Transportation Problem

Transportation-1
 Outline

1) Example

2) Problem description

3) Solution method

4) Extension of transportation problem

Transportation-2
 1. Example (1)

• There are 5 MediaMarts in Hanoi:

HaiBaTrung, TruongChinh, ThanhXuan, LongBien, MyDinh

• TVs are stored at 3 warehouses:

Ha Dong, Soc Son, Hung Yen

Transportation-3
 1. Example (2)
Cost of Transport TVs from warehouses to MediaMarts:
Total HaiBaTrung TruongChinh ThanhXuan LongBien MyDinh
620 50 100 150 200 120
HaDong 4 2 1 5 3
150
SocSon 6 7 4 2 3
270
HungYen 6 8 7 1 3
200

How to ship TVs from warehouses to Mediamarts so that the

transportation cost is minimized?

Transportation-4
 1. Example (3)

xij : number of TVs shiped from warehouse i to Mediamart j

i  HaDong (1), SocSon(2), HungYen(3)
j  HaBaTrung (1), TruongChinh(2), ThanhXuan(3),
LongBien(4), MyDinh(5)
x12 : the number of TV shiped from HaDong to TruongChinh

=>Calculate xij so that transportation cost is minimized

Transportation-5
 1. Example (4)
Total HaiBaTrung TruongChinh ThanhXuan LongBien MyDinh
620 50 100 150 200 120

HaDong 4x11 2x12 1x13 5x14 3x15

150

SocSon 6x21 7x22 4x23 2x24 3x25

270

HungYen 6x31 8x32 7x33 1x34 3x35

200

Transportation-6
Total cost:  4 x11  2 x12  x13  5 x14  3 x15
 6 x21  7 x22  4 x23  2 x24  3 x25
 6 x11  8 x12  7 x13  1x14  3 x15  min

HaDong: x11  x12  x13  x14  x15  150

SocSon: x21  x22  x23  x24  x25  270
HungYen: x31  x32  x33  x34  x35  200

HaiBaTrung: x11  x21  x31  50 TruongChinh: x12  x22  x32  100

ThanhXuan: x13  x23  x33  150 LongBien: x14  x24  x34  200
MyDinh: x15  x25  x35  120

Transportation-7
 1. Example (5)

 c x
3 5
min
i 1 j 1
ij ij

s.t.

x  150; x  270; x  200;

5 5 5

j 1 j 1 j 1
1j 2j 3j

x  50; x  100; x  150; x  200; x  120;

3 3 3 3 3

i 1 i 1 i 1 i 1 i 1
i1 i2 i3 i4 i5

xij  0, i=1,...,3 and j=1,...,5

Transportation-8
 2. Description problem

• The problem of finding the minimum-cost distribution of

a given commodity from a group of supply centers
(sources) i=1,…,m to a group of receiving centers
(destinations) j=1,…,n

• Each source has a certain supply (ai)

• Each destination has a certain demand (bj)

• The cost of shipping from a source to a destination is cij

Transportation-9
Simple Network Representation
Sources Destinations

Supply a1 1 Demand b1
1

Supply a2 2
2 Demand b2
…

…
xij

n Demand bn
Supply am m

Costs cij

Transportation-10
 Formulation

 c x
m n
min
i 1 j 1
ij ij

s.t.

x  ai ;
n

j 1
ij

x  bj ;
m

i 1
ij

xij  0, i=1,...,m and j=1,...,n

Transportation-11
Solution representation

Transportation-12
 Transportation Problems (TP)

• Linear programming

• 85% LP problems have forms in TP=> important!

• How to solve it?

Transportation-13
 Feasible Solutions

A transportation problem will have feasible solutions if

and only if

 a  b
m n

i 1 j 1
i j

Transportation-14
 3. Transportation Simplex Method

• Since any transportation problem can be formulated as

an LP, we can use the simplex method to find an optimal
solution

• Because of the special structure of a transportation LP,

the iterations of the simplex method have a very special
form

Transportation-15
3. Transportation Simplex Method

Initialization
(Find an initial solution)

Is the
current Yes
Stop
solution
optimal?

No
Move to a better
adjacent solution

Transportation-16
 The Transportation Tableau
Des.
b1 b2 … bn
Source
c11 c12 c1n
a1 …
x11 x12 x1n

C21 c22 c2n

a2 …
x21 x22 x2n

… … … … …

cm1 cm2 cmn

am …
xm1 xm2 xmn
Transportation-17
 The Transportation Tableau
• G(x)={(i,j)|xij>0}: used rectangle
• Cycle:

Transportation-18
 An solution is a vertex?

x  ( xij ) is a vertex if
G(x)={(i,j)|x ij >0} does not contain any cycles

Transportation-19
 Example
Given a=(50, 70, 55)T , b=(30, 60, 60, 25)T
 4 7 12 7 
 
C  5 9 6 1
8 2 9 1
 

a) The problem has solutions?

