6.

Chapter 6: Overview of hard OR methodology

Exercise solutions for Management Science, ISBN 1-4039-4174-2
H.G. Daellenbach and D.C. McNickle, 2005. Palgrave Publishers Ltd.
1.

(a) High-level system diagram.

(b) Major boundary judgements: all output can be sold at given prices (fine if increase in output
relatively small), operations not affected by weather (fine for climate controlled sheds, not
necessarily true for compost production), additional raw materials for compost production
available at same costs.
(c) Decision maker: Grard Mousse.
Objective: achieve high net profits.
Decision criterion: maximize profits.
Performance measure: annual net profits.
Alternative courses of action: number of flushes per cycle.
Context: (see also (b) above) processes for making compost and growing mushrooms given,
cost factors all given.
(d) Influence diagram: see Figure 9-1.
(e) Project proposal only given in outline form:
Cover letter. Table of contents. (1) Introduction. (2) Summary of recommendations: yield data,
picking time, for each individual flush to be collected, cost data on all phases of operation. Once
data available, actual analysis no more than one or two days work. (3) Statement of problem.
(4) Analysis: Data collection to determine average yield per flush, average picking rate per
flush. Best done on a shed basis, with around 10 sheds covered for one full cycle each. Cost
data collection using accounting records, covering all costs that are output or level of operation
related. Set up a spreadsheet computing annual output of mushrooms, total annual operating
costs, total annual revenue, individually for cycles covering n flushes, where n varies from 1 to
6. 5. Resources: This analysis can be completed in at most two days, with another day needed
for writing up the report. Data collection may however take about two months of elapse time,
requiring slightly more work for some pickers and Jennifer Bloom.
2.

(a) Decision maker: owner..

User: owner, other management staff
Customers: other employees, firms customers and suppliers, possibly local community at large.
Analyst: owner, possibly other management staff.
(b) Decision maker: owner.
Objective: achieve high return on capital invested by owners, (alternative: achieve high profits
= surrogate for increase owners wealth).
Decision criterion: maximize return on owners investment, (alternative: maximize profit).
Performance measure: return on owners investment, (alternative: annual profit).

6.2

Alternative course of action: amount of equity and composition of liability funds, equipment
choices, major operational decisions, such as final product composition, new products, raw
material sources.
(c) High-level systems diagram for sawmill as a profit making system.

(d) Owner mainly concerned with own benefits, concerns of low-level staff, community, etc. ignored,
demand for products and availability of supplies predictable (otherwise profit maximization may
not be a suitable criterion, survival of firm more appropriate).
3.

(a) The relationship between the defectives produced/hour and the time between adjustments is
shown in the table below.
Cumulative run
time
6 min
12 min
24 min
36 min
48 min
60 min

Average
number of
defectives
0.2
0.8
2.0
4.2
7.0
11.0

Cumulative run time

including adjustments
12
18
30
42
54
66

Number of
cycles/hour

No of
defectives/hour

5.00
3.33
2.00
1.43
1.11
0.91

1.00
2.67
4.00
6.00
7.78
10.00

(See (b) below for meaning of a, b, m, n, t)

[Time lost (min/h)] = [Number of adjustments/h][Time per adjustment (min/adj)] = na
[Productive time (min/hr)] = [1 - (Time lost (min/h))] = 60 - na
[Output (units/h)] = [Productive time (min/hr)][Machine rate (units/min)] = (60 - na)p, where
p = 1/[Machine time (min/unit)]
[Defectives produced/h] = function (n, machine characteristics) = 10t - 1 = 10/n -1 = b/n - 1
[Good output/h] = [Total output/h] - [Defectives/h] = (60 - na)p - (b/n - 1)
[Parts reworked/h] = [Fraction reworked][Defectives/h] = w(b/n - 1)
[Saleable parts/h] = [Good output] + [Parts reworked] = (60 - na)p - (b/n - 1) + w(b/n - 1)
[Total profit] = [Unit selling price][Saleable parts/h] - [Unit material cost][Output/h] [Unit rework cost][Parts reworked/h] - [Labour cost]
= [Revenue] - [Material cost] - [Rework cost] - [Labour cost]
= R[(60 - na)p + (w - 1)(b/n - 1)] - Cm[(60 - na)p] - Cw[w(b/n - 1)] - CL

