LOGO

Linear Programming Applications

 02/06/2023

Outline

1. Introduction
2. Marketing Applications
3. Manufacturing Applications
4. Employee Scheduling Applications
5. Transportation Applications
6. Transshipment Applications
7. Ingredient Blending Applications
8. Financial Applications

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Introduction

 The graphical method of LP is useful for

understanding how to formulate and solve
small LP problems

 There are many types of problems that can

be solved using LP

 The principles developed here are applicable

to larger problems
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Marketing Applications

 Linear programming models have been used

in the advertising field as a decision aid in
selecting an effective media mix

 Media selection problems can be

approached with LP from two perspectives
– Maximize audience exposure

– Minimize advertising costs

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Marketing Applications

 The Win Big Gambling Club promotes gambling

junkets to the Bahamas
 They have $8,000 per week to spend on advertising
 Their goal is to reach the largest possible high-
potential audience
 Media types and audience figures are shown in the
following table
 They need to place at least five radio spots per week
 No more than $1,800 can be spent on radio
advertising each week
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Marketing Applications

 Win Big Gambling Club advertising options

AUDIENCE COST PER MAXIMUM ADS

MEDIUM REACHED PER AD AD ($) PER WEEK
TV spot (1 minute) 5,000 800 12
Daily newspaper (full-
page ad) 8,500 925 5

Radio spot (30

2,400 290 25
seconds, prime time)
Radio spot (1 minute,
afternoon) 2,800 380 20

Coefficients of Coefficients of
obj. function Constraints

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Win Big Gambling Club

 The problem formulation is

X1 = number of 1-minute TV spots each week
X2 = number of daily paper ads each week
X3 = number of 30-second radio spots each week
X4 = number of 1-minute radio spots each week
Objective:
Maximize audience coverage = 5,000X1 + 8,500X2 + 2,400X3 + 2,800X4
Subject to X1 ≤ 12(max TV spots/wk)
X2 ≤ 5 (max newspaper ads/wk)
X3 ≤ 25(max 30-sec radio spots ads/wk)
X4 ≤ 20(max 1-min radio spots ads/wk)
800X1 + 925X2 + 290X3 + 380X4 ≤ $8,000 (weekly advertising budget)
X3 + X4 ≥ 5 (min radio spots contracted)
290X3 + 380X4 ≤ $1,800 (max dollars spent on radio)
X1, X2, X3, X4 ≥ 0
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Marketing Research
 Management Sciences Associates (MSA) is a marketing research
firm
 MSA determines that it must fulfill several requirements in order
to draw statistically valid conclusions
– Survey at least 2,300 U.S. households
– Survey at least 1,000 households whose heads are 30 years of age
or younger
– Survey at least 600 households whose heads are between 31 and 50
years of age
– Ensure that at least 15% of those surveyed live in a state that
borders on Mexico
– Ensure that no more than 20% of those surveyed who are 51 years
of age or over live in a state that borders on Mexico

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Marketing Research

 Linear programming has also been applied to

marketing research problems and the area of
consumer research

 Statistical pollsters can use LP to help make

strategy decisions

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Marketing Research

 Linear programming has also been applied to

marketing research problems and the area of
consumer research

 Statistical pollsters can use LP to help make

strategy decisions

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Marketing Research

 MSA decides that all surveys should be conducted in

person
 It estimates the costs of reaching people in each age
and region category are as follows

COST PER PERSON SURVEYED ($)

REGION AGE ≤ 30 AGE 31-50 AGE ≥ 51

State bordering Mexico $7.50 $6.80 $5.50

State not bordering Mexico $6.90 $7.25 $6.10

Coefficients of obj. function

There are 6 variables in this problem.

