Spreadsheet Modeling & Decision Analysis:: A Practical Introduction To Management Science, 3e

Spreadsheet Modeling &
Decision Analysis:
A Practical Introduction to
Management Science, 3e
by Cliff Ragsdale
1
Chapter 3
Modeling and Solving LP

Problems in a Spreadsheet
Spreadsheet Modeling and Decision Analysis, 3e, by Cliff Ragsdale. © 2001 South-Western/Thomson Learning.
3-2
Introduction
 Solving LP problems graphically is only
possible when there are two decision
variables
 Few real-world LP have only two
decision variables
 Fortunately, we can now use
spreadsheets to solve LP problems
3-3
Finding out the Max or Min values
Global
Global
Global
optima
optima
optima
Local
optima
3-4
Spreadsheet Solvers
 The company that makes the Solver in
Excel, Lotus 1-2-3, and Quattro Pro is
Frontline Systems, Inc.
Check out their web site:
http://www.frontsys.com
 Other packages for solving MP problems:
AMPL LINDO
CPLEX MPSX
3-5
The Steps in Implementing an LP
Model in a Spreadsheet
1. Organize the data for the model on the spreadsheet.
2. Reserve separate cells in the spreadsheet to
represent each decision variable in the model.
3. Create a formula in a cell in the spreadsheet that
corresponds to the objective function.
4. For each constraint, create a formula in a separate
cell in the spreadsheet that corresponds to the left-
hand side (LHS) of the constraint.
3-6
Let’s Implement a Model for the
Blue Ridge Hot Tubs Example...
MAX: 350X1 + 300X2 } profit

S.T.: 1X1 + 1X2 <= 200} pumps
9X1 + 6X2 <= 1566 } labor
12X1 + 16X2 <= 2880 } tubing
X1, X2 >= 0 } nonnegativity
3-7
Implementing the Model
See file Fig3-1.xls
3-8
How Solver Views the Model
 Target cell - the cell in the spreadsheet
that represents the objective function
 Changing cells - the cells in the
spreadsheet representing the decision
variables
 Constraint cells - the cells in the
spreadsheet representing the LHS
formulas on the constraints
3-9
Let’s go back to Excel and see
how Solver works...
3-10
Goals For Spreadsheet Design
 Communication - A spreadsheet's primary business
purpose is that of communicating information to
managers.
 Reliability - The output a spreadsheet generates
should be correct and consistent.
 Auditability - A manager should be able to retrace the
steps followed to generate the different outputs from the
model in order to understand the model and verify results.
 Modifiability - A well-designed spreadsheet should be
easy to change or enhance in order to meet dynamic user
requirements.
3-11
Spreadsheet Design Guidelines
 Organize the data, then build the model around the data.
 Do not embed numeric constants in formulas.
 Things which are logically related should be physically
related.
 Use formulas that can be copied.
 Column/rows totals should be close to the columns/rows
being totaled.
 The English-reading eye scans left to right, top to
bottom.
 Use color, shading, borders and protection to distinguish
changeable parameters from other model elements.
 Use text boxes and cell notes to document various
elements of the model.
3-12
Make vs. Buy Decisions:
The Electro-Poly Corporation
3-13
Make vs. Buy Decisions:
The Electro-Poly Corporation
 Electro-Poly is a leading maker of slip-rings.
 A $750,000 order has just been received.
Model 1 Model 2 Model 3
Number ordered 3,000 2,000 900
Hours of wiring/unit 2 1.5 3
Hours of harnessing/unit 1 2 1
Cost to Make $50 $83 $130
Cost to Buy $61 $97 $145
 The company has 10,000 hours of wiring

capacity and 5,000 hours of harnessing
capacity.
3-14
Defining the Decision Variables
M1 = Number of model 1 slip rings to make in-house
B1 = Number of model 1 slip rings to buy from competitor
3-15
Defining the Objective Function
Minimize the total cost of filling the order.

