Quantitative Analysis for Management

Fourteenth Edition

Chapter 8
Linear Programming
Applications

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Learning Objectives
After completing this chapter, students will be able to:
8.1 Formulate and solve LP problems with Excel Solver in
marketing.
8.2 Formulate and solve LP problems with Excel Solver in
production.
8.3 Formulate and solve LP problems with Excel Solver in the
scheduling of employees.
8.4 Formulate and solve LP problems with Excel Solver in
finance.
8.5 Formulate and solve LP problems with Excel Solver in the
blending of ingredients.
8.6 Formulate and solve LP problems with Excel Solver in
revenue management.
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Introduction
• The graphical method of LP is useful for understanding
how to formulate and solve small LP problems
• Many types of problems can be solved using LP
• Principles developed here are applicable to larger
problems

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Win Big Gambling Club (1 of 2)
• Club promotes gambling junkets to the Bahamas
– $8,000 per week budget
– Goal is to reach the largest possible high-potential audience
– Place at least five radio spots per week
– No more than $1,800 can be spent on radio advertising each week

Audience Reached Cost Per Maximum Ads Per

Medium Per Ad Ad ($) Week
TV sport (1 minute) 5,000 800 12

Daily newspaper (full-page ad) 8,500 925 5

Radio spot (30 seconds, prime time) 2,400 290 25

Radio spot (1 minute, afternoon) 2,800 380 20

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Win Big Gambling Club (2 of 2)
• Problem formulation
X1  number of 1-minute TV spots taken each week
X 2  number of daily newspaper ads taken each week
X 3  number of 30-second prime-time radio spots taken each week
X 4  number of 1-minute afternoon radio spots taken each week
Objective:
Maximize audience coverage Subject to  5,000 X1  8,500 X 2  2,400 X 3  2,800 X 4
X1 12 (max TV spots/wk)
X 2 5 (max newspaper ads/wk)
X 3 25 (max 30-sec radio spots/wk)
X 4 20 (max 1-min radio spots/wk)
800 X1  925 X 2  290 X 3  380 X 4 $8,000 (weekly advertising budget)
X 3  X 4 5 (min radio spots contracted)
290 X 3  380 X 4 $1,800 (max dollars spent on radio) X1 , X 2 , X 3 , X 4 0

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Solution in Excel (1 of 8)
Program 8.1 Win Big Solution in Excel

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Management Sciences Association (1 of 4)
• MSA is a marketing research firm
• Several requirements for a statistical validity
1. Survey at least 2,300 U.S. households
2. Survey at least 1,000 households whose heads are
30 years old
3. Survey at least 600 households whose heads are between
31 and 50
4. Ensure that at least 15% of those surveyed live in a state
that borders Mexico
5. Ensure that no more than 20% of those surveyed who are
51 years of age or over live in a state that borders Mexico

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Management Sciences Association (2 of 4)
• MSA decides to conduct all surveys in person
• Estimates of the costs of reaching people in each age
and region category
• Goal is to meet the sampling requirements at the least
possible cost
Cost Per Person Cost Per Person Cost Per Person
Surveyed ($) Surveyed ($) Surveyed ($)
Age lesser than or equals 30
Age 31 to 50 Age greater than or equals 51

Age 30 Age 31  50 Age 51

Region
State bordering Mexico $7.50 $6.80 $5.50

State not bordering Mexico $6.90 $7.25 $6.10

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Management Sciences Association (3 of 4)
• Decision variables

X1  number of 30 or younger and in a border state

X 2  number of 31–50 and in a border state
X 3  number 51 or older and in a border state
X 4  number 30 or younger and not in a border state
X 5  number of 31–50 and not in a border state
X 6  number 51 or older and not in a border state

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Management Sciences Association (4 of 4)
Objective function
Minimize total interview costs $7.50 X1  $6.80 X 2  $5.50 X 3
 $6.90 X 4  $7.25 X 5  $6.10 X 6
subject to
X1  X 2  X 3  X 4  X 5  X 6  2,300 (total households)
X1  X4  1,000 (households 30 or younger)
X2  X5  600 (households 31–50)
X1  X2  X3  0.15( X1  X 2  X 3  X 4  X 5  X 6 ) (border states)
X3  0.20( X 3  X 6 ) (limit on age group 51+ who can live in
border state)
X1  X 2  X 3  X 4  X 5  X 6 0