 30 20 0 0 
 
b) Prove that x 0   0 40 30 0  is a vertex.
 0 0 30 25 
 
c) Calculate the cost if using solution x 0 .
Transportation-20
 How to find an initial solution?

• Northwest corner rule

• The least cost method

Transportation-21
 Northwest corner rule

• Begin by selecting x11, let x11 = min{ a1, b1 }

• Thereafter, if xij was the last basic variable selected,

– Select xi(j+1) if source i has any supply left
– Otherwise, select x(i+1)j

Transportation-22
 Example: Northwest corner rule

bj
60 30 40 70

ai
2 4 5 1
50

3 6 4 8
70

1 2 5 3
80

Transportation-23
 Example: Northwest corner rule (1)

bj
60 30 40 70

ai

2 4 5 1
50
50

3 6 4 8
70

1 2 5 3
80

Transportation-24
 Example: Northwest corner rule (2)

10
bj
60 30 40 70

ai

2 4 5 1
50
50

3 6 4 8
70

1 2 5 3
80

Transportation-25
 Example: Northwest corner rule (3)

10
bj
60 30 40 70

ai

2 4 5 1
50
50

3 6 4 8
70 10

1 2 5 3
80

Transportation-26
 Example: Northwest corner rule (4)

10
bj
60 30 40 70

ai

2 4 5 1
50
50

3 6 4 8
70 10
60
1 2 5 3
80

Transportation-27
 Example: Northwest corner rule (5)

10
bj
60 30 40 70

ai

2 4 5 1
50
50

3 6 4 8
70 10 30
60
1 2 5 3
80

Transportation-28
 Example: Northwest corner rule (6)

10
bj
60 30 40 70

ai

2 4 5 1
50
50

30 3 6 4 8
70 10 30
60
1 2 5 3
80

Transportation-29
 Example: Northwest corner rule (7)

10
bj
60 30 40 70

ai

2 4 5 1
50
50

30 3 6 4 8
70 10 30 30
60
1 2 5 3
80

Transportation-30
 Example: Northwest corner rule (8)

10 10
bj
60 30 40 70

ai

2 4 5 1
50
50

30 3 6 4 8
70 10 30 30
60
1 2 5 3
80

Transportation-31
 Example: Northwest corner rule (9)

10 10
bj
60 30 40 70

ai

2 4 5 1
50
50

30 3 6 4 8
70 10 30 30
60
1 2 5 3
80
10

Transportation-32
 Example: Northwest corner rule (10)

10 10
bj
60 30 40 70

ai

2 4 5 1
50
50

30 3 6 4 8
70 10 30 30
60
1 2 5 3
70 80
10

Transportation-33
 Example: Northwest corner rule (11)

10 10
bj
60 30 40 70

ai

2 4 5 1
50
50

30 3 6 4 8
70 10 30 30
60
1 2 5 3
70 80
10 70

Transportation-34
 The least cost method

• Always select xij, = min{ ai, bj } where cij is min

• In case of there are more than one selections, choose

the biggest xij

Transportation-35
 Example: The least cost method

bj
60 30 40 70

ai
2 4 5 1
50

3 6 4 8
70

1 2 5 3
80 60

Transportation-36
 Example: The least cost method (1)

bj
60 30 40 70

ai
2 4 5 1
50

3 6 4 8
70

1 2 5 3
20 80 60

Transportation-37
 Example: The least cost method (2)

20
bj
60 30 40 70

ai
2 4 5 1
50 50

3 6 4 8
70

1 2 5 3
20 80 60

Transportation-38
 Example: The least cost method (3)

10 20
bj
60 30 40 70

ai
2 4 5 1
50 50

3 6 4 8
70

1 2 5 3
20 80 60 20

Transportation-39
 Example: The least cost method (3)

10 20
bj
60 30 40 70

ai
2 4 5 1
50 50

3 6 4 8
70 40
30
1 2 5 3
20 80 60 20

Transportation-40
 Example: The least cost method (4)

10 20
bj
60 30 40 70

ai
2 4 5 1
50 50

3 6 4 8
20 70 10 40
30
1 2 5 3
20 80 60 20

Transportation-41
 Example: The least cost method (5)

10 20
bj
60 30 40 70

ai
2 4 5 1
50 50

3 6 4 8
20 70 10 40 20
30
1 2 5 3
20 80 60 20

Transportation-42
 Optimality condition

Solution x 0 =(x ij0 ) is optimal to (TP) if and only if

there exists ui , i  1,..., m; v j , j  1,...., n such that
ui  v j  cij , (i, j );
ui  v j  cij , (i, j )  G( x 0 )

Transportation-43
 Optimality condition

Estimators : ij  ui  v j  cij

Solution x 0 =(x ij0 ) is optimal to (TP) if and only if ij  0 (i, j )

It is unique if ij  0 (i, j )  G ( x 0 )

Transportation-44
 How to find a better vertex x1?

 ik jk  0  x 0 is not optimal
=> how to find a better x1 ?

