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SUPPLEMENTARY
Nonlinear and
Chapter
Non-Smooth
Optimization
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Learning Objectives
After studying this chapter, you will be able to:
Recognize when to use nonlinear optimization models. Recognize a quadratic optimization model.
Develop and solve nonlinear optimization models for Identify non-smooth optimization models and when
different applications. to use Evolutionary Solver.
Interpret Solver reports for nonlinear optimization. Formulate and solve sequencing and scheduling
Use empirical data and line-fitting techniques in models using Solvers alldifferent constraint.
nonlinear optimization.
Figure A.1
Figure A.2
The next example shows a more-complex pricing decision model involving multiple
decision variables.
Figure A.3
Figure A.4
Example A.3 Interpreting Solver Reports for the Hotel Pricing Model
The Answer report, shown in Figure A.5, provides a change in the solution. Lagrange Multipliers in the
the same basic information as for linear models. The Constraints section are similar to shadow prices for lin-
Constraints section provides the value for the left-hand ear models. However, for nonlinear models, the Lagrange
side of each constraint in the Cell Value column, its bind- multipliers give only an approximate rate of change in the
ing or nonbinding status, and the value of the slack. In objective function as the right-hand side of a binding con-
this example, we see that the limit of 450 rooms and the straint is increased by 1 unit. Thus, for this example, if the
lower bound on the price of a gold room are binding. This number of available rooms is increased by 1 to 451, the
suggests that we could increase revenue if we could either total revenue would increase by approximately $12.08.
increase the capacity of the hotel or lower the minimum (For linear models, as we have seen, shadow prices give
price for a gold room. the exact rate of change within the Allowable Increase and
In the Adjustable Cells section of the Sensitivity Allowable Decrease limits.) Thus, you should be some-
report (Figure A.6), the Reduced Gradient is analogous what cautious when interpreting these values and will need
to the Reduced Cost in linear models. For this problem, to re-solve the models to find the true e ffect of changes
however, the objective function coefficient of each price to constraints. For this example, the o ptimal revenue
depends on many parameters; therefore, the reduced gra- for a 451-room capacity is $39,392.52, an increase of
dient is more difficult to interpret in relation to the prob- $39,392.52 $39,380.65 = $11.87, which is close to,
lem data. Thus, we cannot necessarily conclude that a but not exactly, the amount predicted by the Lagrange
decrease in the price of a gold room of $42.69 will force multiplier value.
Figure A.5
Hotel Pricing
Example Solver
Answer Report
Figure A.6
straight@line distance between 1X1, Y12 and 1X2, Y22 = 21X1 - X222 + 1Y1 - Y222 (A.2)
Equation A.2 is often called Euclidian distance. A second measure of distance is called
rectilinear distance, and it is computed as
This is often called the city block metric. Rectilinear distance moves along the coor-
dinate axes; Figure A.7 illustrates the difference. Distances are often weighted based
on the volume, or frequency, of trips between locations.
Figure A.7
Straight-Line versus
Rectilinear Distance
Figure A.8
Figure A.9
Analytics in Practice: L
ocating Collection Facilities
for the Red Cross
Two regional centers of the American Red Cross Blood
Program had the option of changing their main
warehouse/garage configuration and wanted to exam-
ine the effects of such a change.1 Both centers were in-
terested in considering either a single central site or a
combination of a central site with a satellite staging area
having limited facilities for storage of consumable sup-
plies, vehicle repairs, and so on. The problem was cast as
Littleny | Dreamstime.com
These costs are influenced by the amount ordered and the timing of the ordering decision.
For example, if many small orders are placed, then the ordering cost will be high, but little
inventory will be carried, reducing holding costs. On the other hand, if few large orders
are placed, then ordering costs will be low, but inventory-holding costs will be high. Simi-
larly, if orders are placed too early, excessive holding will result. If orders are placed too
late, the firm risks running out of stock and incurring shortages. Thus, decision makers
seek a minimum-cost balance among these costs. The economic order quantity is the
amount to order that minimizes the total cost of ordering and holding.
