Scribd
Upload
8 views13 pages

Optimizing Business Investments A Case Study

The document discusses optimizing sales channel allocation and maximizing net present value (NPV) through linear programming and binary integer programming. It outlines decision variables, constraints, and the objective functions for maximizing profit and NPV, respectively. Key findings indicate that advertising budget impacts profitability significantly, while certain channels like Direct Mail are less viable, and adjustments in investment selections can optimize NPV under resource constraints.

Uploaded by

KUMAR MANGLAM
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
8 views13 pages

Optimizing Business Investments A Case Study

The document discusses optimizing sales channel allocation and maximizing net present value (NPV) through linear programming and binary integer programming. It outlines decision variables, constraints, and the objective functions for maximizing profit and NPV, respectively. Key findings indicate that advertising budget impacts profitability significantly, while certain channels like Direct Mail are less viable, and adjustments in investment selections can optimize NPV under resource constraints.

Uploaded by

KUMAR MANGLAM
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 13

OPTIMIZING SALES CHANNEL

ALLOCATION: A LINEAR
PROGRAMMING CASE STUDY
Problem Formulation:
Maximizing Profit
Problem Definition Objective Function
The problem is a linear programming maximization problem The objective is to maximize total profit (Z), which is a linear
with the goal of maximizing total profit. We define four combination of the unit profits for each channel. For
decision variables representing units sold through each example, Z = 90X1 + 84X2 + 70X3 + 60X4. This function
channel: Marine, Business, National Retail, and Direct represents the overall revenue generation goal.
Mail. We also establish constraints related to advertising
budget, sales effort hours, production capacity, and
minimum sales requirements.

Decision Variables
The decision variables represent the number of
units sold through each distribution channel
X1 : Marine Equipment Distributors
X2 : Business Equipment Distributors
X3 : National Chain of Retail Stores
X4 : Direct Mail
Constraints: Shaping the Decision Space
1 Advertising Budget Constraint Sales Effort Hours Constraint
2
This constraint limits the total advertising This constraint limits the total sales effort hours
expenditure. 10X1 + 8X2 + 9X3 + 15X4 ≤ 5000. It available. 2X1 + 3X2 + 3X3 + 0X4 ≤ 1800. It reflects the
reflects the financial resources available for time and resources dedicated to selling the product.
promoting the product across channels.

3 Production Equality Constraint 4 National Retail Channel Requirement


This constraint ensures that the total units sold equal This constraint sets a minimum sales target for the
the total units produced. X1 + X2 + X3 + X4 = 600. It national retail channel. X3 ≥ 150. It ensures that the
ensures that the company produces only what it can company meets its commitments to its retail partners.
sell.

5 Non Negativity Constraint


X1​,X2​,X3​,X4​≥0
Finding the Optimal Allocation

Optimal Solution Total Profit


The ideal number of units to sell through each channel. The maximum profit achievable
X1 : Marine Equipment Distributors = 25 under the given constraints. In this
X2 : Business Equipment Distributors = 425 case, the total profit is $48,450.
X3 : National Chain of Retail Stores = 150
X4 : Direct Mail = 0
Constraint Analysis

Binding Constraints Non-Binding Constraint


The advertising budget The Sales Effort Hours
constraint and the National constraint is not binding,
Retail requirement are meaning there is unused
binding, indicating that the capacity. This indicates a
solution fully utilizes these potential for optimizing sales
resources. This suggests that effort hours utilization, but it
increasing these resources depends on the flexibility of
could further enhance other constraints.
profitability.
Sensitivity Analysis
Reduced Costs:
Marine (X1): 0 → Already included in the solution.
Direct Mail (X4): -45 → To enter the solution, profit
per unit for Direct Mail would need to increase by at
least 45.
Objective Coefficient Allowable Changes:
Business (X2): Can increase by 6 or decrease by 34
without changing the solution.
National Retail (X3): Can increase by 17 or decrease
by a large value.
Shadow Prices:
Advert Cost Constraint: Shadow price = 3 →
Increasing the budget by $1 increases profit by $3.
Sales Effort Hours Constraint: Shadow price = 0 → No
impact on profit for increasing available hours.
Production Constraint: Shadow price = 60 → Adding 1
more unit increases profit by $60.
Key Findings and Interpretation
Optimal Solution
The optimal solution maximizes profit by fully utilizing the advertising
budget, meeting production targets, and satisfying the minimum
requirement for National Retail sales.

