OPERATION RESEARCH CASE

STUDY: ANALYSIS OF SHIPPING

B.A.(hons) Economics

CONTENTS
1. INTRODUCTION
2. TRANSPORTATION PROBLEM
3. PROBLEM CHOSEN
4. PROBLEM FORMATION & CALCULATION
[Link] 1
[Link] 2
[Link] 3
5. PROBLEM RESULT & CONCLUSION
6. REFERENCES
7. APPENDIX

1. INTRODUCTION

The transportation model is a special class of the linear programming problem. It deals with the situation in
which a commodity is shipped from sources, like factories to destinations (warehouses and inventory).

This objective is to determine the amounts shipped from each source to each destination that minimize the
total shipping cost while satisfying both the supply limits and the demand requirement.

The model assumes that the shipping cost on a given route is directly proportional to the number of units
shipped on that route. In general, the transportation model can be extended to areas other than the direct
transportation of a commodity, including inventory control, employment scheduling, and personnel
assignment and so on.

2. TRANSPORTATION PROBLEM

The Transportation Problem was one of the original applications of linear programming models. It deals with
the determination of a minimum-cost plan for transporting a commodity from a number of sources to a
number of destinations. To be more specific, let there be m sources (or origins) that produce the commodity
and n destinations (or sinks) that demand the commodity.

A set of m supply points from which a good is shipped. Supply point i can supply at most Si units.

A set of n demand points to which the good is shipped. Demand point j must receive at least dj units of the
shipped good.

Each unit produced at supply point i and shipped to demand point j incurs a variable cost of Cij.
That means is that, at the ith source, i=1, 2, 3….m, there are Si units of the commodity available. The demand at
the jth destination, j = 1, 2, 3….n, is denoted by dj. The cost of transporting one unit of the commodity from the
ith source to the jth destination is Cij.

 Define Xij = number of units of goods shipped from supply point i to demand point j.

Thus, our problem becomes to determine the Xij that will minimize the overall transportation cost. According
to the above, the optimal solution Xij is to the problem is called transportation problems.

If total supply equals to total demand, the problem is said to be a balanced transportation problem.

Usually, the total supply does not equal the total demand:

 Such a transportation model is said to be unbalanced

 If total supply exceeds to total demand, we can balance the problem by adding dummy demand
points. Since shipments to the dummy demand points are not real, they are assigned a cost of zero.

 If a transportation problem has a total supply that is strictly less than total demand, the problem has
no feasible solution in such a case, one or more of the demands will be left unmet. Generally in such
situations, a penalty cost is often associated with unmet demand through adding dummy supply
points.

3. PROBLEM CHOSEN

We had finalized the case study for illustration from our supplementary reading material “Introduction to
Operations Research” 8th edition by Author: Frederick S. Hillier & Gerald J. Lieberman (2005), Case Study 8.1
Shipping Wood to Market (Page 372). The problem states as follows:

Alabama Atlantic is a lumber company that has three sources of wood and five markets to be supplied. The
annual availability of wood at sources 1, 2, and 3 is 15, 20, and 15 million board feet, respectively. The amount
that can be sold annually at markets 1, 2, 3, 4, and 5 is 11, 12, 9, 10, and 8 million board feet, respectively.

In the past the company has shipped the wood by train. However, because shipping costs have been
increasing, the alternative of using ships to make some of the deliveries is being investigated. This alternative
would require the company to invest in some ships. Except for these investment costs, the shipping costs in
thousands of dollars per million board feet by rail and by water (when feasible) would be the following for
each route:

Unit Cost By Rail Unit Cost By Ship

Source 1 2 3 4 5 1 2 3 4 5

1 61 72 45 55 66 31 38 24 – 35

2 69 78 60 49 56 36 43 28 24 31

3 59 66 63 61 47 – 33 36 32 26

The capital investment (in thousands of dollars) in ships required for each million board feet to be transported
annually by ship along each route is given as follows:
 Investment for Ships ($1,000’s)
Market

Source 1 2 3 4 5

1 275 303 238 – 285

2 293 318 270 250 265

3 – 283 275 268 240

Considering the expected useful life of the ships and the time value of money, the equivalent uniform annual
cost of these investments is one-tenth the amount given in the table. The objective is to determine the overall
shipping plan that minimizes the total equivalent uniform annual cost (including shipping costs).

