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CHAPTER 4:LINEAR PROGRAMMINGAPPLICATIONS
LINEAR PROGRAMMING (LP) CAN BE USED FOR MANY MANAGERIAL DECISIONS:
Marketing Application Media Selection
Financial Application Portfolio Selection Financial Planning
Product Management Application Product Scheduling
Data Envelopment Analysis Revenue Management
LP Modeling ApplicationFor a particular application we begin
withthe problem scenario and data, then:1) Define the decision variables2) Formulate the LP model using the
decision variables• Write the objective function equation• Write each of the constraint equations• Implement the Model using QM or MS
MEDIA SELECTION APPLICATION
Helps marketing manager to allocate the advertising budget to various advertising media News Paper TV Internet Magazine Radio
MEDIA SELECTION A Construction Company wants to
advertise his new project and hired an advertising company.
The advertising budget for first month campaign is $30,000
Other Restrictions: At least 10 television commercial must be used At least 50,000 potential customer must be
reached No more than $18000 may be spent on TV
advertisement Need to recommend an advertising
selection media plan
MEDIA SELECTION
PLAN DECISION CRETERIA
EXPOSURE QUALITYIt is a measure of the relative value of
advertisement in each of media. It is measured in term of an exposure quality unit.
Potential customers Reached
MEDIA SELECTION
We can use the graph of an LP to see what happens when:
1. An OFC changes, or 2. A RHS changes
Recall the Flair Furniture problem
ADVERTISING MEDIA
# OF CUSTOMER REACHED
COST PER ADVERTISMENT
MAX TIME AVAIALBLE PER MONTH
EXPOSURE QUALITY UNITS
DAY TIME TV(1 MIN)
1000 1500 15 65
EVENING TV (30 SEC)
2000 3000 10 90
DAILY NEWS PAPER
1500 400 25 40
SUNDAY NEWS PAPER
2500 1000 4 60
RADIO 8 AM TO 5 PM NEWS 30 SEC
300 100 30 20
DECISION VARIABLES
DTV : # of Day time TV is used ETV: # of times evening TV is used DN: # of times daily news paper used SN: # of time Sunday news paper is used R: # of time Radio is used Advertising plan with DTV =65 DTV Quality unit Advertising plan with ETV =90 DTV Quality unit Advertising plan with DN =40 DTV Quality unit Objective Function ????
OBJECTIVE FUNCTION
Max 65DTV + 90ETV + 40DN + 60SN + 20R (Exposure quality )
Constraints Availability of Media Budget Constraint Television Restriction
Availability of Media DTV <=15 ETV <=10 DN<=25 SN<=4 R<=30
Budget constraints 1500DTV +3000ETV +400DN +1000SN +100R <=30,000
Television Restriction DTV +ETV >=10 1500DTV +3000ETV<=18000 1000DTV+2000ETV+1500DN +2500SN +300R >=50,000
OPTIMAL SOLUTION
OBJ FUNCTION Value: 2370 (Exposure Quality unit)
Decision variable Potential customers ????
MEDIA FREQUENCY
DTV 10
ETV 0
DN 25
SN 2
RADIO 30
dtv etv dn sn r RHS dual Maximize 65 90 40 60 20 Constraint 1 1 0 0 0 0 <= 15 0 Constraint 2 0 1 0 0 0 <= 10 0 Constraint 3 0 0 1 0 0 <= 25 16 Constraint 4 0 0 0 1 0 <= 4 0 Constraint 5 0 0 0 0 1 <= 30 14 Constraint 6 1500 3000 400 1000 100 <= 30000
0.06 Constraint 7 1 1 0 0 0 >= 10 -25 Constraint 8 1500 3000 0 0 0 <= 18000 0 Constraint 9 1000 2000 1500 2500 300 >= 50000
0 Solution-> 10 0 25 1.999999 30 $2,370.
DISCUSSION
Dual Price for constraint 3 is 16 ???? (DN >=25) exposure quality unit ???? Dual price for constraint 5 is 14 (R <=30) exposure quality unit ???? Dual price for constraint 6 is 0.060 1500DTV +3000ETV +400DN +1000SN
+100R <=30,000 exposure quality unit ???? Dual price for constraint 7 is -25 DTV +ETV >=10 ???
