Chapter 13: Optimization Modeling

2007 Pearson Education

Optimization

The process of selecting values of decision variables that maximize or minimize an objective function. Optimal solution the best set of decision variables

Constrained Optimization

Constraints - limitations or requirements that decision variables must satisfy.

The amount of material used to produce a set of products cannot exceed the available amount of 850 square feet. The amount of money spent on research and development projects cannot exceed the assigned budget of $300,000. Contractual requirements specify that at least 500 units of product must be produced. A mixture of fertilizer must contain exactly 30 percent nitrogen. We cannot produce a negative amount of product

(nonnegativity).

Constraint Functions

Amount of material used 850 square feet Amount spent on research and development $300,000 Number of units of product produced 500 Amount of nitrogen in mixture/total amount in mixture = 0.30 Amount of product produced 0

The left hand sides are called constraint functions.

Mathematical Representation

Suppose that the material requirements for three products are 3.0, 3.5, and 2.3 square feet per unit. Let A, B, and C represent the number of units of each product to produce. The amount of material used to produce A units of product A = 3.0A The amount of material used to produce B units of product B = 3.5B The amount of material used to produce C units of product C = 2.3C Constraint: 3.0A + 3.5B + 2.3C 850

Constraint Categories

Simple bounds Limitations Requirements Proportional relationships Balance constraints

Solutions

Feasible solution: any solution that satisfies all constraints A problem that has no feasible solutions is called infeasible.

Types of Optimization Problems

Linear Integer linear Nonlinear

A linear function is a sum of terms, each of which is some constant multiplied by a decision variable, for example: 2x + 3y - 12z

Transformation to Linear Functions

If two ingredients contain 20 percent and 33 percent nitrogen, respectively, then the fraction of nitrogen in a mixture of x pounds of the first ingredient and y pounds of the second ingredient is expressed by the constraint function (0.20x + 0.33y)/(x + y) If a constraint requires that the fraction to be 0.3, this can be rewritten as a linear function (0.20x + 0.33y) = 0.3(x + y) or -0.1x + 0.03y = 0

Common Model Types

Product mix Media selection Process selection Blending Production Planning Portfolio selection Multiperiod investment planning Transportation planning

Example: Product Mix

Components Required /Unit Component A Component B Gold Player 6 Platinum Player 6 3 5

Profit/unit $48 $70

Maximize Profit = 48G + 70P 6G + 6P 3,000 (Component A limitation) 3G + 5P 1750 (Component B limitation) G 0, P 0 (nonnegativity)

Example: Media Selection

Medium Radio TV Magazine Cost/ad $ 500 $ 2,000 $ 200 Exposure value/ad 2,000 3,500 2,700 Minimum Units 0 12 6 Maximum Units 15 30

Maximize 2000R + 3500T + 2700M 500R + 2000T + 200N 40000 0 R 15 T 12 6 N 30

Example: Process Selection

A textile mill produces three types of fabrics. The decision facing the plant manager is on what type of loom to process each fabric during the next 13 weeks. The mill has 15 regular looms and 3 dobbie looms. Dobbie looms can be used to make all fabrics and are the only looms that can weave certain fabrics. After weaving, fabrics are sent to the finishing department and then sold. Any fabrics that cannot be woven in the mill because of limited capacity will be purchased from an external supplier, finished at the mill, and sold at the selling price. In addition to determining which looms to process the fabrics, the manager also needs to determine which fabrics to buy externally.

LP Model

Di = number of yards of fabric i to produce on dobbie looms, i = 1, .

..,3 Ri = number of yards of fabric i to produce on regular looms, i = 1, . ..,3 Pi = number of yards of fabric i to purchase from an outside supplier, i = 1, . . . , 3
Min 0.65D1 + 0.61D2 + 0.50D3 ++ 0.61R2 + 0.50R3 + 0.85P1 + 0.75P2 + 0.65P3 D1 + P1 = 45,000 (Demand, fabric 1) D2 + R2 + P2 = 76,500 (Demand, fabric 2) D3 + R3 + P3 =10,000 (Demand, fabric 3) 0.213D1 + 0.192D2 + 0.227D3 6552 (Dobbie loom production time) 0.192R2 + 0.227R3 32,760 (Regular loom production time)

