MGMT90141 Business Analysis and Decision

Making
Week 1 Introduction to Business Analytics
and Linear Programming

Dr. William Ho
Senior Lecturer in Operations Management
Department of Management and Marketing
Faculty of Business and Economics
The Spot 10.036
william.ho@unimelb.edu.au

Studying for MGMT90141

10 lectures and tutorials + 1 revision + 1 class presentations

2 recommended textbooks
Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D.,
and Martin, K. (2014), An Introduction to Management
Science: Quantitative Approaches to Decision Making, 14th
edition, South-Western Cengage Learning
Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D.,
and Cochran, J. (2014), Statistics for Business Economics,
12th edition, South-Western Cengage Learning
LMS
Lecture slides
All subject related documents

Studying for MGMT90141

Each week
Prepare for lecture and tutorial:
Read through equivalent book chapter(s)
After lecture and tutorial:
Re-read, try problems for any part of lecture and tutorial
which is not clear
Try to apply the quantitative methods in real situations
Discuss with your subject coordinator if you found any
interesting and/or difficult subject-related matters
Assessments
A 1500 word group assignment, due Week 5 (15%)
A 3500 word group assignment, due Week 11 (30%)
A 10 minute oral presentation, due Week 12 (5%)
A 2-hour closed book examination, end of semester (50%)

Assignment 1 (1500 words) Specifications

The assignment is designed to allow you to demonstrate that you can

effectively collect, review, and analyze the relevant academic literatures
on a particular topic, which is same as the topic for your assignment 2.

Each group has to select a company (manufacturing-based OR servicebased) with which you are familiar, select an optimization problem being
faced by the company (e.g., media selection at Telstra, employee
scheduling in HSBC, make-or-buy at Toyota, resource allocation at the
University of Melbourne, distribution network design at Pickfords, etc.),
and then collect and review 10 international journal articles, from the
past ten years, applying mathematical modelling for the problem to be
studied.

You should analyze the strengths of these applications and their valueadd to the decision making process, and also identify the knowledge
gaps and limitations, if any, and suggest for improvements.

Assignment 1 Expected Contents of Report

Introduction company background, description of the business

optimization problem, justification of selection, identification of the
companys requirements or evaluation criteria, etc.
Methodology description of the method used to collect the journal
articles, such as databases, searching and filtering criteria, etc.
Strengths analysis of the strengths of the articles with respect to the
evaluation criteria.
Weaknesses analysis of the weaknesses of the articles with respect to
the evaluation criteria.
Discussions and Conclusions suggestions for improvement.
References
Appendices including the minutes/notes of meetings.

Assignment 1 Marking Criteria

Criteria

Possible
Mark
2

Identification and description of the problem to be

analyzed
Collection and discussion of relevant academic literatures

Analysis of the strengths of these applications and their

value-add to the decision making process

Identification of the knowledge gaps and limitations, if any,

and suggestion for improvements

Structure and presentation. Use of appropriate language,

spelling, grammar, and punctuation

Total

15

Assignment 1 Word Limits and Submission

Due

Word limits The total length of the report is a

maximum of 1,500 words (excluding figures,
tables, references, and appendices).
Submission due 5pm 24 August 2015

Assignment 1 Useful Online Sources

http://ieeexplore.ieee.org/Xplore/home.jsp
http://www.emeraldlibrary.com
http://www.ingentaconnect.com
http://www.sciencedirect.com
http://www.scopus.com

Assignment 1 Useful References

Ho W (2008) Integrated analytic hierarchy process and its

applications A literature review. European Journal of
Operational Research, Vol. 186(1), pp. 211228.
Ho W, Xu X, Dey PK (2010) Multi-criteria decision making
approaches for supplier evaluation and selection: A literature
review. European Journal of Operational Research, Vol.
202(1), pp. 1624.
Ho W, Zheng T, Yildiz H, Talluri S (2015) Supply chain risk
management: A literature review. International Journal of
Production Research, Vol. 53, pp. 50315069.