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Marketing Research

 MSA’s goal is to meet the sampling requirements at

the least possible cost

 The decision variables are

X1 = number of 30 or younger and in a border state

X2 = number of 31-50 and in a border state

X3 = number 51 or older and in a border state

X4 = number 30 or younger and not in a border state

X5 = number of 31-50 and not in a border state

X6 = number 51 or older and not in a border state

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Marketing Research

Objective function
Minimize total
interview costs = $7.50X1 + $6.80X2 + $5.50X3
+ $6.90X4 + $7.25X5 + $6.10X6
subject to
X1 + X2 + X3 + X4 + X5 + X6 ≥ 2,300 (total households)

X1 + X4 ≥ 1,000 (households 30 or younger)

X2 + X5 ≥ 600 (households 31-50)

X1 + X2 + X3 ≥ 0.15(X1 + X2+ X3 + X4 + X5 + X6) (border states)

X3 ≤ 0.20(X3 + X6) (limit on age group 51+ who can live in

border state)
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Marketing Research

 The following table summarizes the results of the

MSA analysis

 It will cost MSA $15,166 to conduct this research

REGION AGE ≤ 30 AGE 31-50 AGE ≥ 51

State bordering Mexico 0 600 140

State not bordering Mexico 1,000 0 560

 HW: Using Excel Solver and Lingo to solve this problem again!

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Manufacturing Applications

 Production Mix
– LP can be used to plan the optimal mix of
products to manufacture
– Company must meet a myriad of constraints,
ranging from financial concerns to sales demand
to material contracts to union labor demands
– Its primary goal is to generate the largest profit
possible

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Manufacturing Applications

 Fifth Avenue Industries produces four varieties

of ties
– One is expensive all-silk
– One is all-polyester
– Two are polyester and cotton blends

 The table on the below shows the cost and

availability of the three materials used in the
production process
MATERIAL AVAILABLE PER
MATERIAL MONTH (YARDS)
Silk 800
Polyester 3,000
Cotton 1,600

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Manufacturing Applications

 The firm has contracts with several major department

store chains to supply ties
 Contracts require a minimum number of ties but may
be increased if demand increases
 Fifth Avenue’s goal is to maximize monthly profit
given the following decision variables
X1 = number of all-silk ties produced per month
X2 = number polyester ties
X3 = number of blend 1 poly-cotton ties
X4 = number of blend 2 poly-cotton ties
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 Manufacturing Applications
 Contract data for Fifth Avenue Industries
MATERIAL
MONTHLY REQUIRED
CONTRACT MONTHLY PER TIE MATERIAL
VARIETY OF TIE MINIMUM DEMAND (YARDS) REQUIREMENTS
All silk 6,000 7,000 0.125 100% silk

All polyester 10,000 0.08 100% polyester

14,000
Poly-cotton 50% polyester-50%
blend 1 13,000 16,000 0.10 cotton
Poly-cotton 30% polyester-70%
6,000 8,500 0.10
blend 2 cotton
SELLING MATERIAL
PRICE PER REQUIRED PER COST PER PROFIT PER
VARIETY OF TIE TIE ($) TIE (YARDS) TIE ($) TIE ($)
All silk $6.70 0.125 $2.62 $4.08
All polyester $3.55 0.08 $0.48 $3.07
Poly-cotton blend
1 $4.31 0.05 $0.30

0.05 $0.45 $3.56

Poly-cotton blend
$4.81 0.03 $0.18
2
0.70 $0.63 $4.00
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Manufacturing Applications
 The complete Fifth Avenue Industries model
Objective function
Maximize profit = $4.08X1 + $3.07X2 + $3.56X3 + $4.00X4
Subject to 0.125X1 ≤ 800 (yds of silk)
0.08X2 + 0.05X3 + 0.03X4 ≤ 3,000 (yds of polyester)
0.05X3 + 0.07X4 ≤ 1,600 (yds of cotton)
X1 ≥ 6,000 (contract min for silk)
X1 ≤ 7,000 (contract max)
X2 ≥ 10,000 (contract min for all polyester)
X2 ≤ 14,000 (contract max)
X3 ≥ 13,000 (contract min for blend 1)
X3 ≤ 16,000 (contract max)
X4 ≥ 6,000 (contract min for blend 2)
X4 ≤ 8,500 (contract max)
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Manufacturing Applications
 Solution for Fifth Avenue Industries LP model

 HW: Using Excel Solver and Lingo to solve this problem again!
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Manufacturing Applications

 Production Scheduling
– Setting a low-cost production schedule over a
period of weeks or months is a difficult and
important management task
– Important factors include labor capacity, inventory
and storage costs, space limitations, product
demand, and labor relations
– When more than one product is produced, the
scheduling process can be quite complex
– The problem resembles the product mix model for
each time period in the future
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Manufacturing Applications