Example: Blending
Ingredient Sunflower seeds White millet Kibble corn Oats Cracked corn Wheat Safflower Canary grass seed Protein % 16.90 12 8.5 15.4 8.50 12 18 11.9 Fat % 26 4.1 3.8 6.3 3.80 1.7 17.9 4 Fiber % 29 8.3 2.7 2.4 2.70 2.3 28.8 10.9 Cost/lb. $0.22 $0.19 $0.10 $0.10 $0.07 $0.05 $0.26 $0.11

LP Model
Minimize 0.22X1 + 0.19X2 + 0.10X3 + 0.10X4 + 0.07X5 + 0.05X6 + 0.26X7 + 0.11X8 X1 + X2 + X3 + X4 + X5 + X6 + X7 + X8 = 1 (proportion) 0.169X1 + 0.12X2 + 0.085X3 + 0.154X4 + 0.085X5 +0 .12X6 + 0.18X7 + 0.119X8 0.13 (protein) 0.26X1 + 0.041X2 + 0.038X3 + 0.063X4 + 0.038X5 + 0.017X6 + 0.179X7 + 0.04X8 0.15 (fat) 0.29X1 + 0.083X2 + 0.027X3 + 0.024X4 + 0.027X5 + 0.023X6 + 0.288X7 + 0.109X8 0.14 (fiber)

Xi 0, for i = 1,2,...8

Production Planning
PA
Autumn

PW
IA
Winter

PS
IW
Spring

IS

150

400

50

Minimize 11PA + 14PW + 12.50PS + 1.20IA + 1.20IW + 1.20IS PA - IA = 150 PW + IA - IW = 400 PS + IW - IS = 50 Pi 0, for all i Ii 0, for all i

Cash Management

A financial manager must ensure that funds are available to pay company expenditures but would also like to maximize interest income. Three short-term investment options are available over the next six months: A, a one-month CD that pays 0.5 percent, available each month; B, a three-month CD that pays 1.75 percent, available at the beginning of the first four months; and C, a six-month CD that pays 2.3 percent, available in the first month. The net expenditures for the next six months are forecast as $50,000, ($12,000), $23,000, ($20,000), $41,000, ($13,000). Amounts in parentheses indicate a net inflow of cash. The company must maintain a cash balance of at least $100,000 at the end of each month. The company currently has $200,000 in cash.

Model Development

Ai = amount ($) to invest in a one-month CD at the start of month i Bi = amount ($) to invest in a three-month CD at the start of month i Ci = amount ($) to invest in a six-month CD at the start of month i

LP Model

Transportation Problem
Plant/D.C. Marietta Minneapolis Demand Cleveland $12.60 $9.75 150 Baltimore $14.35 $12.63 350 Chicago $11.52 $8.11 500 Phoenix $17.58 $15.88 1000 Capacity 1200 800

LP Model
Minimize 12.60X11 + 14.35X12 +11.52X13 +17.58X14 +9.75X21 +12.63X22 +8.11X23 +15.88X24
X11 + X12 + X13 + X14 1200 X21 + X22 + X23 + X24 800 X11 + X21 = 150 X12 + X22 = 350 X13 + X23 = 500 X14 + X24 = 1000 Xij 0, for all i and j

Supply constraints

Demand constraints

Spreadsheet Modeling

Set up a logical format Define cells for the decision variables Define separate cells for the objective function and each constraint function Avoid Excel functions ABS, MIN, MAX, INT, ROUND, IF, COUNT

Example: Product Mix Model

Spreadsheet Formulas

Example: Transportation Model

Integer Optimization Models

IP Model: some or all decision variables are restricted to integer values Binary variables: 0 or 1
0 x 1 and integer

Example: Cutting Stock Problem

Suppose that a company makes standard 100-inch-wide rolls of thin sheet metal, and slits them into smaller rolls to meet customer orders for widths of 12, 15, and 30 inches. The demands for these widths vary from week to week. Demands this week are 870 12 rolls, 450 15 rolls, and 650 30 rolls. Cutting patterns:

IP Model

Define Xi to be the number of 100 rolls to cut using cutting pattern i, for i = 1,,5. Min 10X1 + 10X2 + 4X3 + 1X4 + 1X5
0X1 + 0X2 + 8X3 + 2X4 + 7X5 870 (12 rolls) 6X1 + 0X2 + 0X3 + 1X4 + 1X5 450 (15 rolls) 0X1 + 3X2 + 0X3 + 2X4 + 0X5 650 (30 rolls) Xi 0 and integer

IP Models With Binary Variables

A binary variable x is simply a general integer variable that is restricted to being between 0 and 1: 0 x 1 and integer We usually just write this as x = 0 or 1

