MBA (Data Analysis)

Introduction

A large number of decision problems faced by a business manager involve allocation of resources to
various activities, with the objective of increasing profits or decreasing costs, or both. When resources are
in excess, there are no problems. But such cases are very rare. Practically in all situations, the
managements are confronted with the problem of scarce resources. Normally, there are several activities
to perform but limitations of either of the resources or their use prevent each activity from being
performed to the best level. Thus the manager has to take a decision as to how best to allocate the
resources among the various activities.

Linear programming is problem solving approach developed to help managers make decisions. Numerous
applications of linear programming can be found in today’s competitive business environment. For
instances, Eastman Kodak uses linear programming to determine where to manufacture products
throughout their worldwide facilities, and Nabil Capital uses linear programming to help determine
optimal lease structuring. Marathon Oil Company uses linear programming for gasoline blending and to
evaluate the economics of a new terminal and pipeline.

To illustrate some of the properties that all linear programming problems have in common, consider the
following typical applications:

1. A manufacturer wants to develop a production schedule and an inventory policy that will satisfy sales
demand in future periods. Ideally, the schedule and policy will enable the company to satisfy demand and
at the same time minimize the total production and inventory costs.

2. A financial analyst must select an investment portfolio from a variety of stock and bond investment
alternatives. The analyst would like to establish the portfolio that maximizes the return on investment.

3. A marketing manager wants to determine how best to allocate a fixed advertising budget among
alternative advertising media such as radio, television, newspaper, and magazine. The manager would like
to determine the media mix that maximizes advertising effectiveness.

4. A company has warehouses in a number of locations. Given specific customer demands, the company
would like to determine how much each warehouse should ship to each customer so that total
transportation costs are minimized.

These examples are only a few of the situations in which linear programming has been used successfully,
similarly some other diverse areas where linear programming can be applied are
Table: Applications of Linear Programming

Application Area Objective Possible Constraints

Manufacturing Determine production quantities Labour availability
that maximize profit Resource availability
Finance Allocates funds to maximize Diversification
expected return Acceptable risk levels

Advertising Select a media mix that Budget

maximizes exposure to a target Length of advertising campaign
population
Worker Training Assign workers to production Production quotas

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and training activities to Number of qualified instructors
maximize profit while building a and trainees available
workforce
Construction Plan tasks and assign labor to Ordering of tasks
meet a production schedule Project deadline
Oil Refining Blend raw crude oils into Supply of raw crude oil and
different grades of gasoline demand for different grades of
gasoline
Required characteristics of
different grades of gasoline

Transportation Assign delivery of resources to Supply/demand of product

minimize transportation costs Shipping capacities
Agriculture Determine a plant rotation plan to Anticipated demand for crops
maximize long-term profit Rotation restrictions
Military Operation Assign troops and material to Troop availability/training
accomplice a military mission Transportation of resources

Linear programming: Linear programming, as it is known today, was conceived in 1947 by George B.
Dantzig while he was the head of the Air Force Statistical Control’s Combat Analysis Branch at the
Pentagon. The military referred to its plans for training, supplying and deploying combat units as
“programs.” When Dantzig analyzed Air Force planning problems, he realized that they could be
formulated as a system of linear inequalities – hence his original name for the technique, “programming
in a linear structure,” which was later shortened to “linear programming.”
The linear programming technique derives its name from the fact that the functional relationships in the
mathematical model are linear and the solution technique consists of predetermined mathematical steps-
that is, a program.

Linear Programming Model (LP Model)

Components of LP Models
A linear programming model consists of certain components and characteristics and the components of
linear programming models provide the structure of the models. A list of the components of LP models is
as follows:

1. Decision variables
2. Objective function
3. Constraints
4. Parameters
5. Non negativity
1. Decision variables

Decision variables are mathematical symbols that represent levels of activity by the firm. For example, an
electrical manufacturing firm desires to produce x 1 radios, x2 toasters and x3 clocks, where x1, x2, and x3
are symbols representing unknown variable quantities of each of them. The final values of x 1, x2, and x3 as
determined by the firm, constitute a decision (e.g. the equation x 1 = 100 radios is a decision by the firm to
produce 100 radios).

2. Objective function

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The objective function is a linear mathematical relationship that describes the objective of the firm in
terms of the decision variables. The objective function always consists of either maximizing or
minimizing some value (e.g. maximize the profit or minimize the cost of producing radios). Maximization
problems often involve profit, revenue, market share, or return on investment, whereas minimization
problems often involve cost, time, or distance etc.