Direct Mail Inefficiency


Direct mail is not included in the optimal solution, indicating that its profit
margin is lower than other channels. It would require a significant increase
in profitability to become a viable option.

Advertising Budget Impact


The advertising budget is a critical factor influencing profitability. Increasing
it can directly enhance profits, as demonstrated by the shadow price.

Slack
There is some slack in the sales effort hours, which suggests an opportunity
to optimize their usage further if other constraints allow.
OPTIMISING BUSINESS
INVESTMENTS: MAXIMIZING
NET PRESENT VALUE
Problem Formulation: Maximising NPV
Problem Definition Objective Function
The problem is a Binary Integer Programming problem with The objective function represents the goal of the problem,
the goal is to maximize the Net Present Value (NPV) of a set which is to maximize the total Net Present Value (NPV) of
of investment options under resource constraints over three selected investments. Each investment has a specific
years. The problem involves binary decision-making, where contribution to the NPV, and the decision to include or
each investment can either be selected (1) or not selected exclude an investment is represented by binary variables.
(0). Constraints include limited capital funds in each year Maximize Total NPV: Z = 4000X1 + 6000X2 + 10500X3 +
and specific business rules regarding investment 4000X4 + 8000X5 + 3000X6
dependencies.

Decision Variables
The decision variables represent the selection of distribution
channels.
X1: Limited Warehouse Expansion
X2: Extensive Warehouse Expansion
X3: Test Market New Product
X4: Advertising Campaign
X5: Basic Research
X6: Purchase New Equipment
Constraints: Shaping the Decision Space
Year 1 Capital
1 3000X1 + 2500X2 + 6000X3 + 2000X4 + 5000X5 + 1000X6 ≤ 10500

Year 2 Capital
2
1000X1 + 3500X2 + 4000X3 + 1500X4 + 1000X5 + 500X6 ≤ 7000

Year 3 Capital
3
4000X1 + 3500X2 + 5000X3 + 1800X4 + 4000X5 + 900X6 ≤ 8750

Binary Constraints
4 X1​,X2​,X3​,X4​,X5,X6∈{0,1}
Initial Solution
Selected Investments Maximum NPV
Limited Warehouse Expansion, Test Z = 4000 + 10500 + 8000 = 22500
Market New Product, Basic Research
Capital Check
Year 1: 3000 + 6000 + 5000 = 14000 → Exceeds budget (10500)!

Adjusting the Solution


Scenario Analysis
Scenario (b) Scenario (c)

Assuming that only one of the warehouse expansion If test marketing of the new product is carried out,
projects can be implemented. the advertising campaign also must be conducted.
Only One Warehouse Expansion: X1 + X2 ≤ 1 Test Marketing Implies Advertising: X3 ≤ X4
Solution Solution
The solution remains the same as Step (a): The solution remains the same as Step (a):
X1 = 0, X2 = 0, X3 = 1, X4 = 1, X5 = 0, X6 = 1 X1 = 0, X2 = 0, X3 = 1, X4 = 1, X5 = 0, X6 = 1

Maximum NPV : Z = $17500 Maximum NPV : Z = $17500

Note : Considering the Scenarios (b) and (c), if we consider one of the expansion project to be
taken up and test marketing implies advertising; The Selection of investments are Extensive
Warhouse Expansion, Basic Research and Purchase of new equipment. Resulting in the
maximum NPV to be $17000.
THANK YOU

You might also like