Example: Project Selection

Maximize $180,000x1 + $220,000x2 + $150,000x3 + $140,000x4 + $200,000x5 $55,000x1 + $83,000x2 + $24,000x3 + $49,000x4 + $61,000x5 $150,000 (cash limitation) 5x1 + 3x2 + 2x3 + 5x4 + 3x5 12 (personnel limitation)

Project Selection Model Spreadsheet

Modeling Logical Conditions

Logical Condition
If A then B If not A then B If A then not B At most one of A and B If A then B and C If A and B then C

Constraint Model Form

B A or B A 0 B 1 A or A + B 1 B 1 A or B + A 1 A+B1 (B A and B A) or B + C 2A C A + B 1 or A + B C 1

Example: Supply Chain Facility Location

Xij = 1 if customer zone j is assigned to DC i, and 0 if not, and Yi = 1 if CD i is chosen from among a set of k potential locations. Cij = the total cost of satisfying the demand in customer zone j from DC i. Min CijXij Xij =1, for every j (each customer assigned to exactly one DC) Yi = k, for every i (choose k DCs) Xij Yi, for every i and j (only assign zone j to DC i if DC i is
selected)

Example: Distribution Center Location

Plant/D.C. Marietta Minneapolis Cleveland $12.60 $9.75 Baltimore $14.35 $12.63 Chicago $11.52 $8.11 Phoenix $17.58 $15.88 Capacity 1200 800

Fayetteville
Chico Demand

$10.41
$13.88 300

$11.54
$16.95 500

$9.87
$12.51 700

$8.32
$11.64 1800

1500
1500

Select a new plant from among Fayetteville and Chico

IP Model
Minimize 12.60X11 + 14.35X12 +11.52X13 +17.58X14 +9.75X21 +12.63X22 +8.11X23 +15.88X24 + 10.41X31 + 11.54X32 + 9.87X33 + 8.32X34 + 13.88X41 + 16.95X42 + 12.51X43 + 11.64X44 X11 + X12 + X13 + X14 1200 X21 + X22 + X23 + X24 800 X31 + X32 + X33 + X34 1500Y1 X41 + X42 + X43 + X44 1500Y2 X11 + X21 + X31 + X41 = 300 X12 + X22 + X32 + X42 = 500 X13 + X23 + X33 + X43 = 700 X14 + X24 + X34 + X44 = 1800 Y1 + Y2 = 1 Xij 0, for all i and j Y1, Y2 = 0,1

Ensures that exactly one DC is selected. Y1 corresponds to Fayetteville; Y2 corresponds to Chico

Nonlinear Optimization

Either objective function or constraint functions are not linear Models are unique in structure Solution techniques are different from linear and integer optimization

Example: Hotel Pricing With Elastic Demand

A 450-room hotel has the following history:

Model Development

Projected number of rooms of a given type sold = (Historical Average Number of Rooms Sold) + (Elasticity)(New Price - Current Price)(Historical Average Number of Rooms Sold)/(Current Price) Define S = price of a standard room, G = price of a gold room, and P = price of a platinum room.
Total Revenue = S (625 - 4.41176S ) + G (300 - 2.04082G ) + P (100 0.35971P ) = 625S + 300G + 100P - 4.41176S 2 - 2.04082G 2 -0.35971P 2

Model
Maximize 625S + 300G + 100P - 4.41176S 2 - 2.04082G 2 -0.35971P 2 70 S 90 90 G 110 120 P 149 (price range restrictions)

(625 - 4.41176S ) + (300 = 2.04082G ) + (100 = 0.35971P ) 450 or 1025 - 4.41176S - 2.04082G - 0.35971P 450 (room limitation)

Spreadsheet Model

Example: Markowitz Portfolio Model

Select stocks to minimize portfolio k variance k 2 2

s
i 1

xi

2s
i 1 ji

ij

xix j

and ensure a specified expected return

Example
Stock 1 Stock 2 Stock 3

Variance-Covariance Matrix Stock 1 Stock 2 Stock 3 .025 .015 -.002 .030 .005 .004
12% 7%

Exp. return 10%

Minimize Variance = 2 2 .025 x 1 .030 x 2 .004 x 3 0.03 x 1 x 2 - 0.004 x 1 x 3 0.010 x 2 x 3 2 x1 + x2 + x3 = 1 10x1 + 12x2 + 7x3 10 (required return) x1, x2, x3 0