Let K the cycle founded in G(x 0 )  (ik , jk )

Starting with + at rectangle (ik , jk ), mark + and -
for each rectangle of K alternatively such that
the sign of two adjacient rectangles is opposite.

Transportation-45
 How to find a better vertex x1?

K  K   K ; K   {(i, j )  K with sign +}

K   {(i, j )  K with sign -}

 xij0   if (i, j )  K  ,
 0
xij   xij   if (i, j )  K  , where   min{xij0 | (i, j )  K  }.
 x0
1

 ij if (i, j )  K ,

We have: f ( x1 )  f ( x 0 )   ik jk
Transportation-46
 Remark

f ( x1 )  f ( x 0 )  ik jk
=>The objective value decreases an amount of ik jk

If there are more than one rectangle (i,j): ij  0,

choose ik jk  max{ ij  0 | (i, j )  G ( x 0 )}

Transportation-47
 Transportation simplex algorithm(1)

Initial step: Build the transportation table of x 0

Step 1: Determine u i , v j by solving the equation system:
ui  v j  cij , (i, j)  G( x 0 )
Step 2: Calculate ij  ui  v j  cij , (i, j )  G ( x 0 )
and fill it in the bottom-right of each (i, j )
Step 3: If ij  0 then x 0 is optimal=>STOP else goto Step 4

Transportation-48
Transportation simplex algorithm (2)
Step 4:
 Determine (ik , jk ) with  ik jk  max{ij  0 | (i, j )  G ( x 0 )}
 Find K  and K 
 xij0   if (i, j )  K  ,
 0
 Calculate xij   xij   if (i, j )  K  ,
 x0
1

 ij if (i, j )  K ,
where   min{xij0 | (i, j )  K  }.
 Let x 0 : x1 and back to Step 1.

Transportation-49
 Example

Solve the following transportation problem

Transportation-50
Example (1)

Transportation-51
Example (2)

Transportation-52
Example (3)

Transportation-53
Example (4)

Transportation-54
 4. The extension of TP
1) Non-balanced TP

2) TP with inequality constraints

3) Building warehouse problem

4) TP with restrictions

5) TP in maximization form

6) Personnel assignment problem

Transportation-55
 4.1 Non balanced TP

1) Supply > Demand ( ai >  b j )

m n

i 1 j 1

2) Supply < Demand ( ai   b j )

m n

i 1 j 1

Transportation-56
Supply > Demand ( ai > b j )
m n

i 1 j 1

=>  supply point still has commodities

=>  xij  ai
n

j 1

We transform it to the balanced TP by

adding a dummy receiving point (n+1) whose demand

bn 1   ai   b j  0
m n

i 1 j 1

Transportation-57
Non-balanced formulation

Transportation-58
Example

Transportation-59
Example(1)

Transportation-60
Example(2)

Transportation-61
 Example(3)

12  13  max{ ij }  2

Which one does we choose?

If we choose (1,3)

Transportation-62
 Example(4)

 0 0 10 90 0   0 0 10 90 
   
x*   0 70 30 0 60   xOPT   0 70 30 0 
 80 0 60 0 0   80 0 60 0 
   
with f(x opt )  1160
Transportation-63
 Example(5)- unique?

 0 10 0 90 0   0 10 0 90 
   
x*   0 60 40 0 60   xOPT   0 60 40 0 
 80 0 60 0 0   80 0 60 0 
   
with f(x opt )  1160 Transportation-64
Example(6)

Transportation-65
Supply < Demand ( ai   b j )
m n

i 1 j 1

=>  supply point still has commodities

=>  xij  ai
n

j 1

We transform it to the balanced TP by

adding a dummy receiving point (n+1) whose demand

bn 1   ai   b j  0
m n

i 1 j 1

Transportation-66
Non-balanced formulation

Transportation-67
4.2 TP with inequality constraints (TPIC)

The problem has optimal solution(s) iff

Transportation-68
 4.2 TP with inequality constraints (TPIC)

2 cases:
a)

b)

Transportation-69
 4.2 TP with inequality constraints (TPIC)

a)

All feasible solutions of (TPIC) hold the equality constraints

=> It becomes the ordinary TP

Transportation-70
 4.2 TP with inequality constraints (TPIC)

b)

TPIC is equivalent to:

Transportation-71
 4.2 TP with inequality constraints -Case b

• It is explainable in practice when receiving points only

get enough commodity.

• How to solve? (Exercise)

Transportation-72
 4.3 Building warehouse problem
One corporation has m plants producing
a commodity with the quantity of ai , i  1,..., m respectively

It already has nold warehouses with the size of b j , j  1, ..., nold

One need build n new new warehouses.
Knowing that the transportation cost cij are given.

The size of new warehouses? The transportation solution?

