Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning. 2-1 Modeling and Solving LP Problems in a Spreadsheet Chapter 3

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning. 2-2 Introduction u Solving LP problems graphically is only possible when there are two decision variables u Few real-world LP have only two decision variables

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning. 2-3 Spreadsheet Solvers u The company that makes the Solver in Excel, Lotus 1-2-3, and Quattro Pro is Frontline Systems, Inc. web site: u Other packages for solving MP problems: AMPLLINDO CPLEXMPSX

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning. 2-4 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 to represent 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.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning. 2-5 The Blue Ridge Hot Tubs Example... MAX: 350X X 2 } profit S.T.:1X 1 + 1X 2 <= 200} pumps 9X 1 + 6X 2 <= 1566} labor 12X X 2 <= 2880} tubing X 1, X 2 >= 0} nonnegativity

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning. 2-6 Implementing the Model See file Fig3-1.xls

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning. 2-7 How Solver Views the Model u Target cell - the cell in the spreadsheet that represents the objective function u Changing cells - the cells in the spreadsheet representing the decision variables u Constraint cells - the cells in the spreadsheet representing the LHS formulas on the constraints

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning. 2-8 Goals For Spreadsheet Design  Communication - A spreadsheet's primary business purpose is that of 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 the model and verify results.  Modifiability - A well-designed spreadsheet should be easy to change or enhance in order to meet dynamic user requirements.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning. 2-9 Spreadsheet Design Guidelines u Organize the data, then build the model around the data. u Do not embed numeric constants in formulas. u Things which are logically related should be physically related. u Use formulas that can be copied. u Column/rows totals should be close to the columns/rows being totaled. u The English-reading eye scans left to right, top to bottom. u Use color, shading, borders and protection to distinguish changeable parameters from other model elements. u Use text boxes and cell notes to document various elements of the model.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Make vs. Buy Decisions: The Electro-Poly Corporation u Electro-Poly is a leading maker of slip-rings. u A $750,000 order has just been received. Model 1 Model 2Model 3 Number ordered3,0002, Hours of wiring/unit21.53 Hours of harnessing/unit121 Cost to Make$50$83$130 Cost to Buy$61$97$145 u The company has 10,000 hours of wiring capacity and 5,000 hours of harnessing capacity.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Decision Variables M 1 = Number of model 1 slip rings to make in-house M 2 = Number of model 2 slip rings to make in-house M 3 = Number of model 3 slip rings to make in-house B 1 = Number of model 1 slip rings to buy from competitor B 2 = Number of model 2 slip rings to buy from competitor B 3 = Number of model 3 slip rings to buy from competitor

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Objective Function Minimize the total cost of filling the order. MIN:50M M M B B B 3

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Constraints u Demand Constraints M 1 + B 1 = 3,000} model 1 M 2 + B 2 = 2,000} model 2 M 3 + B 3 = 900} model 3 u Resource Constraints 2M M 2 + 3M 3 <= 10,000 } wiring 1M M 2 + 1M 3 <= 5,000 } harnessing u Nonnegativity Conditions M 1, M 2, M 3, B 1, B 2, B 3 >= 0

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Implementing the Model See file Fig3-17.xls

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning An Investment Problem: Retirement Planning Services, Inc. u A client wishes to invest $750,000 in the following bonds. Years to CompanyReturn MaturityRating Acme Chemical8.65%111-Excellent DynaStar9.50%103-Good Eagle Vision10.00%64-Fair Micro Modeling8.75%101-Excellent OptiPro9.25%73-Good Sabre Systems9.00%132-Very Good

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Investment Restrictions u No more than 25% can be invested in any single company. u At least 50% should be invested in long- term bonds (maturing in 10+ years). u No more than 35% can be invested in DynaStar, Eagle Vision, and OptiPro.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Decision Variables X 1 = amount of money to invest in Acme Chemical X 2 = amount of money to invest in DynaStar X 3 = amount of money to invest in Eagle Vision X 4 = amount of money to invest in MicroModeling X 5 = amount of money to invest in OptiPro X 6 = amount of money to invest in Sabre Systems

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Objective Function Maximize the total annual investment return. MAX:.0865X X X X X X 6