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Solution in Excel (2 of 8)
Program 8.2 MSA Solution in Excel

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Manufacturing Applications
• Production mix
– LP can be used to plan the optimal mix of products to
manufacture
– Company must meet a myriad of constraints
▪ Financial concerns
▪ Sales demand
▪ Material contracts
▪ Union labor demands
– Primary goal is to generate the largest profit possible

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Fifth Avenue Industries (1 of 5)
• Produces four varieties of ties
– Expensive all-silk
– All-polyester
– Two are polyester-cotton or silk-cotton blends
• Cost and availability of the three materials used in the
production process

Material Cost Per Yard ($) Material Available Per Month (Yards)

Silk 24 1,200

Polyester 6 3,000

Cotton 9 1,600

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Fifth Avenue Industries (2 of 5)
The firm has contracts with several major department store chains
Selling Monthly Monthly Material Material
Price Per Contract Demand Required Per Requirements
Variety Of Tie Tie ($) Minimum Tie (Yards)
All-silk 19.24 5,000 7,000 0.125 100% silk
All-polyester 8.70 10,000 14,000 0.08 100% polyester
Poly–cotton 9.52 13,000 16,000 0.10 50% polyester–50%
combination cotton
Silk–cotton combination 10.64 5,000 8,500 0.11 60% silk–40%
cotton

X1  number of all-silk ties produced per month

X 2  number of all polyester(!) ties
X 3  number of blend 1 polyester-cotton ties

X 4  number of blend 2 silk-cotton ties

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Fifth Avenue Industries (3 of 5)
Establish profit per tie
Profit Sale price  material quantity  material cost

X1 $19  0.125 $24 $16.24

X 2 $8.70  0.08 $6 $8.22

X 3 $9.52  0.05 $6  0.05 $9 $8.77

X 4 $10.64  $1.98 $8.66

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Fifth Avenue Industries (4 of 5)
Objective function
Maximize profit  $16.24 X1  $8.22 X 2  $8.77 X 3  $8.66 X 4

Subject to 0.125 X1  0.066 X 4  1200 (yards of silk)

0.08 X 2  0.05 X 3  3,000 (yards of polyester)
0.05 X 3  0.44 X 4  1,600 (yards of cotton)
X1  5,000 (contract min for silk)
X1  7,000 (contract min)
X 2  10,000 (contract min for all polyester)
X 2  14,000 (contract max)
X 3  13,000 (contract min for blend 1)
X 3  16,000 (contract max)
X 4  5,000 (contract min for blend 2)
X 4  8,500 (contract max)
X1, X 2 , X 3 , X 4  0
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Fifth Avenue Industries (5 of 5)
Optimal solution will result in a profit of $412,028 per month

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Greenberg Motors (1 of 12)
• Manufactures two different electric motors for sale under contract to
Drexel Corp
– Orders placed three times a year for four months at a time
– Demand varies month to month
– Develop a production plan for the next four months

Table 8.2 Four-Month Order Schedule for Electrical Motors

Model January February March April

GM3A 800 700 1,000 1,100

GM3B 1,000 1,200 1,400 1,400

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Greenberg Motors (2 of 12)
• Production planning must consider four factors
1. Produce the required number of motors each month
and ensure the desired ending inventory
2. Desire to keep inventory carrying costs down
3. No-lay-off policy, minimize fluctuations in production
levels
4. Warehouse limitations

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Greenberg Motors (3 of 12)
• Basic data

Motor Ending INV Carrying Cost Labor HRS Req’d Production Cost Per Unit

GM3A 450 $0.36 1.3 $20

GM3B 300 $0.26 0.9 $15

2,240  Desired labor hours per month 2,560

Maximum total inventory space available 3,300 units
Labor cost increases 10% March 1

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Greenberg Motors (4 of 12)
Model formulation
Objective
Minimize total cost (production plus inventory carrying cost)
Constraints
4 demand constraints (1 constraint for each of 4 months) for G M3A
4 demand constraints (1 constraint for each of 4 months) for G M3B
2 constraints (1 for GM3A and 1 for GM3B) for the inventory at the end
of April
4 constraints for minimum labor hours (1 constraint for each month)
4 constraints for maximum labor hours (1 constraint for each month)
4 constraints for inventory storage capacity each month