6.3

(b) Excel spreadsheet CH6EX3 (reproduced below)

THE MACHINE ADJUSTMENT PROBLEM
Machine time (m)
2
Machine rate (1/m)
0.5
Rate of defectives (b)
10
Time per adjustment (a)
6
Fraction defectives reworked (w)
0.5
(t)
Adjustments/h (n)
Output/min
Defectives/h
Salable output/h
Revenue/h
Cost/h
Profit/h

12
5.00
15
1
14.5
304.5
260
44.50

18
3.33
20
2
19
399
342
57.00

min/unit
units/min
units/hour
min/adj

Selling price/unit
Material cost/unit
Reworking cost/unit
Labour cost/hour

Time between adjustments (adj/min)

24
36
48
2.50
1.67
1.25
22.5
25
26.25
3
5
7
21
22.5
22.75
441
472.5
477.75
384
428
452
57.00
44.50
25.75

21
16
4
18

60
1.00
27
9
22.5
472.5
468
4.50

Net profit contribution as a function of time between

adjustments
$60.00
$50.00

Range where
optimal
solution lies

$40.00
$30.00
$20.00
$10.00
$0.00
10

20

30

40

50

60

70

Time between adjustments

(c) The optimal time between adjustments is 20.8. The loss in profit by rounding this number to 20
is 57.897 - 57.833 = 0.064.
(d) (1)
(2)
(3)
(4)

All times and rates remain constant or their averages remain constant.
The rate of defectives is a liner function of t = 1/n, and remains stable over time.
All output produced can be sold at a constant price.
Stopping the machine at the end of the day does not effect its state, i.e., next day is just a
continuation of previous day.
(1) and (2) are reasonable. (3) may change with economic conditions or increased capacity.
(4) may not be valid.

6.4

4. (a) Influence diagram for ELMO problem.

(b) Operation of that machine largely independent of rest of firms operation, machine speed only
aspect that affects reject rate.
(c) The relationship between average rejects produced/hour and machine speed is shown in the
table below.
Machine speed
30
40
50
60
70
80
90

(Machine speed)2
900
1600
2500
3600
4900
6400
8100

Actual average
rejects/hour
1.17
2.00
3.00
4.67
6.00
8.00
10.17
2

Theoretical average rejects =

speed2/800
1.13
2.00
3.13
4.50
6.13
8.00
10.13

[Average rejects/hour] = [Machine speed] /800 = s /800

2

[Fraction of rejects] = [Average rejects/hour]/[Machine speed] = (s /800)/s = s/800

[Size of batch] = [Coils required]/[1 - fraction of rejects] = 10,000/(1 - s/800)
[Hours to produce batch] = [Size of batch]/[Machine speed] = [10,000/(1 - s/800)]/s =
2
10,000/(s - s /800)
[Labour and Machine cost]= [Labour cost/hour + Machine cost/hour][Hours to produce batch]
2
= (L + M)[(10,000/(s - s /800)]
[Raw material cost] = [Unit raw material cost][Size of batch] = R[10,000/(1 - s/800)]
[Total cost] = [Labour and Machine cost] + [Raw material cost]
2
= (L + M)[(10,000/(s - s /800)] + R[10,000/(1 - s/800)]
Additional boundary judgements:
(1) Average rejects/h is a quadratic function of machine speed (or is a linear function of the
square of machine speed). (Reasonable from data)
(2) If machine is not used, workers engaged productively elsewhere, otherwise labour cost
may not be relevant. (Reasonable for any sizeable firm)

6.5

(d) Excel spreadsheet CH6EX4 reproduced below.