 Greenberg Motors, Inc. manufactures two different

electric motors for sale under contract to Drexel Corp.
 Drexel places orders three times a year for four
months at a time
 Demand varies month to month as shown below
 Greenberg wants to develop its production plan for the
next four months
MODEL JANUARY FEBRUARY MARCH APRIL
GM3A 800 700 1,000 1,100
GM3B 1,000 1,200 1,400 1,400

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Manufacturing Applications

 Production planning at Greenberg must consider

four factors
– Desirability of producing the same number of motors
each month to simplify planning and scheduling
– Necessity to inventory carrying costs down

– Warehouse limitations

– The no-layoff policy

 LP is a useful tool for creating a minimum total

cost schedule the resolves conflicts between these
factors

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Manufacturing Applications

 Double subscripted variables are used in this

problem to denote motor type and month of
production
XA,i = Number of model GM3A motors produced in month i (i =
1, 2, 3, 4 for January – April)
XB,i = Number of model GM3B motors produced in month i

 It costs $10 to produce a GM3A motor and $6 to produce a

GM3B
 Both costs increase by 10% on March 1, thus

duction = $10XA1 + $10XA2 + $11XA3 + 11XA4

+ $6XB1 + $6XB2 + $6.60XB3 + $6.60XB4

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Manufacturing Applications
 We can use the same approach to create the portion
of the objective function dealing with inventory
carrying costs
IA,i = Level of on-hand inventory for GM3A motors at the
end of month i (i = 1, 2, 3, 4 for January – April)
IB,i = Level of on-hand inventory for GM3B motors at the
end of month i
 The carrying cost for GM3A motors is $0.18 per month and
the GM3B costs $0.13 per month
 Monthly ending inventory levels are used for the average
inventory level
= $0.18IA1 + $0.18IA2 + $0.18IA3 + 0.18IA4
+ $0.13IB1 + $0.13IB2 + $0.13IB3 + $0.13IB4

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Manufacturing Applications

 We combine these two for the objective function

ost = $10XA1 + $10XA2 + $11XA3 + 11XA4
+ $6XB1 + $6XB2 + $6.60XB3 + $6.60XB4
+ $0.18IA1 + $0.18IA2 + $0.18IA3 + 0.18IA4
+ $0.13IB1 + $0.13IB2 + $0.13IB3 + $0.13IB4
 End of month inventory is calculated using this
relationship

Inventory Inventory
Current Sales to
at the end at the end
of this = of last + month’s – Drexel this
production month
month month

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Manufacturing Applications

 Greenberg is starting a new four-month production

cycle with a change in design specification that left
no old motors in stock on January 1
 Given January demand for both motors
IA1 = 0 + XA1 – 800
IB1 = 0 + XB1 – 1,000
 Rewritten as January’s constraints

XA1 – IA1 = 800

XB1 – IB1 = 1,000

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Manufacturing Applications

 Constraints for February, March, and April

XA2 + IA1 – IA2 = 700 February GM3A demand
XB2 + IB1 – IB2 = 1,200 February GM3B demand
XA3 + IA2 – IA3 = 1,000 March GM3A demand
XB3 + IB2 – IB3 = 1,400 March GM3B demand
XA4 + IA3 – IA4 = 1,100 April GM3A demand
XB4 + IB3 – IB4 = 1,400 April GM3B demand
 And constraints for April’s ending inventory

IA4 = 450
IB4 = 300

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Manufacturing Applications

 We also need constraints for warehouse space

IA1 + IB1 ≤ 3,300
IA2 + IB2 ≤ 3,300
IA3 + IB3 ≤ 3,300
IA4 + IB4 ≤ 3,300
 No worker is ever laid off so Greenberg has a base employment
level of 2,240 labor hours per month
 By adding temporary workers, available labor hours can be
increased to 2,560 hours per month
 Each GM3A motor requires 1.3 labor hours and each GM3B
requires 0.9 hours
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Manufacturing Applications