To develop an EOQ model, we need to make several important assumptions:
1. Only a single inventory item is considered.
2. The entire quantity arrives at one time.
3. The demand for the item is constant over time.
4. No shortages are allowed.
We define the following variables:
Q = order quantity
D = annual demand
C = unit cost of the item
C0 = cost per order placed
i = inventory carrying charge per unit
With an annual demand D and order quantity Q, the number of orders that must be
placed each year is D>Q. Therefore, the total annual ordering cost is
annual ordering cost = 1number of orders per year21cost per order2 = 1D>Q2C0 (A.4)
Inventory holding cost per unit is computed as a fixed percentage of the unit cost
of the item. Thus, if C is the unit cost of the item and i is the annual carrying charge rate
(expressed as a decimal fraction), the cost of holding 1 unit for 1 year is
holding cost per unit = iC (A.5)
The assumption of constant demand becomes important in determining an expression
for the average number of units in inventory. If Q units are ordered and then received
when the inventory level is depleted, the inventory will decrease to zero at a constant
rate until the next order arrives. Because the inventory level starts at Q and ends at zero,
the average inventory is
Q+0 Q
average inventory = = (A.6)
2 2
Thus, the annual inventory holding cost is
annual inventory holding cost = 1average inventory21annual holding cost per unit2
Q iCQ
= a b iC = (A.7)
2 2
We may now express the total annual inventory cost as
DC0 iCQ
total annual cost = + (A.8)
Q 2
Because Q is in the denominator of the order cost term, the model is nonlinear.
Figure A.10
Spreadsheet
Implementation
of the EOQ
Decision
Figure A.11
One issue that the model does not address directly is the decision of when to order. The
decision to reorder is based on the level of inventory and is called the reorder point. If we
order too early, we will have more stock than we need and incur unnecessary holding costs.
If we order too late, we run the risk of running out of stock before the order is received. Ide-
ally, we would like the order to be received at the same time we run out of stock. Therefore,
the reorder point depends on how long it takes an order to be received after it is placed;
this is called the lead time. We should set the reorder point to be the inventory level that
provides enough stock to satisfy all demand during the lead time. If the demand rate, D, is
constant, as assumed, and the lead time is t, then the reorder point should be equal to Dt.
In the previous example, we have D = 15,000 units per year. Suppose that the lead time
is 1 week, or 0.0192 years. The demand during the lead time is 115,000210.01922 = 288
units. If we place an order when the inventory level reaches 288, then the order will a rrive
when the stock level falls to zero. Understanding the lead time and reorder point will
be important when we discuss how to incorporate uncertain demand into this model in
Supplementary Chapter B.
advertising each product, and the constraints reflect Figure A.13 shows a spreadsheet model for this prob-
the budget limitation and advertising requirements. The lem (Excel file DTP Corporation) with the optimal Solver
model is solution; the Solver model is provided in Figure A.14. The
solution specifies that $370,000 of the advertising budget
maximize total profit = 69.612 + 1.1568 ln(X1)
be allocated to product 1 and the remainder to product 2.
+ 0.4177 ln(X2)
X1 + X2 " $500,000
X1 # $50,000
X2 # $50,000
Figure A.12
Figure A.13
Figure A.14
solution (think of the analogy of being at the top of a hill when the highest peak is on
another mountain). The solution found often depends a great deal on the starting solu-
tion in your spreadsheet. For complex problems, it is wise to run Solver from different
starting points. You should also look carefully at the Solver results dialog box when
the model has completed running. If it indicates Solver has found a solution. All con-
straints and optimality conditions are satisfied, then at least a local optimal solution has
been found. If you get the message Solver has converged to the current solution. All
constraints are satisfied. then you should run Solver again from the current solution to
try to find a better solution.
Quadratic Optimization
2H.M. Markowitz, Portfolio Selection, Efficient Diversification of Investments (New York: John Wiley &
Sons, 1959).
Define x j to be the fraction of the portfolio to invest in stock j. The variance of a portfolio
is the weighted sum of the variances and covariances:
variance of portfolio = a s 2i x 2i + a a 2s ij x ix j
k k
(A.9)
i=1 i=1 j7i
where
s 2i = the sample variance in the return of stock i
s ij = the sample covariance between stocks i and j
x1, x2, x3 # 0
Stock 1 Stock 2 Stock 3
Stock 1 0.025 0.015 0.002 The complete model is
Stock 2 0.030 0.005 minimize variance = 0.025x21 + 0.030x22 + 0.004x23
Stock 3 0.004 + 0.03x1 x2 0.004x1 x3
+ 0.010x2 x3
Using these data and formula (A.9), the objective func-
x1 + x2 + x3 = 1
tion is
10x1 + 12x2 + 7x3 # 10
minimize variance = 0.025x12 + 0.030x22 + 0.004x23
+ 2(0.015)x1x2 + 2( 0.002)x1x3 x1, x2, x3 # 0
+ 2(0.005)x2x3
x1 + x2 + x3 = 1
Figure A.15 shows a spreadsheet model for this example (Excel file Markowitz
Model); Figure A.16 shows the Solver model. The minimum variance of the optimal port-
folio is 0.012.