COIL WINDING MACHINE SPEED SETTING PROBLEM
Raw material cost
Labour cost
Machine running cost
Total to produce
Speed coils/hour (s)
Average rejects/hour
Fraction of rejects
Good output
Size of batch
Hrs to produce batch
Material cost
Labour/machine cost
Total cost

2.60
22

/coil
/hour

/hour

10,000

coils

30

40

50

60

70

83

90

1.13

2.00

3.13

4.50

6.13

8.61

10.13

0.04

0.05

0.06

0.08

0.09

0.10

0.11

28.88

38.00

46.88

55.50

63.88

74.39

79.88

10,389.61

10,526.32

10,666.67

10,810.81

10,958.90

11,157.60

11,267.61

346.32

263.16

213.33

180.18

156.56

134.43

125.20

27,012.99

27,368.42

27,733.33

28,108.11

28,493.15

29,009.76

29,295.77

9,696.97

7,368.42

5,973.33

5,045.05

4,383.56

3,764.01

3,505.48

36,709.96

34,736.84

33,706.67

33,153.15

32,876.71

32,773.77

32,801.25

The optimal machine speed is 83 coils/hour with a total cost of 32,773.77.

5. (a) Excel spreadsheet for LOD model 1 CH6EX5a
(b) Excel spreadsheet for LOD model 1 CH6EX5b
6. Excel spreadsheet CH6EX6 answers both (a) and (b). Note that since all orders in multiples of four
drums, EOQ should also be in multiples of 4 drums, requiring additional calculations.
(a) The optimal inventory replenishment size for a cutoff point of 8 drums is 10.8 drums. Rounded
up to 12 drums gives a total relevant cost of $2,015.20 and rounded down to 8 drums gives a
total relevant cost of $2,046.20. The best stock replenishment size is therefore 12 drums. This
has a total annual EOQ cost of $782.
The same answer could have been obtained by using the square root formula, expression 6-2
to find the EOQ and then check again whether rounding to 8 or 12 is better:
EOQ = [2(280)15/0.18(400)] = 10.80
(b) The best cutoff point for special production runs is 12. The optimal stock replenishment is 14.94.
Rounded up to 16 gives a total relevant cost of $1,985.30 and rounded down to 12 gives a total
relevant cost of $2,008.80. The best stock replenishment size is therefore 16 drums.
7. Excel spreadsheet CH6EX7 answers both (a) and (b).
(a) For a cutoff point L = 12, the EOQ is 16.84. Since demand is in multiples of 2, comparison of
Q=16 and Q=18 shows that Q = 16 is cheaper, i.e. $759 versus $760. Total cost = $2100.
(b) The optimal cutoff point is 6 drums and the optimal stock replenishment size is 11.73, rounded
to 12, with a total annual relevant cost of $2020.80.
8. (a) The cost of preparing a batch of 3600 cans is 54 consisting of 36 for the 2 hours of
technicians time and 18 for the two machine operators time.
(b) s = 54, v = cost of ingredients + labour cost + cost of can and label = 1.60 + (1/3600
h/l)(2)(18.00) + 0.15 = 1.76/l, r = 0.18, D = 180,000
EOQ = = 7833.4
Total relevant cost = = 2481.65
(c) The best batch size that is a multiple of 1152 and closest to 7833.49 is 8064 cans. This has a
total relevant cost of 0.5(8064)(1.76)(0.18) + (54)(180000)/(8064) = 2482.69
9. (a) Total annual cost of proposed policy = (0.5)(500)(60)(0.2) + (200)(750)/500 = 3300
(b) Optimal policy: expected demand = 750 + (1/3)(750) = 1000. EOQ = = 182.57
TRC(150) = (0.5)(150)(60)(0.2) + (200)(1000)/150 = 2233.33, TRC(200) = (0.5)(200)(60)(0.2)
+ (200)(1000)/200 = 2200
He can do better by ordering 200 sets five times a year. This is a saving of 3300 - 2200 =
1100. The proposed policy of ordering 500 sets twice a year has a much higher holding cost
than setup cost and therefore has a higher cost.

