MIXED IP APPLNS FOR SC

BY
N.S.Nilakantan
 Introduction to MIP Models
 Mixed-integer programming (MIP) models are a subset
of LP models in which some variables are constrained
to take integer values while other variables may take
non-integer- continuous- values.
 0-1 – binary variables are the most frequent integer
variables. These variables are used to describe cost
relationships, constraints, and logical conditions that
cannot be captured by LP.
 MIP construction overcomes some of the limitations of
LP models discussed earlier.
 Employed in different ways in operational, tactical, and
strategic SC planning problems.
 0-1 variables in SC Modeling
 In operational planning, they are used to model
sequencing and routing decisions associated with the
scheduling of machines, vehicles, or people.
 In tactical problems, they are used to model fixed costs,
economies of scale, and a variety of non-numeric, or
logical, policy restrictions such as sole sourcing of markets.
 In the strategic area, they are used to model the timing,
sizing, phasing, and location of investment options.
 MIP models provide a rigorous approach to supply chain
analysis. The models accurately capture the important
decision options, constraints, and objectives of a supply
chain problem and the methods are capable of finding
good solutions to these models.

Cost Considerations & an example Ajax’s
AssemblyModel
 This is not achieved without a cost. MIP problems are
optimized as a sequence of LP approximations (refer
Branch-and-bound method) and the number of
approximations that must be solved grows exponentially
with the number of integer variables in the model.
 This requires use of MIP constructs sparingly in
balancing the need and desire for realism against the
burden of computation.
 Refer earlier model in Ch.3.
 A-line and C-line resources available for the week were
given and their costs were netted out of net revenue.
 Now we extend the model to explicitly account for the
costs associated with the test resources.
 Original LP model
 Maximize Z = 350MA+470MB+610MC
 s.t.
 MA+MB <= 120 ( A-line test capacity)
 MC <= 48 (C-line test Capacity)
 10Ma+15MB+20MC<= 2000( labour Availability)
 MA,MB,MC>= 0.
 Before the use of the model, Ajax followed weekly strategy of
assembling and testing 64 Alphas, 48 Betas, and 32 Gammas.
 Historical weekly utilization was 112 hrs of A-line test equipment
and 32 hours of C-line test equipment.
 Based on these figures, the unit charge for A-line testing was $
5600/112 = 50/hr. for unit of Alpha and Beta, which require 1
hour of testing. The unit charge of C-line testing was $2432/32 =
76/hr. per unit of Gamma.
 Revisions Required
 To explicitly model the testing cost, we modify the obj fn
as :
 Maximize z = 400MA +520MB +686MC
 Next, we replace the linear approximations ($50/hr for
A-line testing and $76/hr for C-line testing ) employed in
the original model, by the most accurate cost functions
involving fixed and variable costs.
 For the A-line, the function comprises of a fixed cost of
$2016 if the A-line is used at all during the week and a
variable cost of $32 for each hour consumed.
 For the C-line, the function comprises of a fixed cost of
$1200 and a variable cost of 38.5 for each hour consumed.
 Revised MIP Model
 Define 0-1 variable FA as
 =1 if A-line test equipment is used during the week
 =0 if otherwise.
 Similarly, define FC as
 =1, if C-line test equipment is used during the week
 =0, otherwise.
 Revise the constraints of testing capacity as
 MA +MB – 120FA <= 0 and
 MC – 48FC <=0
 Revise the obj function as
 Max Z = 400MA+520MB+686MC – 2016FA-1200FC -32MA-32MB-
38.5MC or
 Max Z = 368MA+488MB+647.50MC – 2016FA-1200FC
 Discussion of Solution
 Reoptimizing the model using an MIP
algorithm, we obtain the optimal solution as
 MA* = 120, MB* =0 and MC* = 40, which is the
same as the original LP solution.
 However, the obj fn value is $66844? Or 70060
instead of 66400 due to refinement in our
depiction of costs in the model.
 Conditional Minimum
 A constraint linked to a decision about whether
or not to incur a fixed cost is called the
conditional minimum. This states that a
continuous decision variable should be either
equal to zero or above a stated minimum.
 For example, Ajax might wish to impose the
constraint of Gammas in the week must either
be 0 or at least 5. We write this as
 MC -5FC >=0.
 Economies of Scale
 Consider the situation arising at Ajax in the acquisition of
microprocessors from Riverfront for the Gamma
workstation.
 Riverfront offers to sell Mps under a long-term
arrangement for $250/unit upto 30/week and then drop
the price to $200/unit for any additional units.
 We require a 0-1 variable to enforce the condition that the
lower price can be paid only when 30 units have been
bought at the higher price.
