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# Chapter 3

## The process of problem formulation

Production Problem
Marketing and media applications
Financial Applications
Transportation Problem
The process of problem formulation

## 1. Provide a detailed verbal description of the problem

2. Determine the overall objective that appears to be
relevant.
3. Determine the factors (constraints) that appear to
restrict the attainment of the objective function.
4. Define the decision variables and state their units of
measurement.
5. Using these decision variables, formulate an
objective function.
6. Formulate a mathematical equations for each of the
identified constraints.
7. Check the entire formulation to ensure linearity.
Production Problem
The demand for a particular item for a Cosmopolitan Company is
known to be:
Month January February March April
Demand 100 110 120 110
The production capacity and the cost per unit in these months is,
respectively:
Month January February March April
Production 120 150 150 100
Cost (\$) 9 10 8 7
and the storage cost is \$5 per month.
At the beginning of January there are 50 items in store, and there
should be 80 items left in store at the end of April.
Formulate a linear program to find the best production level for
each month.
Production Problem

## Let xi be the amount of production in month i (i=1,2,3,4)

Production capacity constraints:
x1 120
x2 150
x3 150
x4 100
Amount left over at the end of each month (positive)
End of January :50+x1-100 >=0 x1-50 0
End of February: x1-50+x2-110 >=0 x1+x2-160 0
End of March: x1+x2-160+x3-120 >= 0 x1+x2+x3-280 0
End of April: x1+x2+x3-280+x4-110 >= 80 x1+x2+x3+x4-390 80
Production Problem

Objective function:
Production Cost= 9x1+10x2+8x3+7x4
Storage Cost = 5 [(x1-50)+(x1+x2-160)+(x1+x2+x3-
280)+(x1+x2+x3+x4-390)]
Minimize Z = Production Cost + Storage Cost
= 29x1+25x2+18x3+13x4-4400

## Non-Negativity Constraint : x1, x2, x3, x4 0

Marketing Applications

## One application of linear programming in marketing

is media selection.
LP can be used to help marketing managers allocate a
fixed budget to various advertising media.
The objective is to maximize reach, frequency, and
quality of exposure.
Restrictions on the allowable allocation usually arise
during consideration of company policy, contract
requirements, and media availability.
Media Selection

## SMM Company recently developed a new instant

The product is to be initially test marketed in the Dallas
area. The money is to be spent on
a TV advertising blitz during one
weekend (Friday, Saturday, and
Sunday) in November.
The three options available
Sunday game-time advertising. A mixture of one-
minute TV spots is desired.
Media Selection

Estimated Audience
Daytime 3,000 \$5,000
Evening News 4,000 \$7,000
Sunday Game 75,000 \$100,000

## SMM wants to take out at least one ad of each type

(daytime, evening-news, and game-time). Further, there
are only two game-time ad spots available. There are
ten daytime spots and six evening news spots available
daily. SMM wants to have at least 5 ads per day, but
spend no more than \$50,000 on Friday and no more than
\$75,000 on Saturday.
Media Selection

## Define the Decision Variables

DFR = number of daytime ads on Friday
DSA = number of daytime ads on Saturday
DSU = number of daytime ads on Sunday
EFR = number of evening ads on Friday
ESA = number of evening ads on Saturday
ESU = number of evening ads on Sunday
GSU = number of game-time ads on Sunday
Media Selection

## Define the Objective Function

Maximize the total audience reached:
Max (audience reached per ad of each type)
x (number of ads used of each type)
Max 3000DFR +3000DSA +3000DSU +4000EFR
+4000ESA +4000ESU +75000GSU
Media Selection

## Define the Constraints

Take out at least one ad of each type:
(1) DFR + DSA + DSU > 1
(2) EFR + ESA + ESU > 1
(3) GSU > 1
Ten daytime spots available:
(4) DFR < 10
(5) DSA < 10
(6) DSU < 10
Six evening news spots available:
(7) EFR < 6
(8) ESA < 6
(9) ESU < 6
Media Selection

## Define the Constraints (continued)

Only two Sunday game-time ad spots available:
(10) GSU < 2
At least 5 ads per day:
(11) DFR + EFR > 5
(12) DSA + ESA > 5
(13) DSU + ESU + GSU > 5
Spend no more than \$50,000 on Friday:
(14) 5000DFR + 7000EFR < 50000
Media Selection

## Define the Constraints (continued)

Spend no more than \$75,000 on Saturday:
(15) 5000DSA + 7000ESA < 75000
Spend no more than \$282,000 in total:
(16) 5000DFR + 5000DSA + 5000DSU + 7000EFR
+ 7000ESA + 7000ESU + 100000GSU7 < 282000
Non-negativity:
DFR, DSA, DSU, EFR, ESA, ESU, GSU > 0
Media Selection

## Variable Value Reduced Costs

DFR 8.000 0.000
DSA 5.000 0.000
DSU 2.000 0.000
EFR 0.000 0.000
ESA 0.000 0.000
ESU 1.000 0.000
GSU 2.000 0.000
Media Selection