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Constraints u Total amount is invested X 1 + X 2 + X 3 + X 4 + X 5 + X 6 = 750,000  No more than 25% in any one investment X i <= 187,500, for all i u 50% long term investment restriction. X 1 + X 2 + X 4 + X 6 >= 375,000 u 35% Restriction on DynaStar, Eagle Vision, and OptiPro. X 2 + X 3 + X 5 <= 262,500 u Nonnegativity conditions X i >= 0 for all i

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Implementing the Model See file Fig3-20.xls

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning A Transportation Problem: Tropicsun Mt. Dora 1 Eustis 2 Clermont 3 Ocala 4 Orlando 5 Leesburg 6 Distances (in miles) Capacity Supply 275, , , , , ,000 Groves Processing Plants

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Decision Variables X ij = # of bushels shipped from node i to node j Specifically, the nine decision variables are: X 14 = # of bushels shipped from Mt. Dora (node 1) to Ocala (node 4) X 15 = # of bushels shipped from Mt. Dora (node 1) to Orlando (node 5) X 16 = # of bushels shipped from Mt. Dora (node 1) to Leesburg (node 6) X 24 = # of bushels shipped from Eustis (node 2) to Ocala (node 4) X 25 = # of bushels shipped from Eustis (node 2) to Orlando (node 5) X 26 = # of bushels shipped from Eustis (node 2) to Leesburg (node 6) X 34 = # of bushels shipped from Clermont (node 3) to Ocala (node 4) X 35 = # of bushels shipped from Clermont (node 3) to Orlando (node 5) X 36 = # of bushels shipped from Clermont (node 3) to Leesburg (node 6)

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Objective Function Minimize the total number of bushel-miles. MIN:21X X X X X X X X X 36

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Constraints u Capacity constraints X 14 + X 24 + X 34 <= 200,000} Ocala X 15 + X 25 + X 35 <= 600,000} Orlando X 16 + X 26 + X 36 <= 225,000} Leesburg  Supply constraints X 14 + X 15 + X 16 = 275,000} Mt. Dora X 24 + X 25 + X 26 = 400,000} Eustis X 34 + X 35 + X 36 = 300,000} Clermont u Nonnegativity conditions X ij >= 0 for all i and j

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Implementing the Model See file Fig3-24.xls

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning A Blending Problem: The Agri-Pro Company u Agri-Pro has received an order for 8,000 pounds of chicken feed to be mixed from the following feeds. NutrientFeed 1Feed 2 Feed 3Feed 4 Corn30%5%20%10% Grain10%3%15%10% Minerals20%20%20%30% Cost per pound$0.25$0.30$0.32$0.15 Percent of Nutrient in u The order must contain at least 20% corn, 15% grain, and 15% minerals.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Decision Variables X 1 = pounds of feed 1 to use in the mix X 2 = pounds of feed 2 to use in the mix X 3 = pounds of feed 3 to use in the mix X 4 = pounds of feed 4 to use in the mix

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Objective Function Minimize the total cost of filling the order. MIN: 0.25X X X X 4

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Constraints u Produce 8,000 pounds of feed X 1 + X 2 + X 3 + X 4 = 8,000 u Mix consists of at least 20% corn (0.3X X X X 4 )/8000 >= 0.2 u Mix consists of at least 15% grain (0.1X X X X 4 )/8000 >= 0.15 u Mix consists of at least 15% minerals (0.2X X X X 4 )/8000 >= 0.15 u Nonnegativity conditions X 1, X 2, X 3, X 4 >= 0

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning A Comment About Scaling  Notice that the coefficient for X 2 in the ‘corn’ constraint is 0.05/8000 = u As Solver solves our problem, intermediate calculations must be done that make coefficients large or smaller. u Storage problems may force the computer to use approximations of the actual numbers. u Such ‘scaling’ problems sometimes prevents Solver from being able to solve the problem accurately. u Most problems can be formulated in a way to minimize scaling errors...

