Lecture 4

Formulations

Practice yourself
on various case
studies !!

1
4.1 Production Scheduling Models
 These models can assist
managers in making decision
regarding the efficient
utilization of scarce resource.

 Applications include:
 Determining production levels
 Scheduling shifts
 Using overtime
 The cost effectiveness of adding
resources

2
Inventory Control

 Inventory quantity each time =Q units

 Set up cost or ordering cost =$K
 Acquisition cost =$C/unit
 Storing cost per unit =$h/year
 Demand (constant)= units/time unit, this implies
ordering period =T=Q/ 
 Question: berapa jumlah pemesanan optimum Q*?
 Cost per ordering cycle  K  CQ  QhT / 2

Inventroy
control

Solution T ime

Objective function =Total cost per year

f(Q)=Cost per cycle*

1 year K Qh
  c 
T year / cycle Q 2
K h 2K
f ' Q   
Q* 2K
  Q*   0 or T *  
Q2 2 h  h
Problems
 Cost function harus dinyatakan secara eksplisit
 Turunan dari fungsi ongkos harus dituliskan
secara eksplisit
 Selesaiakn persamaan turunan
 Dalam banyak kasus persamaan turunan tidak
diselesaikan secara analitik tetapi secara numerik,
misalnya menggunakan metoda Newton’s yang
lebih mudah dibanding menggunakan cara
analitik
Galaxy Industries Expansion Plan
 Galaxy Industries is planning to increase its production
and include two new products.
 Data
 Up to 3000 pounds of plastic will be available.
 Regular time available will be 40 hours.
 Overtime available will be 32 hours .
 The $180 overtime cost will be paid from the weekly
profits.
 Two new products will be introduced:
 Big Squirts
 Soakers
The old products are:
• Space rays
• Zappers
6
Galaxy Industries Expansion Plan
Marketing requirements:
 Space Rays should account no more 50% of total production.
 Other products should account no more than 40% of total production.
 Total production should be at least 1000 dozen per week.

Plastic
Plastic Production
Production
Product
Product Profit
Profit (lbs)
(lbs) Time
Time(min)
(min)
Space
SpaceRays
Rays $16
$16 22 33
Zappers
Zappers $15
$15 11 44
Big
BigSquirts
Squirts $20
$20 33 55
Soakers
Soakers $22
$22 44 66

 A weekly production schedule must be determined.

 Management wants to maximize the Net Weekly Profit.
7
Galaxy Industries Expansion Plan – Solution

 Decision Variables.
X1 = number of dozen Space Rays,
X2 = number of dozen Zapper,
X3 = number of dozen Big Squirts
X4 = number of dozen Soakers, to be produced weekly
X5 = number of hours of overtime to be scheduled

 Objective Function
The total net weekly profit from the sale of products, less the
extra cost of overtime, to be maximized.
Maximize 16X1 +15X2 +20X3+22X4 - 180X5
8
Galaxy Industries Expansion Plan – Solution
Amount of plastic used ≤ 3000
2X1 + X2 + 3X3 + 4X4 ≤ 3000
Number of production time ≤ 2400
3X1 + 4X2 + 5X3 +6X4 ≤ 2400 + X5
Number of overtime ≤ 1920
X5 ≤ 1920

Introduce the summation Variable X6, that helps in setting up the production mix
constraints
Weekly production of Space Rays ≤ 50% of the total production
X1 ≤ 0.5X6
Weekly production of other products ≤ 40% of the total production
X2 ≤ 0.4X6 ; X3 ≤ 0.4X6 ; X4 ≤ 0.4X6
Total production is at least 1000
X6 ≥ 1000
And … X1+X2+X3+X4 = X6
where X6 = total weekly production (in dozens),
9
4.2 Portfolio Models
 Portfolio models are usually designed to:
 Maximized return on investment,
 Minimize risk.
 Factors considered include:
 Liquidity requirements,
 Long and short term investment goals,
 Funds available.