The Solver Sensitivity report is shown in Figure A.17. As we noted, for nonlinear
models, the Lagrange multipliers are only approximate indicators of shadow prices. For
this solution, the Lagrange multiplier predicts that the minimum variance will increase by
63.2% if the target return is increased from 10% to 11%. If you re-solve the model, you
will find that the minimum variance increases to 0.020, a 66.67% increase.
Optimization models can and should provide decision makers with valuable insight
beyond simply finding an optimal solution. Using spreadsheet models and Solver, it is
Figure A.15
Figure A.16
Figure A.17
easy to systematically vary a parameter of a model and investigate its impact on the solu-
tion. For example, we might be interested in understanding the relationship between the
minimum risk and the target return.
Figure A.18
Risk-Return Analysis
for Markowitz Portfolio
Example
Analytics in Practice: A
pplying Nonlinear Optimization at Prudential Securities
Prudential Securities Inc. (PSI) created a mortgage- use a scenario analysis to generate an optimal portfo-
backed securities (MBS) department to develop lio composed of securities with widely differing char-
models for managing complex investments.3 The de- acteristics that matches the investors performance
partment developed a variety of analytical models, profile under a variety of interest rate scenarios and
including linear, integer, and nonlinear optimization employ a weighting scheme on the scenarios to reflect
models, to help value, trade, and hedge MBSs in in- the portfolio managers actual view of the direction of
ventory and c onstruct portfolios. In one example, future interest rates. The portfolio manager defines
nonlinear optimization models are used to construct the desired portfolio performance for each scenario.
optimal portfolios for clients, matching the clients in- An optimization technique bundles the different sce-
vestment performance profile with constraints u nder narios and leads to optimal structured portfolios that
a variety of interest rate scenarios. The model inputs meet specified performance targets while taking into
required from the client include the portfolio perfor- account possible interest rate movement. These mod-
mance target, the securities to consider, diversification els have been used hundreds of times per day by PSI
restrictions, and view of future interest rates. Analysts personnel.
As we noted in Chapter 13, such Excel functions as IF, ABS, MIN, and MAX lead to
non-smooth models. In the fixed-cost problem for K&L Designs in Chapter 15, we needed
binary variables to incorporate the fixed costs into the objective function and model the
logical conditions that ensure that the fixed cost will be incurred only if the production in
a period is positive. As we noted, we did this to preserve linearity of the constraints so that
we could use Solvers linear optimization method to find an optimal solution. H owever, it
might have been simpler to use an IF function in the spreadsheet to model the fixed costs.
Doing so, however, results in a non-smooth model that violates the linearity conditions
required for the linear optimization solution method used by Solver. Nevertheless, this can
simplify the modeling task, especially for nonanalytics professionals.
Problems that are nonsmooth or involve both nonlinear functions and integer
v ariables are usually difficult to solve using conventional techniques. To overcome
these limitations, new approaches called metaheuristics have been developed by re-
searchers. These approaches have some exotic names, including genetic algorithms,
neural n etworks, and tabu search. Such approaches use heuristicsintelligent rules for
systematically searching among solutionsthat remember the best solutions they find
and then modify or combine them in attempting to find better solutions. Solvers Stand-
ard Evolutionary algorithm uses such an approach. The evolutionary algorithm is avail-
able in both the standard Excel-supplied Solver as well as in the premium version.
3Based on Yosi Ben-Dov, Lakhbir Hayre, and Vincent Pica, Mortgage Valuation Models at Prudential
Securities, Interfaces, 22, 1 (JanuaryFebruary 1992): 5571.
Now, the only constraints needed are the material balance constraints:
PA - IA = 150
PW + IA - IW = 400
PS + IW - IS = 50
In this way, there is no need for the binary variables and the additional constraints that
involve them, which are more difficult to logically understand and model.
We illustrate Evolutionary Solver first using the new model for K&L Designs and
then with some other applications.