Transportation-73
 Example
One company has 3 plants. Actually, they have 2 warehouses.
They expect to build more 2 warehouses. Determine the size
of two new warehouses and the transportation solution from
the plants to the warehouses.

Transportation-74
 Solution method

Transform to TP with supply<demand by

b j   ai , j  nold  1,..., nold  nnew

m

i 1

So, we have to add a dummy supply point with

a m1   b j   ai and c ( m 1) j  0

n m

j 1 i 1

Transportation-75
 Example-Solution method

m  3; n old  2; n new  2; let b3  b4   ai  280

3

i 1

A dummy supply point (m  1)  4 with

a4   b j   ai  780  280  440 and c4 j  0, j  1,..., 4

4 3

j 1 i 1

Transportation-76
Example-Solution method

Transportation-77
 Example-Solution method

After 2 iterations, we have:

Transportation-78
 Example-Solution method
 0 75 0 5 
 
x*   
0 0 110 0
 85 0 5 
 
0
 0 0 170 270 

 the size of the 3 warehouse =  xi*3  0  110  0  110

3
th

i 1

the size of the 4 warehouse =  xi*4  5  0  5  10

3
th

i 1

After building that two warehouses, the optimal transportation solution:

 0 75 0 5 
 
  0 0 110 0 
 85 0 0 5 
x opt

Transportation-79
 4.4 TP with restricted rectangles

• Do not ship commodity from i to j => (i,j) is restricted

• How to solve it?

– Let cij=M, sufficiently large
– Encourage to use the least cost method to find an
initial vertex

Transportation-80
 Example
One commodity is transported from three supply points with
quantity of 70, 110 and 120 to three receiving points with the
demand of 80, 100 and 160. Assume that:
- Priority is that the first receiving point got enough commodity.
- The third receiving point got an amount greater than 140.
- No ship from the first supply point to the second receiving
point.
Find the optimal transportation solution, knowing that

Transportation-81
Example-Solution method (1)

Transportation-82
 Example-Solution method(2)

• After 2 iterations:

Transportation-83
4.5 TP in maximization form

Transportation-84
 Example

Solve the maximization TP with:

Transportation-85
Example (1)

Transportation-86
Example (2)

Transportation-87
Example (3)

Transportation-88
 4.6 Personnel assignment problem (PAP)

• Assign n people to n tasks

• Each person get only one task
• Each task is carried out by exactly one person
• cij: cost to person i={1,2,…,n} finishes task j ={1,2,…,n}

• Find the assignment way so that the total cost is

minimized

Transportation-89
4.6 PAP – formulation (1)

 c x
n n
min
i 1 j 1
ij ij

s.t.

x  1, i  1, 2,..., n;
n

i 1
ij

x  1, j  1, 2,..., n;
n

j 1
ij

xij {0,1}, i  1, 2,..., n; j  1, 2,..., n;

Transportation-90
4.6 PAP – formulation (2)

 c x
n n
min
i 1 j 1
ij ij

s.t.

x  1, i  1, 2,..., n;
n

i 1
ij

x  1, j  1, 2,..., n;
n

j 1
ij

xij  0, i  1, 2,..., n; j  1, 2,..., n;

Transportation-91
Exercise 1

a) x is a vertex?
b) This problem has optimal solutions? Vector x in
Question a is an optimal solution? Calculate the cost if
using this solution.

Transportation-92
Exercise 2

The optimal value of the problem depends on  .

Denote it by function f( ).
a) Find all optimal solutions when  =0.
b) Sketch the graph f( ) with   0.

Transportation-93
Exercise 3

If commodity quantity is not equal to zero after supply,

each unit of commodity suffer from a storage cost at
three supply points is 1, 6 and 5, respectively. Find
optimal transportation solution. Calculate the
transportation cost and the storage cost if using the
solution.

Transportation-94
Exercise 4

If receiving point does not get enough commodity

quantity, penalty money for each lack commodity unit of
three supply points is 9, 6 and 5, respectively. Find
optimal transportation solution. Calculate the
transportation cost and the penalty cost at each
receiving point (if available).

Transportation-95
Exercise 5

a) Without calculating, prove that the problem has at least

an optimal solution whose elements are even numbers.
b) Prove that x below is optimal. The problem has another
optimal solution?

Transportation-96
Exercise 6

a) Determine a vertex of TP by using the northeast corner

rule and the least cost method. Which method is better?
b) Solve the problem using one of two vertices in Question a.
c) The problem has an unique optimal solution?

Transportation-97
Exercise 7
Solve the following problems:

Transportation-98
 CHAPTER 3
INPUT OUTPUT MODELS

1
3.1 Introduction
 There is a dependence of industries in
economics:
 Eg.:
 Steel industry needs Labour + Coal + many
products (as inputs of manufacture
process).

 In turn, coal industry needs steel industry,…

2
I. Introduction
 A direct dependence of two industries arises
when the output of each is a input of the other.

 Eg:
Coal- output of mining industry
=> input of thermal power industry.

