragsdale
Chapter 2
Introduction to Optimization
and Linear Programming
Introduction
We all face decision about how to use
limited resources such as:
Oil in the earth
Land for dumps
Time
Money
Workers
Mathematical Programming...
MP is a field of management science that
finds the optimal, or most efficient, way of
using limited resources to achieve the
objectives of an individual of a business.
a.k.a. Optimization
Applications of Optimization
Determining Product Mix

Manufacturing
Routing and Logistics
Financial Planning
Characteristics of
Optimization Problems
Decisions
Constraints
Objectives
General Form of an Optimization Problem

MAX (or MIN): f0(X1, X2, , Xn)
Subject to:
f1(X1, X2, , Xn)<=b1

:
fk(X1, X2, , Xn)>=bk
:
fm(X1, X2, , Xn)=bm
Note: If all the functions in an optimization are linear,

the problem is a Linear Programming (LP) problem
Linear Programming (LP) Problems

MAX (or MIN): c1X1 + c2X2 + + cnXn
Subject to:
a11X1 + a12X2 + + a1nXn <= b1

:
ak1X1 + ak2X2 + + aknXn >=bk
:
am1X1 + am2X2 + + amnXn = bm
An Example LP Problem
Blue Ridge Hot Tubs produces two types of hot
tubs: Aqua-Spas & Hydro-Luxes.
Pumps
Labor
Tubing
Unit Profit
Aqua-Spa
1
9 hours
12 feet
$350
Hydro-Lux
1
6 hours
16 feet
$300
There are 200 pumps, 1566 hours of labor,

and 2880 feet of tubing available.
5 Steps In Formulating LP Models:

1. Understand the problem.
2. Identify the decision variables.
X1=number of Aqua-Spas to produce
X2=number of Hydro-Luxes to produce
3. State the objective function as a linear

combination of the decision variables.
MAX: 350X1 + 300X2
5 Steps In Formulating LP Models

(continued)
4. State the constraints as linear combinations of

the decision variables.
1X1 + 1X2 <= 200
} pumps
9X1 + 6X2 <= 1566
} labor
12X1 + 16X2 <= 2880} tubing

5. Identify any upper or lower bounds on the
decision variables.
X1 >= 0
X2 >= 0
LP Model for
Blue Ridge Hot Tubs
MAX: 350X1 + 300X2
S.T.: 1X1 + 1X2 <= 200
9X1 + 6X2 <= 1566
12X1 + 16X2 <= 2880
X1 >= 0
X2 >= 0
Solving LP Problems:
An Intuitive Approach
Idea: Each Aqua-Spa (X1) generates the highest unit
profit ($350), so lets make as many of them as possible!
How many would that be?
Let X2 = 0
1st constraint:
1X1 <= 200
2nd constraint:
3rd constraint:
9X1 <=1566
or X1 <=174
12X1 <= 2880 or X1 <= 240
If X2=0, the maximum value of X1 is 174 and the total

profit is $350*174 + $300*0 = $60,900
This solution is feasible, but is it optimal?
No!
Solving LP Problems:
A Graphical Approach
The constraints of an LP problem
defines its feasible region.
The best point in the feasible region is
the optimal solution to the problem.
For LP problems with 2 variables, it is
easy to plot the feasible region and find
the optimal solution.
X2
Plotting the First Constraint
250
(0, 200)
200
boundary line of pump constraint

X1 + X2 = 200
150
100
50
(200, 0)
0
0
50
100
150
200
250
X1
Plotting the Second

Constraint
(0, 261)
X2
250
boundary line of labor constraint

9X1 + 6X2 = 1566
200
150
100
50
(174, 0)
0
0
50
100
150
200
250
X1
X2
Plotting the Third Constraint
250
(0, 180)
200
150
boundary line of tubing constraint

12X1 + 16X2 = 2880
100
Feasible Region
50
(240, 0)
0
0
50
100
150
200
250
X1
Plotting A Level Curve of the

Objective Function
X2
250
200
(0, 116.67)
150
objective function
350X1 + 300X2 = 35000
100
(100, 0)
50
0
0
50
100
150
200
250
X1
A Second Level Curve of the

