1

Chapter 4

Linear Optimization:
Sensitivity Analysis

Part 2

DECISION MODELING
WITH
MICROSOFT EXCEL
Copyright 2001
Prentice Hall Publishers and
Ardith E. Baker
2
Sensitivity
Analysis
Sensitivity analysis is the effect a
(small) change of an exogenous
variable has upon another variable.
In the case of optimization models, sensitivity
analysis refers to the process of analyzing such
changes in a model after the optimal solution
has been found.
We will use 2-dimensional graphs (i.e., only
two decision variables) to give insight into LP
sensitivity analysis. In addition, we will use
Solver Sensitivity Report and SolverTable.
3
Oak Products
Model
Lets return to the Oak Products model of
Chapter 3. In this simplified model, there
are only two decision variables:
Captains chairs (C )
Mates chairs (M )
Now, review the symbolic model
containing the objective function and
constraints.
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Max 56C + 40M (objective function)
Subject to
8C + 4M < 1280 (Long Dowels Restriction)
4C + 12M < 1600 (Short Dowels Restriction)
C + M > 100 (Minimum Production)
4C + 4M < 760 (Legs Restriction)
C < 140 (Heavy Seats Restriction)
M < 120 (Light Seats Restriction)
C > 0 and M > 0 (Nonnegativity Conditions)
Symbolic
Model
5
Sensitivity
Analysis
Changes in the Objective
Function Coefficients
Suppose that the constraint data
remain unchanged and only the
objective coefficients are changed.
The only effect on the model, is that the slope
of the isoprofit line will change.
By changing the coefficients of the Oak Products
models objective function, you can see that some
of those changes will not necessarily change the
optimal solution, even though the isoprofit lines
will have a different slope.
6
In general, the Allowable Increase and Allowable
Decrease entries indicate how much a given decision
variables Objective Coefficient may change, holding
all the other data in the model constant, and still
have the same LP solution.
7
Sensitivity
Analysis
Changes in Constraint
Right-Hand Sides
Ignoring the objective function, lets
observe the effects of right-hand-side
changes for inequality constraints.
You can use GLPs graphical analysis to explain
the effects of changes in these parameters.
You can see the effects of changing the right-
hand-side of the inequality by changing that
number directly, by dragging the constraint line
or by clicking on the buttons next to each
constraint in GLP.
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Note that:
Tightening an inequality constraint means
making it more difficult to satisfy.
For a > constraint, this means increasing the RHS.
For a < constraint, this means decreasing the RHS.
Loosening an inequality constraint means
making it easier to satisfy.
For a < constraint, this means increasing the RHS.
For a > constraint, this means decreasing the RHS.
Tightening either contracts the feasible
region or leaves it unaffected.
Loosening either expands the feasible region or
leaves it unaffected.
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Sensitivity
Analysis
RHS Sensitivity and the
Shadow Price
For the Oak Products Model, first hold
all numbers fixed except for the
inventory of Long Dowels.
Since this constraint is the < form, increasing
the RHS results in loosening the constraint,
making it easier to satisfy.
Let us change the inventory from L=1280 to
L=1281, L=1320, and L=1350.
The geometric interpretation is that the
feasible region is expanding.
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L=1281
Note that the constraints on Legs and Long Dowels
continue to be binding.
The optimal solution is C=130.25 and M=59.75
For a
maximum
profit of
$9684 (an
increase
of $4, the
shadow
price).
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The shadow price of a given constraint is the
change per unit increase in RHS with all other
data held fixed.
It is called a shadow price because its value is
masked or shadowed until the model is
optimized and sensitivity analysis is done by
Solver. In economic theory, the shadow price
is sometimes called a reservation price.
Note that:
12
When L = 1280, the shadow price of 4 is valid for
an allowable increase (in L) of 40 Long Dowels
and an allowable decrease of 180 Long Dowels.
For L values between 1000 and 1320 Long
Dowels, the change in the OV for each unit of RHS
inventory increase, with all other data held fixed,
is $4/Long Dowel.
13
L=1320
Now three constraints are binding.
The optimal solution is C=140 and M=50
For a
maximum
profit of
$9840.
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Here is the corresponding Solver Solution:
Again, note 3 binding constraints and only 2 positive
decision variables.
When an LP solution has more binding constraints
than positive variables, it is called degenerate.
15
Here is the corresponding Sensitivity Report:
Degeneracy can lead to some anomalies when
interpreting this report. Note the allowable
increase/decrease for some shadow prices = 0.
16
When L = 1320, the shadow price remains at 4,
but the allowable increase is 0, which means that
the value 4 does not apply to RHS values any
larger than 1320.
Indeed, the geometric analysis shows that the
constraint becomes non-binding and redundant
when L > 1320.
Small changes in the RHS of a non-binding
constraint cannot affect the OV, and hence for a
non-binding constraint the shadow price will
always be zero.
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The interpretation of the shadow price is valid
only within a range for the given RHS. This
range is specified by the Allowable Increase
and Allowable Decrease columns in the
Constraints section of the Sensitivity Report.
Note that:
18
L=1350
The binding constraints are now Legs and Heavy
Seats.
The optimal solution is C=140 and M=50
For a
maximum
profit of
$9840.
19
Here is the corresponding Solver Solution:
The Long Dowels constraint is now non-binding.
The shadow price is now $0.
20
When L = 1350, we see that now, with the relevant
constraint non-binding, the shadow price is indeed
zero and the allowable increase is infinite. That is,
for any further increase in L, the constraint will
remain non-binding and the shadow price will remain