 Let W1 = weekly purchases from riverfront at $250/unit
and W2 = weekly purchases from Riverfront at $200/unit.
 Let MC denote Gammas assembled in a given week and
MC = W1+W2 because each Gamma requires one Mp.
 Use of 0-1 variable
 To impose logical condition that W2>0 implies W1 = 30,
we introduce a 0-1 variable D constrained to take a
value of 0 (economy of scale not achieved) or 1
( economy of scale achieved).
 0<=W1<=30 and W2>=0 and
 W1>=30D and W2 <= 18D leading to
 -W1 +30D <=0 and W2 – 18D <=0
 If D =1, W1 = 30 and W2 <=18.
 If D =0, W1>=0 and W2<=0 or W2 =0.
 Can we have W1=30 and D =0? Yes. When W1=30,
model is free to choose D =0 or 1, but it must choose
D=1, if lower-cost purchases are needed to achieve
optimality.
 Production Changeover
 Setup resource is utilized during changeover during the week
when both Alphas and Betas are tested on A-line testing facility.
 20 hrs. are required for changeover. Hence only 100 out of 120
hrs. are available when both Alphas and betas are tested on A-
line.
 Let TESTA denote a 0-1 variable that takes a value of 1 if Alphas
are tested in a given week, or 0 otherwise. Let TESTB denote a 0-
1 variable that takes a value of 1 if Betas are tested in a given
week, or 0 otherwise.
 Let TESTBOTH denote a 0-1 variable that takes on either a value
of 1 if both Alphas and Betas are tested in given week, and 0, if
at most one of Alphas and Betas is tested that week.
 This is expressed mathematically as
 TESTBOTH >= TESTA+TESTB -1.
 Production Changeover(contd.)
 The changeover resource constraint is modified as
 MA+MB +20TESTBOTH <=120.
 We also link MA to TESTA and MB to TESTB by the
constraints
 MA – 120TESTA <=0 and MB-120TESTB <=0.
 These constraints express the condition that TESTA is
forced to take on a value of 1 if any Alphas are tested
in the week ( i.e. if MA >0) and TESTB is forced to
take on a value of 1 if any Betas are tested in the week
(i.e. if MB>0). Under such conditions, MA or MB will
not exceed 120, which is the capacity of the A-line.
Multiple Choice and other constraints
 0-1 variables may be used to capture various
non-numerical or logical constraints.
 A multiple-choice constraint states that exactly
one or at most one, logical decision must be
selected from among a set of possible logical
decisions.
 We consider a sole-sourcing constraint in the
context of the Alpha transportation model
discussed earlier.
 Alpha Transportation Model
transport cost and other data
From/ 1 2 3 4 5 6 7 8 Suppl
to y
Plant 14.00 24.00 21.00 20.00 21.50 19.00 17.00 30.00 100
Wareh 24.00 15.00 28.00 20.00 18.50 19.50 24.00 28.00 45
ouse
Dema 22 14 18 17 15 13 15 20
nd
The optimal solution is obtained through a normal LP formulation. Please note
that market8 is served by both the plant and the warehouse.
If Ajax has a sole sourcing policy-each market must be served by a single source-
this solution is not feasible.
For reasons of customer service, Ajax would like to investigate the consequences of
limiting shipments to market8 and all other markets to a single supply source.
The illustration of how to use 0-1 variables in this context follows.
 Example 4.4 Use of 0-1 variables
 Let DP8 = 1 if the plant serves market8 and DP8 =
0 if otherwise.
 Let DW8 =1 if the warehouse serves market8 and
DW8 = 0 otherwise.
 The demand constraint of market8 is rewritten as
 20DP8 + 20DW8 = 20 or DP8+DW8 =1
 We must also adjust the supply constraints and
objective function by replacing the flow variables
XP8 and XW8 by the 0-1 variables DP8 and DW8.
 The cost of supplying market8 is reworked as
600DP8 from Plant and 560DW8 from warehouse.
 Variations of multiple-choice
constraints
 Suppose that the management considers that no more
than three markets can be served by the warehouse.
 We define DWJ for each market J where DWJ =1 if
market J is served by the warehouse and DWJ =0
otherwise. This policy would be expressed as
 DW1+DW2+………+DW8 <=3.
 Suppose management wants to impose the policy that
markets 4 and 6 must both be served either by the
warehouse or plant.
 DW4 – DW6 =0
Distribution center location models
 Locating distribution centers is a classic application of MIP.
the objective is to minimize the sum of warehousing and
transportation costs while maintaining acceptable customer
service.