 Labor hour constraints

1.3XA1 + 0.9XB1 ≥ 2,240 (January min hrs/month)
1.3XA1 + 0.9XB1 ≤ 2,560 (January max hrs/month)
1.3XA2 + 0.9XB2 ≥ 2,240 (February labor min)
1.3XA2 + 0.9XB2 ≤ 2,560 (February labor max)
1.3XA3 + 0.9XB3 ≥ 2,240 (March labor min)
1.3XA3 + 0.9XB3 ≤ 2,560 (March labor max)
1.3XA4 + 0.9XB4 ≥ 2,240 (April labor min)
1.3XA4 + 0.9XB4 ≤ 2,560 (April labor max)
All variables ≥0 Non-negativity constraints
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Manufacturing Applications

 Greenberg Motors solution

PRODUCTION SCHEDULE JANUARY FEBRUARY MARCH APRIL

Units GM3A produced 1,277 1,138 842 792

Units GM3B produced 1,000 1,200 1,400 1,700

Inventory GM3A carried 477 915 758 450

Inventory GM3B carried 0 0 0 300

Labor hours required 2,560 2,560 2,355 2,560

 Total cost for this four month period is $76,301.61

 Complete model has 16 variables and 22 constraints

 HW: Using Excel Solver and Lingo to solve this problem again!
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Employee Scheduling Applications

 Assignment Problems
 Involve determining the most efficient way to assign
resources to tasks
 Objective may be to minimize travel times or maximize
assignment effectiveness
 Assignment problems are unique because they have a
coefficient of 0 or 1 associated with each variable in the
LP constraints and the right-hand side of each
constraint is always equal to 1

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Employee Scheduling Applications

 Ivan and Ivan law firm maintains a large staff of young

attorneys
 Ivan wants to make lawyer-to-client assignments in the
most effective manner
 He identifies four lawyers who could possibly be assigned
new cases
 Each lawyer can handle one new client
 The lawyers have different skills and special interests
 The following table summarizes the lawyers estimated
effectiveness on new cases

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Employee Scheduling Applications

 Effectiveness ratings
CLIENT’S CASE
CORPORATE
LAWYER DIVORCE MERGER EMBEZZLEMENT EXHIBITIONISM
Adams 6 2 8 5
Brooks 9 3 5 8
Carter 4 8 3 4
Darwin 6 7 6 4

1 if attorney i is assigned to case j

Let Xij = 0 otherwise
where i = 1, 2, 3, 4 stands for Adams, Brooks, Carter, and
Darwin respectively
j = 1, 2, 3, 4 stands for divorce, merger,
embezzlement, and exhibitionism
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Employee Scheduling Applications

 The LP formulation is

Maximize effectiveness = 6X11 + 2X12 + 8X13 + 5X14 + 9X21 + 3X22

+ 5X23 + 8X24 + 4X31 + 8X32 + 3X33 + 4X34
+ 6X41 + 7X42 + 6X43 + 4X44
subject to X11 + X21 + X31 + X41 = 1(divorce case)
X12 + X22 + X32 + X42 = 1(merger)
X13 + X23 + X33 + X43 = 1(embezzlement)
X14 + X24 + X34 + X44 = 1(exhibitionism)
X11 + X12 + X13 + X14 = 1(Adams)
X21 + X22 + X23 + X24 = 1(Brook)
X31 + X32 + X33 + X34 = 1(Carter)
X41 + X42 + X43 + X44 = 1(Darwin)
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Employee Scheduling Applications

 Solving Ivan and Ivan’s assignment scheduling LP problem
CLIENT’S CASE
CORPORATE
LAWYER DIVORCE MERGER EMBEZZLEMENT EXHIBITIONISM
Adams 6 2 8 5
Brooks 9 3 5 8
Carter 4 8 3 4
Darwin 6 7 6 4
CLIENT’S CASE
CORPORATE
LAWYER DIVORCE MERGER EMBEZZLEMENT EXHIBITIONISM
Adams X
Brooks X
Carter X
Darwin X

 HW: Using Excel Solver and Lingo to solve this problem again!
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Employee Scheduling Applications

 Labor Planning

 Addresses staffing needs over a particular time

 Especially useful when there is some flexibility in

assigning workers that require overlapping or

interchangeable talents

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Employee Scheduling Applications