3. Constraints (restrictions or limitations)

The ability of a decision maker to select values for the decision variables in LP is subject to certain
restrictions or limits. These can come from a variety of sources. The restrictions may reflect availabilities
of resources (e.g., raw materials, labor time, machine time, work space), legal or contractual requirements
(e.g., product or work standards) or technological requirements (e.g., necessary compressive strength or
tensile strength), or they may reflect other limits based on forecasts, customer orders, company policies
and so on. In an LP model, the restrictions are referred as constraints.
Hence, the model constraints are also linear relationships of the decision variables; they represent the
restrictions can be in the form of limited resources or restrictive guidelines.

for example,
a11x1 + a12x2 + ............ + a1n xn > b1
a21x1 + a22x2 + .............. + a2nxn > b2
:
.
an1x1 + an2 x2 + ........... + ann xn > bn
Where a11, a12, ......................., ann are constants, x1, x2, ........., xn are decision variables.
The general guide lines for the use of the different types of signs '<', '=' and '>' in formatting the constraint equations
are presented in the following table.

Use less than or equal to sign (<) in Use greater then or equal to sign (>) in the Use equality
constraint equation constraint equation sign (=)
If the constraint in LPP is relating to words If the constraint in LPP is relating to word If the constraint in LPP is
(i) Maximum available (i) Minimum requirement (i) Must be
(ii) At the most (ii) At least (ii) Exactly
(ii) Not more than (iii) Not less than (iii) Standard size
(iv) Not exceeding (iv) Willing to at least (iv) Net weight content
(v) Restricted to (v) Minimum demand (v) Neither less nor more
(vi) up to (vi) Exceeded by
(vii) Unwilling to
(viii) capacity to
(ix) Limited to
(x) Available

Linear Programming (Model Formulation) (Assignment –Only model Formulation)

a) The Electrocomp Corporation manufactures two electrical products: air conditioners and large
fans. The assembly process for each is similar in that both require a certain amount of wiring and
drilling. Each air conditioner takes 3 hours of wiring and 2 hours of drilling. Each fan must go
through 2 hours of wiring and 1 hour of drilling. During the next production period, 24 hours of
wiring time are available and up to 18 hours of drilling time may be used. Each air conditioner
sold yields a profit of Rs25. Each fan assembled may be sold for Rs15 profit. Formulate and

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solve this LP production mix situation to find the best combination of air conditioners and fans
that yields the highest profit.
b) Mr. Sharma manufactures inexpensive set-it –up-yourself furniture for students. He currently
makes two products- bookcases and tables. Each bookcase contributes Rs.6 to profit, and each
table, Rs.5. Each product passes through two manufacturing points, cutting and finishing.
Bookcase takes 4 hours a unit in cutting and 4 hours in finishing. Tables require 3 hours a unit in
cutting and 5 in finishing. There are currently 40 hours available in cutting and 30 in finishing.
Formulate the problem as a linear programming problem then solve graphically.
c) The Choudary Group produces two types of Noodles, the waiwai and GolMol. There are two
production lines, one for each noodle and there are two departments, both of which are used in
the production of each noodle. The capacity of the waiwai production line is 86 lots per day. The
capacity of the GolMol line is 60 lots per day. In department A, waiwai requires 1 labor hour and
the GolMol requires 3 labor hours. Presently in department A, maximum of 120 labor hours per
day can be assigned to production of the two types of noodle. In department B, the waiwai
requires 2 labor hours and GolMol also requires 2 labor hours. Presently in department B a
maximum of 92 labor hours per day can be assigned to production of the two types of noodles.
The profit contributions are 230 and 120 rupees respectively, for each waiwai and GolMol lots.
Then formulate the linear programming model.
d) The Karuna Furniture Company produces sofas, tables and chairs at its plants in
Bagbazzar and Kalimati. The plant uses three main resources to make furniture- wood,
upholstery and labor. The resource requirements for each piece of furniture and the total
resources available weekly as follows:

Resource Requirements

Wood (lb) Upholstery (yd) Labor

(hr)

Sofa 7 12 6

Table 5 - 9

Chair 4 7 5

Total 2,250 1,000 240

available
resources

The furniture is produced on a weekly basis and stored in a warehouse until the end of the
work, when it is shipped out. The warehouse has a total capacity of 650 pieces of furniture.
Each sofa earns Rs4000 in profit, each table, Rs2750 and each chair, Rs1900. The company
wants to know how many pieces of each type of furniture to make per week to maximize
profit.
Formulate a linear programming model for this problem.