6.6

10. Excel spreadsheet CH6EX10 answers both (a) and (b) and is reproduced below.
Q-ELECTRONICS GUARANTEE PROBLEM
INPUTS:
Selling price

$35

/chip

Production cost
Labour cost

$25
$10

/chip
/replacement

Chips sold

2000

/year

Time
Replacements
Revenue
Production cost
Labour cost
Profit

3
1
$70,000
$50,025
$10
$19,965

Increase guarantee from 6 months to:

Increase
Costs

9 months 12 months 15 months 18 months

$105
$245
$455
$700

Extra

4
1
$70,000
$50,025
$10
$19,965

5
2
$70,000
$50,050
$20
$19,930

6
3
$70,000
$50,075
$30
$19,895

11

26

46

72

7
3
$70,000
$50,075
$30
$19,895

8
4
$70,000
$50,100
$40
$19,860

9
6
$70,000
$50,150
$60
$19,790

10
7
$70,000
$50,175
$70
$19,755

* Extra sales based on a gross profit = selling price production cost = $10. Note that these extra
sales will also produce guarantee claims. As a simple approximation, for example, for a
guarantee period of 18 months, there are an additional 27 - 2 =25 replacements for 1000 chips.
For resulting in 25(70/1000) = 1.75 further replacements, rounded to 2.
11. (a) Influence diagram for pump assembly system.
Planned
repl'ment size
Production
rate

Time to
assemble
pumps

Actual
stock
increase

Demand
while
assembling

Daily
demand

Annual
number of
stock
repl'ments
Production
setup
cost/batch

Average
stock
level

Average
stock
investment

Annual
setup
cost

Annual
stock
investment

Unit
product
value

Investment
holding
cost

Total
relevant cost

(b) [Number of replenishments/year] = [Yearly demand]/[Planned replenishment size] = D/Q

[Days to assemble pumps] = [Planned replenishment size]/[Production rate] = Q/b
[Demand while assembling] = [Daily demand] [Days to assemble pumps] = aQ/b
[Actual stock increase] = [Planned replenishment size] - [Demand while assembling] = Q - aQ/b
[Average stock level] = [Actual stock increase]/2 = (Q - aQ/b)/2 = 0.5Q(1 - a/b)
[Annual holding cost] = [Average stock level] [Product value] [Holding cost] = 0.5Q(1 - a/b)vr
[Annual setup cost] = [Number of replenishments/year] [Setup cost/replenishment] = Ds/Q
[Total annual cost] = [Annual holding cost] + [Annual setup cost] = 0.5Q(1 - a/b)vr + Ds/Q
(c) (1) Demand occurs at a constant rate. (reasonable approximation on average)
(2) Setup times and production rates are constant or vary little, so that averages are a good
approximation. (reasonable)

6.7

(d) Excel Spreadsheet CH6EX11 is reproduced below.

Pump Assembly Problem
Demand

1250

pumps/year

Daily demand

3.42

pumps/day

EOQ

110.72

TRC

5,125.64

Annual
setup
cost

Annual
holding
cost

Product value

216.00

/pump

Production setup cost

Investm't holding cost

227.00
0.25

/production run
/dollar invested/year

Production rate

24

pumps/day

Planned
size of
repl'ments

Number of
repl'ments
per year

1250

1.00

52.08

178

1,072

536

227

28,934

1100

1.14

45.83

157

943

472

258

25,462

25,712

1000

1.25

41.67

143

857

429

284

23,147

23,431

900

1.39

37.50

128

772

386

315

20,833

21,148

800

1.56

33.33

114

686

343

355

18,518

18,873

700

1.79

29.17

100

600

300

405

16,203

16,608

600

2.08

25.00

86

514

257

473

13,888

14,361

500

2.50

20.83

71

429

214

568

11,574

12,141

400

3.13

16.67

57

343

171

709

9,259

9,968

300

4.17

12.50

43

257

129

946

6,944

7,890

Days to
assemble
pumps

Demand
while
assembling

Actual
stock
increase

Average
stock
level

Total
relevant
cost
29,161

200

6.25

8.33

29

171

86

1,419

4,629

6,048

100

12.50

4.17

14

86

43

2,838

2,315

5,152

50

25.00

2.08

43

21

5,675

1,157

6,832

Optimal replenishment size is 110.72 with total relevant cost of 5125.64.