 Hong Kong Bank of Commerce and Industry has

requirements for between 10 and 18 tellers depending on
the time of day
 Lunch time from noon to 2 pm is generally the busiest
 The bank employs 12 full-time tellers but has many part-
time workers available
 Part-time workers must put in exactly four hours per day,
can start anytime between 9 am and 1 pm, and are
inexpensive
 Full-time workers work from 9 am to 5 pm and have 1 hour
for lunch
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Employee Scheduling Applications

 Labor requirements for Hong Kong Bank of Commerce

and Industry
TIME PERIOD NUMBER OF TELLERS REQUIRED
9 am – 10 am 10
10 am – 11 am 12
11 am – Noon 14
Noon – 1 pm 16
1 pm – 2 pm 18
2 pm – 3 pm 17
3 pm – 4 pm 15
4 pm – 5 pm 10

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Employee Scheduling Applications

 Part-time hours are limited to a maximum of 50% of the

day’s total requirements

 Part-timers earn $8 per hour on average

 Full-timers earn $100 per day on average

 The bank wants a schedule that will minimize total personnel

costs

 It will release one or more of its part-time tellers if it is

profitable to do so
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Employee Scheduling Applications

 We let
F = full-time tellers
P1 = part-timers starting at 9 am (leaving at 1 pm)
P2 = part-timers starting at 10 am (leaving at 2 pm)

P3 = part-timers starting at 11 am (leaving at 3 pm)

P4 = part-timers starting at noon (leaving at 4 pm)
P5 = part-timers starting at 1 pm (leaving at 5 pm)

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Employee Scheduling Applications

 Objective function
Minimize total daily
personnel cost = $100F + $32(P1 + P2 + P3 + P4 + P5)
subject to
F + P1 ≥ 10 (9 am – 10 am needs)
F + P1 + P2 ≥ 12 (10 am – 11 am needs)
0.5F + P1 + P2 + P3 ≥ 14 (11 am – noon needs)
0.5F + P1 + P2 + P3 + P4 ≥ 16 (noon – 1 pm needs)
F + P2 + P3 + P4 + P5 ≥ 18 (1 pm – 2 pm needs)
F + P3 + P4 + P5 ≥ 17 (2 pm – 3 pm needs)
F + P4 + P5 ≥ 15 (3 pm – 4 pm needs)
F + P5 ≥ 10 (4 pm – 5 pm needs)
F ≤ 12 (12 full-time tellers)
4P1 + 4P2 + 4P3 + 4P4 + 4P5 ≤ 0.50(112) (max 50% part-timers)
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Employee Scheduling Applications

 There are several alternate optimal schedules Hong

Kong Bank can follow

 F = 10, P2 = 2, P3 = 7, P4 = 5, P1, P5 = 0

 F = 10, P1 = 6, P2 = 1, P3 = 2, P4 = 5, P5 = 0

 The cost of either of these two policies is $1,448 per day

 HW: Using Excel Solver and Lingo to solve this problem again!

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Transportation Applications

 Shipping Problem
– The transportation or shipping problem involves
determining the amount of goods or items to be
transported from a number of origins to a number
of destinations
– The objective usually is to minimize total shipping
costs or distances
– This is a specific case of LP and a special
algorithm has been developed to solve it

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Transportation Applications
 The Top Speed Bicycle Co. manufactures and markets a line of
10-speed bicycles
 The firm has final assembly plants in two cities where labor
costs are low
 It has three major warehouses near large markets
 The sales requirements for the next year are
– New York – 10,000 bicycles
– Chicago – 8,000 bicycles

– Los Angeles – 15,000 bicycles

 The factory capacities are

– New Orleans – 20,000 bicycles
– Omaha – 15,000 bicycles

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Transportation Applications

 The cost of shipping bicycles from the plants to the

warehouses is different for each plant and warehouse

TO
FROM NEW YORK CHICAGO LOS ANGELES

New Orleans $2 $3 $5

Omaha $3 $1 $4

 The company wants to develop a shipping

schedule that will minimize its total annual cost

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Transportation Applications

 The double subscript variables will represent the

origin factory and the destination warehouse
Xij = bicycles shipped from factory i to warehouse j

 So
X11 = number of bicycles shipped from New Orleans to New York
X12 = number of bicycles shipped from New Orleans to Chicago
X13 = number of bicycles shipped from New Orleans to Los Angeles
X21 = number of bicycles shipped from Omaha to New York
X22 = number of bicycles shipped from Omaha to Chicago
X23 = number of bicycles shipped from Omaha to Los Angeles