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Re-Defining the Decision Variables X 1 = thousands of pounds of feed 1 to use in the mix X 2 = thousands of pounds of feed 2 to use in the mix X 3 = thousands of pounds of feed 3 to use in the mix X 4 = thousands of pounds of feed 4 to use in the mix

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Re-Defining the Objective Function Minimize the total cost of filling the order. MIN: 250X X X X 4

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Re-Defining the Constraints u Produce 8,000 pounds of feed X 1 + X 2 + X 3 + X 4 = 8 u Mix consists of at least 20% corn (0.3X X X X 4 )/8 >= 0.2 u Mix consists of at least 15% grain (0.1X X X X 4 )/8 >= 0.15 u Mix consists of at least 15% minerals (0.2X X X X 4 )/8 >= 0.15 u Nonnegativity conditions X 1, X 2, X 3, X 4 >= 0

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning A Comment About Scaling  Earlier the largest coefficient in the constraints was 8,000 and the smallest is 0.05/8 =  Now the largest coefficient in the constraints is 8 and the smallest is 0.05/8 = u The problem is now more evenly scaled.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning The Assume Linear Model Option u The Solver Options dialog box has an option labeled “Assume Linear Model”. u When you select this option Solver performs some tests to verify that your model is in fact linear. u These test are not 100% accurate & often fail as a result of a poorly scaled model. u If Solver tells you a model isn’t linear when you know it is, try solving it again. If that doesn’t work, try re-scaling your model.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Implementing the Model See file Fig3-33.xls

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning A Production Planning Problem: The Upton Corporation u Upton is planning the production of their heavy-duty air compressors for the next 6 months Unit Production Cost$240$250$265$285$280$260 Units Demanded1,0004,5006,0005,5003,5004,000 Maximum Production4,0003,5004,0004,5004,0003,500 Minimum Production2,0001,7502,0002,2502,0001,750 Month u Beginning inventory = 2,750 units u Safety stock = 1,500 units u Unit carrying cost = 1.5% of unit production cost u Maximum warehouse capacity = 6,000 units

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Decision Variables P i = number of units to produce in month i, i=1 to 6 B i = beginning inventory month i, i=1 to 6

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Objective Function Minimize the total cost production & inventory costs. MIN : 240P P P P P P (B 1 +B 2 )/ (B 2 +B 3 )/ (B 3 +B 4 )/ (B 4 +B 5 )/ (B 5 + B 6 )/ (B 6 +B 7 )/2 Note: The beginning inventory in any month is the same as the ending inventory in the previous month.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Constraints u Production levels 2,000 <= P 1 <= 4,000 } month 1 1,750 <= P 2 <= 3,500 } month 2 2,000 <= P 3 <= 4,000 } month 3 2,250 <= P 4 <= 4,500 } month 4 2,000 <= P 5 <= 4,000 } month 5 1,750 <= P 6 <= 3,500 } month 6 u Ending Inventory (EI = BI + P - D) 1,500 <= B 1 + P 1 - 1,000 <= 6,000} month 1 1,500 <= B 2 + P 2 - 4,500 <= 6,000} month 2 1,500 <= B 3 + P 3 - 6,000 <= 6,000} month 3 1,500 <= B 4 + P 4 - 5,500 <= 6,000} month 4 1,500 <= B 5 + P 5 - 3,500 <= 6,000} month 5 1,500 <= B 6 + P 6 - 4,000 <= 6,000} month 6

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Constraints (cont’d) u Beginning Balances B 1 = 2750 B 2 = B 1 + P 1 - 1,000 B 3 = B 2 + P 2 - 4,500 B 4 = B 3 + P 3 - 6,000 B 5 = B 4 + P 4 - 5,500 B 6 = B 5 + P 5 - 3,500 B 7 = B 6 + P 6 - 4,000 Notice that the B i can be computed directly from the P i. Therefore, only the P i need to be identified as changing cells.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Implementing the Model See file Fig3-31.xls

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning A Multi-Period Cash Flow Problem: The Taco-Viva Sinking Fund - I u Taco-Viva needs to establish a sinking fund to pay $800,000 in building costs for a new restaurant in the next 6 months. u Payments of $250,000 are due at the end of months 2 and 4, and a final payment of $300,000 is due at the end of month 6. u The following investments may be used. InvestmentAvailable in MonthMonths to MaturityYield at Maturity A1, 2, 3, 4, 5, 611.8% B1, 3, 523.5% C1, 435.8% D1611.0%

