marketing application media selection financial application portfolio selection …
DESCRIPTION
LP Modeling Application For a particular application we begin with the problem scenario and data, then: 1) Define the decision variables 2) Formulate the LP model using the decision variables Write the objective function equation Write each of the constraint equations Implement the Model using QM or MSTRANSCRIPT
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CHAPTER 4:LINEAR PROGRAMMINGAPPLICATIONS
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LINEAR PROGRAMMING (LP) CAN BE USED FOR MANY MANAGERIAL DECISIONS:
Marketing Application Media Selection
Financial Application Portfolio Selection Financial Planning
Product Management Application Product Scheduling
Data Envelopment Analysis Revenue Management
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LP Modeling ApplicationFor a particular application we begin
withthe problem scenario and data, then:1) Define the decision variables2) Formulate the LP model using the
decision variables• Write the objective function equation• Write each of the constraint equations• Implement the Model using QM or MS
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MEDIA SELECTION APPLICATION Helps marketing manager to allocate
the advertising budget to various advertising media News Paper TV Internet Magazine Radio
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MEDIA SELECTION A Construction Company wants to advertise
his new project and hired an advertising company.
The advertising budget for first month campaign is $30,000
Other Restrictions: At least 10 television commercial must be used At least 50,000 potential customer must be
reached No more than $18000 may be spent on TV
advertisement Need to recommend an advertising
selection media plan
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MEDIA SELECTIONPLAN DECISION CRETERIA
EXPOSURE QUALITYIt is a measure of the relative value of
advertisement in each of media. It is measured in term of an exposure quality unit.
Potential customers Reached
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MEDIA SELECTIONWe can use the graph of an LP to see
what happens when:
1. An OFC changes, or 2. A RHS changes
Recall the Flair Furniture problem
ADVERTISING MEDIA
# OF CUSTOMER REACHED
COST PER ADVERTISMENT
MAX TIME AVAIALBLE PER MONTH
EXPOSURE QUALITY UNITS
DAY TIME TV(1 MIN)
1000 1500 15 65
EVENING TV (30 SEC)
2000 3000 10 90
DAILY NEWS PAPER
1500 400 25 40
SUNDAY NEWS PAPER
2500 1000 4 60
RADIO 8 AM TO 5 PM NEWS 30 SEC
300 100 30 20
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DECISION VARIABLES DTV : # of Day time TV is used ETV: # of times evening TV is used DN: # of times daily news paper used SN: # of time Sunday news paper is used R: # of time Radio is used Advertising plan with DTV =65 DTV Quality unit Advertising plan with ETV =90 DTV Quality unit Advertising plan with DN =40 DTV Quality unit Objective Function ????
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OBJECTIVE FUNCTION Max 65DTV + 90ETV + 40DN + 60SN +
20R (Exposure quality ) Constraints
Availability of Media Budget Constraint Television Restriction
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Availability of Media DTV <=15 ETV <=10 DN<=25 SN<=4 R<=30
Budget constraints 1500DTV +3000ETV +400DN +1000SN +100R <=30,000
Television Restriction DTV +ETV >=10 1500DTV +3000ETV<=18000 1000DTV+2000ETV+1500DN +2500SN +300R >=50,000
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OPTIMAL SOLUTION OBJ FUNCTION Value: 2370 (Exposure
Quality unit) Decision variable Potential customers ????
MEDIA FREQUENCY
DTV 10ETV 0DN 25SN 2RADIO 30
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dtv etv dn sn r RHS dual Maximize 65 90 40 60 20 Constraint 1 1 0 0 0 0 <= 15 0 Constraint 2 0 1 0 0 0 <= 10 0 Constraint 3 0 0 1 0 0 <= 25 16 Constraint 4 0 0 0 1 0 <= 4 0 Constraint 5 0 0 0 0 1 <= 30 14 Constraint 6 1500 3000 400 1000 100 <= 30000
0.06 Constraint 7 1 1 0 0 0 >= 10 -25 Constraint 8 1500 3000 0 0 0 <= 18000 0 Constraint 9 1000 2000 1500 2500 300 >= 50000
0 Solution-> 10 0 25 1.999999 30 $2,370.
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DISCUSSION Dual Price for constraint 3 is 16 ???? (DN >=25) exposure quality unit ???? Dual price for constraint 5 is 14 (R <=30) exposure quality unit ???? Dual price for constraint 6 is 0.060 1500DTV +3000ETV +400DN +1000SN
+100R <=30,000 exposure quality unit ???? Dual price for constraint 7 is -25 DTV +ETV >=10 ???