You are the head of the OR team that has been assigned the task of determining this shipping plan for each of
the following three options.

Option 1: Continue shipping exclusively by rail.

Option 2: Switch to shipping exclusively by water (except where only rail is feasible).

Option 3: Ship by either rail or water, depending on which is less expensive for the particular route.

Present your results for each option. Compare.

Finally, consider the fact that these results are based on current shipping and investment costs, so that the
decision on the option to adopt now should take into account management’s projection of how these costs are
likely to change in the future.

For each option, describe a scenario of future cost changes that would justify adopting that option now.

4. PROBLEM FORMATION & CALCULATION

Option 1

Decision Variables

Xij = Amount of Woods Shipped from Source i to Market j (i = 1,2,3; j = 1,2,3,4,5)

Objective

Minimize z = 61 x11 + 72 x12 + 45 x13 + 55 x14 + 66 x15 + 69 x21 + 78 x22 + 60 x23 + 49 x24 +56 x25 + 59 x31 + 66 x32 + 63
x33 + 61 x34 + 47 x35

Constraints

 Supply Demand 

x11 + x12 + x13 + x14 + x15 ≤ 15 x11 + x21 + x31 ≥ 11

x21 + x22 + x23 + x24 +x25 ≤ 20 x12 + x22 + x32 ≥ 12

x14 + x24 + x34 ≥ 10

x15 + x25 + x35 ≥ 8

 Non-negativity xij ≥ 0, for i = 1,2,3; j = 1,2,3,4,5

As Total Supply = Total Demand, Constraints are usually expressed in equality form.

Step1: Initial BFS by using the Minimum Cost Method

Step2: Transportation Simplex Method

From Complementary Slackness Property,

u1 + v1 = 61; u1 + v2 = 72; u1 + v3 = 45; u2+ v2 = 78; u2 + v4 = 49; u3 + v1 = 59; u3 + v5 = 47

Set u1 = 0, then v1 = 61, v2 = 72, v3 = 45, u2 = 6, v4 = 43, u3 = -2, v5 = 49.

Then Computing ui + vj – cij for non-basic variables:

We get X14 = -12; X15 = -17; X21 = -2; X23 = -9, X25 = -1, X32 = 4, X33 = -20, X34 = -20.

So X32 is the entering variable & X35 is the leaving variable

Optimum Solution as shown below:

Now that, z = 61(6) + 69(2) + 59(3) + 66(12) + 45(9) + 49(10) + 56(8) = $2,816 (1,000’s)
Option 2

Decision Variables

Xij = Amount of Woods Shipped from Source i to Market j (i = 1,2,3; j = 1,2,3,4,5)

Cij = Unit Cost Needed from Source i to Market j (i = 1,2,3; j = 1,2,3,4,5)

Yij = Unit Cost Needed for investment from Source i to Market j (i = 1,2,3; j = 1,2,3,4,5)

Objective

Minimize z = sum of all (cij + 0.1 Yij)

Constraints

 Supply Demand 

x11 + x12 + x13 + x14 + x15 ≤ 15 x11 + x21 + x31 ≥ 11

x21 + x22 + x23 + x24 +x25 ≤ 20 x12 + x22 + x32 ≥ 12

x31 + x32 + x33 + x34 + x35 ≤ 15 x13 + x23 + x33 ≥ 9

x14 + x24 + x34 ≥ 10

x15 + x25 + x35 ≥ 8

 Cost Note: c14 &c31 using Rail ways due to water unavailability

c11 = 31 c12 = 38 c13 = 24 c15 = 35

c21 = 36 c22 = 43 c23 = 28 c24 = 24

c25 = 31 c32 = 33 c33 = 36 c34 = 32

c35 = 26 c14 = 55 c31 = 59 y11 = 275

y12 = 303 y13 = 238 y15 = 285 y21 = 293

y22 = 318 y23 = 270 y24 = 250 y25 = 265

 Non-negativity xij , yij, cij ≥ 0, for i = 1,2,3; j = 1,2,3,4,5

As Total Supply = Total Demand, Constraints are usually expressed in equality form.