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Transportation Applications

 Objective function
Minimize
total
shipping = 2X11 + 3X12 + 5X13 + 3X21 + 1X22 + 4X23
costs

subject to X11 + X21 = 10,000 (New York demand)

X12 + X22 = 8,000 (Chicago demand)
X13 + X23 = 15,000 (Los Angeles demand)
X11 + X12 + X13 ≤ 20,000 (New Orleans factory
supply)
X21 + X22 + X23 ≤ 15,000 (Omaha factory supply)
All variables ≥ 48 0
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Transportation Applications
 Top Speed Bicycle solution
TO
FROM NEW YORK CHICAGO LOS ANGELES

New Orleans 10,000 0 8,000

Omaha 0 8,000 7,000

 Total shipping cost equals $96,000

 Transportation problems are a special case of LP as the
coefficients for every variable in the constraint
equations equal 1
 This situation exists in assignment problems as well as
they are a special case of the transportation problem
 HW: Using Excel Solver and Lingo to solve this problem again!

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Transportation Applications

 Truck Loading Problem

– The truck loading problem involves deciding which
items to load on a truck so as to maximize the
value of a load shipped
– Goodman Shipping has to ship the following six
items
ITEM VALUE ($) WEIGHT (POUNDS)
1 22,500 7,500
2 24,000 7,500
3 8,000 3,000
4 9,500 3,500
5 11,500 4,000
6 9,750 3,500

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Transportation Applications

 The objective is to maximize the value of

items loaded into the truck

 The truck has a capacity of 10,000 pounds

 The decision variable is
Xi = proportion of each item i loaded on the truck

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Transportation Applications
 Objective function

Maximize $22,500X1 + $24,000X2 + $8,000X3

=
load value + $9,500X4 + $11,500X5 + $9,750X6
subject to
7,500X1 + 7,500X2 + 3,000X3
+ 3,500X4 + 4,000X5 + 3,500X6 ≤ 10,000 lb capacity
X1 ≤ 1
X2 ≤ 1
X3 ≤ 1
X4 ≤ 1
X5 ≤ 1
X6 ≤ 1
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Transportation Applications

 Solution for Goodman Shipping

 HW: Using Excel Solver and Lingo to solve this problem again!

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Transportation Applications

 The Goodman Shipping problem has an interesting issue

 The solution calls for one third of Item 1 to be loaded on
the truck
 What if Item 1 can not be divided into smaller pieces?
 Rounding down leaves unused capacity on the truck and
results in a value of $24,000
 Rounding up is not possible since this would exceed the
capacity of the truck
 Using integer programming, the solution is to load one
unit of Items 3, 4, and 6 for a value of $27,250

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Transshipment Applications

 The transportation problem is a special case of the

transshipment problem

 When the items are being moved from a source to a

destination through an intermediate point (a

transshipment point), the problem is called a
transshipment problem

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Transshipment Applications

 Distribution Centers
– Frosty Machines manufactures snowblowers in Toronto and
Detroit
– These are shipped to regional distribution centers in Chicago
and Buffalo
– From there they are shipped to supply houses in New York,
Philadelphia, and St Louis
– Shipping costs vary by location and destination

– Snowblowers can not be shipped directly from the factories

to the supply houses

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Transshipment Applications

 Frosty Machines network

Source Transshipment Destination
Point
New York City

Toronto Chicago

Philadelphia

Detroit Buffalo

St Louis

Figure 8.1

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Transshipment Applications

 Frosty Machines data

TO
NEW YORK
FROM CHICAGO BUFFALO CITY PHILADELPHIA ST LOUIS SUPPLY
Toronto $4 $7 — — — 800

Detroit $5 $7 — — — 700

Chicago — — $6 $4 $5 —

Buffalo — — $2 $3 $4 —

Demand — — 450 350 300

 Frosty would like to minimize the transportation costs

associated with shipping snowblowers to meet the demands at

the supply centers given the supplies available
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Transshipment Applications
 A description of the problem would be to minimize cost subject to
1. The number of units shipped from Toronto is not more than 800