3
I. Introduction
 A modern economic has many (hundred,
milion) different products. They are almost
used as inputs of other product manufacture
process in direct/indirect way.

 Quantity of a product?
Total = Consumer + Invest + Export + Input
for other industries.

 I/O model analyses the relationship of

industries in economics and their interaction

4
1.1 History
 François Quesnay proposed Economic Table
(Tableau économique) in 1758

 Quesnay studied the process of product

distribution in three classes: farmer, small
businessman, landlord

 It is not correct but in the opinion of Karl Marx:

economics is already considered in quantitative
analysis

5
1.1 History
 After World War 1, Statistical science developed

 Wassily Leontief (Nobel prize 1973) introduced

I/O table of 1919-1929 period for USA in 1932

6
 Wassily Leontief 1905-1999

Wassily Leontief was born August 5th,

1905 in St. Petersburg.

A brilliant student, he enrolled in the newly

renamed University of Leningrad at only 15
years old.

At Harvard, he developed his theories and

methods of Input-Output analysis.

This work earned him the Nobel prize in

Economics in 1973 for his analysis of
America's production machinery. His analytic
methods, as the Nobel committee observed,
became a permanent part of production
planning and forecasting in scores of
industrialized nations and in private
corporations all over the world Wassily Leontief
in 1983
7
Objectives

 i) Analyze + forecast + production planning

 ii) Study the effect of a change of an area for

other areas.

 iii) core of System of National Account (SNA)

8
SNA
 SNA investigates complex transaction
network of economic entities that a
country produced.

 SNA uses I/O table to describe the use of

physical products, service, labor, fixed
asset in the production process

 Richard Stone (Nobel prize1984) improved

SNA by using the I/O table in 1968

9
Importance
 I/O model is used by many countries

 The first I/O table of Vietnam was established in 1989

with 54 industries; then in 1996 with 96 and 2001
with 125 industries.

 Import and export relation between the two countries

=> What is the advantage of industry in this country
compared to other countries? Demand for products of
this country to other countries?
=> international I/O table

10
1.2 Some definitions
 Pure industry

 Primary input factors

 Final product (final demand)

11
Pure industry

 I/O model consider a national economy as a

system composed of many industries that are
closely related to each other.

 The units are assigned to the same industry if

there are three characteristics:
-produce the same product
-use similar materials
-use the same process technology
=> corresponding 1-1 between pure industry
and product

12
Primary input factors
 Import
 Labor (Salary)
 Depreciation and amortization
 Tax
 Profit

 They are defined from the outside of

industries:
- Government gives depreciation rate,
exchange rate and wage
- Foreign markets and exchange rates affect
the import
- Profit depends on market

13
Final product

 Total quantity:
- Intermediate product (input for the other
industries)
- Final product: final demand

 Final product => to consumer + invest

14
Hypothesis

 Each industries (sector) produces a

homogeneous product, the use of
homogeneous inputs

 Products of the industry is not substituted for

each other

15
1.3 Classification of I/O table
 Based on the expression patterns
- I/O in kind
- I/O in value

 Based on the time

- dynamic I/O
- static I/O

 Based on the geographic

- enterprise, industry, national and
international I/O

16
2. Static I/O Model
2.1 I/O Model in kind

17
2.1. I/O model in kind
 I/O table is often built by the one-year cycle

 The national economy can be considered as

uniform consists of n different industries
 Each industry appears in the I/O 2 times: in
the role of production industry + in the role of
consumption industry
 Each production industry corresponds to a row,
each consumption industry corresponds to one
column
 When adding industry => expand rows and
columns

18
 I/O table
Product. Unit Consumption industry Final Total
industry product
1 2 … j … n
1 Km/h q11 q12 … q1j … q1n q1 Q1

2 Ton q21 q22 … q2j … q2n q2 Q2

… … … … … … … … … …

i m3 qị1 qị2 … qịj … qịn qị Qị

… … … … … … … … … …

n piece qn1 qn2 … qnj … qnn qn Qn

Labor q01 q02 … q0j … q0n q0 Q0

unit

19
Notation
i: index of production industry, i= 1..n
j: index of consumption industry, j= 1..n
Qi: product quantity of industry i
qi: final product of industry i
qij: quantity of product i for industry j
Q0: labor used in 1 year
q0j: amount of labor used in industry j
q0: amount of labor used in non-production area

20
Equations
 Product distribution equation

 Labor using equation

21
Direct cost coefficient in kind

 For a unit of industry j, industry i has to

provide directly for the industry j an amount of
products:

22
We have:

Write in matrix form:

23
 Direct cost matrix in kind

24
 Entire cost matrix in kind

 => to produce one unit of final product j,

industry i has to produce an amount of
product:

25
 Coefficient of the direct costs of the labor
industry j:

 Labor using coefficient vector:

26
Example
Given an I/O table with 3 industries:

Industry 1 2 3 Final Total

demand
1 20 10 8 62 100
2 10 10 16 14 50
3 10 10 8 12 40
30 20 10

a) Calculate the direct cost matrix in kind

b) Calculate the labor using coefficient vector
c) The meaning of and

27
a) Direct cost matrix

28
b) Labor using coefficient vector

29
c) Explain the coefficients:
- In order that industry 1 produces an unit of
product, it needs 0.2 unit of its product.

