I NFORMATION TECHNOLOGY

AN INTRODUCTION TO EXCEL
SOLVER – AN OPTIMIZATION
TOOL

([FHOVROYHULVDQRSWLPL]DWLRQWRROZKLFKFDQEHXVHGWRÀQGVROXWLRQRU
make decision on real life business problems, where we want to arrive at
decision either based on maximum or minimum value of something. For ex-
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time consuming. This article provides an insight into this tool.

tion problems’, ‘capital Budget-

M icrosoft Excel
Solver is an op-
timisation tool,
inbuilt provided into Ex-
cel. This tool can be used
to solve practical business
problems like ‘optimum
product mix problems’,
‘transportation or distribu-
— CA. Liyakatali Lal
(The author is a Member of the Insti-
tute. He can be reached at liyakatali_
lal@in.com)
LQJ SUREOHPV· ¶ÀQDQFLDO SODQ-
ning problems’, ‘retirement
planning problems’, and ‘work-
force scheduling problems’.
8VLQJ ([FHO 6ROYHU LV HDV\ DQG
simple. It can be used to answer
problems which otherwise seem
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FEBRUARY 2009 1408 THE CHARTERED ACCOUNTANT

 I NFORMATION TECHNOLOGY
See below listed illustrative problems:
A 7\SHRI SUREOHP Example
Optimum product How can a large FMCG
mix FRPSDQ\ GHWHUPLQH
WKH PRQWKO\ SURGXFW
mix at their Mumbai
plant that maximizes
WKHLUSURÀWZLWKXVHRI 
limited resource?
B Transportation or If XYZ Textile Ltd
Distribution produces textile at
three different loca-
tions and distribute to
four outlets, how can
WKH\PLQLPL]HWKHFRVW
of meeting demand for
them?
C Capital Budgeting Software Ltd would like
to undertake 10 projects
(Selection of proj-
that will require capital
ect)
and labour for the next
IHZ\HDUV7KH\GRQRW
have enough resources
for all projects; which
RQHV WKH\ VKRXOG XQ-
dertake?
D Financial Planning How should I allocate
P\ LQYHVWPHQW SRUWIR-
lio among Govt. bond,
blue chip stocks, specu-
lative stocks and short
term deposits?
,QDOOWKHDERYHVLWXDWLRQVZHZDQWWRÀQGWKH´EHVWµ
ZD\WRGRVRPHWKLQJLHZHZDQWWRHLWKHUPD[LPL]H
or minimize values of certain cells in a worksheet to
DFKLHYHRXUREMHFWLYH0LFURVRIW2IÀFH([FHO6ROYHU
tool helps us answer all such optimization problems.
7KHEHVWZD\WRXQGHUVWDQGKRZWRXVH6ROYHULVWR
look at some detailed examples
An optimization model has three parts: target cell,
changing cells, and the constraints.
1. The target cell represents the objective or goal. We
want to either minimize or maximize the amount in
the target cell. In our examples
Example Maximise or Target cell
minimise
FMCG Com- Maximise 3URÀW
SDQ\²3URGXFW
Mix
XYZ Textile Minimise Distribution
Ltd cost
6RIWZDUH /WG ² Maximise Net present val-
Project ue (NPV)
I n v e s t m e n t Maximise Annual return
planning
2. The changing cell represents cells that we can
change or adjust to optimize the target cell. In our
examples
Example Changing cell
)0&* &RPSDQ\ ² 4W\RI HDFKSURGXFWSUR-
Product Mix duce during the month
XYZ Textile Ltd 4W\ SURGXFH DW HDFK
plant and shipped to
each outlet
6RIWZDUH/WG²3URMHFW Which project to be se-
lected
Investment planning $PRXQW RI  PRQH\ LQ-
vested in each asset class
3. The list of problem Constraints in our examples
Example Changing cell
)0&* &RPSDQ\ ² Product mixes don’t
Product Mix use more resource than
DYDLODEOH4W\VKRXOGQRW
be more than demand.
XYZ Textile Ltd Don’t ship more than
SODQW FDSDFLW\ RXWOHW
UHFHLYH  4W\ ZKDW WKH\
need
6RIWZDUH/WG²3URMHFW Projects can’t use more
capital and labour than
available
Investment planning 0LQLPLVH ULVN DQG À[HG
% in speculation stock
7R LQVWDOO 6ROYHU FOLFN WKH 0LFURVRIW 2IÀFH %XWWRQ
click Excel Options, and click Add-Ins. In the Man-
age box at the bottom of the window, select Excel
Add-ins, and click Go. Check the Solver Add-in in the
Add-Ins box, and click OK. After Solver is installed,
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Figure 1 shows the Solver parameters dialog box.
Navigation to Excel Solver tool:
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$GG,QV!!,Q0DQDJHER[VHOHFW([FHO$GG,QV!!
THE CHARTERED ACCOUNTANT 1409 FEBRUARY 2009
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*R!!&KHFN6ROYHU$GGLQ!!2.$IWHULQVWDOOD- available.
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([FHO7RRO!!$GG,QV!!&KHFN6ROYHU$GG the excess production is wasted (for example, a per-
LQ!!2.$IWHULQVWDOODWLRQ7RRO!!6ROYHU ishable drug).
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produces six different products at their plant. Produc-
tion of each product requires.