at the value 0.
21
Note that:
The shadow price of a non-binding constraint
will always be zero. A non-binding constraint
means that the constraint has slack or
surplus.
The RHS sensitivity information that the
Sensitivity Report provides does not tell us
how the optimal decisions for C and M change.
It merely explains the way in which the OV
will change as the RHS changes.
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SolverTable.xla is a DataTable-like
macro to re-optimize and tabulate
an LP model after each change in
its parameters.
Similar to Excels DataTable, SolverTable knows
how to re-Solve the LP model for each change
before tabulating any results.
SolverTable can also tabulate the information
in the Solver Sensitivity Report.
SolverTable is not restricted to two-variable
models.
Sensitivity
Analysis
Using SolverTable
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Sensitivity
Analysis with
SolverTable
To begin using SolverTable,
open the SimpleOakProd.xls
workbook.
Open the add-in file SolverTable.xla. Click
on the resulting Enable Macros button.
SolverTable will install itself and be available as a
menu item on the Tools menu.
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To illustrate SolverTable, start with the Simplified
Oak Products model.
RHS Ranging with SolverTable
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First a range of RHS parameter values for the
constraint are entered as data in a column (or a row).
Next, enter a row of references to model output cells.
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Now, highlight the table by click-dragging and choose
SolverTable from the Tools pull-down menu.
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In the resulting dialog, specify the cell location of the
Long Dowel constraints RHS in the Input Column Cell
edit field.
Click OK to run Solver on the model for each Long
Dowels constraint RHS value (in this case for 11
optimizations).
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SolverTable tabulates the requested model results
referenced in the tables columns.
The shadow price changes abruptly each time a
different set of constraints combine to determine the
optimal corner point.
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Here are the corresponding GLP pictures of the Oak
Products model for the Long Dowels Starting
Inventory amounts (L).
L = 400
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L = 480
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L = 800
32
L = 1100
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L = 1320
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L = 1350
Sweeping the values of L from 400 to 1350
causes the feasible region to expand until the
Long Dowels constraint becomes redundant.
35
SolverTable can mimic DataTable 2 to tabulate
simultaneous variations in two parameters, with the
restriction that only one output cell can be tabulated.
To illustrate, a range of parameter values for the
inventory constraint RHS values for both Long and
Short Dowels will be analyzed.
Using the
Oak Products
model, start by
setting up the
table, in this
case with a
range of
parameter
values for both
parameters.
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Now, click on Tools SolverTable and in the resulting
dialog, specify cell $F$7 as the Input Row Cell and
$F$6 as the Input Column Cell.
Click OK to continue.
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SolverTable will run Solver on the model for each
paired combination of Long and Short Dowels
constraint RHS values (108 optimizations in this
case), and for each run, tabulate the single Profit
result referenced in the tables upper left corner.
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Sensitivity
Analysis
Objective Function
Coefficient Ranging
with SolverTable
Similar to ranging an RHS, first set up a
table with values of the objective
function coefficient in a column or row.
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As before, click on Tools SolverTable and in the
resulting dialog, specify cell $B$3 as the Input
Column Cell.
Click OK to continue.
40
Here are the results of the SolverTable analysis.
Notice that the objective function coefficients for
profit per Captain chair are the coefficient values at
which the LP solution changes (as shown by the
Allowable Increase).
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Here are the corresponding GLP pictures of the Oak
Products model for the Captain objective function
coefficient values (V). Note how the corner point
solution changes abruptly for critical values of V.
V = 0
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V = 13.334
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V = 40
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V = 80
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V = 99999
Sweeping the values of V from 0 to 99999 causes the
objective function to rotate from horizontal to nearly
vertical in slope.
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Sensitivity
Analysis
Technical Coefficient
Ranging with SolverTable
SolverTable can be used to investigate
alternative production technologies.
Suppose Oak Products were to consider the
option of strengthening or slightly weakening a
Mate chair by increasing or decreasing the
number of long dowels it uses.
Lets examine the economic effects of reducing
the number of long dowels per Mate chair from
the current 4 to 2, and increasing the number
above 4.
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Here is the resulting solution:
As before, first set up a table in Excel and run
SolverTable. In the SolverTable dialog, specify $C$6
(no. of Mates in the Long Dowel constraint) as the
Input Column Cell.
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Increasing the number of long dowels per Mate chair
from 4 to 6 reduces the optimal number of Mates to
produce (with an associated increase in Captains),
with a net reduction in Profit.
Reducing the number of long dowels per Mate chair
from 4 to 2 also reduces the optimal number of Mates
(with an associated increase in Captains), but with a
net increase in Profit.