- To produce an unit of product of industry 1,

industry 3 has to supply 0.1 unit of its product

30
Exercise
Given a I/O table with 3 industries:
Ngành 1 2 3 SP Sản
cuối cùng lượng
1 20 ? 15 41 100
2 20 12 30 ? 120
3 10 24 45 71 ?
10 24 45 16 95

a) Complete the table

b) Calculate the direct cost matrix and the labor using
coefficient vector
c) To product one unit of product of industry 2, how many
labors does industry 2 need?
d) The meaning of and . Why are they different?
31
I/O table in value

32
2.2 I/O table in value
Product. Consumption industry FP Total
industry 1 2 … j … n
1 x11 x12 … x1j … x1n y1 X1
2 X21 x22 … x2j … x2n y2 X2
… … … … … … … … …
i Xị1 xị2 … xịj … xịn yị Xị
… … … … … … … … …
n Xn1 Xn2 … xnj … xnn yn Xn
PIF
Import g11 g12 … g1j … g1n G1
Labor g21 g22 … g2j … g2n G2
DaA g31 g32 … g3j … g3n G3
Tax g41 g42 … g4j … g4n G4
Profit g51 g52 … g5j … g5n G5
Total X1 X2 … Xj … Xn

33
Notations
Xi: value of industry i,

yi: value of total final demand i,

xij: value of industry j getting from industry i,

ghj: value of PIF h used in industry j,

Gh: total value of PIF h

34
Direct cost coefficient in value

Meaning:
to produce a money unit of industry j, industry i
has to supply aij money unit.

35
Direct cost matrix in value

 A = (aij)nxn

 Property:
1) aij in [0,1)
2)

3) Matrix (I-A) is non-singular

36
Basic equations
 Product value distribution equation:

X = AX + Y=> (I-A)X =Y=> X=(I-A)-1 Y

37
Basic equations
 Product value forming equation

 Sum of final product values =

Sum of primary input factor values

38
Primary input factor coefficient

 Meaning: To have one money unit of product j,

industry j has to use directly bhj unit of primary
input factor h

 B=(bhj)5xn :Matrix of primary input factor

coefficients

39
Remarks
1) bhj in [0,1)
2) One has:

40
Example
Consider an economic system having 3 industries with
0.2 0.3 0.2 0 0 0.1 320
A= 0.2 0.3 0.1 0.2 0.05 0.2 Y= 140
0.1 0.2 0.1 B= 0.1 0 0.1 40
0.1 0 0.1
0.1 0.15 0.1

a) Establish I/O table

b) The meaning of b12 and b52?

41
Answer
Product. Consumption industry FP Total
industry
1 2 3
1 120 120 40 320 600
2 120 120 20 140 400
3 60 80 20 40 200
PIF
Import 0 0 20 20
Labor 120 20 40 180
DaA 60 0 20 80
Tax 60 0 20 80
Profit 60 60 20 140
Total 600 400 200

42
Answer
 b12=0 => Industry 2 does not import anything

 b52= 0.15 => For one value unit of product,

the profit of industry 2 is 0.15 value unit

43
Entire cost coefficient

C= (I-A)-1 : entire cost matrix

X= (I-A)-1Y => X =CY

Assume that: the final demand of industry j is 1 unit, the

other ones is 0:
Y = (y1, …, yj, …, yn)T = (0, …, 1, …,0)T

X1 c11 … c1j … c1n 0 c1j

… … … … … …
Xj = cj1 … cjj … cjn 1 = cjj
… … … … … …
Xn cn1 … cnj ;;; cnn 0 cnj

44
That means:
X1=c1j, …, Xi=cij, …, Xn = cnj

The value of products of industries = elements of

j-th column of matrix C

=> The meaning of cij is that: to produce one

value unit of final demand of industry j,
industry i has to produce an amount of
product value cij

45
C=(I-A)-1=I + A + A2 + … + Am
with m sufficiently large
 cii > 1 for all i

Meaning: To have 1 unit of final demand of

industry i, this industry has to produce an
amount of product greater than 1 value
unit.

46
 Sum of elements in j-th column of C is the
entire cost of all industries for one unit of final
demand of industry i.
 The vector

is the entire cost vector of all industries for one

unit of final demand => important vector in
forecasting and planning production.
=> Develop the industry corresponding to the
max element
47
If the final demand of all products increases one value unit
then the value of products of each industry i has to
increase an amount of

=> Sum of elements of i-th row represents the demand of

using products in production process.