MIN: 50M1 + 83M2 + 130M3 + 61B1 + 97B2 + 145B3
3-16
Defining the Constraints
 Demand Constraints
M1 + B1 = 3,000 } model 1
M2 + B2 = 2,000 } model 2
M 3 + B3 = 900 } model 3
 Resource Constraints
2M1 + 1.5M2 + 3M3 <= 10,000 } wiring
1M1 + 2.0M2 + 1M3 <= 5,000 } harnessing
 Nonnegativity Conditions
M1, M2, M3, B1, B2, B3 >= 0
3-17
See file Fig3-17.xls
3-18
An Investment Problem
3-19
An Investment Problem:
Retirement Planning Services, Inc.
 A client wishes to invest $750,000 in the
following bonds.
Years to
Company Return Maturity Rating
Acme Chemical 8.65% 11 1-Excellent
DynaStar 9.50% 10 3-Good
Eagle Vision 10.00% 6 4-Fair
Micro Modeling 8.75% 10 1-Excellent
OptiPro 9.25% 7 3-Good
Sabre Systems 9.00% 13 2-Very Good
3-20
Investment Restrictions
 No more than 25% can be invested in
any single company.
 At least 50% should be invested in long-
term bonds (maturing in 10+ years).
 No more than 35% can be invested in
DynaStar, Eagle Vision, and OptiPro.
3-21
X1 = amount of money to invest in Acme Chemical
X2 = amount of money to invest in DynaStar
X3 = amount of money to invest in Eagle Vision
X4 = amount of money to invest in MicroModeling
X5 = amount of money to invest in OptiPro
X6 = amount of money to invest in Sabre Systems
3-22
Maximize the total annual investment return.
MAX: .0865X1 + .095X2 + .10X3 + .0875X4 + .0925X5 + .09X6
3-23
 Total amount is invested
X1 + X2 + X3 + X4 + X5 + X6 = 750,000
 No more than 25% in any one investment
Xi <= 187,500, for all i
 50% long term investment restriction.
X1 + X2 + X4 + X6 >= 375,000
 35% Restriction on DynaStar, Eagle Vision, and
OptiPro.
X2 + X3 + X5 <= 262,500
 Nonnegativity conditions
Xi >= 0 for all i
3-24
3-25
A scheduling problem: Air-
Express
 Anyone responsible for creating work
schedules for a number of employees
can appreciate the difficulties in this
task. It can be very difficult to develop a
feasible schedule, much less than an
optimal schedule.
 LP models have been devised to solve
these problems.
3-26
Express
 Air-Express is an express shipping service
that guarantees overnight delivery of
packages anywhere in the continental United
states. The Co. has various operations
centers, called hubs, at airports in major cities
across the country. Packages are received at
hubs from other locations and then shipped to
intermediate hubs or to their final
destinations.
3-27
Express
Day of the week Workers reqd shift Days Off Wage
Sunday 18 1 Sunday & Monday $680
Monday 27
Day of the week Workers 2 Monday & Tuesday
reqd 705
Sunday 18
Tuesday 22
Monday 3 27Tuesday & Wednesday 705
Tuesday
Wednesday 26
Wednesday
4 22
Wednesday & Thursday
26
705
Thursday
Thursday
25
Friday
5 25
Thursday & Friday
21
705
Friday
Saturday
21 6 19Friday & Saturday 680
7 Saturday & Sunday 655
Saturday 19
As per negotiation, Saturday and Sunday are off days and

