Optimization Techniques

Introduction
 Business Problem
Maintaining stocks of finished goods.
 Alternative Solutions
• To the marketing manager, stocks of a large variety of products area
means of supplying the company’s customers with what they want
and when they want it. Clearly, according to marketing manager, a
fully stocked warehouse is of prime importance to the company.

• The production manager argues for long production runs preferably

on a smaller product range, particularly if significant time is lost
when production is switched from one variety to another. The result
would again be a tendency to increase the amount of stock carried but
it is of course vital that the plant should be kept running.

• On the other hand the finance manager sees stocks in terms of capital
tied up unproductively and argues strongly for their reduction.

• Finally there appears the personal manager for whom a steady level
of production is advantageous for having better labour relations.
• Solution: All these people would claim to uphold the interests
of their organization
– They do so only from their specialized point of view.
– They may come up with contradictory solution
– However they can not all be right or wrong.

• To solve this problem, it needs to balancing these conflicting

interests (objectives or goals)
– As there are many alternative courses of action available to the decision
makers.

• Optimization techniques provide the decision aids (or rules) to

the decision maker for resolving these problems, which is
derived from:
– A total system orientation
– Scientific methods of investigation
– Models of reality based on quantitative measurement and quantitative
techniques
 SITUATION
Apna Gaon, an ethnic resort, wishes to decide on a special dish that will be
served to all patrons free on Diwali. They held a competition for amateur
cooking teams to decide on the dish. Four teams participated in the
competition. Each team was to present a dish prepared by them. The rules also
laid down that all the participant members of the team were to be amateurs.
The competition was not open to professionals.

Seven judges from amongst the prominent citizens were appointed for the
competition. Each judge had to rank order the teams according to their
performance. The team standing first was awarded 4 points, the second 3, the
third 2 and the team standing fourth was awarded 1 point. The point of the
judges were totaled up and a score sheet was prepared in the given table.

Before the result could be announced Team C put up a protest against Team B
stating that Team B had used a professional which was against the rules and
hence they should be disqualified. You are the Chairperson of Apna Gaon and
are the sole arbitrator in case of disputes. Your queries revealed that Team B
had indeed used professionals and therefore, should be disqualified under the
rules. What decision would you take?
 SITUATION

Judges J1 J2 J3 J4 J5 J6 J7 Total
Rank 2 1 3 4 2 3 1 1
A
Score 3 4 2 1 3 2 4 19
Rank 3 2 4 1 3 4 2 4
B
Score 2 3 1 4 2 1 3 16
Rank 4 3 1 2 4 1 3 3
C
Score 1 2 4 3 1 4 2 17
Rank 1 4 2 3 1 2 4 2
D
Score 4 1 3 2 4 3 1 18
• Decision making is a key managerial responsibility, that can
be improved through:
– Disciplined thinking: Think what is realistic and feasible.
– Objective thinking: An unbiased evaluation of data.
– Systematic thinking: A step by step analysis of the problem.
– Action oriented thinking: Solution can be implemented economically.

• Decision is a choice among alternatives. Process of choice

involves:
– Defining the problem
– Setting objectives
– Collecting data
– Analyzing data
– Gathering alternatives
– Evaluating alternatives
– Selecting the best one
– Implementing the choses course of action
– Process may be formal or informal
– Process may be qualitative or quantitative
 Solution

• As a chairperson of Apna Gaon, you would be fully justified in

disqualifying Team B.

• You may also take the view that since they were last the result
need not be changed.

• But Team C now argues that since there are only three teams,
they should be ranked first, second and third and given point 3,
2, and 1, respectively.

• Individual preferences of judges would not change. They

presented a revised score sheet as given in the table and claim
to be the winners.
 Solution

Judges J1 J2 J3 J4 J5 J6 J7 Total
Rank 2 1 3 3 2 3 1 3
A
Score 2 3 1 1 2 1 3 13
Rank
B
Score
Rank 3 2 1 1 3 1 2 1
C
Score 1 2 3 3 1 3 2 15
Rank 1 3 2 2 1 2 3 2
D
Score 3 1 2 2 3 2 1 14
 SITUATION

There is a five week business commitment between Fayetteville

(FYV) and Denver (DEN). You fly out of Fayetteville on Monday
and return on Wednesday. A regular round trip ticket costs $400, but
a 20% discount is granted if the dates of the ticket span a weekends.
An one way ticket in either side direction cost 75% of the regular
price. How should you buy tickets for 5-week period?

• The following alternatives are available for purchasing tickets:

1. Buy five regular FYV-DEN-FYV.

2. Buy one FYV-DEN, four regular round trip DEN-FYV-DEN and
one DEN-FYV.
3. Buy one regular round trip ticket FYV-DEN-FYV to cover Monday
of the first week and Wednesday of the last week and four DEN-
FYV-DEN which span weekends to cover the remaining legs.
 Solution

• Alternative 1. Buy five regular FYV-DEN-FYV.