Assignment 2 (3500 words) Specifications

The assignment is designed to allow you to demonstrate

that you can effectively analyze the business optimization
problems, apply the mathematical modelling approaches
such as LP and IP to formulate the problems, use the Excel
Solver to obtain the optimal solutions, generate the
sensitivity analysis report, and suggest courses of action to
the focal company.
Each group has to base on the same company and
optimization problem selected for the assignment 1, and
then apply the LP or IP to formulate the optimization
problem with primary or notional data.

Assignment 2 Expected Contents of Report

Introduction company background, description of the business

optimization problem, justification of selection, etc.
Literature review summary of the findings from the assignment 1.
Methodology description and illustration of the mathematical modelling
approach for the problem.
Implementation formulation of the problem by using the mathematical
modelling approach, application of the Excel Solver to optimize the
mathematical model, and execution of the sensitivity analysis.
Discussions and Conclusions suggestions for courses of action to the
selected company as well as the evaluation of the mathematical
modelling approach.
References
Appendices including the minutes/notes of meetings.

Assignment 2 Marking Criteria

Criteria

Possible Mark

Identification and description of the problem to be analyzed

Summary of literature review

Description and application of the mathematical modelling

approach to analyze and solve the problem

16

Suggestions for courses of action to the company, and

critical evaluation of the mathematical modelling approach

Structure and presentation. Use of appropriate language,

spelling, grammar, and punctuation

Oral presentation

5
Total

35

Assignment 2 Word Limits and Submission

Due

Word limits The total length of the report is a

maximum of 3,500 words (excluding figures,
tables, references, and appendices).
Submission due 5pm 12 October 2015

Examination

Part one (25%): 1 compulsory question

Part two (75%): 3 out of 4 questions
All questions are equally weighted

Objectives of Lecture

To explain what is business analytics

To introduce the linear programming elements,
formulation, and solution approaches
To differentiate between the minimization and
maximization linear programming problems
To recognize the sensitivity analysis of the linear
programming models

Business Analytics Introduction

The use of data, information technology, statistical

analysis, quantitative methods, and mathematical or
computer-based models to help managers gain
improved insight about their business operations
and make better, fact-based decisions

Supported by various tools such as Microsoft Excel

and various Excel add-ins, commercial statistical
software packages such as SAS or SPSS, and more
complex business intelligence suites that integrate
data with analytical software.

Business Analytics Elements

Descriptive: categorize, characterize, consolidate and classify

data to convert it into useful information for the purposes of
understanding and analysing past and current business
performance and make informed decisions.

Predictive: analyze past performance in an effort to predict the

future by examining historical data, detecting patterns or
relationships in these data, and then extrapolating these
relationships forward in time.

Prescriptive: use optimization to identify the best alternatives to

minimize or maximize a single or multiple objective. The
mathematical and statistical techniques of predictive analytics
can also be combined with optimization to make decisions that
take into consideration the uncertainty in the data.

Linear Programming Introduction

In the world of management science or operations research,

programming refers to modelling and solving a problem
mathematically.

LP is widely used mathematical technique designed to help

managers plan and make the decisions necessary to allocate
resources.

Many business decisions involve trying to make the most

effective use of an organizations resources. Resources
typically include machinery, labour, money, time, and raw
materials. These resources may be used to produce products
or services. how to do more with less

Linear Programming Elements

A set of decision variables: which are used to stand

for the quantity of each product or service to be
produced.

An objective function: which measures the extent to

which alternative feasible decisions achieve the aim
being pursued.

A set of constraints: which define in mathematical

terms the values of the decision variables that are
feasible.

Linear Programming General Form

Max or Min

c 1x 1 + c 2x 2 + + c nx n

Subject to:

a11x1 + a12x2 + + a1nxn b1

a21x1 + a22x2 + + a2nxn b2

am1x1 + am2x2 + + amnxn bm

All x1, , xn 0.

c1, , cn:
a11, , amn:
b1, , bm:
x1, , xn:

Objective function coefficients

Technical coefficients
Right-hand-sides (RHS)
Decision variables

Linear Programming Assumptions

Deterministic model
All ci, aij, bj (for i = 1, , n; j = 1, , m) are known with certainty.
Implications of linearity
Divisibility: All variables are continuous. For example, we could
produce whole tons of products or proportions of tons.
Proportionality: Value of the function is in direct proportion to the
values of the decision variables. For example, if we increase the
cost per unit shipped by 10%, then we will increase the total cost
of the shipments by 10% .