the Co. has to pay extra $ 25 per day for workers on their
Work on these days.
3-28
Express
Model
680 x1  705 x2  705 x3  705 x4  705 x5  680 x6  655 x7
Min: s.t.
0 x1  1x2  1x3  1x4  1x5  1x6  0 x7  18
0 x1  0 x2  1x3  1x4  1x5  1x6  1x7  27
1x1  0 x2  0 x3  1x4  1x5  1x6  1x7  22
1x1  1x2  0 x3  0 x4  1x5  1x6  1x7  26
1x1  1x2  1x3  0 x4  0 x5  1x6  1x7  25
1x1  1x2  1x3  1x4  0 x5  0 x6  1x7  21
1x1  1x2  1x3  1x4  1x5  0 x6  0 x7  19
x1 ,
x ,x ,x ,x ,x ,x ,x 0
Spreadsheet Modeling and Decision 1Analysis,
2 3 by4 Cliff5Ragsdale.
3e, 6 7 © 2001 South-Western/Thomson Learning.
3-29
A Transportation Problem:
Tropicsun
Processing
Groves Distances (in miles) Plants
Supply Capacity
Mt. Dora 21 Ocala
275,000 200,000
1 50 4
40
35
Eustis 30 Orlando
400,000 600,000
2 5
22
55
Clermont 20 Leesburg
300,000 225,000
3 25 6
3-30
Xij = # of bushels shipped from node i to node j
Specifically, the nine decision variables are:
X14 = # of bushels shipped from Mt. Dora (node 1) to Ocala (node 4)

X15 = # of bushels shipped from Mt. Dora (node 1) to Orlando (node 5)
X16 = # of bushels shipped from Mt. Dora (node 1) to Leesburg (node 6) X24
= # of bushels shipped from Eustis (node 2) to Ocala (node 4)
X25 = # of bushels shipped from Eustis (node 2) to Orlando (node 5)
X26 = # of bushels shipped from Eustis (node 2) to Leesburg (node 6)
X34 = # of bushels shipped from Clermont (node 3) to Ocala (node 4)
X35 = # of bushels shipped from Clermont (node 3) to Orlando (node 5)
XSpreadsheet
36 = # of bushels
Modeling shipped
and Decision Analysis, 3e, by from Clermont
Cliff Ragsdale. (node 3)Learning.
© 2001 South-Western/Thomson to Leesburg (node 6)
3-31
Minimize the total number of bushel-miles.

MIN: 21X14 + 50X15 + 40X16 +
35X24 + 30X25 + 22X26 +
55X34 + 20X35 + 25X36
A bushel = 35.2391 litres
3-32
 Capacity constraints
X14 + X24 + X34 <= 200,000 } Ocala
X15 + X25 + X35 <= 600,000 } Orlando
X16 + X26 + X36 <= 225,000 } Leesburg
 Supply constraints
X14 + X15 + X16 = 275,000 } Mt. Dora
X24 + X25 + X26 = 400,000 } Eustis
X34 + X35 + X36 = 300,000 } Clermont
Xij >= 0 for all i and j
3-33
3-34
A Blending Problem:
The Agri-Pro Company
 Agri-Pro has received an order for 8,000 pounds of
chicken feed to be mixed from the following feeds.
Percent of Nutrient in
Nutrient Feed 1 Feed 2 Feed 3 Feed 4
Corn 30% 5% 20% 10%
Grain 10% 3% 15% 10%
Minerals 20% 20% 20% 30%
Cost per pound $0.25 $0.30 $0.32 $0.15
 The order must contain at least 20% corn, 15%