2. The number of units shipped from Detroit is not more than 700

3. The number of units shipped to New York is 450

4. The number of units shipped to Philadelphia is 350

5. The number of units shipped to St Louis is 300

6. The number of units shipped out of Chicago is equal to the number

of units shipped into Chicago

7. The number of units shipped out of Buffalo is equal to the number of

units shipped into Buffalo

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Transshipment Applications
 The decision variables should represent the number of units
shipped from each source to the transshipment points and from
there to the final destinations

T1 = the number of units shipped from Toronto to Chicago

T2 = the number of units shipped from Toronto to Buffalo
D1 = the number of units shipped from Detroit to Chicago
D2 = the number of units shipped from Detroit to Chicago
C1 = the number of units shipped from Chicago to New York
C2 = the number of units shipped from Chicago to Philadelphia
C3 = the number of units shipped from Chicago to St Louis
B1 = the number of units shipped from Buffalo to New York
B2 = the number of units shipped from Buffalo to Philadelphia
B = the number of units shipped
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Transshipment Applications

 The linear program is

Minimize cost =
4T1 + 7T2 + 5D1 + 7D2 + 6C1 + 4C2 + 5C3 + 2B1 + 3B2 + 4B3
subject to
T1 + T2 ≤ 800 (supply at Toronto)
D1 + D2 ≤ 700 (supply at Detroit)
C1 + B1 = 450 (demand at New York)
C2 + B2 = 350 (demand at Philadelphia)
C3 + B3 = 300 (demand at St Louis)
T1 + D1 = C1 + C2 + C3 (shipping through
Chicago)
T2 + D2 = B1 + B2 + B3 (shipping through Buffalo)
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 Transshipment Applications
 The solution:
TO
FROM CHICAGO BUFFALO NEW YORK CITY PHILADELPHIA ST LOUIS SUPPLY
Toronto 650 150 — — — 800
Detroit 0 300 — — — 700
Chicago — — 0 350 300 —
Buffalo — — 450 0 0 —
Demand — — 450 350 300
Source Transshipment Destination
Point
New York City
450
650
Toronto Chicago
350
150 Philadelphia

Detroit 300 Buffalo

300
St Louis

 HW: Using Excel Solver and Lingo to solve this problem again!
 02/06/2023

Ingredient Blending Applications

 Diet Problems
– One of the earliest LP applications

– Used to determine the most economical diet

for hospital patients

– Also known as the feed mix problem

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Ingredient Blending Applications

 The Whole Food Nutrition Center uses three bulk grains
to blend a natural cereal
 They advertise the cereal meets the U.S. Recommended
Daily Allowance (USRDA) for four key nutrients
 They want to select the blend that will meet the
requirements at the minimum cost

NUTRIENT USRDA
Protein 3 units
Riboflavin 2 units
Phosphorus 1 unit
Magnesium 0.425 units

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Ingredient Blending Applications

 We let
XA = pounds of grain A in one 2-ounce serving of cereal
XB = pounds of grain B in one 2-ounce serving of cereal
XC = pounds of grain C in one 2-ounce serving of cereal

 Whole Foods Natural Cereal requirements

COST PER PROTEIN RIBOFLAVIN PHOSPHOROU MAGNESIUM

GRAIN POUND (CENTS) (UNITS/LB) (UNITS/LB) S (UNITS/LB) (UNITS/LB)
A 33 22 16 8 5
B 47 28 14 7 0
C 38 21 25 9 6

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Ingredient Blending Applications

 The objective function is

Minimize total cost of

mixing a 2-ounce serving = $0.33XA + $0.47XB + $0.38XC

subject to
22XA + 28XB + 21XC ≥ 3 (protein units)
16XA + 14XB + 25XC ≥ 2 (riboflavin units)
8XA + 7XB + 9XC ≥ 1 (phosphorous
units)
5XA + 0XB + 6XC ≥ 0.425 (magnesium units)
XA + XB + XC = 0.125 (total mix)
XA, XB, XC ≥ 0
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Ingredient Blending Applications

 Ingredient Mix and Blending Problems

– Diet and feed mix problems are special cases of a
more general class of problems known as
ingredient or blending problems
– Blending problems arise when decisions must be
made regarding the blending of two or more
resources to produce one or more product
– Resources may contain essential ingredients that
must be blended so that a specified percentage is
in the final mix
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Ingredient Blending Applications