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Greenberg Motors (5 of 12)
• Objective function—production costs
A i  Number of model GM3A motors produced in month i
(i = 1, 2, 3, 4 for January–April)
B i  Number of model GM3B motors produced in month I

Cost of production $20 A1  $20 A2  $22 A3  $22 A4

 $15B1  $15B2  $16.50B3  $16.50B4

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Greenberg Motors (6 of 12)
• Objective function—inventory carrying costs
lai  Units of GM3A left in inventory at the end of month i
(i = 1, 2, 3, 4 for January–April)

lbi  Units of GM3B left in inventory at the end of month

i (i = 1, 2, 3, 4 for January–April)

Cost of carrying inventory $0.36IA1  $0.36IA2  $0.36IA3

0.36IA4  $0.26IB1  $0.26IB2  $0.26IB3  $0.26IB4

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Greenberg Motors (7 of 12)
• Complete objective function

Minimize costs $20 A1  $20 A2  $22 A3  $22 A4

 $15B1  $15B2  $16.50B3 
$16.50B4  $0.36IA1  $0.36IA2 
$0.36IA3  0.36IA4  $0.26IB1 
$0.26IB2  $0.26IB3  $0.26IB4

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Greenberg Motors (8 of 12)
End-of-month inventory is calculated using
 Inventory at   Inventory at   Current   Sales to 
       
 the end of 
  the end of 
  month's   Drexel this 
 this month   last month   production   month 
       
Rearranged to create a standard format for a constraint
equation
 Inventory at   Current   Inventory at   Sales to 
       
 the end of 
  month's   the end of 
  Drexel this 
 last month   production   this month   month 
       

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Greenberg Motors (9 of 12)
The demand constraints

A 1 IA1 800 (demand for GM3A in Jan)

IA1  A 2  IA 2 700 (demand for GM3A in Feb)
IA 2  A3  IA 3 1,000 (demand for GM3A in Mar)
IA3  A 4  IA 4 1,000 (demand for GM3A in Apr)
B1  IB1 1,000 (demand for GM3B in Jan)
IB1  B 2  IB 2 1,200 (demand for GM3B in Feb)
IB 2  B 3  IB 3 1,400 (demand for GM3B in Mar)
IB 3  B 4  IB 4 1,400 (demand for GM3B in Apr)
IA 4 450 (inventory of GM3A at end of Apr)

IB 4 300 (inventory of GM3B at end of Apr)

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Greenberg Motors (10 of 12)
The labor hour constraints

1.3 A1  0.9B1 2,240 (min labor hours in Jan)

1.3 A2  0.9B2 2,240 (min labor hours in Feb)
1.3 A3  0.9B3 2,240 (min labor hours in Mar)
1.3 A4  0.9B4 2,240 (min labor hours in Apr)
1.3 A1  0.9B1 2,560 (max labor hours in Jan)
1.3 A2  0.9B2 2,560 (max labor hours in Feb)
1.3 A3  0.9B3 2,560 (max labor hours in Mar)
1.3 A4  0.9B4 2,560 (max labor hours in Apr)

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Greenberg Motors (11 of 12)
The storage constraints

IA1  IB1
 3,000 (storage capacity in Jan)

IA2  IB2 

 3,000 (storage capacity in Feb)

IA3  IB3 

 3,000 (storage capacity in Mar)

IA4  IB4 

  3,000 (storage capacity in Apr)

All variables  0 (nonnegativity constraints)

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Solution in Excel (3 of 8)
Program 8.4 Greenberg Motors Solution in Excel

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Greenberg Motors (12 of 12)
Table 8.3 Solution to Greenberg Motors Problem

Production Schedule January February March April

Units of GM3A produced 1,277 223 1,758 792

Units of GM3B produced 1,000 2,522 78 1,700

Inventory of G M3A carried 477 0 758 450

Inventory of G M3B carried 0 1,322 0 300

Labor hours required 2,560 2,560 2,355 2,560

• Total cost for this four-month period is about $169,295

• Complete model has 16 variables and 22 constraints

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Hong Kong Bank Scheduling (1 of 5)
• Hong Kong Bank requires between 10 and 18 tellers
• The bank wants to minimize total costs
– Lunch time from noon to 2 pm is generally the busiest
– Bank employs 12 full-time tellers, many part-time
workers
– Part-time workers must put in exactly four hours per
day, can start anytime between 9 am and 1 pm, and
are inexpensive

