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Decision Modeling and Applications

Thomas Vossen
Associate professor of Operations Management
Leeds School of Business, University of Colorado
Todays Agenda
Solving LPs using Excel Solver

Even more LP examples

Case Study:
Al-Manakh Stock Market

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Solving LPs using Excel Solver

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Spreadsheet Solvers
The company that makes the Solver
in Excel is Frontline Systems, Inc.
Check out their web site:
http://www.solver.com

Other packages for solving MP


problems:
AMPL, LINDO, CPLEX, Gurobi
Opensolver

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The Steps in Implementing
an LP Model in a Spreadsheet
1. Organize the data for the model on
the spreadsheet.
2. Reserve separate cells in the
spreadsheet for each decision
variable in the model.
3. Create a formula in a cell in the
spreadsheet that corresponds to the
objective function.
4. For each constraint, create a formula
in a separate cell in the spreadsheet
that corresponds to the left-hand side
(LHS) of the constraint.
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How Solver Views the Model
Target cell - the cell in the spreadsheet
that represents the objective function

Changing cells - the cells in the


spreadsheet representing the decision
variables

Constraint cells - the cells in the


spreadsheet representing the LHS
formulas on the constraints

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Lets do it
Create a spreadsheet model
for
Example 1: Diet Problem
Example 2: Transportation
Problem
Example 3: Workforce Planning

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Goals For Spreadsheet Design
Communication - A spreadsheet's primary business
purpose is communicating information to managers.

Reliability - The output a spreadsheet generates


should be correct and consistent.

Auditability - A manager should be able to retrace


the steps followed to generate the different outputs
from the model in order to understand and verify
results.

Modifiability - A well-designed spreadsheet should


be easy to change or enhance in order to meet
dynamic user requirements.
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Hazards of Spreadsheet Design
$24-million spreadsheet "clerical error

June 03, 2003 TORONTO (Reuters) - TransAlta Corp. said on


Tuesday it will take a $24 million charge to earnings after a
bidding snafu landed it more U.S. power transmission hedging
contracts than it bargained for, at higher prices than it wanted
to pay.
[...] the company's computer spreadsheet contained
mismatched bids for the contracts, it said. "It was literally a
cut-and-paste error in an Excel spreadsheet that we did not
detect when we did our final sorting and ranking bids prior to
submission," TransAlta chief executive Steve Snyder said in a
conference call. "I am clearly disappointed over this event. The
important thing is to learn from it, which we've done."
As New York ISO rules did not allow for a reversal of the bids,
the contracts went ahead.
- http://eusprig.org/horror-stories.htm

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Spreadsheet Design Guidelines - I
Organize the data, then build the
model around the data
Do not embed numeric constants in
formulas
Things which are logically related
should be physically related
Use formulas that can be copied
Column/rows totals should be close to
the columns/rows being totaled

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Spreadsheet Design Guidelines - II
The English-reading eye scans left
to right, top to bottom.
Use color, shading, borders and
protection to distinguish
changeable parameters from other
model elements.
Use text boxes, cell notes and
names to document various
elements of the model.
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Template Approach to formulating LPs

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Template Approach to formulating LPs
Common Templates:
Product mix problems
Transportation Problems
Blending problems
Covering/Packing problems (i.e. scheduling)
Problems that involve Decisions over Time

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Production over Time
SilComputer needs to meet the demand of its largest corporate
and educational customers for notebook computers over the
next four quarters (before its current model becomes obsolete).
SilComputer currently has 5,000 notebook computers in inventory.
Expected demand over the next four quarters for its notebook is
7,000; 15,000; 10,000; and 8,000.
SilComputer has sufficient capacity and material to produce up to
10,000 computers in each quarter at a cost of $2000 per notebook.
By using overtime, up to an additional 2,500 computers can be
produced at a cost of $2200 each.
Computers produced in a quarter can be used either to meet that
quarters demand, or be held in inventory for use later. Each
computer in inventory is charged $100 to reflect carrying costs.

How should SilComputer meet its demand for notebooks at


minimum cost?

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Investments over Time
We are going to manage an investment portfolio over a 6-year
time horizon. We begin with $1000, and at various times we can
invest in one or more of the following:

Savings account X, annual yield 5%.


Security Y, 2-year maturity, total yield 12% if bought now, 11%
thereafter.
Security Z, 3-year maturity, total yield 18%.
Security W, 4-year maturity, total yield 24%.

To keep things simple we will assume that each security can be


bought
in any denomination. We can make savings deposits or
withdrawals
anytime. We can buy Security Y any year but year 3. We can buy
Security Z anytime after the first year. Security W, now available,
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one-time opportunity.
Cutting Stock Problems
The Papyrus Company prints various types of brochures for its
customers. The raw material for these brochures comes in 50-
inch width rolls, which cost $500/roll and are 1,000 feet long.
Papyrus currently has 3 orders:
A brochure which is 16 wide with a run-length of 400,000
feet
A brochure which is 30 wide with a run-length of 80,000 feet
A brochure which is 24 wide with a run-length of 120,000
feet

The question is how to slit the larger raw material rolls into
widths suitable for the brochures, using its paper as efficiently
as possible.

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Another Example: Regression

Fit a linear trendline to data to


minimize mean absolute deviation (not
usual lse).

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Case Study

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Case Study
A solution to
Post Crash Debt Entanglements in
Kuwaits Al-Manakh Stock Market,
Elimam et al.,
Interfaces 27:Jan-Feb 1997

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Kuwaits Al-Manakh Stock Market
Unofficial, unregulated stock market
emerged after 1977 stock market collapse

Heavy use of post-dated checks


Premiums of spot price paid for delays in
payment (60%, 200-300%)

Traditional speculative market bubble .

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Al-Manakh Market Collapse
Securities fell by 60-98%
Banks, industrial firms, individual investors
involved
Outstanding debts of $94 billion
95% involved only 18 traders
350 bankruptcies in early days
Social unrest leads to ..

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Damage Control Measures
Government establishes
Clearinghouse to collect traders financial
data
Trust fund to compensate small investors
Arbitration panel to effect settlements
Complicated by debt entanglements

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Debt Entanglements

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Debt Settlement Ratios (DSRs)

Complications, Issues?
Other complicating factors?

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Classification of Traders

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Questions
Determine a method of allocating
payments between traders using
the example given in the case
First ignore the asset breakdown.
How should the total payments be
allocated among asset classes?

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Problem Data (no asset breakdown)

A B C D Total Total
Receivables Assets
A - 42 5 15 62 10
B 9 - 40 15 64 3
C 74 23 - 20 117 85
D 0 0 0 - 0 30
Total 83 65 45 50
Payables

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LP formulation
Decisions

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LP formulation
Objective Function

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LP formulation
Constraints

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Summary of LP Formulation

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Further Issues
Modeling Aspects
Choice of objective, data gathering, distribution of
payments by asset type, etc.

Solutions widely accepted, stabilized


economy, prevented prolonged litigation,
avoided family feuds
Etc., etc., etc.

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Next Week

LP Sensitivity Analysis
Read Chapter 4

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