– Cost = 5 x 400 = $2000

• Alternative 2. Buy one FYV-DEN, four DEN-FYV-DEN that

span weekends, and one DEN-FYV.
– Cost = 0.75 x 400 + 4 x 400 + 0.75 x 400 = $2200

• Alternative 3. Buy one FYV-DEN-FYV to cover Monday of

the first week and Wednesday of the last week and four DEN-
FYV-DEN that span weekends to cover the remaining legs.
– Cost = 400 + 4 x (0.80 x 400) = $1680

• Thus you should choose alternative 3

• The situation is a decision making problem
Solution requires to identify three main components.

1. What are the decision alternatives?

– Alternative that yields the smallest cost is the best
– Alternatives of decision problem take the form of unknown variables.

2. Under what restrictions is the decision made?

– Restriction on these options is to leave on Monday and return on
Wednesday.
– Unknown variables are then used to construct the restrictions

3. What is an objective criterion for evaluating the alternatives?

– Objective criterion for evaluating the proposed alternative is the price
of the tickets.
– Objective criterion in appropriate mathematical functions
• Solution of the model yields the values of the decision
variables that optimize (maximize or minimize) the value of
the objective function while satisfying all the constraints.
• Resulting solution is referred as the optimum feasible solution.

Maximize or Minimize (Objective function)

Subject to (Constraints)

• In optimization models
– Decision variables may be integer or real
– Objective and constraint functions may be linear or nonlinear.
– Preferably used model in business is linear programming where all
objective and constraint functions are linear and all variables are real.
– Computational algorithms are iterative in nature, that means the
problem is solved in iterations with each new iteration bringing the
solution closer to optimum.
 Steps for optimization techniques

• Problem Definition
• Construction of the model
• Solution of the model
• Validation of the model
• Implementation of the solution

• Problem definition: It defines the scope of the problem and

the end result of the investigation that includes three
principal components:
– (i) description of the decision alternatives
– (ii) determination of the objective of the study
– (iii) specification of limitations under the model system operates.
• Model Construction translates the problem definition into
mathematical relationship such as linear programming.

• A general decision problem model can be written as

– Optimize (Max or Min) Z = f(x)

– Subject to the constraints gi(x) {≤, =, ≥ } bi; i=1,2,…..,m

– Where, x = a vector of decision variables (x1, x2, ….xm); f(x) =

criterion or objective function to be optimized; gi(x) = ith constraint
and bi = fixed amount of the ith resources

– Parameter are constants in the functional relationship and it can be

deterministic or probabilistic in nature.
• Model Solution gives us the well defined optimization
algorithms and solution output.

– An important aspect of model solution is sensitivity analysis.

– It gives us an additional information about the behavior of optimum

solution when the model undergoes some parameter variations.

– The model solution is not only anticipate what will happen and when it
will happen, but also why it will happen.

– It can continually process new data to improve prediction and provide

better decision options.
• Model Validation checks
– whether or not the proposed model does?
– what it is supposed to do?
– does the model provide a reasonable prediction of behavior of the
system under study?
– does the solution make sense?
– are the results intuitively acceptable?

• Common methods for checking the validity of models is to

compare its output with historical output data.
– Model is valid if, under similar input conditions, it reproduces past
performance.

• Implementation: Solution of validated model translate into

operating instructions issued in understandable form to the
individuals who will administer the recommended system.
 Approaches

• Interdisciplinary Approach: Individuals from different fields can be

studied the problem to arrive at an appropriate and desirable solution.

• Methodological Approach: Scientific methods; observing and defining the

problem; formulating and testing the hypothesis; accepted or rejected the
hypothesis, if accepted then results should be implemented, otherwise an
alternative hypothesis has to be formulated.

• Wholistic Approach: Examines the relative importance of all the conflicting

objectives and validate the claims of various departments from the
perspective of whole organization.

• Objectivistic Approach: Obtain an optimal solution to the problem under

analysis; measure of desirability (or effectiveness) is defined based on the
objectives of the organization, which can be used to compare alternative
courses of action with respect to their outcomes.
• Definition:

• Optimization techniques synthesizes data, mathematical

sciences, business rules and machine learning to make
predictions and suggests decision options on how to take
advantage of a future opportunity or mitigate a future risk and
illustrate the implication of each decision option.
 Applications and Scope of Optimization Technique
• Finance and Accounting
• Dividend policies, investment and portfolio management, auditing, balance sheet, cash flow analysis
• Break even analysis, capital budgeting, cost allocation and control, financial planning
• Claim and complainant procedure, public accounting

• Marketing
• Selection of product mix, marketing planning accounting
• Sales effort allocation and assignment
• Advertising and media planning

• Purchasing Procurement and Exploration

• Optimal buying and reordering under price quantity discount
• Bidding policies
• Transportation planning
• Vendor analysis
• Replacement policies

• Personal Management
• Manpower planning, wage/salary administration
• Skills and wages balancing
• Scheduling of training programmers

• Production Management
• Warehouse location and size, distribution centers, retail outlets
• Logistics, layout, engineering design
• Aggregate production planning, assembly line, blending, purchasing, inventory control
• Employment, training, layoffs and quality control
• Project scheduling and allocation of resources

• General Management
• Decision support system and MIS; forecasting
• Organisation design and control
• Strategic planning

• Government
• Economic planning, natural resources, social planning, energy
• Urban and housing problems
• Military, police, pollutio control etc.