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Summary of Possible Cash Flows Investment A B C D A A B A C A B A Req’d Payments $0$0$250 $0$250$0$300 (in $1,000s) Cash Inflow/Outflow at the Beginning of Month

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Decision Variables A i = amount (in $1,000s) placed in investment A at the beginning of month i=1, 2, 3, 4, 5, 6 B i = amount (in $1,000s) placed in investment B at the beginning of month i=1, 3, 5 C i = amount (in $1,000s) placed in investment C at the beginning of month i=1, 4 D i = amount (in $1,000s) placed in investment D at the beginning of month i=1

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Objective Function Minimize the total cash invested in month 1. MIN :A 1 + B 1 + C 1 + D 1

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Constraints u Cash Flow Constraints 1.018A 1 – 1A 2 = 0 } month B A 2 – 1A 3 – 1B 3 = 250 } month C A 3 – 1A 4 – 1C 4 = 0 } month B A 4 – 1A 5 – 1B 5 = 250 } month A 5 –1A 6 = 0 } month D C B A 6 = 300 } month 7  Nonnegativity Conditions A i, B i, C i, D i >= 0, for all i

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Implementing the Model See file Fig3-35.xls

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Risk Management: The Taco-Viva Sinking Fund - II u Assume the CFO has assigned the following risk ratings to each investment on a scale from 1 to 10 (10 = max risk) InvestmentRisk Rating A1 B3 C8 D6 u The CFO wants the weighted average risk to not exceed 5.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Constraints u Risk Constraints 1A 1 + 3B 1 + 8C 1 + 6D 1 <= 5 A 1 + B 1 + C 1 + D 1 } month 1 1A 2 + 3B 1 + 8C 1 + 6D 1 <= 5 A 2 + B 1 + C 1 + D 1 } month 2 1A 3 + 3B 3 + 8C 1 + 6D 1 <= 5 A 3 + B 3 + C 1 + D 1 } month 3 1A 4 + 3B 3 + 8C 4 + 6D 1 <= 5 A 4 + B 3 + C 4 + D 1 } month 4 1A 5 + 3B 5 + 8C 4 + 6D 1 <= 5 A 5 + B 5 + C 4 + D 1 } month 5 1A 6 + 3B 5 + 8C 4 + 6D 1 <= 5 A 6 + B 5 + C 4 + D 1 } month 6

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning An Alternate Version of the Risk Constraints u Equivalent Risk Constraints -4A 1 - 2B 1 + 3C 1 + 1D 1 <= 0} month 1 – 2B 1 + 3C 1 + 1D 1 – 4A 2 <= 0} month 2 3C 1 + 1D 1 – 4A 3 – 2B 3 <= 0} month 3 1D 1 – 2B 3 – 4A 4 + 3C 4 <= 0} month 4 1D 1 + 3C 4 – 4A 5 – 2B 5 <= 0} month 5 1D 1 + 3C 4 – 2B 5 – 4A 6 <= 0} month 6 Note that each coefficient is equal to the risk factor for the investment minus 5 (the maximum allowable weighted average risk).

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Implementing the Model See file Fig3-38.xls

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Data Envelopment Analysis (DEA): Steak & Burger u Steak & Burger needs to evaluate the performance (efficiency) of 12 units.  Outputs for each unit ( O ij ) include measures of: Profit, Customer Satisfaction, and Cleanliness  Inputs for each unit ( I ij ) include: Labor Hours, and Operating Costs  The “Efficiency” of unit i is defined as follows: Weighted sum of unit i’s outputs Weighted sum of unit i’s inputs =

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Decision Variables w j = weight assigned to output j v j = weight assigned to input j A separate LP is solved for each unit, allowing each unit to select the best possible weights for itself.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Objective Function Maximize the weighted output for unit i : MAX :

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Defining the Constraints u Efficiency cannot exceed 100% for any unit u Sum of weighted inputs for unit i must equal 1  Nonnegativity Conditions w j, v j >= 0, for all j

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Important Point When using DEA, output variables should be expressed on a scale where “more is better” and input variables should be expressed on a scale where “less is better”.

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning Implementing the Model See file Fig3-41.xls

Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning End of Chapter 3