Example A.9 Using Evolutionary Solver for the K&L Design Fixed-Cost Problem
Figure A.19 shows a simpler, modified spreadsheet for the bounds to restrict the search space to a m anageable
K&L Designs fixed-cost problem (Excel file K&L Designs region. Thus, we set upper bounds of 600 (the to-
Evolutionary Solver Model). The objective function in cell B20 tal demand) and lower bounds of 0 for each of them.
is = SUMPRODUCT(B6:D9,B14:D15) + IF(B14+ 0,B9,0) + Evolutionary Solver finds essentially the same optimal
IF(C14 + 0,C9,0) + IF(D14+ 0,D9,0). Figure A.20 shows solution as the integer optimization problem we solved in
the Solver model. The Evolutionary Solver algorithm Chapter 15, except for a minor rounding issue in cell C14.
requires that all variables have simple upper and lower
Some applications use absolute value functions in the objective function or con-
straints. Absolute value functions are similar to IF functions and result in non-smooth
functions, necessitating the use of Evolutionary Solver.
Figure A.19
Figure A.20
Figure A.21
Edwards Manufacturing
Spreadsheet
Figure A.22
The results obtained by Evolutionary Solver can depend heavily on the starting values
of the decision variables and the amount of time devoted to the search. For simple problems,
it usually doesnt make much difference; however, for complex models, different starting
values can produce different results. In addition, increasing the maximum search time may
improve the solution. Thus, for complex problems, it is wise to run the p rocedure from
different starting points, and we suggest you try this on this example and end-of-chapter
problems. The maximum search time and other parameters can be changed from the
Options button in the dialog; however, this is usually only necessary for advanced users.
were completed before it. We may then compare the completion times with the requested
due dates to determine if the job is either completed early or late. Lateness (L i) is the differ-
ence between the completion time 1Ci2 and the due date 1Di2, which can either be positive
or negative. Tardiness (Ti) is the amount of time by which the completion time exceeds the
due date; thus, tardiness is zero if a job is completed early). Hence, for job i,
L i = Ci - Di (A.10)
Ti = max50, L i6 (A.11)
Researchers have shown that sequencing jobs in order of shortest processing time
(SPT) first will minimize the average completion time for all jobs. Sequencing by ear-
liest due date (EDD) first will minimize the maximum number of tardy jobs. However,
the manager might be interested in minimizing other criteria, such as the average tar-
diness, total tardiness, or total lateness. It is possible to develop integer optimization
models for such problems, but these are quite complicated and can take a very long
time to solve.
Job 1 2 3 4 5 6 7 8 9 10
Time 8 7 6 4 10 8 10 5 9 5
Due date 20 27 39 28 23 40 25 35 29 30
To develop a spreadsheet model for this problem, B13, =INDEX($B$4:$K$6,3,B10), finds the due date asso-
we use the Excel function INDEX to identify the pro- ciated with job 5.
cessing times and due date for the job assigned to a Any sequence of integers in the decision variable
particular s equence. Figure A.23 shows the model range is called a permutation. Our goal is to find a per-
(Excel file, Job Sequencing Model) and a portion of the mutation that optimizes the chosen criteria. Solver has
Excel formulas. A particular job sequence (the decision an option to define decision variables as a permutation;
variables) is given in row 10; for this example, we show this is called an alldifferent constraint. To do this, click
the sequence for the EDD rule. In rows 11 and 13, we on Integers in the Solver Parameters dialog, choose the
use the INDEX function to identify the processing time range of the decision variables, and then choose dif from
and due date associated with a specific job. For exam- the drop-down box as shown in Figure A.24. The final
ple, the formula in cell B11 is =INDEX($B$4:$K$6,2,B10). model, shown in Figure A.25, is quite simple: minimize the
This function references the value in the second row of chosen objective cellin this case, total tardinessand
the range B4:K6 corresponding to the job assigned to ensure that the decision variables are a valid permutation
cell B10, in this case, job 5. Likewise, the formula in cell of the job numbers. Figure A.26 shows the Solver solution.
Figure A.23
Figure A.24
collect money and replenish bottles for a set of retail locations and then return to the ware-
house. Other examples are programming drilling machines to drill holes in circuit boards
and picking orders within a warehouse. In all these applications, the goal is to perform the
task in minimum total time or distance.