Linear Programming Maximization

The Shader Electronics Company produces two products: (1) the Shader xpod, a portable music player, and (2) the Shader BlueBerry, an internetconnected colour telephone. The production process for each product is
similar in that both require a certain number of hours of electronic work and
a certain number of labour-hours in the assembly department. Each x-pod
takes 4 hours of electronic work and 2 hours in the assembly shop. Each
BlueBerry requires 3 hours in electronics and 1 hour in assembly. During
the current production period, 240 hours of electronic time are available,
and 100 hours of assembly department time are available. Each x-pod sold
yields a profit of $7; each BlueBerry produced can be sold for a $5 profit.
Shaders problem is to determine the best possible combination of x-pods
and BlueBerrys to manufacture to reach the maximum profit.

Linear Programming Formulation

Step 1: Fully understand the managerial or optimization problem

being faced
Hours required to produce one unit
Department

x-pods

BlueBerrys

Available hours

Electronic

240

Assembly

100

Profit per unit

$7

$5

How many x-pods and BlueBerrys should Shader manufacture

to reach the maximum profit, while not exceeding the limited
amount of electronic and assembly time?

Linear Programming Formulation

Step 2: Define the decision variables

x1 = number of x-pods to be produced
x2 = number of BlueBerrys to be produced
Step 3: Identify the objective function
Maximize profit or z = 7x1 + 5x2
Step 4: Identify the constraints
4x1 + 3x2 240 (Electronic department resource constraint)
2x1 + 1x2 100 (Assembly department resource constraint)
x1 and x2 0 (Non-negativity)

Linear Programming Formulation

Maximize profit or z = 7x1 + 5x2

Subject to

4x1 + 3x2 240

2x1 + 1x2 100
x1 and x2 0

This is a linear programming model:

Objective function is linear
All functions on left-hand side of the constraints are linear

Linear Programming Solution

Graphical Solution Method:

Plot the solution on a two-dimensional graph
Simplex Method:
It is the basis of most LP optimization software. It works
by finding corner point solutions, evaluating the objective
function at each, and stopping when no more improvement
to the objective function value (z) is possible.
Optimization Software:
such as Lindo, SAS etc.
MS Excel:
Solver add-in is needed.

Linear Programming Lindo

A free (limited) version can be downloaded from http://www.lindo.com

Once the software is running, the first window is untitled. You should
enter your model in this window and then save, naming the file as
you wish.

For the Shader problem the input file is:

Linear Programming Lindo

When this has been saved, proceed as follows:

Click Debug in Solve submenu to debug any errors
When no more errors, click Solve in Solve submenu
Answer No to the question: Do Range (Sensitivity) Analysis?
To view the solution, Click Solution in Reports submenu

Linear Programming Excel

Steps for installing Solver add-in in Excel

- Click the File tab, and then click Options.
- Click Add-Ins, and then in the Manage box, select Excel
Add-ins.
- Click Go.
- In the Add-Ins available box, select the Solver Add-In
check box, and then click OK.
- After you load the Solver add-in, the Solver command is
available in the Analysis group on the Data tab.
Tip
- If Solver Add-In is not listed in the Add-Ins available box,
click Browse to locate the add-in.
- If you get prompted that the Solver add-in is not currently
installed on your computer, click Yes to install it.

Linear Programming Excel

Data Input

=SUMPRODUCT(B7:C7,B12:C12)

=SUMPRODUCT(B4:C4,B12:C12)

=SUMPRODUCT(B5:C5,B12:C12)

Linear Programming Excel

Parameters setting
(Data > Solver)

Enter the cell address for

the objective function
value.
Specify the location of
the values for the
variables. Solver will put
the optimal values here.
Click Add to add the
constraints to Solver.

Check this box to make

the variables nonnegative.
Click and select Simplex
LP from the menu that
appears.
Check Solve to solve
the LP.

