SESSION 7

CASE STUDY 3
PRESCRIPTIVE ANALYTICS - BUY OR MAKE PROBLEM
PRESCRIPTIVE ANALYTICS
PRESCRIPTIVE ANALYTICS
 INTRO TO OPTIMIZATION &
LINEAR PROGRAMMING
⬥Resources are used to produce things. (Objective Function)
⬥Resources can be used in different ways to produce the target. (Decision
Variables)
⬥Resources are limited. (Constraint)
⬥How can we use limited resources most efficiently? (Optimization)
⬥The relationship between the resource and the produced good determines the
technique you will use:

⬦Linear
⬦Non-linear
 LINEAR VS. NONLINEAR
Linear Non Linear
⬥Workforce Scheduling ⬥Routing / Traveling Salesman
⬥Production Planning ⬥Economic Order Quantities
⬥Portfolio Allocation ⬥Portfolio Optimization
⬥Can find Global Optimum ⬥Can find Local Optima
 DECISION VARIABLES

⬥These are the variables that you are trying to optimize when faced with a
programming problem.
⬥Denoted by X_1,X_2,…, X_n

⬥For example:
⬦Manufacturing companies decide the optimal Product Mix to maximize profit.

⬦Logistics companies decide the optimal Delivery Route to minimize travel

time/cost.
 CONSTRAINTS
⬥These are the factors that limit your choices when it comes to Decisions (X_1,
X_2,…, X_n)

⬥Denoted by
⬦X_1≤a
⬦X_2≥b
⬦X_1+X_2=c

⬥For example:
⬦Manufacturing companies are limited by labor hours, raw materials, and
minimum demand.
⬦Logistics companies are limited by warehouse locations and minimum stock
requirements.
 OBJECTIVE FUNCTION
⬥What we are trying to maximize or minimize. In order to use LP techniques, we
must formulate this objective function and then optimize it subject to Constraints.

⬥Denoted by:
⬦MAX (or MIN): f(X_1,X_2,…, X_n )

⬥For example:
⬦Manufacturing companies want to maximize profit.

⬦Logistics companies want to minimize delivery time.

 OBJECTIVE FUNCTION
Decision Variables: X1, X2, ...., Xn --> represent resources.

Objective function: Y = f(X1, X2, ...., Xn) --> represents target to achieve.

Constraints are imposed on the ways we use resources.

Optimization: MAX or MIN objective function.

 SOLVING OPTIMIZATION – STEPS
⬥Identify your decision variables

⬥Write down your objective function

⬥List all your constraints in equations (using inequalities if necessary)

⬥Identify your optimization condition (minimum or maximum)

⬥Solve using the Microsoft Excel Solver module.

 MAKE OR BUY BUSINESS CASE
⬥A manufacturer makes 3 types of products, requiring differing amounts of time &
and raw material:
⬦Model A: 2 Hours of Wiring, 1 Hour of Harnessing, $50 Raw Material
⬦Model B: 1.5 Hours of Wiring, 2 Hours of Harnessing, $83 Raw Material
⬦Model C: 3 Hours of Wiring, 1 Hour of Harnessing, $130 Raw Material
⬥They received a $750,000 order for the following units: 3,000 Model A, 2,000
Model B, 900 Model C
⬥Unfortunately, the manufacturer only has 10,000 hours of Wiring and 5,000
hours of Harnessing available.
 MAKE OR BUY BUSINESS CASE
⬥Luckily, they can buy additional units to fulfill the order from another
manufacturer at the following costs:
⬦Model A: $61
⬦Model B: $97
⬦Model C: $145
⬥What is the maximum profit the manufacturer can make while fulfilling the order?
And how many units are bought (subcontracted) from the other manufacturer?

DECISION VARIABLE(S)?
OBJECTIVE FUNCTION?
CONSTRAINT(S)?
MAKE OR BUY BUSINESS CASE
Units Cost Wiring Harnessing

DECISION VARIABLE(S)?
MAKE OR BUY BUSINESS CASE

CONSTRAINT(S)?
MAKE OR BUY BUSINESS CASE

OBJECTIVE FUNCTION?
MAKE OR BUY BUSINESS CASE
Run Solver from Data Menu in Excel

Linear optimization model:

Simplex LP
MAKE OR BUY BUSINESS CASE

Objective function

Decision Variables

Constraints
MAKE OR BUY BUSINESS CASE

Optimum Solution