grain, and 15% minerals.
3-35
X1 = pounds of feed 1 to use in the mix
3-36
MIN: 0.25X1 + 0.30X2 + 0.32X3 + 0.15X4
3-37
 Produce 8,000 pounds of feed
X1 + X2 + X3 + X4 = 8,000
 Mix consists of at least 20% corn
(0.3X1 + 0.5X2 + 0.2X3 + 0.1X4)/8000 >= 0.2
 Mix consists of at least 15% grain
(0.1X1 + 0.3X2 + 0.15X3 + 0.1X4)/8000 >= 0.15
 Mix consists of at least 15% minerals
(0.2X1 + 0.2X2 + 0.2X3 + 0.3X4)/8000 >= 0.15
X1, X2, X3, X4 >= 0
3-38
A Comment About Scaling
 Notice that the coefficient for X2 in the ‘corn’
constraint is 0.05/8000 = 0.00000625
 As Solver solves our problem, intermediate
calculations must be done that make coefficients
large or smaller.
 Storage problems may force the computer to use
approximations of the actual numbers.
 Such ‘scaling’ problems sometimes prevents
Solver from being able to solve the problem
accurately.
 Most problems can be formulated in a way to
minimize scaling errors...
3-39
Re-Defining the Decision
Variables
X1 = thousands of pounds of feed 1 to use in the mix
3-40
Re-Defining the Objective
Function
MIN: 250X1 + 300X2 + 320X3 + 150X4
3-41
Re-Defining the Constraints
 Produce 8,000 pounds of feed
X1 + X2 + X3 + X4 = 8
 Mix consists of at least 20% corn
(0.3X1 + 0.5X2 + 0.2X3 + 0.1X4)/8 >= 0.2
 Mix consists of at least 15% grain
(0.1X1 + 0.3X2 + 0.15X3 + 0.1X4)/8 >= 0.15
 Mix consists of at least 15% minerals
(0.2X1 + 0.2X2 + 0.2X3 + 0.3X4)/8 >= 0.15
X1, X2, X3, X4 >= 0
3-42
A Comment About Scaling
 Earlier the largest coefficient in the
constraints was 8,000 and the smallest
is 0.05/8 = 0.00000625.
 Now the largest coefficient in the
constraints is 8 and the smallest is
0.05/8 = 0.00625.
 The problem is now more evenly scaled.
3-43
The Assume Linear Model Option
 The Solver Options dialog box has an option
labeled “Assume Linear Model”.
 When you select this option Solver performs some
tests to verify that your model is in fact linear.
 These test are not 100% accurate & often fail as a
result of a poorly scaled model.
 If Solver tells you a model isn’t linear when you
know it is, try solving it again. If that doesn’t work,
try re-scaling your model.
3-44
3-45
A Production Planning Problem:
The Upton Corporation
 Upton is planning the production of their heavy-duty air
compressors for the next 6 months.
Month
1 2 3 4 5 6
Unit Production Cost $240 $250 $265 $285 $280 $260
Units Demanded 1,000 4,500 6,000 5,500 3,500 4,000
Maximum Production 4,000 3,500 4,000 4,500 4,000 3,500
Minimum Production 2,000 1,750 2,000 2,250 2,000 1,750
 Beginning inventory = 2,750 units

 Safety stock = 1,500 units
 Unit carrying cost = 1.5% of unit production cost
 Maximum warehouse capacity = 6,000 units
3-46
Pi = number of units to produce in month i, i=1 to 6
Bi = beginning inventory month i, i=1 to 6
3-47
Minimize the total cost production & inventory costs.
MIN: 240P1+ 250P2 + 265P3 + 285P4 + 280P5 + 260P6 +

3.6(B1+B2)/2 + 3.75(B2+B3)/2 + 3.98(B3+B4)/2 +
4.28(B4+B5)/2 + 4.20(B5+ B6)/2 + 3.9(B6+B7)/2
Note: The beginning inventory in any month is the same as the
ending inventory in the previous month.
3-48
 Production levels
2,000 <= P1 <= 4,000 } month 1
1,750 <= P2 <= 3,500 } month 2
2,000 <= P3 <= 4,000 } month 3
2,250 <= P4 <= 4,500 } month 4
2,000 <= P5 <= 4,000 } month 5
1,750 <= P6 <= 3,500 } month 6
 Ending Inventory (EI = BI + P - D)
1,500 <= B1 + P1 - 1,000 <= 6,000 } month 1
1,500 <= B2 + P2 - 4,500 <= 6,000 } month 2
1,500 <= B3 + P3 - 6,000 <= 6,000 } month 3
1,500 <= B4 + P4 - 5,500 <= 6,000 } month 4
1,500 <= B5 + P5 - 3,500 <= 6,000 } month 5
3-49
Defining the Constraints (cont’d)
 Beginning Balances
B1 = 2750
B2 = B1 + P1 - 1,000
B3 = B2 + P2 - 4,500
B4 = B3 + P3 - 6,000
B5 = B4 + P4 - 5,500
B6 = B5 + P5 - 3,500
B7 = B6 + P6 - 4,000
Notice that the Bi can be computed directly from the Pi.
Therefore, only the Pi need to be identified as changing cells.
3-50
3-51
A Multi-Period Cash Flow Problem:
The Taco-Viva Sinking Fund - I
 Taco-Viva needs to establish a sinking fund to pay $800,000
in building costs for a new restaurant in the next 6 months.
 Payments of $250,000 are due at the end of months 2 and
4, and a final payment of $300,000 is due at the end of
month 6.
 The following investments may be used.
Investment Available in Month Months to Maturity Yield at Maturity

