LINEAR PROGRAMMING - INTRODUCTION AND FORMULATION Linear Programming (LP), one of the most powerful management decision making

tools, enables businesses to find optimal solutions to certain problems in which the solution must satisfy a given set of requirements, or constraints. This note will provide you with an introduction to LP models. Emphasis is placed on terminology, problem definition and examples of LP formulations. A commonly encountered form of decision making involves situations in which the set of acceptable solutions is restricted, either internally, externally or both. For instance, an internal restriction might be the amount of raw materials that a department has available to produce its products. Other internal restrictions can include availability of labor time, machine time, and budgets. External restrictions might include government and labor regulations, competition, and market demand. These restrictions are collectively called constraints in LP. The goal in LP is to determine the best (optimal) solution given the set of constraints imposed by the decision situation; hence, the term constrained optimization. In 1947, George Dantzig developed the use of linear algebra for determining solutions to problems involving the optimal allocation of scarce resources. Advances in the past decades in computer technology and related computer software has removed the computational burden of solving large LP problems. The programming aspect of LP is not computer programming. Programming refers to the use of algorithms. An algorithm is a step-by-step procedure that will lead to a solution. The term linear refers to straight-line relationships. Thus, the term linear programming refers to a family of mathematical techniques that can be used to find solutions to optimization problems whose objective and constraints are linear expressions of decision variables. All LP models have certain characteristics in common. Knowledge of these characteristics is necessary to be able to correctly formulate an LP model. The characteristics can be grouped into two categories: components and assumptions. Components relate to the structure of the model and assumptions reveal the conditions under which the model is valid. There are four components and five basic assumptions of every LP model. The components of a Linear Program are: 1. Objective function. A mathematical statement of profit, cost, etc. per unit of input or output or any quantity that is to be maximized or minimized. 2. Decision variables. Choices available to the decision maker in terms of either inputs or outputs. 3. Constraints. Limitations that restrict the alternatives available to decision makers. 4. Parameters. Numerical values that are fixed; the model is solved given those values. Linear Programming Assumptions: 1. Proportionality (i.e., linearity): Objective function and constraint coefficients are strictly proportional to the decision variables ( e.g., if the first unit of production requires 2 hours of labor so must the 50th unit and 100th unit.). 2. Divisibility: Non integer values of the decision variables are acceptable. 3. Certainty: The values for the parameters are known and constant. 4. Nonnegativity: Negative values of the decision variables are not allowed (although negative values of their coefficients the effect they have on the decision are certainly allowed.).

2 5. Additivity: Terms of the objective function must be additive. In other words, the total effect of each decision variable (profit, cost, etc,) must equal the sum of the effects contributed by each decision variable) and terms of each constraint must be additive (total amount of resource consumed (or provided) must equal the sum of the resources used (or provided) by each decision variable.

3 Formulating LP models involves the following steps: 1. 2. 3. 4. Clearly state the goal (what should be driven to a maximum or a minimum). Clearly state the objective (those things which the decision maker can decide). Define the decision variables (including their units of measurement). Determine the objective function (a mathematical statement of the objective which should include every decision variable and a coefficient indicating how much each unit of each decision variable contributes to the goal). 5. Identify the constraints (those things over which, for this decision, the manager has no control). 6. Determine the value of the constraint (the "right-hand-side") and determine whether an upper limit, lower limit, or equality is required. Additionally, for each constraint determine appropriate values for the coefficients for each decision variable. (Remember, each and every decision variable appears at least conceptually) in each and every constraint (although the coefficient of some decision variables may be zero effectively removing them form the constraint) 7. Build the mathematical model. Formulation Example 1 A firm that assembles computers and computer equipment is about to start production of two new personal computers. Each type of PC will require assembly time, inspection time, and storage space. The amounts of each of these resources that can be devoted to the production of the PCs are limited. The management of the firm would like to determine the quantity of each type of PC to produce in order to maximize profit generated by sales of these PCs. Additional information about each PC follows: PC Type 1 Profit per unit Assembly time per unit Inspection time per unit Storage space per unit The model formulation is: Let : x1 = the quantity of PC Type 1 to produce x2 = the quantity of PC Type 2 to produce Max Z = 60x1 + 50x2 (Objective function) $60 4 hours 2 hours 3 cubic feet PC Type 2 $50 10 hours 1 hour 3 cubic feet Available Resources

100 hours 22 hours 39 cubic feet

Subject to: 4x1 + 10x2 100 2x1 + 1x2 22 3x1 + 3x2 39 x1, x2 0

(Assembly) (Inspection) (storage) (non-negativity restriction)

This model can then be entered into an LP solving program (such as Excel Solver) and a solution derived.