Figure 1 : Solver parameters dialog box

After we have input the target cell, changing cells, and
constraints, what does Solver do? To understand this Available
we need to know some background in Solver termi-
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be a feasible solution:
1. Does not use more raw material or labour than
is available
2. Does not produce more of each product than
is demanded
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product
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largest value for maximum optimization, the smallest
for minimum optimization). Such a solution is called
an optimal solution. Some Solver models have no op-
timal solution and some have a unique solution. Oth-
HU 6ROYHU PRGHOV KDYH PXOWLSOH DFWXDOO\ DQ LQÀQLWH
number of) optimal solutions.
A. Determine the Optimal Product Mix:
How can I determine the monthly product mix
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form, the product mix problem involves how to deter-
mine the amount of each product that should be pro-
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straints
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within the labour, material and demand constraints?
If we knew nothing about Excel Solver, we would
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WUDFN SURÀW DQG UHVRXUFH XVDJH DVVRFLDWHG ZLWK WKH
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and-error stage i.e. Solver is an optimization tool that
performs the trial-and-error search.
In solving the product mix problem we need to com-
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given product mix. An important function SUM-
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in cell ranges and returns the sum of those values.
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with one column and one row.
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FEBRUARY 2009 1410 THE CHARTERED ACCOUNTANT

 I NFORMATION TECHNOLOGY

 *RUE\XVLQJ 680352'8&7%*%* Click the Options button in the Solver Parameters
6LPLODUO\ UDZ PDWHULDO XVDJH FRXOG EH FRPSXWHG DV dialog box. Check Assume Linear Model box and As-
% %& &' '( () )* * sume Non-Negative box as shown below. Click OK.
RUE\ 680352'8&7%*%*(QWHULQJ
formula in traditional fashion for six products is time-
consuming. Imagine how long it would take if we are
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:H FDQ QRZ LGHQWLI\ WKH WKUHH FRPSRQHQWV RI  RXU
product mix solver model:
1. Target cell - Our goal is to maximize prof-
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680352'8&7%*%*
&KDQJLQJFHOOV7KH4W\SURGXFHGRI HDFKSURG-
uct (listed in the cell range B4:G4)
3. Constraints - We have the following constraints:
z Do not use more of labour or raw material
than available i.e. values in cells B13:B14 (used)
must be less than or equal to the values in cells
D13:D14 (available).
z Do not produce more of a drug than its de- Figure 4 : Solver option settings
mand i.e. values in the cells B4:G4 (produced) Checking the Assume Non-Negative box ensures
must be less than or equal to the value in cell that changing cell assumes a non-negative value. We
B3:G3 (demand). checked the Assume Linear Model box because this is
z :H FDQ
W SURGXFH D HLWKHU SDUWLDO RU QHJDWLYH DOLQHDUSUREOHP(VVHQWLDOO\D6ROYHUPRGHOLVOLQHDU
4W\RI DQ\SURGXFW under the following conditions:
Now enter the target cell, changing cells and con-  7KHWDUJHWFHOOLVFRPSXWHGE\DGGLQJWRJHWKHU
straints into Solver. Then click the Solve button to WKHWHUPVLQIRUPFKDQJLQJFHOO FRQVWDQW
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eter dialog box will look like WKHWHUPVLQIRUPFKDQJLQJFHOO FRQVWDQW
6LQFHRXUSURGXFWPL[SUREOHPLVDOLQHDUPRGHOZK\
should we care?
1. If a Solver model is linear and we select As-
sume Linear Model, Solver is guaranteed to
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2. If a Solver model is linear and we select As-
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is linear and we do not select Assume Linear
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After clicking OK in the Solver Options box, we re-
turn to the main Solver parameter dialog box, shown
earlier in Figure 3. When we click Solve, Solver calcu-
Figure 3 : Final dialog box for product mix problem

THE CHARTERED ACCOUNTANT 1411 FEBRUARY 2009

 I NFORMATION TECHNOLOGY

lates an optimal solution (if one exists) for our prod-
uct mix problem. An optimum solution calculated in
)LJXUH
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Available
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tribution cost
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demand point must receive its required de-
mand. Also, each changing cell must be non
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cannot be shipped)
If XYZ Textile Ltd produces textile at three different
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minimize the cost of meeting demand for them?
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portation problem.