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Reducing the TV commercial by 1 will increase the quality unit by 25 this means
The reducing the requirement having at least 10 TV commercial should be reduced
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BLENDING PROBLEMFrederick's Feed Company receives four raw grains from which it blends its dry pet food. The pet food advertises that each 8-ounce can meets the minimum daily requirements for vitamin C, protein and iron. The cost of each raw grain as well as the vitamin C, protein, and iron units per pound of each grain are summarized on the next slide.Frederick's is interested in producing the 8-ounce mixture at minimum cost while meeting the minimum daily requirements of 6 units of vitamin C, 5 units of protein, and 5 units of iron.
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BLENDING PROBLEM
Vitamin C Protein Iron Grain Units/lb Units/lb Units/lb
Cost/lb 1 9 12 0 .75
2 16 10 14 .90 3 8 10 15 .804 10 8 7 .70
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BLENDING PROBLEM Define the constraints
Total weight of the mix is 8-ounces (.5 pounds): (1) x1 + x2 + x3 + x4 = .5
Total amount of Vitamin C in the mix is at least 6 units: (2) 9x1 + 16x2 + 8x3 + 10x4 > 6
Total amount of protein in the mix is at least 5 units: (3) 12x1 + 10x2 + 10x3 + 8x4 > 5
Total amount of iron in the mix is at least 5 units: (4) 14x2 + 15x3 + 7x4 > 5
Nonnegativity of variables: xj > 0 for all j
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OBJECTIVE FUNCTION VALUE = 0.406 VARIABLE VALUE REDUCED COSTS
X1 0.099 0.000 X2 0.213 0.000 X3 0.088 0.000 X4 0.099 0.000
Thus, the optimal blend is about .10 lb. of grain 1, .21 lb.of grain 2, .09 lb. of grain 3, and .10 lb. of grain 4. Themixture costs Frederick’s 40.6 cents.
BLENDING PROBLEM
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FINANCIAL APPLICATION S Portfolio Selection 1.A company wants to invest $100,000 either in
oil, steel or govt industry with following guidelines:
2.Neither industry (oil or steel ) should receive more than $50,000
3.Govt bonds should be at least 25% of the steel industry investment
4.The investment in pacific oil cannot be more than 60% of total oil industry.
What portfolio recommendations investments and amount should be made for available $100,000
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Decision Variables A = $ invested in Atlantic Oil P= $ invested in Pacific Oil M= $ invested in Midwest
Steel H = $ invested in Huber
Steel G = $ invested in govt bonds Objective function ????
Investment Projected Rate of Return %
Atlantic oil 7.3%Pacific oil 10.3%Midwest steel 6.4%Huber Steel 7.5%Govt Bonds 4.5%
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CONSTRAINTS & OBJ FUNCTION Max 0.073A + 0.103P + 0.064M +
0.075H + 0.045G 1.A+P+M+H+G=100000 2.A+P <=50,000, M+H <= 50,000 3. G>=0.25(M + H) or G -0.25M -0.25
H>=0 4. P<=0.60(A+P) or -0.60A +0.40P<=0
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SOLUTION Objective Function=8000
Variable Value Reduced Cost
A 20000
0.00
P 30000
0.00
M 0.00 0.011H 4000
00.00
G 10000
0.00
Constraint
Slack/surplus
Dual price
1 0 0.0692 0 0.0223 10000 0.004 0 -0.0245 0 0.030Investment
Amount Expected Annual Return
A $20,000 $1460P $30,000 $3090H 40,000 $3000G $10,000 $450Total $100000 $8000
Overall Return ????
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DISCUSSION Dual price for constraint 3 is zero increase in steel
industry maximum will not improve the optimal solution hence it is not binding constraint.,
Others are binding constraint as dual prices are zero
For constrain 1 0.069 value of optimal solution will increase by 0.069 if one more dollar is invested.
A negative value for constrain 4 is -0.024 which mean optimal solution get worse by 0.024 if one unit on RHS of constrain is increased. What does this mean
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DISCUSSION If one more dollar is invested in govt
bonds the total return will decrease by $0.024 Why???
Marginal Return by constraint 1 is 6.9% Average Return is 8% Rate of return on govt bond is 4.5%/
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DISCUSSION Associated reduced cost for M=0.011
tells Obj function coefficient of for midwest
steel should be increase by 0.011 before considering it to be advisable alternative.
With such increase 0.064 +0.011 =0.075 making this as desirable as Huber steel investment.
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DATA ENVELOPMENT ANALYSIS It is an application of the linear
programming model used to measure the relative efficiency of the operating units with same goal and objectives.