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Hong Kong Bank Scheduling (2 of 5)
– Full-time workers work from 9 am to 3 pm and have 1
hour for lunch
– Part-time hours are limited to a maximum of 50% of
the day’s total requirements
– Part-timers earn $8 per hour on average
– Full-timers earn $100 per day on average

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Hong Kong Bank Scheduling (3 of 5)
• Labor requirements
Table 8.4 Hong Kong Bank of Commerce and Industry
Time Period Number Of Tellers Required

9 AM–10 AM 10

10 AM–11 AM 12

11 AM–Noon 14

Noon–1 PM 16

1 PM–2 PM 18

2 PM–3 PM 17

3 PM–4 PM 15

4 PM–5 PM 10

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Hong Kong Bank Scheduling (4 of 5)
• Variables

F = full-time tellers

P1  part-timers starting at 9 am (leaving at 1 pm)

P2  part-timers starting at 10 am (leaving at 2 pm)

P3  part-timers starting at 11 am (leaving at 3 pm)

P4  part-timers starting at noon (leaving at 4 p m)
P5  part-timers starting at 1 pm (leaving at 5 pm)
• Objective

Minimize total daily personnel cost

$100F  $32(P1  P2  P3  P4  P5 )

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Hong Kong Bank Scheduling (5 of 5)
Constraints

F  P1 10 (9 AM  10AM needs)

F  P1  P2 12 (10 AM  11 AM needs)
0.5 F  P1  P2  P3 14 (11 AM  Noon needs)
0.5 F  P1  P2  P3  P4 16 (Noon  1 PM needs)
F  P2  P3  P4  P5 18 (1 PM  2 PM needs)
F  P3  P4  P5 17 (2 PM  3 PM needs)
F  P4  P5 15 (3 PM  4 PM needs)
F  P5 10 (4 PM  5 PM needs)

F 12

4 P1  P2  P3  P4  P5  0.50(10  12  14  16  18  17  15  10)

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Solution in Excel (4 of 8)
Program 8.5 Labor Planning Solution in Excel

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International City Trust Portfolio (1 of 4)
• International City Trust (ICT) invests in a number of
instruments
• The board places limits on each area
Investment Interest Return Maximum Investment $1,000,000s

Trade credits 7% 1.0

Corporate bonds 11% 2.5

Gold stocks 19% 1.5

Construction loans 15% 1.8

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International City Trust Portfolio (2 of 4)
• ICT has $5 million to invest. They want to:
– Maximize the return on investment over the next six
months
– Satisfy the diversification requirements set by the
board
• The board has also decided:
– At least 55% of the funds must be invested in gold
stocks and construction loans
– No less than 15% be invested in trade credit

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International City Trust Portfolio (3 of 4)
• Variables

X1  dollars invested in trade credit

X 2  dollars invested in corporate bonds
X 3  dollars invested in gold stocks
X 4  dollars invested in construction loans

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International City Trust Portfolio (4 of 4)
• Formulation
Maximize dollars of interest earned 0.07 X1  0.11X 2 
0.19 X 3  0.15 X 4
subject to: X1  1,000,000
X2  2,500,000
X3  1,500,000
X4  1,800,000
X3  X 4  0.55( X1  X 2  X 3  X 4 )
X1  0.15( X1  X 2  X 3  X 4 )
X1  X 2  X 3  X 4  5,000,000
X1, X 2 , X 3 , X 4 0
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Solution in Excel (5 of 8)
Program 8.6 ICT Portfolio Solution in Excel

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Goodman Shipping (1 of 3)
• Maximize the value shipped
– Goodman Shipping has to ship the following six items

Item Value ($) Weight (Pounds)

1 22,500 7,500

2 24,000 7,500

3 8,000 3,000

4 9,500 3,500

5 11,500 4,000

6 9,750 3,500

Truck capacity is 10,000 pounds

Let X i  proportion of each item i loaded

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Goodman Shipping (2 of 3)
• Formulation
Maximize load value $22,500 X1  $24,000 X 2  $8,000 X 3  $9,500 X 4
$11,500 X 5  $9,750 X 6

subject to
7,500 X1  7,500 X 2  3,000 X 3
 3,500 X 4  4,000 X 5  3,500 X 6 10,000lb
capacity X1  1
X2  1
X3  1
X4  1
X5  1
X6  1
X1, X 2 , X 3 , X 4 , X 5 , X 6 , 0