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constraint
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units of T. We can be sure that with our limited re-
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Is it necessary that Solver model always have a
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function
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product must be met. Demand constraint will change from
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This message means that with our limited resources, we
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What if Solver result gives the message as “The
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constraints
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portation Solver model:
1. Target cell - Our goal is to minimise Total ship-
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for each product, delete demand constraint and we
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Negative box. When we click Solve, Solver returns the
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means that our model has an error. SO\FRUUHVSRQGLQJHOHPHQWLQWZRVHSDUDWHUHFWDQJOH
(both rectangle are of the same size) and add together
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the product.]
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point (Factories) and shipped to each demand point
customers (Demand points). A question then is, what
(Outlet), (listed in the cell range B12:E14).
LVWKHOHDVWH[SHQVLYHZD\WRSURGXFHDQGVKLSSURG-
XFWVWRFXVWRPHUVDQGVWLOOPHHWGHPDQG"7KLVW\SHRI  3. Constraints - We have the following constraints:
problem is called a transportation problem. A trans- z 'R QRW VKLS IURP HDFK )DFWRU\ PRUH WKDQ
portation problem is a linear model with the following SODQW FDSDFLW\ LH YDOXHV LQ FHOOV ))
VSHFLÀFDWLRQV (Sent) must be less than or equal to the values
1. Target cell - Minimize total shipping and dis- LQFHOOV++FDSDFLW\

FEBRUARY 2009 1412 THE CHARTERED ACCOUNTANT

 I NFORMATION TECHNOLOGY

z Demand from each of warehouse outlet &&DSLWDO%XGJHWLQJ3UREOHPV:

PXVWEHPHWLHYDOXHVLQWKHFHOOV%(
(received) must be more than or equal to the 0DQ\FRPSDQLHVOLNHWRNQRZZKLFKQHZSURGXFWVWR
value in cell B17:E17 (demand). develop or which projects to be undertaken, i.e. one
z :HFDQ
WVKLSHLWKHUSDUWLDORUQHJDWLYH4W\RI  want to undertake projects that contribute the greatest
DQ\SURGXFWLHYDOXHLQFHOO%(VKRXOG net present value (NPV), subject to limited resources
be an integer.
Now enter the target cell, changing cells and con-
straints into Solver. Then click the Solve button to
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log box will look like
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undertake 10 projects that will require capital and labour
IRUWKHQH[W\HDUV7KH\GRQRWKDYHHQRXJKUHVRXUFHV
IRUDOOSURMHFWVZKLFKRQHVVKRXOGWKH\XQGHUWDNH"

Figure 7 : Final solver dialog box for Transportation

problem
Our transportation problem is a linear Solver model
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WKHWHUPVLQIRUPFKDQJLQJFHOO
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comparing the sum of changing cells to a constant.
Thus, Click Options and check the Assume Linear
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Solve, Solver will calculate an optimal solution (if one
W GR
exists) for our transportation problem. An optimum
solution calculated in Figure 8.
Figure 8 : Optimum solution for transportation prob-
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The minimum shipment cost of meeting demand of XYZ
/WGLVGHULYHGE\VXSSO\LQJXQLWVIURP)DFWRU\
WR:XQLWVIURP)DFWRU\WR:DQGVRRQ«
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Capital budgeting problem
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VRPHWKLQJ FDQ EH VROYHG E\ XVLQJ ELQDU\ FKDQJLQJ
FHOOV $ ELQDU\ FKDQJLQJ FHOO DOZD\V HTXDOV  RU 
Where 1 = Do the project and 0 = don’t do the proj-
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changing cell and then choose bin from the list in the
Add Constraint dialog box.
Figure 10 : Add constraint box with option of bin =
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THE CHARTERED ACCOUNTANT 1413 FEBRUARY 2009
 I NFORMATION TECHNOLOGY