A 1, 2, 3, 4, 5, 6 1 1.8%
B 1, 3, 5 2 3.5%
C 1, 4 3 5.8%
D 1 6 11.0%
3-52
Summary of Possible Cash Flows
Cash Inflow/Outflow at the Beginning of Month
Investment 1 2 3 4 5 6 7
A1 -1 1.018
B1 -1 <_____> 1.035
C1 -1 <_____> <_____> 1.058
D1 -1 <_____> <_____> <_____> <_____> <_____> 1.11
A2 -1 1.018
A3 -1 1.018
B3 -1 <_____> 1.035
A4 -1 1.018
C4 -1 <_____> <_____> 1.058
A5 -1 1.018
B5 -1 <_____> 1.035
A6 -1 1.018
Req’d Payments $0 $0 $250 $0 $250
$0 $300
(in $1,000s) 3-53
Ai = amount (in $1,000s) placed in investment A at the
beginning of month i=1, 2, 3, 4, 5, 6
Bi = amount (in $1,000s) placed in investment B at the
beginning of month i=1, 3, 5
Ci = amount (in $1,000s) placed in investment C at the
beginning of month i=1, 4
Di = amount (in $1,000s) placed in investment D at the
beginning of month i=1
3-54
Minimize the total cash invested in month 1.
MIN: A1 + B1 + C1 + D 1
3-55
 Cash Flow Constraints
1.018A1 – 1A2 = 0 } month 2
1.035B1 + 1.018A2 – 1A3 – 1B3 = 250 } month 3
1.058C1 + 1.018A3 – 1A4 – 1C4 = 0 } month 4
1.035B3 + 1.018A4 – 1A5 – 1B5 = 250 } month 5
1.018A5 –1A6 = 0 } month 6
1.11D1 + 1.058C4 + 1.035B5 + 1.018A6 = 300 } month 7
Ai, Bi, Ci, Di >= 0, for all i
3-56
3-57
Risk Management:
The Taco-Viva Sinking Fund - II
 Assume the CFO has assigned the following risk ratings to
each investment on a scale from 1 to 10 (10 = max risk)
Investment Risk Rating
A 1
B 3
C 8
D 6
 The CFO wants the weighted average risk to not exceed 5.
3-58
 Risk Constraints
1A1 + 3B1 + 8C1 + 6D1
<= 5 } month 1
A1 + B1 + C1 + D1
1A2 + 3B1 + 8C1 + 6D1
<= 5 } month 2
A2 + B1 + C1 + D1
1A3 + 3B3 + 8C1 + 6D1
<= 5 } month 3
A3 + B3 + C1 + D1
1A4 + 3B3 + 8C4 + 6D1
<= 5 } month 4
A4 + B3 + C4 + D1
1A5 + 3B5 + 8C4 + 6D1
<= 5 } month 5
A5 + B5 + C4 + D1
1A6 + 3B5 + 8C4 + 6D1