Objective Function
X2
250
(0, 175)
200
objective function
350X1 + 300X2 = 35000
objective function
350X1 + 300X2 = 52500
150
100
(150, 0)
50
0
0
50
100
150
200
250
X1
X2
Using A Level Curve to Locate

the Optimal Solution
250
objective function
350X1 + 300X2 = 35000
200
150
optimal solution
100
objective function
350X1 + 300X2 = 52500
50
0
0
50
100
150
200
250
X1
Calculating the Optimal Solution

The optimal solution occurs where the pumps and labor
constraints intersect.
This occurs where:
X1 + X2 = 200 (1)
and
9X1 + 6X2 = 1566
(2)
From (1) we have, X2 = 200 -X1(3)

Substituting (3) for X2 in (2) we have,
9X1 + 6 (200 -X1) = 1566
which reduces to X1 = 122
So the optimal solution is,
X1=122, X2=200-X1=78
Total Profit = $350*122 + $300*78 = $66,100
X2
Enumerating The Corner Points
250
obj. value = $54,000
(0, 180)
200
Note: This technique will not work if

the solution is unbounded.
150
(80, 120)
(122, 78)
100
50

(174, 0)
obj. value = $0
(0, 0)
0
0
50
100
150
200
250
X1
Summary of Graphical Solution

to LP Problems
1. Plot the boundary line of each constraint
2. Identify the feasible region
3. Locate the optimal solution by either:
a. Plotting level curves
b. Enumerating the extreme points
Understanding How Things Change

See file Fig2-8.xls
Special Conditions in LP Models

A number of anomalies can occur in LP
problems:
Alternate Optimal Solutions
Redundant Constraints
Unbounded Solutions
Infeasibility
Example of Alternate Optimal

Solutions
X2
250
objective function level curve

450X1 + 300X2 = 78300
200
150
100
alternate optimal solutions
50
0
0
50
100
150
200
250
X1
Example of a Redundant
Constraint
X2
250
boundary line of tubing constraint

200
boundary line of pump constraint
150
boundary line of labor constraint
100
Feasible Region
50
0
0
50
100
150
200
250
X1
Example of an Unbounded
Solution
X2
1000
objective function
X1 + X2 = 600
800
-X1 + 2X2 = 400
objective function
X1 + X2 = 800
600
400
200
X1 + X2 = 400
0
0
200
400
600
800
1000
X1
Example of Infeasibility
X2
250
200
X1 + X2 = 200
feasible region for

second constraint
150
100
feasible region
for first constraint
50
X1 + X2 = 150
0
0
50
100
150
200
250
X1
End of Chapter 2

Spreadsheet Modeling & Decision Analysis: A Practical Introduction To Management Science

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Spreadsheet Modeling

& Decision Analysis

Determining Product Mix

General Form of an Optimization Problem

f1(X1, X2, , Xn)<=b1

Note: If all the functions in an optimization are linear,

Linear Programming (LP) Problems

a11X1 + a12X2 + + a1nXn <= b1

There are 200 pumps, 1566 hours of labor,

5 Steps In Formulating LP Models:

3. State the objective function as a linear

5 Steps In Formulating LP Models

4. State the constraints as linear combinations of

12X1 + 16X2 <= 2880} tubing

12X1 <= 2880 or X1 <= 240

If X2=0, the maximum value of X1 is 174 and the total

Plotting the First Constraint

boundary line of pump constraint

Plotting the Second

boundary line of labor constraint

Plotting the Third Constraint

boundary line of tubing constraint

Plotting A Level Curve of the

A Second Level Curve of the

Using A Level Curve to Locate

Calculating the Optimal Solution

9X1 + 6X2 = 1566

From (1) we have, X2 = 200 -X1(3)

Enumerating The Corner Points

Note: This technique will not work if

obj. value = $64,000

obj. value = $60,900

Summary of Graphical Solution

Understanding How Things Change

Special Conditions in LP Models

Example of Alternate Optimal

objective function level curve

alternate optimal solutions

boundary line of tubing constraint

-X1 + 2X2 = 400

feasible region for

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