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Sensitivity
Analysis
Eastern Steel Example
Ore from four different locations is
blended to make a steel alloy.
Each ore contains three essential elements
(A, B, and C) that must appear in the final
blend at minimum threshold levels.
Find the cost-minimizing blend by solving the
following LP model (T
i
= fraction of a ton of ore
from location i).
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Min 800T
1
+ 400T
2
+ 600T
3
+ 500T
4
s.t.
10T
1
+ 3T
2
+ 8T
3
+ 2T
4
> 5
(requirement on A)
90T
1
+ 150T
2
+ 75T
3
+ 175T
4
> 100
(requirement on B)
45T
1
+ 25T
2
+ 20T
3
+ 37T
4
> 30
(requirement on C)
T
1
+ T
2
+ T
3
+ T
4
= 1 (blend condition)
T
1
, T
2
, T
3
, T
4
> 0 (nonnegativity constraints)
Eastern Steel Symbolic Model
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Here is the Excel spreadsheet:
Next, run Solver and specify the Sensitivity Report.
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Look at the Reduced Cost column:
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The Reduced Cost of any particular decision variable
is defined to be the amount by which the coefficient
of that variable in the objective function would have
to change in order to have a positive optimal value
for that variable.
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The Reduced Cost of a decision variable (whose
optimal value is currently zero) is the rate (per unit
amount) at which the objective value is hurt as that
variable is forced into a previously optimal solution.
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Sensitivity
Analysis
Sensitivity Report
Interpretation for
Alternative LP Models
In this example, the Friendly Loan
Company has an annual $15 million loan
budget. Profit is generated by the
annual interest income from three types
of loans:
Real Estate (First Mortgage; 7%)
Furniture Loans (12%)
Signature Loans (15%)
In addition, Friendly requires at least 60% First
Mortgage loans and no more than 10% Signature
loans.
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Here is the spreadsheet model:
Note how compact the model is. The constraints
are immediately adjacent to the quantities they
affect and are custom formatted to include the
inequality while still being read as a number.
Empty cells are shaded in order to focus attention
on the important things.
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Here are the spreadsheet formulas:
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Using Solver, specify the parameters and solve
the model.
Be sure to specify the Sensitivity Report.
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The resulting Solver analysis shows that all $15
million will be loaned out ($9 million into First
Mortgage Loans, $1.5 million into Signature
loans, and $4.5 million into Furniture loans).
The annual Total interest income will be
$1,395,000 with an average return of 9.3%.
All three constraints are binding.
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Here is the Sensitivity Report for the model:
The Shadow Price of .12 indicates that a 12%
return can be achieved on any budget increase.
In addition, the Allowable Increase value
indicates that we can increase the budget as
much as we want (infinitely).
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Verify Solvers Sensitivity Report by typing a new
budget limit into the spreadsheet and Solving.
Notice that the Avg. Return for this model is still
9.3%. This indicates that the marginal return for
the extra $5 million is actually 9.3% and not
12% as indicated by the previous Sensitivity
Analysis.
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The Sensitivity Analysis for this model shows a
shadow price of .12 (12%), the same as the
previous model.
To understand what is happening, re-formulate
the model using the recommended rules from
Chapter 3.
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Here is the reformulated spreadsheet model:
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And the resulting Sensitivity Analysis from Solver:
Note the presence of 3 constraints and the
correct Shadow Price of 9.3%.
The solution is not degenerate and none of the
constraints are binding.
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Now that we have looked at both
spreadsheet models (the compact
model vs. the recommended LP
model), it would seem that they give
different results.
However, both models are completely correct,
and neither Sensitivity Report contains any
errors.
To understand the differences, look at simple
upper and lower bounds.
Sensitivity
Analysis
Simple Upper and
Lower Bounds
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The time and memory requirements for Solver
to optimize a model are determined primarily
by the size of the coefficient matrix of cells
making up the LHS of the set of constraints.
The size of the constraint coefficient matrix is
proportional to the product of the number of
decision variables and constraints. This size
effects speed of optimization.
In addition to nonnegativity constraints,
Solver allows any upper or lower constraint
bounds directly on the decision variables to be
honored without actually considering them as
constraints.
This keeps the coefficient matrix smaller,
allowing larger LP models to be optimized.
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However, the only sensitivity information
available for any simple upper and lower
bound constraints are their shadow prices.
Solver places any non-zero shadow price on
an upper or lower bound constraint into the
Reduced Cost column next to the relevant
decision variable.
The Reduced Cost numbers for Solver LP
models containing simple upper and lower
bounds are the shadow prices for whichever
bound, if any, is binding on that decision
variable.
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The table below gives values the Reduced Cost
shadow price entry may have in Solver models
containing simple upper and lower bounds.
Value of Decision
Variable at Optimality
Reduced Cost Entry,
Maximization Model
Reduced Cost Entry,
Minimization Model
Lower Bound (>) Binding Zero or Negative Shadow Zero or Positive Shadow
Price Price