Fast Food Chain Target inefficient outlets that should be
targeted for further study Relative efficiency of the Hospital,
banks ,courts and so on
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EVUALATING PERFORMANCE OF HOSPITAL General Hospital; University Hospital County Hospital; State Hospital Input Measure # of full time equivalent (FTE) nonphysician personnel Amount spent on supplies # of bed-days available Output Measures Patient-days of service under Medicare Patient-days of service notunder Medicare # of nurses trained # of interns trained
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ANNUAL RESOURCE CONSUMED BY 4 HOSPITAL
Input Measure General University County StateFTE 285.50 162.30 275.70 210.40Supply Expense
123.80 128.70 348.50 154.10
Bed-days available
106.72 64.21 104.10 104.04
ANNUAL SERVICES PROVIDED BY FOUR HOSPITALSOutput Measure
General University County State
Medicare patient days
48.14 34.62 36.72 33.16
Non-Medicare patient days
43.10 27.11 45.98 56.46
Nurses Trained
253 148 175 160
Interns trained
41 27 23 84
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RELATIVE EFFICIENCY OF COUNTY HOSPITAL
Construct a hypothetical composite Hospital Output & inputs of composite hospital is
determined by computing the average weight of corresponding output & input of four hospitals.
Constraint Requirement All output of the Composite hospital should be greater
than or equal to outputs of County Hospital If composite output produce same or more output with
relatively less input as compared to county hospital than composite hospital is more efficient and county hospital will be considered as inefficient.
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Wg= weight applied to inputs and output for general hospital
Wu = weight applied to input & output for University Hospital
Wc=weight applied to input & output for County Hospital
Ws = weight applied to input and outputs for state hospital
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OUTPUT CONSTRAINTS Constraint 1 Wg+ wu + wc + ws=1 Output of Composite Hospital Medicare: 48.14wg + 34.62wu + 36.72wc+
33.16ws Non-
Medicare:43.10wg+27.11wu+45.98wc+54.46ws
Nurses:253wg+148wu+175wc+160ws Interns:41wg+27wu+23wc+84ws
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OUTPUT CONSTRAINTS Constraint 2: Output for Composite Hospital >=Output for
County Hospital Medicare: 48.14wg + 34.62wu + 36.72wc+
33.16ws >=36.72 Non-
Medicare:43.10wg+27.11wu+45.98wc+54.46ws>=45.98
Nurses:253wg+148wu+175wc+160ws >=175 Interns:41wg+27wu+23wc+84ws >=23
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Constraint 3 Input for composite Hospital <=Resource
available to Composite Hospital FTE:285.20wg+162.30wu+275.70wc+210.40ws Sup:123.80wg+128.70wu+348.50wc+154.10ws Bed-dys:106.72wg+64.21wu+104.10wc+104.04ws We need a value for RHS: %tage of input values for county Hospital.
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INPUT CONSTRAINTS E= Fraction of County Hospital ‘s input
available to composite hospital Resources to Composite Hospital=
E*Resources to County Hospital If E=1 then ??? If E> 1 then Composite Hospital would
acquire more resources than county If E <1 ….
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INPUT CONSTRAINTS FTE:285.20wg+162.30wu+275.70wc+210ws<=27
5.70E SUP:123.80wg+128.70wu+348.50wc+154.10ws<
=348.50E Beddays:106.72wg+64.21wu+104.10wc+104.04w
s<=104.10E If E=1 composite hospital=county hospital there is
no evidence county hospital is inefficient If E <1 composite hospital require less input to
obtain output achieved by county hospital hence county hospital is more inefficient,.
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MODEL Min E Wg+wu+wc+ws=1 48.14wg + 34.62wu + 36.72wc+ 33.16ws
>=36.72 43.10wg+27.11wu+45.98wc+54.46ws>=45.98 253wg+148wu+175wc+160ws >=175 41wg+27wu+23wc+84ws >=23 285.20wg+162.30wu+275.70wc+210.40ws-275.70E <=0 123.80wg+128.70wu+348.50wc+154.10ws-348.50E <=0 106.72wg+64.21wu+104.10wc+104.04ws-104.10E <=0
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OPTIMAL SOLUTIONVariable Valu
eReduced cost
E 0.905
0
WG 0.212
0
WU 0.260
0
WC 0.00 0.95WS 0.52
70
Constraint
Slack/Surplus
Dual Price
1 0 0.2392 0 -0.0143 0 -0.0144 1.615 0.05 37.027 0.06 35.824 0.07 174.42
20.0
8 0.00 0.010
Composite Hospital as much of as each output as County Hospital (constrain 2-5) but provides 1.6 more trained nurses and 37 more interim. Contraint 6 and 7 are for input which means that Composite hospital used less than 90.5 of resources of FTE and supplies
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DISCUSSION E=0.905 Efficiency score of County Hospital is
0.905 Composite hospital need 90.5% of
resources to produce the same output of County Hospital hence it is efficient than county hospital. and county hospital is relatively inefficient
Wg=0.212;Wu=0.26;Ws=0.527.