Figure A.25
Figure A.26
Evolutionary Solver
Solution for Minimum
Total Tardiness
In general, a TSP for n cities has 1n - 12! possible tours, making it quite difficult to
identify the optimal one. For example, if n is just 14, there are more than 6 billion possible
tours! The use of algorithms such as Evolutionary Solver allow us to find near-optimal
solutions efficiently.
from city 0 is the decision variable in cell B23. We must visited in the tour from city 0 exactly once. This is accom-
ensure that this city becomes the From city in the next plished by using the alldifferent constraint, as we saw in
row; thus, the formula in cell A24 is =B23. In other words, the job-sequencing example. Because the alldifferent con-
we simply copy the value of cell B23 into cell A24 and do straint applies to a set of positive integers from 1 to N, we
this for the remaining cells in column A. The INDEX func- needed to designate the first city as 0 (otherwise the deci-
tion is used to find the distance from one city to another sion variables would have had to range from 2 to 14, and we
(note that the INDEX function refers to the row and column would not have been able to use the alldifferent constraint).
numbers of the range $D$5:$Q$18 and not the numbering Figure A.29 shows the solution that Evolutionary
of the cities that we used). Finally, in columns E and F we Solver finds. To find the tour starting in Detroit, begin at
use the VLOOKUP function to translate the numerical city row 34 and cycle around the tour to Milwaukee, Minnesota,
values in the tour to their names. Seattle, Oakland, California, Texas, Kansas City, Chicago,
Figure A.28 shows the Solver model. The objective is Cleveland, Baltimore, New York, Boston, Toronto, and r eturn
to minimize the total tour length in cell C37 by changing the to Detroit, for a total distance of 6,718 miles. Of course, the
decision variables in the range B23:B35. The key to using real problem should incorporate the game schedules (who
the Standard Evolutionary algorithm is to ensure that the wants to visit a ball park if the team is out of town?), but this
decision variables include each of the remaining 13 cities would require a much more complicated model.
Figure A.27
Figure A.28
Figure A.29
Key Terms
Note: Data for many of these problems are provided For the pricing decision model in Example A.1, sup-
4.
in the Excel file Chapter A Problem Data to facilitate pose that the company wants to keep the price at a
model building. Worksheet tabs correspond to problem maximum of $500. Note that the solution in
scenarios. Figure A.1 will no longer be feasible. Modify the
spreadsheet model to include a constraint on the
Problem 15 in Chapter 1 posed the following situa-
1.
maximum price and solve the model. Interpret the in-
tion: A manufacturer of mp3 players is preparing to
formation in the Solver Sensitivity report.
set the price on a new model. Demand is thought to
depend on the price and is represented by the model In the hotel pricing problem in Example A.2, sup-
5.
pose that the hotel is considering adding suites to its
D = 2,500 - 3P
room mix. Based on an analysis of local competitors,
The accounting department estimates that the total
suites can sell for a rate of $180, and they expect to
costs can be represented by sell 20 per day to business travelers. The price elas-
ticity of demand is estimated to be 2.5. The hotel
C = 5,000 + 5D
would want to keep the price of suites between $150
You were asked to develop a model for the total
and $200. Modify the spreadsheet to include suites
profit and implement it on a spreadsheet. Use non- and find prices that will maximize total revenue.
linear optimization with Solver to find the price that
A franchise of a chain of Mexican restaurants wants
6.
maximizes profit.
to determine the best location to attract customers
Problem 16 in Chapter 1 posed the following situa-
2. from three suburban neighborhoods. The coordinates
tion: The demand for airline travel is quite sensitive of the three suburban neighborhoods are as follows:
to price. Typically there is an inverse relationship
between demand and price; when price decreases, Neighborhood X-Coordinate Y-Coordinate
demand increases, and vice versa. One major airline Liberty 2 12
has found that when the price (p) for a round trip be-
Jefferson 9 6
tween Chicago and Los Angeles is $600, the demand (D)
is 500 passengers per day. When the price is reduced Adams 1 1
to $400, demand is 1,200 passengers per day. You
were asked to develop an appropriate model. Use The population of Adams is four times as large as
nonlinear optimization with Solver to find the opti- Jefferson, and Jefferson is twice as large as Liberty.
mal price to maximize revenue. The restaurant wants to consider the population in
its location decision. Develop and solve a model to
Problem 8 in Chapter 11 posed the following situation:
3. find the best location, assuming that straight-line dis-
The Radio Shop sells two popular models of portable tances can be used between the locations.
sport radios, model A and model B. The sales of these
products are not independent of each other (in eco- ElectroMart wants to identify a location for a ware-
7.
nomics, we call these substitutable products, because house that will ship to five retail stores. The coor-
if the price of one increases, sales of the other will dinates and annual number of truckloads are given
increase). The store wishes to establish a pricing here. Develop and solve a model to find the best
policy to maximize revenue from these products. A location, assuming that straight-line distances can be
study of price and sales data shows the following re- used between the locations.