Upper Bound (<) Binding Zero or Positive Shadow Zero or Negative Shadow
Price Price

Neither Bound Binding Zero Shadow Price Zero Shadow Price
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Solver invokes its special bounding procedure
whenever it sees Changing Cells cell
references in the Subject to the Constraints:
box of the Solver Parameters dialog.
Solver will not evoke this procedure if the
upper or lower bound on any decision
variable is specified indirectly on the
worksheet.
This indirect reference can be achieved by
the use of some intervening formula, such as
the SUMPRODUCT formula.
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Although the shadow price given in
the two different models was correct,
the interpretation of that price was
incorrect.
Sensitivity
Analysis
Shadow Price
Interpretation
Remember, a shadow price is the change in the
LPs OV per unit of change in a given constraints
RHS value holding all other data, including the
other RHSs, constant.
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So, for example, the correct interpretation of the
shadow price of .120 should be :
Holding the Loan Limit RHSs for
Signature and First Mortgage loans at
their original dollar amount bounds
of $1500 and $9000, respectively,
the improvement in the objective
function value is .12 for each
additional budget dollar.
The use of simple upper and lower bounds and
the use of formulas on RHSs of LP formulations
can lead to more compact and managerially
appealing spreadsheet formulations of LPs.
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Sensitivity Analysis Summary
Objective coefficients
slope of iso-profit line
Right-hand sides of Constraints
shadow price
Technological coefficients
solver table
Upper/Lower bounds on variables
reduced costs

Alternative models