 The Low Knock Oil Company produces two grades of
cut-rate gasoline for industrial distribution
 The two grades, regular and economy, are created
by blending two different types of crude oil
 The crude oil differs in cost and in its content of
crucial ingredients

CRUDE OIL TYPE INGREDIENT A (%) INGREDIENT B (%) COST/BARREL ($)

X100 35 55 30.00
X220 60 25 34.80

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Ingredient Blending Applications

 The firm lets

X1 = barrels of crude X100 blended to produce the
refined regular
X2 = barrels of crude X100 blended to produce the
refined economy
X3 = barrels of crude X220 blended to produce the
refined regular
X4 = barrels of crude X220 blended to produce the
refined economy
 The objective function is

Minimize cost = $30X1 + $30X2 + $34.80X3 + $34.80X4

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Ingredient Blending Applications

 Problem formulation
At least 45% of each barrel of regular must be
(X ingredient
1
A amount of crude blended to produce
+ X ) = total
3
the refined regular gasoline demand
Thus,
0.45(X1 + X3) = amount of ingredient A required
But
0.35X1 + 0.60X3 = amount of ingredient A in refined regular gas

So
0.35X1 + 0.60X3 ≥ 0.45X1 + 0.45X3
or
– 0.10X1 + 0.15X3 ≥ 0 (ingredient A in regular constraint)

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Ingredient Blending Applications

 Problem formulation
Minimize cost = 30X1 + 30X2 + 34.80X3+ 34.80X4
subject to X1 + X3 ≥ 25,000
X2 + X4 ≥ 32,000
– 0.10X1 + 0.15X3 ≥0

0.05X2 – 0.25X4 ≤ 0
X1, X2, X3, X4≥ 0

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Ingredient Blending Applications

 Solution from QM for Windows

 HW: Using Excel Solver and Lingo to solve this problem again!

72
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Financial Applications

 Portfolio Selection
– Bank, investment funds, and insurance

companies often have to select specific

investments from a variety of alternatives

– The manager’s overall objective is generally to

maximize the potential return on the investment

given a set of legal, policy, or risk restraints

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Financial Applications

 International City Trust (ICT) invests in short-term trade

credits, corporate bonds, gold stocks, and construction
loans
 The board of directors has placed limits on how much
can be invested in each area
INTEREST MAXIMUM INVESTMENT
INVESTMENT EARNED (%) ($ MILLIONS)
Trade credit 7 1.0
Corporate bonds 11 2.5
Gold stocks 19 1.5
Construction loans 15 1.8

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Financial Applications

 ICT has $5 million to invest and wants to

accomplish two things
 Maximize the return on investment over the next
six months
 Satisfy the diversification requirements set by the
board
 The board has also decided that at least 55% of the
funds must be invested in gold stocks and
construction loans and no less than 15% be
invested in trade credit
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Financial Applications

 The variables in the model are

X1 = dollars invested in trade credit
X2 = dollars invested in corporate bonds

X3 = dollars invested in gold stocks

X4 = dollars invested in construction loans

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Financial Applications

 Objective function
Maximize
dollars of = 0.07X1 + 0.11X2 + 0.19X3 + 0.15X4
interest earned

subject to X1 ≤ 1,000,000
X2 ≤ 2,500,000
X3 ≤ 1,500,000
X4 ≤ 1,800,000
X3 + X4 ≥ 0.55(X1 + X2 + X3 + X4)
X1 ≥ 0.15(X1 + X2 + X3 + X4)
X1 + X2 + X3 + X4 ≤ 5,000,000
X1, X2, X3, X4 ≥ 0
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Financial Applications

 The optimal solution to the ICT is to make the

following investments
X1 = $750,000
X2 = $950,000
X3 = $1,500,000
X4 = $1,800,000
 The total interest earned with this plan is
$712,000

 HW: Using Excel Solver and Lingo to solve this problem again!

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Homeworks

 Using Excel Solver to solve again at least 3

examples in this lecture.

 Using Lingo to solve at least 3 examples in this

lecture

 Prefer the examples of Manufacturing,

Transportation and Transshipment Applications

79