4 Formulation Example 2 General Mills is investigating the possibility of introducing a new cereal. It would be composed of wheat, rice, and corn flakes. The cost per ounce and dietary requirements are shown in the following table: Requirements per Wheat Rice Corn 12 - ounce box Protein (grams per ounce) Carbohydrates (grams per ounce) Calories per ounce Cost per ounce 4 20 90 $0.03 2 25 110 $0.05 2 21 100 $0.02 At least 27 grams At least 240 grams No more than 1,260 calories

Let : W = ounces of wheat to place in a 12 ounce box R = ounces of rice to place in a 12 ounce box C = ounces of corn to place in a 12 ounce box Min Z = 0.03W + 0.05R + 0.02C 27 22 1260 = 12 0 (Objective function)

Subject to: 4W + 2R + 2C 20W + 25R + 21C 90W + 110R + 100C 1xW + 1C 1R + W, R, C

(protein) (carbohydrates) (calories) (box size in ounces) (non-negativity restriction)

Now suppose the natural sugar content of wheat, rice, and corn flakes is 10, 15, and 20 percent, respectively. If each box of cereal must contain at least 17 percent natural sugar, develop the appropriate constraint to be added to the model to reflect this requirement. The natural sugar content constraint is then; 0.10W + 0.15R + 0.20C 0.17(W +R+C)

Rewriting the constraint so that the decision variables are on the left side and the constant is on the right side yields: - 0.07W - 0.02R + 0.03C 0. (sugar-content constraint) This constraint may then be added to the model to represent this new requirement.

5 Formulation Example 3 (Portfolio Selection) A conservative investor has $100,000 available to invest. The investor has decided to use three vehicles for generating income: municipal bonds, a certificate of deposit (CD), and a money market account. After reading a financial newsletter, the investor has also identified a few restrictions on the investments: 1. No more than 40 percent of the investment should be in bonds. 2. The proportion allocated to the money market account should be at least double the amount in the CD. The annual return will be 8 percent for bonds, 9 percent for the CD, and 7 percent for the money market account. The entire amount of $100,000 does need to be invested. If the investor wishes to maximize total return formulate the LP model for this problem, ignoring any transaction costs, the possibility of variance on the annual rates of return and the potential for different investment lives. The model formulation is: Let : x1 = dollar amount to invest in bonds x2 = dollar amount to invest in the CD x3 = dollar amount to invest in the money market account Max Z = 0.08x1 + 0.09x2 + 0.07x3 (Objective function)

Subject to 1x1 + 0x2 + 0 x3 0.60x1 - 0.40x2 - 0.40x3 0x1 + + 1x3 0x1 2x2 + 1x3 1x1 + 1x2 + 1x3 x1, x2, x3 0.4(x1 + x2 + x3) 0 2x2 0 100000 0 or, rewritten into standard format: (bond limit) or, rewritten into standard format: (money market to CD ratio) ($ available to invest) (non-negativity restriction)

The standard format for linear programs requires that all decision variables appear on the lefthand-side (LHS) of the relational symbol and the right-hand-side (RHS) be non-negative constants. For example, see the bond constraint in Example 3. Some solution packages such as Excel Solver allow the relationships to be represented in other formats. Sometimes these are easier for a manager to understand but it is important that you keep in mind that, conceptually, all LP problems must be able to be put into standard format.