48
Example
 Vietnam I/O table in 1996 with 3 economic areas:
 I: Agriculture, forestry and fishery
 II: Mining industry, power industry, processing and
construction industry
 III: service activities
 Matrix A:
I II III

I 0.11081 0.18510 0.00883

II 0.17047 0.41758 0.19099

III 0.03269 0.10194 0.14112

49
Matrix C
I II III Sum
I 1.2052 0.4008 0.1015 1.7075

II 0.3827 1.9138 0.4295 2.7260

III 0.0913 0.2424 1.2191 1.5528

Sum 1.6792 2.5570 1.7501

 2th column sum is max => develop II

 2th row sum is max=> the demand of using product of II
is max.
=> Conclusion: In both suply and demand aspect, area II
is the most important

50
3. Some applications of I/0 table

51
3.1 Create a production plan
Input: I/O table of period t
final demand of period (t+1)
Output:
I/O table of period (t+1)
________________________________

Assume that:
A(t)= A(t+1)
B(t)= B(t+1)

52
Schema
Step 1: From I/O table of period t, calculate A

Step 2: Calculate matrix B

Step 3: Calculate matrix C (if necessary)

Step 4: Determine vector X of period (t+1)

by solving (I-A)X=Y

Step 5: Establish I/O table of period (t+1)

53
Example
Product. Consumption industry FP Total
industry
1 2 3

1 50 60 40 100 250

2 100 20 40 40 200

3 25 60 40 75 200

PIF

Import 10 0 5

Labor 15 20 20

DaA 10 10 15

Tax 10 10 10

Profit 30 20 30

Total 250 200 200

54
Knowing that
y1 increases 5%
y2 increases 10%
y3 increases 10%
Build I/O table in period (t+1)

55
We have:
y1(t+1)= y1x 105%=105
y2(t+1)= y2x 110%=44
y3(t+1)= y3x 110%=82.5

56
Step 1: Calculate A

0.2 0.3 0.2

A = 0.4 0.1 0.2
0.1 0.3 0.2

57
Step 2

0.04 0 0.025
0.06 0.1 0.1
B= 0.04 0.05 0.075
0.04 0.05 0.05
0.12 0.1 0.15

58
Step 4: Determine X
(I-A)X =Y
0.8 -0.3 -0.2 X1 105
-0.4 0.9 -0.2 X2 44
-0.1 -0.3 0.8 X3 82.5

X1 = 266.406
X2 = 215.573
X3 = 217.266

59
Step 5: New table
Product. Consumption industry FP Total
industry
1 2 3

1 53.281 64.672 43.453 105 266.406

2 106.562 21.557 43.453 44 215.573

3 26.641 64.672 43.453 82.5 217.266

PIF

Import 10.656 0 5.432

Labor 15.984 21.557 21.727

DaA 10.656 10.779 16.295

Tax 10.656 10.779 10.863

Profit 31.969 21.557 32.590

Total 266.406 215.573 217.266

60
3.2 Determine Price

 Consider the I/O table in kind with the matrix

 Let Pj be the price of an unit of product j. It is

composed of 2 components:
 Material cost

 Value added (value for using PIFs): Wj

61
 Eg. 1000VND/bread = 500 VND for
wheat + 500 VND for value added
(salary, profit, tax …)

 We have:

62
 If in the period (t+1) we know

then

63
Example
 Given
1.719 0.781 0.625
C= 0.885 1.615 0.625
0.547 0.703 1.563
and WT=(0.2 0.15 0.1)
a) Calculate the price of each industry
b) If ΔWT=(-0,05 0.05 0.1) then how do the
prices change?

64
 Chapter IV
Inventory Management

65
4.1 Introduction
 Enterprise needs inventory
 If inventory is not enough
=> affect to production/ dangerous
eg.run out of material when closing to duedate
run out of fuel when a plane is flying
run out of medicine at an emergency department
 If inventory is big
=>capital, maintenance cost
 Problem: Determine a suitable quantity for
inventory

66
Some types of cost
a) Cost for employing a contract
b) Cost for maintenance
c) Extra cost

67
a) Cost for a contract
+) Fixed cost: A
Invoice, fax, tel., transaction,…

+) Commodity cost
C: cost for an unit of commodity for inventory
(buying cost, transportation cost, …)
S: quantity of commodity
 Commodity cost = C.S

Cost for a contract = A+C.S

68
b) Maintenance cost
 Direct cost:
 renting warehouses
 salary for guards
 Facility for maintaining commodity

 Indirect cost:
 Interest when using capital from banks

 Maintenance cost coefficient: I

=> cost for maintaining an unit of commodity: I.C

 If a warehouse has Z units of commodity

=> maintenance cost = Z.I.C

69
c) Extra cost

 Cost for ensuring the prestige of enterprises

 Eg.: Lack of material in the storage => can not
make products
For producing in duedate => get material
urgently from somewhere => cost!!!