10
 Jones Investment
Evaluation Results on Some Alternatives

Potential
Potential Expected
Expected Jones's
Jones's Liquidity
Liquidity Risk
Risk
Investment
Investment Return
Return Rating
Rating Analysis
Analysis Factor
Factor
Savings
SavingsAccount
Account 4.0%
4.0% AA Immediate
Immediate 00
Certificate
CertificateofofDeposite
Deposite 5.2%
5.2% AA 5-year
5-year 00
Atlantic
AtlanticLighting
Lighting 7.1%
7.1% BB++ immediate
immediate 25
25
Arkansas
ArkansasREITREIT 10.0%
10.0% BB immediate
immediate 30
30
Bedrock
BedrockInsurance
InsuranceAnnuity
Annuity 8.2%
8.2% AA 1-year
1-year 20
20
Nocal
NocalMining
MiningBond
Bond 6.5%
6.5% B+
B+ 1-year
1-year 15
15
Minicomp
MinicompSystems
Systems 20.0%
20.0% AA immediate
immediate 65
65
Antony
AntonyHotel
Hotel 12.5%
12.5% CC mediate
mediate 40
40

11
Jones Investment

• Portfolio goals
– Expected annual return of at least 7.5%.
– At least 50% invested in “A-Rated” investments.
– At least 40% invested in immediately liquid investments.
– No more than $30,000 in savings accounts and
certificates of deposit.

• Problem summary
– Determine the amount to be placed in each investment.
– Minimize total overall risk.
– Invest all $100,000.
– Meet the investor goals (diversify).

12
 Jones Investment – Solution
 Decision Variables
Xi = the amount allocated to each investment; Risk function
Total
 The Mathematical Model
investment
Minimize 25X3+30X4+20X5+15X6+65X7 + 40X8
ST: Return
X 1+ X2 + X 3 + X 4+ X5+ X6 + X7 + X8 = 100,000
.04X1+.052X2+.071X3+.10X4+.082X5+.056X6+.27X7+.125X8  7500
X 1+ X2 + X5 + X7  50,000
X 1+ X3+ X4 + X7  40,000
Savings/
X 1+ X2  30,000
All the variables are non-negative Certificate
A - Rate Liquid

13
4.3 Purchasing Modeling
 These models can consider:
 Demand
 Budget
 Cash flow
 Advertising
 Inventory restrictions.
 In solving purchasing problems, we
attempt to balance customer satisfaction
with resource utilization by the business
enterprise.

14
Euromerica Liquor Purchasing Problem

 Euromerica Liquors purchases and distributes a number of wines to retailers.

 There are four different wines to be ordered.
 Requirements
 Order at least 800 of each type.
 Order at least twice as many domestic bottles as imported bottles.
 Data :

Wine
Wine Country
Country Cost
Cost Selling
SellingPrice
Price
Napa
NapaGold
Gold U.S.
U.S. $2.50
$2.50 $4.25
$4.25
Cayuga
CayugaLake
Lake U.S.
U.S. $3.00
$3.00 $4.50
$4.50
Seine
SeineSoir
Soir France
France $5.00
$5.00 $8.00
$8.00
Bella
BellaBella
Bella Italy
Italy $4.00
$4.00 $6.00
$6.00
 Management wishes to determine how many bottles of each
type to order.
 The objective is to maximize the total profit from purchasing
and distributing the wine bottles. 15
Euromerica Liquor Purchasing Problem – Solution
Variables
X1 = bottles of Napa Gold purchased
X2 = bottles of Cayuga Lake purchased
X3 = bottles of Seine Soir purchased
X4 = bottles of Bella Bella purchased.
The Mathematical Model
Maximize 1.75X1 + 1.50X2 + 3X3 + 2X4
ST:
X1  800
X2  800
X3  800
X4  800
$4.25 - $2.50 = $1.75 X1 + X2 - 2X3 - 2X4 
0
X1, X2, X3, X4  0
[Domestic wines] [ Are at least]
[ Twice the imported wines] 16
contoh
 A manufacturing firm producing small refrigerators has entered into
 a contract to supply 50 refrigerators at the end of the first month, 50 at the end of the
 second month, and 50 at the end of the third. The cost of producing x refrigerators
 in any month is given by $(x2 + 1000). The firm can produce more refrigerators in
 any month and carry them to a subsequent month. However, it costs $20 per unit for
 any refrigerator carried over from one month to the next. Assuming that there is no
 initial inventory, determine the number of refrigerators to be produced in each
month to minimize the total cost.
 SOLUTION Let x1, x2, and x3 represent the number of refrigerators produced in the
 first, second, and third month, respectively. The total cost to be minimized is given
by
 total cost = production cost + holding cost

17
 f (x1, x2, x3) = (x21 + 1000) + (x22 + 1000) + (x23 + 1000) +
20(x1 − 50)+ 20(x1 + x2 − 100)
 = x21 + x22 + x23 + 40x1 + 20x2
 The constraints can be stated as
 g1(x1, x2, x3) = x1 − 50 ≥ 0
 g2(x1, x2, x3) = x1 + x2 − 100 ≥ 0
 g3(x1, x2, x3) = x1 + x2 + x3 − 150 ≥ 0

18
Don”t touch that drop card!

More LP
The Simplex Algorithm

The fun never stops!

19