 Although it is a strategic planning problem, next year’s
demand is assumed fixed and given. In many instances,
marketing managers determine the marketing and sales plan
without regard to the logistics consequences. The plan is
passed on to the logistics managers who are responsible for
ensuring that the products reach the markets at low cost and
in a timely manner.
 This illustration lets us examine how spreadsheet optimizers
can generate and optimize MIP models.
 DC location problem – example
 Electronica Corp is a wholesale distributor of consumer electronic
products to 20 markets in the Midwestern states. The company is seeking
a DC location strategy for next year that will minimize their total
distribution cost.
 The details are in the handout. Table 4.1(pp.124-128) is divided into 4
sections. 8 potential locations for 3rd party warehouses and their distance
to the 20 markets are listed in the ‘distances’ section.
 Electronica has the choice of selecting among no DC, small DC, or a large
DC. the ‘DC section indicates a fixed(FC) cost and a variable cost(VC) for
outbound flows (1000s) that are associated with each DC. These flows are
measured in truckloads for the year upto the stated capacity of the DC
option.
 The demand for full truckloads for next year alongwith product flows
from the DCs to meet them are listed in the ‘Flows’ section.
 The costs of the DCs selected in the optimal solution are calculated in the
‘DC Capacity and cost’ section.
 Mixed IP Model
 The choices at each location are modeled by two 0-1 variables. We define
 CHISM = 1 if a small DC is selected at Chicago location; 0 otherwise.
 CHILG = 1 if a large DC is selected at Chicago location; 0 otherwise.
 CHISM+CHILG<=1, which states that at most one of the two options for
Chicago may be selected.
 We set up the model in an excel sheet as described in the handout and run
OpenSolver –a spreadsheet optimizer.
 The minimal cost solution involves the opening of a large DC in Chicago and
six small DCs, one in every location except Chicago and Des Moines. The cost
of the optimal solution is $2180100, of which $816080 is transportation cost
and $1364020 is DC cost.
 What-if, the management suggest that four DCs are the maximal number
that they believe are needed to efficiently manage the distribution supply
chain.
 We add a constraint stating that the sum of the 16 0-1 variables may not
exceed 4.
 The optimal solution under this constraint is to open large DCs in Chicago
and Nashville and small DCs in St. Louis and Cleveland. And the minimum
total cost becomes $2293260.
 Generalisations
 The above simple model could be generalized to create accurate and
comprehensive models for specific SC problems.
 Some applications might also involve more than one level of DCs – for
example, a distribution SC with large regional DCs that serve smaller
warehouses closer to the markets.
 Logistics managers might impose sole-sourcing constraints on the flows
from DCs to markets. These constraints require that, for customer service
reasons, each market receives all shipments from a single DC.
 Another simple construction in the model is the treatment of
transportation costs. We have used the same cost per truckload-mile on all
routes connecting DCs to markets. If these shipments are being made by
3rd-party carriers, we need to employ a different cost per truckload-mile for
each route in the network.
 An SC cost not captured by the model is inventory-holding costs. This will
be a serious omission only if inventory-holding costs are a significant % -
say % % or more- of total SC cost. Artistry is required model inventory-
holding costs in a snapshot(one-period) model like the one solved by us.
 SC Network Optimization Models
 The earlier model was concerned only with
distribution. Many important applications
involve manufacturing as well as distribution
decisions. This example also illustrates how
diverse but related resource acquisition
decisions can be evaluated together.
 We construct and optimize an MIP model to
evaluate strategic planning options facing Ajax
over next 3 years. This analysis extends the
shorter-term production planning models
developed for Ajax in 3.1.
 Strategic Planning at Ajax
 Senior management at Ajax faces the following four interconnected sets of
decisions:
 Should Ajax invest in anew assembly plant in Sunnyvale, California, and if
so, in what year?
 Should Ajax invest in a major expansion of its existing assembly plant in
Chicago, and if so, in what year?
 Should Ajax invest in development of the new Delta workstation and if so,
where should it be assembled?
 What quantity of each product should be assembled at each plant in each
time period? Which plant should serve each market fro each product in each
time period?
 Strategic planning at Ajax begins with a forecast of potential sales for the
company’s products over the next 3 years.
 The forecasts are given in table 4.2 ( pp.130-138 of handout) for existing
market in Chicago and for new markets opening up in northern California
and Seattle.
 Spreadsheet model
 In a spreadsheet, we organise the data for the submodels, idnetify variables
and constraints of the submodels, link connections among the submodels,
calculate yearly and discounted net revenues, and perform strategic analyses.
 We review the data and model sections beginning with year 1. the section
‘production at existing plant’ contains data that relate to yearly assembly
operations.
 To include options for expanding capacity and producing a new product, we
define decision variables employed in ‘ production at existing plant’ and
‘investments at existing plant’.