NRZOHWXVVROYHWKLVSUREOHPE\LGHQWLI\WKHWKUHH
components of capital budgeting model:
1. Target cell - Our goal is to maximise To-
WDO 139 LQ FHOO ( FRPSXWHG E\ XVLQJ IRUPXOD
Since our model is linear, we will also check the As-
sume Linear Model and Assume Non-Negative boxes
XQGHU2SWLRQ)LQDOO\&OLFN6ROYH6ROYHUZLOOFDlculate
an optimal solution for our capital budgeting prob-
lem. An optimum solution calculated in Figure 12.
680352'8&7$$&& WKLV IRUPXOD
RQO\SLFNVXS139RI SURMHFWZLWKLQFROXPQ
A and doesn’t consider NPV with 0 in column
A. It can also be calculated in tedious fashion
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139 YDOXHVLQ FROXPQ & HYHU\ URZ ZLVH DQG
adding together for all projects to arrive at total
139ÀJXUH
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changing cell for each project (listed in A3:A12).
Here, 1 = Do the project and 0 = don’t do the
project.
3. Constraints - We have the following con-
straints:
z Do not use capital and labour more
WKDQ DYDLODEOH LQ HDFK \HDU LH YDO-
XHV LQ FHOOV (+ 8VHG PXVW
be less than or equal to the values
Figure 12 : Optimum solution - maximum NPV with-
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in constraint
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absolute cell referencing).
z Values of changing cell listed in A3:A12
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After entering the target cell, changing cells and con-
straints into Solver. Solver parameter dialog box will
look like
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Figure 11 : Final solver dialog box with constraint
FEBRUARY 2009 1414 THE CHARTERED ACCOUNTANT
6RIWZDUH/WGFDQREWDLQPD[LPXP139RI E\
VHOHFWLQJSURMHFWDQG
D. Financial Planning:
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XVHGDVDSRZHUIXOWRROIRUDQDO\]LQJÀQDQFLDOSODQ-
QLQJSUREOHPVOLNHKRZPXFKPRQH\,QHHGWRVDYH
IRUUHWLUHPHQW"2UKRZVKRXOG,DOORFDWHP\LQYHVW-
ment portfolio among Govt. bond, blue chip stocks,
speculative stocks and short term deposits?
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fund of 20 Lakhs to invest in among 4 options within
following constraints:
z :HLJKWHGDYHUDJHULVNIDFWRUQRWWRH[FHHG
z Amt in speculative stocks should not exceed
20% of total amount invested
z At least 2 Lakhs to be invested in short term
deposits
z ,QYHVWPHQW LQ DQ\ RSWLRQ VKRXOG EH ZKROH
number i.e. fraction of rupee cannot be in-
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 I NFORMATION TECHNOLOGY

should be at least 2 Lakhs.

z ,QYHVWPHQW DPRXQW LQ FHOO UDQJH ''
should be an integer.
After entering the target cell, changing cells and con-
straints into Solver. Solver parameter dialog box will
look like

Figure 13 : Feasible solution (not optimum) for In-

vestment decision within given constraints
:HFDQQRZLGHQWLI\WKHWKUHHFRPSRQHQWVRI ,Qvest-
ment problem:
1. Target cell - Our goal is to maximise Annual Return
LQFHOO(FRPSXWHGDV 680((
2. Changing cells - The Investment amount in each
RSWLRQOLVWHGLQWKHFHOOUDQJH''
3. Constraints - We have the following constraints: Figure 14 : Final solver dialog box with all constraints
for Investment decision
z 7RWDOLQYHVWPHQWDPWYDOXHLQFHOO'QRWWR
exceed total fund available i.e. 20 Lakhs. ,QWKLVÀQDQFLDOSODQQLQJSUREOHPRXUPRGHOLVQRQ
linear as the relationship that each constraint should be
z Weighted average risk factor computed in
LQIRUPFKDQJLQJFHOO
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FHOO& 680352'8&7&&''
case of Risk factor constraint, where we have used divi-
680''QRWWRH[FHHG
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z Amt in speculative stocks i.e. value in cell D4 WKH$VVXPH1RQ1HJDWLYHER[HVXQGHU2SWLRQ)LQDOO\
not more than value in cell G4 (20% of total Click Solve, Solver will calculate an optimal solution for
amount invested)
z ,QYHVWPHQWLQ6KRUWWHUPGHSRVLWVLQFHOO'
)LJXUH2SWLPXPVROXWLRQZLWKLQFRQVWUDLQWVIRU
Investment planning
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E\LQYHVWLQJLQ*RYWERQGLQ%OXH
chip stocks, 4 Lakhs in Speculative stocks and 2 Lakhs
in Short term deposits.
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Conclusion:
Excel solver is an optimization tool which can be used
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problems, where we want to arrive at decision either
based on maximum or minimum value of something.
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THE CHARTERED ACCOUNTANT 1415 FEBRUARY 2009