Solving Using Ms Excel Solver

By Formulating Problem as Below & Please Find Details inside Appendix Excel File

Final Solution Shown as Below:

Option 3

Decision Variables

Xij = Amount of Woods by Rail from Source i to Market j (i = 1,2,3; j = 1,2,3,4,5)

Sij = Amount of Woods by Ship from Source i to Market j (i = 1,2,3; j = 1,2,3,4,5)

Dij = Unit Cost Needed for Rail from Source i to Market j (i = 1,2,3; j = 1,2,3,4,5)

Cij = Unit Cost Needed for Ship from Source i to Market j (i = 1,2,3; j = 1,2,3,4,5)

Yij = Unit Cost Needed for investment from Source i to Market j (i = 1,2,3; j = 1,2,3,4,5)

Objective

Minimize z = sum of all (Min[Xij Dij; Sij (Cij + 0.1Yij)])

Constraints


 Supply

x11 + x12 + x13 + x14 + x15 + s11 + s12 + s13 + s14 + s15 ≤ 15

x21 + x22 + x23 + x24 +x25 +s21 + s22 + s23 + s24 +s25 ≤ 20

x31 + x32 + x33 + x34 + x35 +s31 + s32 + s33 + s34 + s35 ≤ 15


 Demand

x11 + x21 + x31 +s11 + s21 + s31 ≥ 11

x12 + x22 + x32 +s12 + s22 + s32 ≥ 12

x13 + x23 + x33 + s13 + s23 + s33 ≥ 9

x14 + x24 + x34 + s14 + s24 + s34 ≥ 10

 Cost d11 = 61

d12 = 72 d13 = 45 d15 = 66 d21 = 69

d22 = 78 d23 = 60 d24 = 49 d25 = 56

d32 = 66 d33 = 63 d34 = 61 d35 = 47

c11 = 31 c12 = 38 c13 = 24 c15 = 35

c21 = 36 c22 = 43 c23 = 28 c24 = 24

c25 = 31 c32 = 33 c33 = 36 c34 = 32

c35 = 26 d14 = 55 d31 = 59 y11 = 275

y12 = 303 y13 = 238 y15 = 285 y21 = 293

y22 = 318 y23 = 270 y24 = 250 y25 = 265

y32 = 283 y33 = 275 y34 = 268 y35 = 240

 Non-negativity xij , sij , yij, cij , dij ≥ 0, for i = 1,2,3; j = 1,2,3,4,5

As Total Supply = Total Demand, Constraints are usually expressed in equality form.

Solving With the Minimum Unit Cost For Either Rail or Ship Methods
And Optimum Solution Get From Solver:

And the objective z = = $2,729.1 (1,000’s)

5. PROBLEM RESULT & CONCLUSION

Comparison For Three Options

Options Exclusively by Rail Exclusively by Ship Depending on Cost

Total Cost (1,000’s) $2,816.0 $2,770.8 $2,729.1

In conclusion, with rigorous checking for the accuracy of above optimum solution, the final optimal solution
obtained by this OR team, we can conclude that the shipping method for different route case by case was
needed and depending on the unit cost needed; we can have a more economical solution if we adopt new
investment and also keep some tradition shipping method at the same time.

During this term paper, the objective is always minimizing the cost for business purpose, methods applied
including problem formation, and transportation minimum cost method, simplex method, linear programming
problem formation and solving. Due to the restrictions of limited pages & scenarios, solving with duality and
sensitivity testing was not able to apply, and due to the problem property, solutions using graphical & non-
linear methods have to be forfeited. Problem linearity was assumed for this problem and unpredictable
parameters ignored, such as weather, inflations, etc. After all, complexity of the transportation system was
minimized to the most by the OR team.

In the end, this is a very realistic template for those transportations forecasting problems, especially without
sufficient data on the complexity of the whole system, formulation with unit cost would be the safest choice.
Special thanks to the lecturer and tutors for their effort and help on this problem and also to the team
member for smooth work flow and cost saving for the business.