 MAXPLt, MBXPLt, MCXPLt,MDXPLt,XPLt( bin), DELTAX(bin), DELTAN(bin)
 Similarly, for the section ‘production at new plant’.
 The obj fn is to maximize discounted sum of net revenues;
 Z1+0.9Z2+0.81Z3, where Zt is defined as
 gross revenue from sales
 –production costs at the 2plants
 – transportation costs from the 2 plants to the markets
 - investment costs in expanding the existing plant, constructing the new plant,
and developing the new product
 - production costs at two plants.
 Spreadsheet model( contd.)
 Note that the costs listed in ‘investments’ for expanding
the existing plant and constructing the new plant are
annualized costs to be charged in the first year that the
investment is active and every year after that.
 the new product cost is a one-time charge for year1.
 Ajax discounts cash flows at 10% per year.
 The spreadsheets for year 2 and 3 are virtually identical
to that of year1. the only difference is the treatment of
the available capacities.
 We summarise the optimal investment decisions in the
next slide.
 Base case and scenario analysis
Option Decision

Build new assembly plant in Build immediately for use in yr1

Sunnyvale
Expand existing Chicago Assembly Expand for use in yr2
plant
Develop new product Reject

 The timing and sizing of the investments allow maximal sales

to be made for Ajax’s existing products in all years and all
markets. This is called the base case.
 The management will try to refine their intuition by making a
number of additional runs with the model.
 The additional runs will be through what-if questions about
Ajax’s strategic options and the internal and external business
environments in which the company operates.
 Some Scenarios
 What if we delayed construction of the new plant in Sunnyvale
to yr2 or yr3?
 We set the 0-1 variable in cell O26 (year1 yes/no)=0 and
reoptimize the model.
 What is the impact on the optimal investment strategy if
maximal potential sales in years 2 and 3 are higher than
forecast? What if they are 20% lower?
 These scenarios are evaluated by appropriate changes in
‘Forecast of Sales’ for 3 yrs.
 What is the impact on the optimal strategy of adding a labour
overtime option for the existing plant in each year?
 This option requires the addition of three 0-1 variables, one for
the fixed cost in each of 3 yrs. It also requires three continuous
variables, one for the qty of overtime incurred in each of the 3
yrs upto maximum no. of overtime hrs. allowed.
 Some Scenarios (contd.)
 What is the impact on maximal net discounted revenues over the 3-yr
planning horizon if we force acceptance of the Delta computer?
 We modify the <= constraint in cell P10 (new product sum) to an =
constrain, thereby forcing the model to develop the new product, either
in the new plant or existing plant.
 The optimal strategy for this scenario is less profitable than the base
case optimal strategy. Given this unpleasant news, the Chief Design
Engineer and Marketing Manager decide to review the new product
design thoroughly.
 They now propose to add features to the Delta workstation that will
enhance its value and allow Ajax to sell it for $3200 rather than
$2500 /unit. However, the redesigned version will cost $200/unit more
to make and an extra 2hrs to assemble.
 How does the base-case strategy change if the new Delta design is
substituted for the old design?
 Table 4.4 summarises the results of the base case of Tabvle4.2 and
reoptimizing the model under six scenarios.
 Table 4.4
descriptio Base S1 S2 S3 S4 S5 S6
n case
Existing yr2 yr1 yr2 rejected yr2 yr2 Yr2
plant
expn.
New plant yr1 yr2 yr1 yr1 yr1 yr1 Yr1
constrn
New prod rej rej rej rej rej Accpted Accptd
devlp at new at new
plant plant
Other Rejecte
options d
Max 12734 12006 13100 11620 12734 12196 14375
discntd
Net Rev.
(000)
 Strategic conclusions
 Based on the results of base case and six scenarios,
the following indications would be obtained.
 New plant in Sunnyvale should be constructed
immediately to be ready for use in yr1.
 New product Delta should be redesigned to make
it more competitive with Ajax’s other products.
 Expansion of the existing plant should be delayed
until yr2, with a final positive decision dependent
on strong sales forecasts.
 Ajax management should prepare additional
expansion options to deal with possible shortages
in capacity to meet growth in product sales.
 Concluding Notes
 The foregoing models illustrated how 0-1 variables can
be used to model situations involving locational
decisions, fixed costs, economies of scale, sole-sourcing
constraints etc. – features of supply chain modelling
that cannot be captured by LP models.
 The application of MIP models for strategic planning
was also demonstrated.
 These models are typical in form, though not in size, of
the models being employed in a number of supply
chain studies.
 While we resort to solving the MIP models through the
currently available branch-and-bound algorithms,
research is continuing on better algorithmic methods.