Solution Summary
Total new audience reached = 199,000
Number of daytime ads on Friday = 8
Number of daytime ads on Saturday = 5
Number of daytime ads on Sunday = 2
Number of evening ads on Friday = 0
Number of evening ads on Saturday = 0
Number of evening ads on Sunday = 1
Number of game-time ads on Sunday = 2
Financial Planning

## A bank makes four kinds of loans to its personal customers and

these loans yield the following annual interest rates to the bank:
First mortgage 14%
Second mortgage 20%
Home improvement 20%
Personal overdraft 10%
The bank has a maximum foreseeable lending capability of 250 BD
million and is further constrained by the policies:
1. First mortgages must be at least 55% of all mortgages issued
and at least 25% of all loans issued (in BD terms)
2. Second mortgages cannot exceed 28% of all loans issued
(in BD terms)
3. To avoid public displeasure and the introduction of a new
windfall tax the average interest rate on all loans must not
exceed 15%.
Formulate the bank's loan problem as an LP so as to maximize
interest income whilst satisfying the policy limitations.
Financial Planning

## Define the Decision Variables

Essentially we are interested in the amount (in BD)
the bank has loaned to customers in each of the four
different areas (not in the actual number of such
loans). Hence let
xi = amount loaned in area i in million of BD (where
i=1 corresponds to first mortgages, i=2 to second
mortgages i=3 to home improvement, and i=4 to
personal overdraft)
Financial Planning

## Define the Objective Function

To maximize interest income (which is given above)
Maximize Z=0.14x1 + 0.20x2 + 0.20x3 + 0.10x4
Define the Constraints
(a) Limit on amount lent
x1 + x2 + x3 + x4 250
(b) Policy condition 1
x1 0.55(x1 + x2)
i.e. first mortgages >= 0.55(total mortgage lending) and also
x1 0.25(x1 + x2 + x3 + x4)
i.e. first mortgages >= 0.25(total loans)
Financial Planning

## Define the Constraints (continued)

c) policy condition 2
x2 0.28(x1 + x2 + x3 + x4)
d) policy condition 3
we know that the total annual interest is 0.14x1 + 0.20x2
+ 0.20x3 + 0.10x4 on total loans of (x1 + x2 + x3 + x4).
Hence the constraint relating to policy condition (3) is:
0.14x1 + 0.20x2 + 0.20x3 + 0.10x4 0.15(x1 + x2 + x3 + x4)
Non-Negativity Constraint:
xi 0 (i=1,2,3,4)
Transportation Problem

## The transportation problem seeks to minimize the

total shipping costs of transporting goods from m
origins (each with a supply si) to n destinations
(each with a demand dj), when the unit shipping
cost from an origin, i, to a destination, j, is cij.
The network representation for a transportation
problem with two sources and three destinations is
given on the next slide.
Transportation Problem

Network Representation

1 d1
c11
s1 1 c12
c13
2 d2
c21

s2 2 c22
c23
3 d3

Sources Destinations
Transportation Problem

## Steel Mills in three cities produce the following amounts of

steel:
Location A B C
Production (tons) 150 210 320

## These mills supply steel to four cities, where manufacturing

plants have the following demands:
Plants 1 2 3 4
Demand (tons) 190 70 180 240

## The cost of sending 1 tons of steel from a production location to

a plant depends on the distance the truck must travel.
The problem is to determine how many tons of steel to transport
from each production mill to each manufacturing plant on a
weekly basis to minimize the total cost of transportation.
Formulate the above problem as a linear programming model.
Transportation tableau
A transportation problem is specified by the supply, the
demand, and the shipping costs. So the relevant data can be
summarized in a transportation tableau. The transportation
tableau implicitly expresses the supply and demand constraints
and the shipping cost between each demand and supply point.

From To Plant
1 2 3 4 Supply (tons)
A \$14 \$9 \$16 \$18 150
B \$11 \$8 \$7 \$16 210
C \$16 \$12 \$10 \$22 320
Demand (tons) 190 70 180 240

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Transportation Problem

Decision Variable:
Let Xij = number of tons of steel shipped from location i to
plant j (i = A, B, C; j = 1, 2, 3, 4)
Objective function

## Transportation costs of steel shipped from location A

= 14 XA1 + 9 XA2 +16 XA3 +18 XA4
Transportation costs of steel shipped from location B
= 11 XB1 + 8 XB2 + 7 XB3 +16 XB4
Transportation costs of steel shipped from location C
= 16 XC1 + 12 XC2+ 10 XC3+22 XC4
Therefore, the objective function is:
Minimize 14 XA1 + 9 XA2 +16 XA3 +18 XA4 + 11 XB1 + 8 XB2 + 7 XB3
+16 XB4 + 16 XC1 + 12 XC2+ 10 XC3+22 XC4

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Transportation Problem

3. Supply Constraints
Since each supply point has a limited production
capacity;

## XA1 + XA2 + XA3 + XA4 150

XB1 + XB2 + XB3 + XB4 210
XC1 + XC2+ XC3+ XC4 320

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Transportation Problem

4. Demand Constraints
Since each supply point has a limited production
capacity;
XA1 + XB1 + XC1 190
XA2 + XB2 + XC2 70
XA3 + XB3 + XC3 180
XA4 + XB4 + XC4 240
5. Sign Constraints
Xij 0 (i= A,B,C; j= 1,2,3,4)

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