lationships between the quantity sold (N) and prices
(P) of each model: Retail Store X-Coordinate Y-Coordinate Truckloads
A 18 15 12
NA = 20 - 0.62PA + 0.30PB
B 3 4 18
NB = 29 + 0.10PA - 0.60PB C 20 5 24
You were asked to construct a model for total rev-
D 3 16 12
enue and implement it on a spreadsheet. Use non- E 10 20 18
linear optimization with Solver to find the optimal
prices to maximize revenue.
bond fund focuses on the bond market, which has formulation. Modify the spreadsheet and solve with
a more stable, but lower, expected return. SCIP is a Evolutionary Solver. Compare your solution with the
high-risk scheme, often resulting in heavy losses but optimal solution in Figure 15.23.
occasionally coming through with spectacular gains.
16. Formulate Chris Corrys investment problem (Prob-
Average returns, their variances, and covariances are
lem 23 in Chapter 15) on a spreadsheet without using
as follows:
linking constraints for the binary variables but using
IF statements instead. Modify the spreadsheet and
Stock Bond SCIP
solve with Evolutionary Solver.
Average return 0.148 0.060 0.152
17. Modify the economic order quantity problem in this
Variance 0.014697 0.000155 0.160791
chapter (Example A.5) to include discounts. Assume
Covariance with 0.000468 0.002222
that the unit cost is $22 for the first 1,000 units in
stock
an order but drops to $19 for any additional units or-
Covariance with 0.000227 dered. Use IF statements in the spreadsheet model to
bond incorporate the quantity discount and Evolutionary
Solver to find the best solution.
Develop and solve a portfolio optimization model for
this situation for a target return of 12%. 18. Stout Investments wishes to design a minimum vari-
ance portfolio of index funds. The funds selected for
15. Modify the plant location model in Chapter 15 consideration and their variance-covariance matrix
(E xample 15.10) to use IF statements to express and average returns are given next:
the linking constraints in the mixed-integer model
Emerging
Bond S&P 500 Small Cap Mid Cap Large Cap Market Commodity
Bond 0.002%
S&P 500 0.001% 0.020%
Small cap 0.001% 0.027% 0.047%
Mid cap 0.001% 0.024% 0.039% 0.033%
Large cap 0.001% 0.019% 0.027% 0.023% 0.027%
Emerging market 0.000% 0.032% 0.050% 0.043% 0.041% 0.085%
Commodity 0.000% 0.000% 0.005% 0.005% 0.009% 0.015% 0.054%
Average weekly return 0.044% 0.118% 0.256% 0.226% 0.242% 0.447% 0.053%
a. Formulate and solve a Markowitz portfolio opti- How would the optimal portfolio change? Compare
mization model for this situation having a target the solutions obtained using the nonlinear optimiza-
return of 0.19%. tion and Evolutionary Solver options.
b. Suppose the company wants to restrict the per- 19. An IT support group at Thomson State College has
centage of investments in each fund as follows: seven projects to complete. The time in days and
Bond: between 10% and 50% project deadlines are shown next.
S&P 500: between 30% and 50%
Small cap: no more than 20% Project 1 2 3 4 5 6 7
a. Sequence the projects to minimize the average 20. Suppose the distances that a pharmaceutical rep-
lateness. resentative, Tracy Ross, travels between medical
b. Sequence the projects to minimize the average offices are
tardiness.
c. Compare these solutions to the SPT and EDD
rules.
To
From 1 2 3 4 5 6 7 8
1 0 19 57 51 49 4 12 92
2 19 0 51 10 53 25 80 53
3 57 51 0 49 18 30 6 47
4 51 10 49 0 50 11 91 38
5 49 53 18 50 0 68 62 9
6 4 25 30 11 68 0 48 94
7 12 80 6 91 62 48 0 9
8 92 53 47 38 9 94 9 0
The accounting department at PLE reviewed the that the following nonlinear function could model the rate-
production-planning model assumptions in the case in change costs rather accurately:
Chapter 14 and does not believe that the rate-change cost
rate@change cost = 0.0051Xt - Xt-122
was appropriately modeled using a fixed $5.00 per unit.
Instead, their analysis shows that the rate-change cost Modify your model and analysis from the case in
grows faster as the deviation from production in the pre- Chapter 14 using this assumption. Summarize your results
vious month increases. Specifically, their analyst found in a short memo to Ms. Burke.