6
HOMEWORK PROBLEMS - FORMULATIONS 1. A firm is considering the production of two products. Data pertaining to sales price and costs are shown in the table. The firm has already contracted to provide 500 units of product A and would like to calculate the quantities for product A and B that would enable the company to break-even. Formulate an LP model to determine the break-even points for product A and B at minimal total capital outlay. Selling price per unit $30 35 Variable cost per unit $16 18

Product A B

Fixed cost $10,000 12,000

2. The Specific Motors Company (SMC), which manufactures only one model of car, wants to plan its production and inventory levels for the next 4 months. The following table provides the relevant data for each month, where the inventory levels in the last two columns refer to the levels at the end of the month: Maximum Minimum Production Maximum Minimum inventory inventory Month Demand cost/unit production level production level level level 1 2 3 4 10,000 15,000 25,000 20,000 $10,800 11,000 11,000 11,300 25,000 35,000 30,000 10,000 3,000 3,000 3,000 3,000 15,000 15,000 15,000 15,000 2,000 2,000 2,000 2,000

SMC estimates that the cost to hold one car in inventory for one month is $150. To estimate a month's inventory costs, SMC multiplies the average of the month's starting and ending inventory levels by $150. SMC currently has an inventory level of 3000 cars. SMC wants to meet its demand with no backlogging; that is, all demand must be met in the month it occurs. Formulate an LP model for SMC. 3. The Leiz Manufacturing Company produces small chips for use in pocket calculators. Leiz has two plants that produce the chips and then distribute them to five different wholesalers. The costs of production at plant 1 and 2 are $2.19 and $2.38, respectively. Forecast demand indicates that shipments will have to be 2,000 to wholesaler A, 3,000 to wholesaler B, 1,000 to wholesaler C, 5,000 to wholesaler D, and 4,000 to wholesaler E. The distribution costs of shipping a chip from plant to wholesaler are shown in the table. Production capacity at each plant is 8,000 units. Formulate an LP model. To wholesaler C D 0.05 0.04 0.02 0.03

From plant 1 2

A 0.03 0.06

B 0.02 0.04

E 0.02 0.05

4. An agriculture student wants to determine what quantities of various grains to feed cattle to meet minimum nutritional requirements at the lowest cost. The student is considering the use of corn, barley, oats and wheat. The table relates the relevant dietary information per pound of grain. Formulate an LP model to determine the dietary mix that minimizes cost. Recommended daily Nutrient Corn Barley Oats Wheat allowance Protein 10 9 11 8 20 mg Calcium 50 45 58 50 70 mg Iron 9 8 7 10 12 mg

7
Calories Cost per LB 1,000 $0.55 800 $0.47 850 $0.45 9,000 $0.52 4,000

5. The following table summarizes how the Centerville police department's requirements for on-duty police officers varies according to the time of the day: Shift Number 1 2 3 4 5 6 Duration 2:00 am - 6:00 am 6:00 am - 10:00 am 10:00 am - 2:00 pm 2:00 pm - 6:00 pm 6:00 pm - 10:00 pm 10:00 pm - 2:00 am Minimum Number of Officers Required 22 55 88 110 44 33

Officers report for duty at the start of each of the above 6 time periods and remain on-duty for eight consecutive hours. Formulate a linear program Centerville can use to minimize the total number of police officers it must hire to meet its needs throughout the day. 6. The Ferguson Paper Company produces rolls of paper for use in adding machines, desk calculators, and cash registers. The rolls that are 200 feet long, are sold in widths of 1.5, 2.5, and 3.5 inches. The production process provides 200 foot rolls in 10-inch widths only. The firm must therefore cut the rolls to the desired product sizes. This month's demand for 1.5 inch, 2.5 inch, and 3.5 inch rolls are 1,000, 2,000 and 4,000 units, respectively. a. Determine all possible alternative patterns that the 10-inch width roll could be cut to form marketable product widths. b. If the company wants to minimize the number of units of the 10-inch rolls that must be manufactured, formulate the LP model to determine how many 10-inch rolls must be processed on each cutting alternative. c. Formulate the LP model if the company wants to minimize total trim and surplus waste. 7. National Insurance Associates carries an investment portfolio on a variety of stocks, bonds, and other investment alternatives. Currently $200,000 of funds have become available and must be considered for new investment opportunities. The four stock options National is considering and the relevant financial data are as follows: Investment Alternative B C $50 $80 0.08 0.06 0.07 0.05

Price per share Rate of return Risk measure

A $100 0.12 0.10

D $40 0.10 0.08

National's top management has stipulated the following investment guidelines: 1. Annual rate of return for the portfolio must be at least 9% 2. No one stock can account for more than 50% of the dollar investment. Formulate an appropriate LP model that will minimize investment risk.