<= 5 } month 6
A6 + B5 + C4 + D1
3-59
An Alternate Version of the Risk Constraints
 Equivalent Risk Constraints
-4A1 - 2B1 + 3C1 + 1D1 <= 0 } month 1
– 2B1 + 3C1 + 1D1 – 4A2 <= 0 } month 2
3C1 + 1D1 – 4A3 – 2B3 <= 0 } month 3
1D1 – 2B3 – 4A4 + 3C4 <= 0 } month 4
1D1 + 3C4 – 4A5 – 2B5 <= 0 } month 5
1D1 + 3C4 – 2B5 – 4A6 <= 0 } month 6

Note that each coefficient is equal to the risk factor for the investment minus 5
(the maximum allowable weighted average risk).
3-60
3-61
Data Envelopment Analysis (DEA):
Steak & Burger
 Steak & Burger needs to evaluate the performance
(efficiency) of 12 units.
 Outputs for each unit (Oij) include measures of: Profit,
Customer Satisfaction, and Cleanliness
 Inputs for each unit (Iij) include: Labor Hours, and Operating
Costs
 The “Efficiency” of unit i is defined as follows:
nO
Weighted sum of unit i’s outputs

nO
 Oij w j  Oij w j
j 1
j 1
=
nI
I v
nI
Weighted sum of unit i’s inputs
ij j
j 1
 I ij v j
j 1
3-62
wj = weight assigned to output j
vj = weight assigned to input j
A separate LP is solved for each unit, allowing each

unit to select the best possible weights for itself.
3-63
Maximize the weighted output for unit i :

nO
MAX:  Oij w j
nO
 Oij w j
j 1 j 1
3-64
 Efficiency cannot exceed 100% for any unit
nO nI
 Okj w j   I kj v j , k  1 to the number of units
j 1 j 1
 Sum of weighted inputs for unit i must equal 1 nO n I
  I ij v j  1
nI j 1 j 1
 I ij v j  1
j 1
wj, vj >= 0, for all j
3-65
Important Point
When using DEA, output variables should be
expressed on a scale where “more is better”
and input variables should be expressed on a
scale where “less is better”.
3-66
3-67
Assignments
 Page 114
14, 15, 18, 21, 22, 24, 25, 29, 30, 35, 38, 46.
3-68
End of Chapter 3
3-69

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Spreadsheet Modeling &

Modeling and Solving LP

MAX: 350X1 + 300X2 } profit

 The company has 10,000 hours of wiring

Minimize the total cost of filling the order.

As per negotiation, Saturday and Sunday are off days and

X14 = # of bushels shipped from Mt. Dora (node 1) to Ocala (node 4)

Minimize the total number of bushel-miles.

 The order must contain at least 20% corn, 15%

X2 = pounds of feed 2 to use in the mix

X3 = pounds of feed 3 to use in the mix

X4 = pounds of feed 4 to use in the mix

Minimize the total cost of filling the order.

MIN: 0.25X1 + 0.30X2 + 0.32X3 + 0.15X4

X2 = thousands of pounds of feed 2 to use in the mix

X3 = thousands of pounds of feed 3 to use in the mix

X4 = thousands of pounds of feed 4 to use in the mix

MIN: 250X1 + 300X2 + 320X3 + 150X4

 Beginning inventory = 2,750 units

Bi = beginning inventory month i, i=1 to 6

Minimize the total cost production & inventory costs.

MIN: 240P1+ 250P2 + 265P3 + 285P4 + 280P5 + 260P6 +

Investment Available in Month Months to Maturity Yield at Maturity

Minimize the total cash invested in month 1.

 The CFO wants the weighted average risk to not exceed 5.

1A6 + 3B5 + 8C4 + 6D1

– 2B1 + 3C1 + 1D1 – 4A2 <= 0 } month 2

3C1 + 1D1 – 4A3 – 2B3 <= 0 } month 3

1D1 – 2B3 – 4A4 + 3C4 <= 0 } month 4

1D1 + 3C4 – 4A5 – 2B5 <= 0 } month 5

1D1 + 3C4 – 2B5 – 4A6 <= 0 } month 6

Weighted sum of unit i’s outputs

A separate LP is solved for each unit, allowing each

Maximize the weighted output for unit i :

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