Linear Programming Excel

Optimal solution generation

Linear Programming Sensitivity Analysis

Changes in the objective function coefficients

- Reduced cost: how much the objective function coefficient of each
decision variable would have to improve before that variable could
assume a positive value in the optimal solution.
- Allowable increase and decrease: what are the limits that the
objective function coefficients can be adjusted without affecting the
optimality of the current solution.

Changes in the constraints or right-hand-side (RHS) values

- Shadow price or dual prices (in Lindo): how much objective function
value can be improved if the RHS value of a constraint is increased
by one unit.
- Allowable increase and decrease: what are the limits that RHS
value of a constraint can be adjusted without affecting the validity of
the shadow price.

Linear Programming Sensitivity Analysis

For Lindo, in the Reports submenu, click Solution.

In the Reports submenu, click Range.

Linear Programming Sensitivity Analysis

In the Solver Report window, select Sensitivity Report, and then click OK.
Select Sensitivity Report 1 worksheet.

Linear Programming Minimization

As part of a quality improvement initiative, Consolidated Electronics

employees complete a 3-day training program on teaming and a 2-day
training program on problem solving. The manager of quality improvement
has requested that at least 8 training programs on teaming and at least 10
training programs on problem solving be offered during the next 3 months.
In addition, senior-level management has specified that at least 25 training
programs must be offered during this period. Consolidated Electronics uses
a consultant to teach the training programs. During the next 3 months, the
consultant has 84 days of training time available. Each training program on
teaming costs $10,000 and each training program on problem solving costs
$8,000.
Consolidated Electronicss problem is to determine the number of training
programs on teaming and the number of training programs on problem
solving that should be offered in order to minimize the total cost.

Linear Programming Formulation

Step 1: Fully understand the managerial or optimization problem
being faced
Number of training programs to be offered
Teaming

Problem solving

Consultant

3 days

2 days

84 days

Manager 1

8 programs

Manager 2

10 programs

Senior-level

25 programs

$10,000

$8,000

Cost per program

How many training programs on teaming and problem solving to offer to

reach the minimum total cost, while not exceeding the available time of
the consultant and meeting the minimum training requirements?

Linear Programming Formulation

Step 2: Define the decision variables

Step 3: Identify the objective function

Step 4: Identify the constraints

Linear Programming Formulation

Linear Programming Excel Solution

Data Input

Linear Programming Excel Solution

Parameters setting

Linear Programming Excel Solution

Optimal solution generation

Linear Programming Excel Solution

Sensitivity analysis

Tutorial

Failsafe Electronics Corporation primarily manufactures four highly

technical products, which it supplies to aerospace firms that hold NASA
contracts. Each of the products must pass through the following
departments before they are shipped: wiring, drilling, assembly, and
inspection. The time requirements in each department (in hours) for each
unit produced and its corresponding profit value are summarized below:
Department
Product

Wiring

Drilling

Assembly

Inspection

Unit Profit

XJ201

0.5

0.5

$9

XM897

1.5

$12

TR29

1.5

0.5

$15

0.5

$11

BR788

Tutorial

The production time available in each department each month and the
minimum monthly production requirement to fulfill contracts are as follows:
Department

Capacity (hours)

Product

Minimum
production level

Wiring

1,500

XJ201

150

Drilling

2,350

XM897

100

Assembly

2,600

TR29

200

Inspection

1,200

BR788

400

Failsafe Electronics Corporations problem is to determine the production

quantities of the four highly technical products in order to maximize the total
profit.

Summary of Lecture

Explained what is business analytics

Introduced the linear programming elements,
formulation, and solution approaches
Differentiated between the minimization and
maximization linear programming problems
Recognized the sensitivity analysis of the linear
programming models

Announcements

1) Readings
Chapters 2 and 3 (An Introduction to
Management Science: Quantitative
Approaches to Decision Making)
2) Office hours
3 to 5pm, 31st July 2015
3) Useful websites
http://www.theorsociety.com/
https://www.informs.org/
http://ifors.org/web/

 Copyright The University of Melbourne 2013