12. (a) Use Excel spreadsheet FIG6-5
Setup cost
% Difference
EOQ
Total relevant cost
% difference in cost

12
33.33%
41.53
2,392.31
18.35%

18
0%
50.87
2,929.97
0%

24
33.33%
58.74
3,383.23
15.47%

36
100%
71.94
4,143.60
41.42%

12%
33.33%
62.30
2,392.31
18.25%

18%
0%
50.87
2,929.97
0%

24%
33.33%
44.05
3,383.23
15.47%

30%
66.67%
39.40
3,782.57
29.10%

16.8
20%
9.11
15.20
126.25%

18.9
10%
16.54
17.33
70.7%

21
0%
20.78
57.90
0%

26.25
25%
27.05
168.23
190.55%

0.4
20%
19.50
53.90
6.91%

0.5
0%
20.78
57.90
0%

0.6
20%
22.36
62.30
7.60%

0.75
0.5%
25.58
69.89
20.71%

(b) Use Excel spreadsheet FIG6-5

Investment holding
% difference
EOQ
Total relevant cost
% difference in cost

13. (a) Use Excel spreadsheet CH6EX13

Net selling price
% difference
Time between adjustments
Profit
% difference in cost

(b) Use Excel spreadsheet CH6EX13

Defectives reworked
% difference
Time between adjustments
Profit
% difference in cost

6.8

(c) Use Excel spreadsheet CH6EX13

Slope of defectives function
% difference
Time between adjustments
Profit
% difference in cost

6
40%
26.83
58.93
1.77%

8
20%
23.24
58.91
1.74%

10
0%
20.78
57.90
0%

5,000
50%
83
i16,386.89
50%

10,000
0%
83
i32,773.77
0%

20,000
100%
83
i65,547.55
100%

12
20%
18.97
56.27
2.82%

14. (a) Use Excel spreadsheet CH6EX14

Order size
% difference
Optimal speed
Total cost
% difference in cost

(b) Use Excel spreadsheet CH6EX14

Rate of Defectives
% difference
Optimal speed
Total cost
% cost increase

0.001
20%
94
i31,985.35
2.41%

0.00125
0%
83
i32,773.77
0%

0.0015
20%
75
i33,502.35
2.22%

15. (a) Use Excel spreadsheet FIG6-5

Used wrong value of $18 for setup cost
Setup cost - true value
12
Error in setup cost
50%
Should have ordered
41.53
Cost of optimal order size
$2,392.31
Actual cost incurred
$2442
Difference in cost
$49.69
% cost increase
2.08%

24
25%
58.74
$3,383.23
$3418
$34.77
1.03%

(b) Use Excel spreadsheet FIG6-5

Used wrong value of 18% for holding cost
Holding cost - true value
12%
% error in holding cost
50%
Should have ordered
62.30
Cost of optimal order size
$2,392.31
Actual cost incurred
$2442
Difference in cost
$49.69
% cost increase
2.08%

24%
25%
44.05
$3,383.23
$3418
$34.77
1.03%

(c) Use Excel spreadsheet FIG6-5

Error in setup cost
-80%
-20%
50%
100%

% Increase in costs
34%
0.6%
2.1%
6.1%

Setup cost &Holding cost

[$12 & 12%]
[$15 & 25%]
[$24 & 15%]

Error in ratio of setup

cost and holding costs
0%
66.67%
35.5%

% Increase in costs
0%
about 3%
about 3%

40,000
300%
83
i131,095.09
300%

6.9

16. (a) Use Excel spreadsheet CH6EX13

Used wrong value of 21 for net selling price
Selling price - true value
% error in selling price
Time between adjustments should have been
Profit if true value used
Actual profit incurred
Difference in profit
% profit decrease