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Solution in Excel (6 of 8)
Program 8.7 Goodman Truck Loading Solution in Excel

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Goodman Shipping (3 of 3)
• Goodman Shipping raises an interesting issue
– The solution calls for one third of Item 1 to be loaded
on the truck
– What if Item 1 cannot be divided into smaller pieces?
• Rounding down leaves unused capacity on the truck and
results in a value of $24,000
• Rounding up is not possible since this would exceed the
capacity of the truck
• Using integer programming, the solution is to load one
unit of Items 3, 4, and 6 for a value of $27,250

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Whole Food Nutrition Center Blending
Problem (1 of 3)
• Use three bulk grains to blend a natural cereal

• Cereal must meet USRDA for four key nutrients

• Meet the requirements at the minimum cost

Nutrient USRDA
Protein 3 units
Riboflavin 2 units
Phosphorus 1 unit
Magnesium 0.425 unit

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Whole Food Nutrition Center Blending
Problem (2 of 3)
• Variables
X A  pounds of grain A in one 2-ounce serving of cereal
XB  pounds of grain B in one 2-ounce serving of cereal
XC  pounds of grain C in one 2-ounce serving of cereal
Table 8.5 Whole Food’s Natural Cereal Requirements
Cost Per Protein Riboflavin Phosphorus Magnesium
Grain Pound (Cents) (Units/LB) (Units/LB) (Units/LB) (Units/LB)

A 33 22 16 8 5

B 47 28 14 7 0

C 38 21 25 9 6

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Whole Food Nutrition Center Blending
Problem (3 of 3)
Minimize cost of a 2-ounce  $0.33 X A  $0.47 X B  $0.38 X C
serving
subject to

22 X A  28 X B  21X C 3 (protein units)

16 X A  14 X B  25 X C 2 (riboflavin units)
8 X A  7 X B  9 X C 1 (phosphorous units)
5 X A  0 X B  6 XC 0.425 (magnesium units)
XA  XB  XC 0.125 (total mix)
X A , X B , X C 0

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Solution in Excel (7 of 8)
Program 8.8 Whole Food Diet Solution in Excel

This solution is in pounds of grain

Expressed as ounces/serving, the optimal mix is:
0.4 oz Grain A
0.8 oz Grain B
0.8 oz Grain C
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Low Knock Oil Blending Problem (1 of 3)
• Company produces two grades of cut-rate gasoline by
blending two different types of crude oil

• The crude oil differs in cost and in its content of crucial

ingredients

Crude Oil Type Ingredient A (%) Ingredient B (%) Cost/Barrel ($)

X100 35 55 30.00

X220 60 25 34.80

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Low Knock Oil Blending Problem (2 of 3)

X1  barrels of crude X100 blended for refined regular

X 2  barrels of crude X100 blended for refined economy
X 3  barrels of crude X220 blended for refined regular
X 4  barrels of crude X220 blended for refined economy

Min Cost $30 X1  $30 X 2  $34.80 X 3  $34.80 X 4

Subject to
X1  X 3 25,000 plus the percentage
X 2  X 4 32,000 constraints

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Low Knock Oil Blending Problem (3 of 3)
At least 45% of each barrel of regular must be A
Therefore, 0.45  X1  X 3   minimum A

But 0.35 X1  0.60 X 3 amount of A in refined regular

So, 0.35 X1  0.60 X 3 0.45 X1  0.45 X 3
 0.10 X1  0.15 X 3 0  ingredient of A in regular gas

What is the ingredient B in economy constraint?

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Solution in Excel (8 of 8)
Program 8.9 Low Knock Oil Solution in Excel

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Other LP Applications
• Revenue Management—Airlines and Hotels
– Differential pricing of seats/rooms to generate
additional revenue
• Data Envelopment Analysis
– Minimize resources used
– Compare efficiency of similar units
• Transportation, Transshipment, and Assignment—
Logistics

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Copyright

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