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B-1 Operations Management Linear Programming Module B - New Formulations

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B-2 You are creating an investment portfolio from 4 investment options: stocks, real estate, T-bills (Treasury-bills), and cash. Stocks have an annual rate of return of 12% and a risk measure of 5. Real estate has an annual rate of return of 10% and a risk measure of 8. T-bills have an annual rate of return of 5% and a risk measure of 1. Cash has an annual rate of return of 0% and a risk measure of 0. The average risk of the portfolio can not exceed 5. At least 15% of the portfolio must be in cash. Formulate an LP to maximize the annual rate of return of the portfolio. New Formulation #1

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B-3 New Formulation #1 Constraints:: Average risk 5 At least 15% in cash Investment ReturnRisk Stocks 0.12 5 8 Portfolio Real estate T-bills 0.10 0.05 1 5 Cash 0 0

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B-4 New Formulation #1 Investment ReturnRisk Stocks 0.12 5 8 Portfolio Real estate T-bills 0.10 0.05 1 5 Cash 0 0 Variables:: x i = % of portfolio in investment type i. i = 1 is Stocks; i = 2 is Real estate; i = 3 is T-bills; i=4 is is Cash

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B-5 New Formulation #1 : Maximize: 0.12x 1 + 0.10x 2 + 0.05x 3 x i = % of portfolio in investment type i. i = 1 is Stocks; i = 2 is Real estate; i = 3 is T-bills; i=4 is is Cash x 4 0.15 (Cash) 5x 1 + 8x 2 + x 3 5 (Risk) x 1 + x 2 + x 3 + x 4 = 1.0 (Total = 100%) x 1, x 2, x 3, x 4 0 Optimal Solution is x 1 = 0.85, x 2 = 0, x 3 = 0 and x 4 = 0.15

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B-6 New Formulation #1 x i = % of portfolio in investment type i. Maximize: 0.12x 1 + 0.10x 2 + 0.05x 3 x 4 0.15 (Cash) 5x 1 + 8x 2 + x 3 5 (Risk) x 1, x 2, x 3, x 4 0 Without the total = 100% constraint, the optimal solution is: x 1 = 0, x 2 = 0, x 3 = 5 and x 4 = 0.15 This means invest 500% in T-bills and get a 25% return!!

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B-7 A business operates 24 hours a day and employees work 8 hour shifts. Shifts may begin at midnight, 4 am, 8 am, noon, 4 pm or 8 pm. The number of employees needed in each 4 hour period of the day to serve demand is in the table below. Formulate an LP to minimize the number of employees to satisfy the demand. New Formulation #2 Midnight - 4 am 4 am - 8 am 9 3 8 am - noon 6 Noon - 4 pm 13 4 pm - 8 pm 15 8 pm - midnight 12

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B-8 Heuristic Solution Start 9 at midnight, then need 0 to start at 4 am, then need 6 to start at 8 am, then need 7 to start at noon, then need 8 to start at 4 pm, and 4 to start at 8 pm. But those 4 also work from midnight to 4 am! Total = 34 Midnight - 4 am 4 am - 8 am 9 3 8 am - noon 6 Noon - 4 pm 13 4 pm - 8 pm 15 8 pm - midnight 12

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B-9 New Formulation #2 12-4 am8-noon12-4 pm4-8 pm8 pm-124-8 am 961315123 x1x1 x2x2 x3x3 x4x4 x5x5 x6x6 x6x6 x i = number of employees who start an 8 hour shift at time i i = 1 is midnight, i = 2 is 4 am, i = 3 is 8 am; i=4 is noon, i = 5 is 4 pm, i = 6 is 8 pm

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B-10 New Formulation #2 Minimize: x 1 + x 2 + x 3 + x 4 + x 5 + x 6 x 1 + x 6 9 x 1, x 2, x 3, x 4, x 5, x 6 0 x i = Number of employees who start an 8 hour shift at time i. i = 1 is midnight, i = 2 is 4 am, i = 3 is 8 am; i=4 is noon, i = 5 is 4 pm, i = 6 is 8 pm x 1 + x 2 3 x 2 + x 3 6 x 3 + x 4 13 x 4 + x 5 15 x 5 + x 6 12

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B-11 New Formulation #2 Minimize: x 1 + x 2 + x 3 + x 4 + x 5 + x 6 x 1 + x 6 9 x 1, x 2, x 3, x 4, x 5, x 6 0 x i = Number of employees who start an 8 hour shift at time i. x 1 + x 2 3 x 2 + x 3 6 x 3 + x 4 13 x 4 + x 5 15 x 5 + x 6 12 Optimal solution = 30 employees x 1 = 0, x 2 = 3, x 3 = 3, x 4 = 10, x 5 = 5, x 6 = 9 x 1 = 3, x 2 = 0, x 3 = 6, x 4 = 7, x 5 = 8, x 6 = 6

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