Reducing the TV commercial by 1 will increase the quality unit by 25 this means
The reducing the requirement having at least 10 TV commercial should be reduced
FINANCIAL APPLICATION S Portfolio Selection 1.A company wants to invest $100,000 either in
oil, steel or govt industry with following guidelines:
2.Neither industry (oil or steel ) should receive more than $50,000
3.Govt bonds should be at least 25% of the steel industry investment
4.The investment in pacific oil cannot be more than 60% of total oil industry.
What portfolio recommendations investments and amount should be made for available $100,000
Decision Variables A = $ invested in Atlantic Oil P= $ invested in Pacific Oil M= $ invested in Midwest
Steel H = $ invested in Huber
Steel G = $ invested in govt bonds Objective function ????
Investment Projected Rate of Return %
Atlantic oil 7.3%
Pacific oil 10.3%
Midwest steel 6.4%
Huber Steel 7.5%
Govt Bonds 4.5%
CONSTRAINTS & OBJ FUNCTION
Max 0.073A + 0.103P + 0.064M + 0.075H + 0.045G
1.A+P+M+H+G=100000 2.A+P <=50,000, M+H <= 50,000 3. G>=0.25(M + H) or G -0.25M -0.25
H>=0 4. P<=0.60(A+P) or -0.60A +0.40P<=0
SOLUTION
Objective Function=8000Variable Value Reduced
Cost
A 20000
0.00
P 30000
0.00
M 0.00 0.011
H 40000
0.00
G 10000
0.00
Constraint
Slack/surplus
Dual price
1 0 0.069
2 0 0.022
3 10000 0.00
4 0 -0.024
5 0 0.030Investment
Amount Expected Annual Return
A $20,000 $1460
P $30,000 $3090
H 40,000 $3000
G $10,000 $450
Total $100000 $8000
Overall Return ????
DISCUSSION
Dual price for constraint 3 is zero increase in steel industry maximum will not improve the optimal solution hence it is not binding constraint.,
Others are binding constraint as dual prices are zero
For constrain 1 0.069 value of optimal solution will increase by 0.069 if one more dollar is invested.
A negative value for constrain 4 is -0.024 which mean optimal solution get worse by 0.024 if one unit on RHS of constrain is increased. What does this mean
DISCUSSION
If one more dollar is invested in govt bonds the total return will decrease by $0.024 Why???
Marginal Return by constraint 1 is 6.9% Average Return is 8% Rate of return on govt bond is 4.5%/
DISCUSSION
Associated reduced cost for M=0.011 tells
Obj function coefficient of for midwest steel should be increase by 0.011 before considering it to be advisable alternative.
With such increase 0.064 +0.011 =0.075 making this as desirable as Huber steel investment.
DATA ENVELOPMENT ANALYSIS
It is an application of the linear programming model used to measure the relative efficiency of the operating units with same goal and objectives.
Fast Food Chain Target inefficient outlets that should be
targeted for further study Relative efficiency of the Hospital,
banks ,courts and so on
EVUALATING PERFORMANCE OF HOSPITAL General Hospital; University Hospital County Hospital; State Hospital Input Measure # of full time equivalent (FTE) nonphysician personnel Amount spent on supplies # of bed-days available Output Measures Patient-days of service under Medicare Patient-days of service notunder Medicare # of nurses trained # of interns trained
ANNUAL RESOURCE CONSUMED BY 4 HOSPITAL
Input Measure General University County State
FTE 285.50 162.30 275.70 210.40
Supply Expense
123.80 128.70 348.50 154.10
Bed-days available
106.72 64.21 104.10 104.04
ANNUAL SERVICES PROVIDED BY FOUR HOSPITALSOutput Measure
General University County State
Medicare patient days
48.14 34.62 36.72 33.16
Non-Medicare patient days
43.10 27.11 45.98 56.46
Nurses Trained
253 148 175 160
Interns trained
41 27 23 84
RELATIVE EFFICIENCY OF COUNTY HOSPITAL
Construct a hypothetical composite Hospital Output & inputs of composite hospital is
determined by computing the average weight of corresponding output & input of four hospitals.