26.25
20%
27.05
168.23
163.45
0.22
2.84%

(b) Use Excel spreadsheet CH6EX13

Used wrong value of 0.5 for the rate of defectives reworked
Rework rate - true value
0.4
% error in rework rate
25%
Time between adjustments should have been
19.5
Optimal profit
53.90
Actual profit incurred
53.71
Difference in profit
0.19
% profit decrease
0.35%

0.75
33.33%
25.58
69.89
68.37
1.52
2.17%

(c) Use Excel spreadsheet CH6EX13

Used wrong value of 10 for the slope of defectives function
Slope of defectives function - true value
8
% error
25%
Time between adjustments should have been
23.24
Optimal profit
67.04
Actual profit incurred
66.56
Difference in profit
0.48
% profit decrease
0.72%

17. (a) Use Excel spreadsheet CH6EX14

Used wrong value of 10,000 for order size
Order size - true value
20,000
% error in order size
50%
Speed should have been
83
Optimal total cost
i65,547.55
Actual cost incurred
i65,547.55
Difference in cost
0
% cost increase
0%

(b) Use Excel spreadsheet CH6EX14

Used wrong value of 0.00125 for rate of defectives
Rate of defectives - true value
0.001
% error
25%
Speed should have been
94
Optimal total cost
i31,985.35
Actual cost incurred
i32,032.16
Difference in cost
i46.81
% cost increase
0.15%

12
33.33%
18.97
49.51
49.24
0.27
0.55%

6.10

18. The contradiction is the consequence of the evaluation to proceed being made on a different
cost/benefit basis, i.e., total costs and benefits at the beginning of the project, but only incremental
costs and benefits, once the analysis has been completed, but not yet implemented. The implication
of this is that whether or not a project should be abandoned or continued should be made as early
as possible, so as to avoid incurring costs that may never be recovered by the benefits of
implementing the recommendations. An early assessment, even based on fairly inaccurate and
vague data, may nevertheless indicate that even optimistic benefits may incur a high risk of not
recovering further costs to be incurred and it may be prudent/wise to abandon the project at that
point (or at least advise the problem owner of this tentative assessment to make an informed
decision).
19. Outline of a project report for the ELMO case:
Table of contents
Introductory statement: Report reports the result of an analysis as to the best speed setting for the
new coil winding machine for a production run of 10,000 motors, based on preliminary findings
of the number of failures produced on six trial runs at speeds of 30 to 90 coils/hour.
Executive Summary: Based on an approximate functional relation of the failure rate as a function
of the speed setting derived from the trial runs for the motor in question, the best speed setting
was found to be 83 at a total cost of i32,774. The optimal speed of 83 is independent of the lot
size. This result is relatively robust in the sense that any setting between 70 and 90 deviates
from this optimum by less than i100. Similarly, an error in the failure function of up to 25%
causes a negligible increase in the actual cost incurred of only around 0.15%. It is recommended
that the speed be set at the optimal level found for this type motor, and that future runs for other
motors use the same model, modified for data.
Statement of the Problem: (Summary of some of the wording in exercise 4)
Analysis: Brief description of how failure rate function was derived and of the model used.
Major findings: Reproduction of the spreadsheet shown in the answer to exercise 4 (c) and exercise
17 (b).
Recommendations: For this problem, this section can be dropped if the Major Findings clearly
identify the optimal solution, given that the Executive Summary already summarizes the
recommendations.
20. Student's own words!
21. Establishing internal and external validity is important for the decision maker/user of the solution
since it will strongly contribute towards establishing credibility of the model and confidence in the
solution in the minds of these people. Without confidence and credibility implementation and proper
continued use is unlikely to occur.
It is important/crucial for the problem analyst for a number of reasons: (a) It is the only means
to establish the correctness of the model and its solution and its validity in terms of the issue
addressed (to the extent that this can be done!), (b) this steps allows the analyst to learn from any
errors or misinterpretations made, and is thus important to increase her/his expertise, (c) it increases
the confidence of the analyst in her/his abilities, and (d) it is part of the ethics of good mathematical
modelling.