Industrial Engineering 416

Operations Research I
Professor Mirzaei
Fall 2012
November 27, 2012

Presented by:
Thomas Alonso
Stephen Cruz
Jiogy Grundy

Alonso, Cruz, Grundy

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INTRODUCTION
Problem statement:
SilComputer needs to meet the demand of its largest corporate and educational
customers for notebook computers over the next four quarters (before its current model
becomes obsolete). SilComputer current has 5,000 notebook computers in inventory.
Expected demand over the next four quarters for its notebook is 7,000; 15,000; 10,000;
and 8,000. SilComputer has sufficient capacity and material to produce up to 10,000
computers in each quarter at a cost of $2000 per notebook. By using overtime, up to an
additional 2,500 computers can be produced at a cost of $2200 each. Computers
produced in a quarter can be used either to meet that quarters demand, or be held in
inventory for use later. Each computer in inventory is charged $100 to reflect carrying
costs.
How should SilComputer meet its demand for notebooks at minimum cost?

The main goals of this project is to identify the variables involved, state the
objective function, list the constraints, formulate the problem, show the method of
obtaining the answer, and analyzing the end result.

FORMULATION
The Decision Variables of this problem can be summed up as follows:
x1, x2, x3, x4 = # of computers produced at a normal cost for quarters 1, 2, 3, 4
y1, y2, y3, y4 = # of computers produced at an overtime cost for quarters 1, 2, 3, 4
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i1, i2, i3 = ending inventory at the end of quarters 1, 2, 3

Since the objective of this problem is to minimize the cost of meeting the demand,
we decided that the formulating of the Objective Function is as follows:
Min Z = $2,000*(Sum of computers produced at normal cost) + $2,200*(Sum of
computer produced at overtime cost) + $100*(Sum of computers in inventory)
Combining the above equation with the Decision Variables, we find the
Objective Function as:
Min Z = 2000(x1+x2+x3+x4) + 2200(y1+y2+y3+y4) + 100(i1+i2+i3)

CONSTRAINTS
The two supply constraints on the max production per quarter are as follows:
x1, x2, x3, x4 <= 10,000 (computers at a normal cost)
y1, y2, y3, y4 <= 2,500 (computers at an overtime cost)
For the demand constraints, we formulate the following equation for each quarter:
(Beginning Inventory) + (Computers produced at a normal cost) + (Computers
produced at an overtime cost) = (Expected Demand) + (Ending Inventory)
Note that the ending inventory of one quarter becomes the beginning inventory of
the succeeding quarter. Thus, our carrying cost equations are:
5000 + x1 + y1 = 7000 + i1 (for Quarter 1)
i1 + x2 + y2 = 15000 + i2 (for Quarter 2)
i2 + x3 + y3 = 10000 + i3 (for Quarter 3)
i3 + x4 + y4 = 8000 (for Quarter 4)
Our final constraint shows that our optimum values can not be negative numbers:

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x1, x2, x3, x4, y1, y2, y3, y4, i1, i2, i3 >= 0

SOLUTION
We used LINGO to solve our problem, using the following input:
LINGO INPUT:
min = 2000*x1 + 2000*x2 + 2000*x3 + 2000*x4 + 2200*y1 + 2200*y2 +
2200*y3 + 2200*y4 + 100*i1 + 100*i2 + 100*i3;
x1
x2
x3
x4
y1
y2
y3
y4

<=
<=
<=
<=
<=
<=
<=
<=

5000
x2 +
x3 +
x4 +

10000;
10000;
10000;
10000;
2500;
2500;
2500;
2500;
+ x1
y2 +
y3 +
y4 +

+ y1
i1 i2 i3 =

= 7000 + i1;
i2 = 15000;
i3 = 10000;
8000;

Our output is as follows:

LINGO OUTPUT:
Global optimal solution found.
Objective value:
Infeasibilities:
Total solver iterations:

0.7050000E+08
0.000000
3

Model Class:

LP

Total variables:
Nonlinear variables:
Integer variables:

11
0
0

Total constraints:
Nonlinear constraints:

13
0

Total nonzeros:
Nonlinear nonzeros:

33
0
Variable
X1
X2
X3
X4
Y1

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Value
7000.000
10000.00
10000.00
8000.000
0.000000

Reduced Cost
0.000000
0.000000
0.000000
0.000000
200.0000

Y2
Y3
Y4
I1
I2
I3

0.000000
0.000000
0.000000
5000.000
0.000000
0.000000

Row
1
2
3
4
5
6
7
8
9
10
11
12
13

Slack or Surplus
0.7050000E+08
3000.000
0.000000
0.000000
2000.000
2500.000
2500.000
2500.000
2500.000
0.000000
0.000000
0.000000
0.000000

100.0000
0.000000
200.0000
0.000000
0.000000
300.0000
Dual Price
-1.000000
0.000000
100.0000
200.0000
0.000000
0.000000
0.000000
0.000000
0.000000
-2000.000
-2100.000
-2200.000
-2000.000

The output shows that our objective function, and thus our minimum cost is
0.7050000E+08, or min z = $70,500,000. We find that x1 = 7000, x2 = 10000, x3 =
10000, x4 = 8000, y1 = y2 = y3 = y4 = 0, i1 = 5000, and i2 = i3 = 0.
Weve come to a few conclusions regarding the results we received. First of all,
there was only one quarter where inventory was held at the end of the month (i1 = 5,000).
This inventory of 5,000 was added to the production of 10,000 computers in quarter 2 to
complete fill the expected demand of 15,000 for quarter 2. From here on out, no
inventory is held onto for the remaining quarters, and thus, we deduced that the carrying
costs of inventory became unnecessary after quarter 1. Another thing we concluded was
that all y variables equaled 0, and thus no overtime was used to produce extra computers.
The inventory held at the end of quarter 1 (i1 = 5,000) was worth the carrying cost so that
the number of computers produced at a normal cost in quarter 2 (x2 = 10,000) is at the
maximum capacity before incurring the extra cost of producing computers at an overtime

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rate. In this way, overtime costs are completely avoided with the trade-off of one quarter
of carrying costs.
RESULT ANALYSIS
With an inventory cost of $100/unit, we expect the firm to lose a total of $500,000 in
inventory cost. As the graph below shows, if they eliminate their inventory of 5,000 units
from the second quarter they can save $500,000.

Instead of spending $500,000 to store inventory, the firm may want to consider investing
it in better equipment to improve their current capacity to 15,000 units/quarter to
eliminate the inventory cost. If they cannot purchase new equipment due to limited space,
they may want to consider outsourcing some components so that their capacity increases
to 15,000 units/quarter. If either option can be done with less than $500,000 then the firm
would further reduce their total cost.

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