Constraint Requirement All output of the Composite hospital should be greater
than or equal to outputs of County Hospital If composite output produce same or more output
with relatively less input as compared to county hospital than composite hospital is more efficient and county hospital will be considered as inefficient.
Wg= weight applied to inputs and output for general hospital
Wu = weight applied to input & output for University Hospital
Wc=weight applied to input & output for County Hospital
Ws = weight applied to input and outputs for state hospital
OUTPUT CONSTRAINTS
Constraint 1 Wg+ wu + wc + ws=1 Output of Composite Hospital Medicare: 48.14wg + 34.62wu +
36.72wc+ 33.16ws Non-
Medicare:43.10wg+27.11wu+45.98wc+54.46ws
Nurses:253wg+148wu+175wc+160ws Interns:41wg+27wu+23wc+84ws
OUTPUT CONSTRAINTS
Constraint 2: Output for Composite Hospital >=Output for
County Hospital Medicare: 48.14wg + 34.62wu + 36.72wc+
33.16ws >=36.72 Non-
Medicare:43.10wg+27.11wu+45.98wc+54.46ws>=45.98
Nurses:253wg+148wu+175wc+160ws >=175
Interns:41wg+27wu+23wc+84ws >=23
Constraint 3 Input for composite Hospital <=Resource
available to Composite Hospital FTE:285.20wg+162.30wu+275.70wc+210.40ws Sup:123.80wg+128.70wu+348.50wc+154.10ws Bed-
dys:106.72wg+64.21wu+104.10wc+104.04ws We need a value for RHS: %tage of input values for county Hospital.
INPUT CONSTRAINTS
E= Fraction of County Hospital ‘s input available to composite hospital
Resources to Composite Hospital= E*Resources to County Hospital
If E=1 then ??? If E> 1 then Composite Hospital would
acquire more resources than county If E <1 ….
INPUT CONSTRAINTS
FTE:285.20wg+162.30wu+275.70wc+210ws<=275.70E
SUP:123.80wg+128.70wu+348.50wc+154.10ws<=348.50E
Beddays:106.72wg+64.21wu+104.10wc+104.04ws<=104.10E
If E=1 composite hospital=county hospital there is no evidence county hospital is inefficient
If E <1 composite hospital require less input to obtain output achieved by county hospital hence county hospital is more inefficient,.
MODEL
Min E Wg+wu+wc+ws=1 48.14wg + 34.62wu + 36.72wc+ 33.16ws
>=36.72 43.10wg+27.11wu+45.98wc+54.46ws>=45.98 253wg+148wu+175wc+160ws >=175 41wg+27wu+23wc+84ws >=23 285.20wg+162.30wu+275.70wc+210.40ws-275.70E <=0 123.80wg+128.70wu+348.50wc+154.10ws-348.50E <=0 106.72wg+64.21wu+104.10wc+104.04ws-104.10E <=0
OPTIMAL SOLUTIONVariable Valu
eReduced cost
E 0.905
0
WG 0.212
0
WU 0.260
0
WC 0.00 0.95
WS 0.527
0
Constraint
Slack/Surplus
Dual Price
1 0 0.239
2 0 -0.014
3 0 -0.014
4 1.615 0.0
5 37.027 0.0
6 35.824 0.0
7 174.422
0.0
8 0.00 0.010
Composite Hospital as much of as each output as County Hospital (constrain 2-5) but provides 1.6 more trained nurses and 37 more interim. Contraint 6 and 7 are for input which means that Composite hospital used less than 90.5 of resources of FTE and supplies
DISCUSSION
E=0.905 Efficiency score of County Hospital is
0.905 Composite hospital need 90.5% of
resources to produce the same output of County Hospital hence it is efficient than county hospital. and county hospital is relatively inefficient
Wg=0.212;Wu=0.26;Ws=0.527.