70
4.2 Wilson inventory model
 Each year, fixed demand: Q
 Consuming rate is a constant
 Time for commodity transportation is 0

=>Problem: Determine the quantity of commodity

to buy each time such that the total cost is
minimized

71
Strategy
 We only order a new contract when
warehouses are run out of commodity (avoid
the maintenance cost)
 We have a monotone function representing the
relation between the quantity of remaining
commodity and inventory time
Q

40000 Q(t)

20000

t
1 year

72
Notations
 Q: quantity of commodity demand for inventory per year,

 S: quantity of commodity needed to buy each time,

 n: number of contract times in a year (n=Q/S),

 Z: average inventory quantity in the warehouse (Z=S/2 ?),

 A: fixed cost

 C: cost of an unit of commodity

 I: maintenance cost coefficient

 D1: total cost for inventory

73
 Cost for n contracts in one year = n.A+C.Q

 Maintenance cost in one year = I.C.S/2

 Total cost: D1 = C.Q +n.A + I.C.S/2

 Since n=Q/S

=> D1 = C.Q +A Q/S + I.C.S/2

 Question: S=? so that D1 is minimized

74
Solution
Min D1 = C.Q +A Q/S + I.C.S/2
 Min D(S) = A Q/S + I.C.S/2

dD/dS = I.C/2 – A.Q/S2 = 0

: Wilson’s formula

75
 Optimal average inventory:

 Optimal number of contracts:

 Duration between two contracts:

 Optimal cost:

76
Graphical representation
Consider D= AQ/S + ICS/2
Let D1= ICS/2 and D2= AQ/S

d2 d

ICS* d1

S*

77
Remarks
 Carrying out a contract takes time
=> do order before inventory level = 0

 Let L be the duration of transportation commodity

 Contract has to be done when the warehouse has

B = Q.L –m.S* and it is done before m cycles.
B is call the contract point

78
Example
One import-export company need supply one
kind of commodity to the market with the
demand of 120000 ton/year. The fixed cost is
400 million VND. The maintenance cost
coefficient is 0.1. The cost for this kind of
commodity is 600 thousand VND/ton. The
transportation duration is 6 months.

a) Determine the quantity of commodity needed

to buy each time so that the total cost is
minimized. Calculate that cost.

b) Determine the average inventory quantity

a) Find the contract point

79
 Optimal quantity of commodity needed to buy?

80
 Optimal quantity of commodity needed to buy?

81
 Optimal total cost?

82
 Optimal total cost?

83
 Optimal number of contracts:

84
 Average inventory quantity?

85
 Average inventory quantity?

86
 Contract point?

87
 Contract point?

Order the contract before 1 cycle

88
 Contract point?

When the warehouse has 20000 tons left,

the next contract has to be ordered in order
that rightafter inventory level = 0, a new
quantity of S* = 40000 tons is added

89
4.3 Gradual replacement model
 In Wilson model, S units of commodity are
added to the warehouse at the same time

 Commodity comes and goes simultaneously

 If supply rate = consumption rate

 => no inventory
 => only consider
Supply rate > consumption rate

90
 Model
 Q: quantity of commodity demand for inventory in
period T,
 K: replacement rate of commodity in T = 1 year
 A: fixed cost
 C: cost of an unit of commodity
 I: maintenance cost coefficient
 S: quantity of commodity needed to buy each time,
 D1: total cost for inventory

S=? so that D1 is minimized

91
Solution
 Let Tn be the duration of getting a lot of S => Tn= S/K
 In T= 1 year, if getting commodity continuously, the
redundant amount: K-Q
 In Tn year, if getting commodity continuously, the
redundant amount : Tn(K-Q) = (S/K)(K-Q)= S(1-Q/K)
=> Average inventory: Z= S(1-Q/K)/2

 Time using Q units of commodity: T (=1 year)

 Time using S(1-Q/K) units of commodity: Tt
=> Tt= (S/Q)(1-Q/K)

 Time for getting and using commodity:

 T=Tn+ Tt = S/K +(S/Q)(1-Q/K) = S/Q (year)
=> The number of contracts: n=1/(S/Q) = Q/S

92
S(1-Q/K)

Tn Tt

93
 The cost (order + store commodity):
 D(S) = nA + IC(S/2)(1-Q/K)
=AQ/S +(IC/2)(1-Q/K).S min

94
 Similar to Wilson model, the contract point:
B = Q.L –m.S*

95
Remark 1
 Each time, one gets a lot of S units
 max amount of commodity in the warehouse:
S(1-Q/K)

 Each the cycle of getting and using commodity,

the amount of commodity that is NOT stored:
S – S(1-Q/K) = SQ/K

 In 1 year, the amount of un-stored commodity:

nSQ/K= (Q/S)(SQ/K)=Q2/K

96
 Remark 2

=>The cost of this model is smaller than Wilson model’s

97