COLLEGE OF ACCOUNTANCY, BUSINESS, ECONOMICS AND INTERNATIONAL HOSPITALITY MANAGEMENT

NOTES
DISTRIBUTION MODELS
TRANSPORTATION PROBLEM
The transportation problem arises frequently in planning for the distribution of goods and services from several
supply locations to several demand locations. Typically, the quantity of goods available at each supply location (or origin) is
limited, and the quantity of goods needed at each of several demand locations (or destinations) is known. The usual objective
in a transportation problem is to minimize the cost of shipping goods from the origins to the destinations.
The transportation problem was first formulated by F. L. Hitchcock in 1941 who also proposed a solution procedure similar to
the general Simplex method. Independently T. C. Koopmans looked on the same problem in connection with his work as a
member of the Joint Shipping Board. The problem is frequently referred to as the Hitchcock–Koopmans problem.

Characteristics and Assumptions of the Transportation Problem:

The main objective of the transportation model is to determine the cheapest routes from the suppliers to the
destinations. A transportation model exhibits the following characteristics and assumptions:
• Supply or Sources. Certain sources have limited available quantity of one commodity.
• Demand. The demand comes from several destinations, such as warehouses, distribution centers, shops, etc.
• Quantities. The quantities available at each source and the demands of each destination are constant.
• Shipping Cost. The shipping cost is based on per unit cost of the commodity from the source to each destination. It is
usually based in the distance between the two points.
• It is assumed that there will be no shipments between sources or between destinations as they will require special
adjustments to the transportation model.
• Demand and supply quantities are presented in whole numbers.

Example 1: Foster Electronics is a company manufacturing memory 3-Month

Origin Plant
cards that are used in digital cameras. These are manufactured at Capacity (units)
three different plants: in the Czech Republic, in Brazil and in China. 1 Czech Republic 5000
The production capacity for each plant over the next three-month
2 Brazil 3000
planning period is shown below:
3 China 2500
The firm distributes its products through four distribution centres located in Boston, Dubai, Singapore and London; the
three-month forecast of demand for each of the distribution centres is as follows:
3-Month Demand Forecast
Origin Distribution Centre
(units)
1 Boston 6000
2 Dubai 4000
3 Singapore 2000
4 London 1500

Management would like to determine how much of its production should be

shipped from each manufacturing plant to each distribution centre. Figure 7.1
shows graphically the 12 distribution routes Foster can use. Such a graph is
called a network; the circles are referred to as nodes and the lines connecting the
nodes as arcs. Each origin or destination is represented by a node, and each
possible shipping route is represented by an arc. The amount of the supply is
written next to each origin node, and the amount of the demand is written next
to each destination node. The goods shipped from the origins to the destinations
represent the flow in the network. Note that the direction of flow (from origin to
destination) is indicated by the arrows.

Determine the routes to be used and the quantity to be shipped via each route
that will provide the minimum total transportation cost. The cost for each unit
shipped on each route is given in the table below.
Destination
Origin
Boston Dubai Singapore London
Czech Republic 3 2 7 6
Brazil 7 5 2 3
China 2 5 4 5

Rizal Avenue Extension, Batangas City, Philippines (+63) 945-556-3080

www.batstate-u.edu.ph [email protected]
Structure of the Transportation Problem:
Transportation problems are presented in tabular form to make it easier to apply and understand the transportation
algorithm. The following are the rules on how to construct transportation table:
1. Each row in the transportation table contains the source of supply, while each column is for the demand or
destination point.
2. The total available supply is written on the right side of the table’s main body.
3. The total requirements of each destination are given in the lowest row of the main body of the table.
4. Cells in the main body of the table should correspond to the decision variables.
5. At the corner of each cell, the boxed-in value contains the objective function coefficient of the decision variable.

Transportation Algorithm
The first step in the transportation method is to find an initial feasible
solution (considered the first iteration) that does not violate the constraints.
There are three methods to obtain the initial feasible solution to a transportation
problem: Northwest Corner Method (NCM), Greedy Method or Minimum Cost
Method (MCM), and Vogel’s Approximation Method (VAM).

The northwest corner method

(NWC) is the most simple and logical
method of finding the initial solution.
The procedure begins by allocating units
to the upper left-hand corner and ends
in the lower right-hand corner of the
transportation table.

Vogel’s approximation method

(VAM) is an algorithm that obtains the
initial feasible solution by determining
the “penalty cost” of not using the
lowest cost route. This method results
in an optimal or near optimal as an
initial solution.

The minimum cost method (MCM) is a systematized procedure that is easy to

use and yields an initial solution that is close to the optimal solution in small
problems. In this method, the allocation is made to the cell with the most possible
lowest cost or the highest profit in a maximization case.

Steps of Creating the Initial Tableau:

A. Northwest Corner Method (NCM)

1. Start with the upper left-hand corner cell (northwest corner) of the main body of the table by putting the largest value
that satisfies the supply constraint and demand constraint.
2. Once the supply constraint is satisfied, go to step 3. If not, move one cell to the right in the same row. Place in that cell
the largest value that does not exceed both supply and demand constraints. In doing so, you must consider all cell
values that were previously entered either in the row or column. Repeat this procedure if the supply constraint is not
yet exhausted.
3. Once the entire supply in a particular row has been used up, move one to the next cell located in the same column.
Place in that cell the largest value that does not exceed the row or the column that corresponds to the demand. Again,
all values previously entered must be considered.
4. Return to steps 2 and 3 until all rows and columns are used up.
5. Compute the value of the objective function by multiplying the value in each cell by the objective function coefficient
“boxed-in values”. Then, sum all the cells. This is not a necessary procedure, but it is helpful to determine how much
improvement in the cost (or profit) is gained in every iteration.

B. Minimum Cost Method (MCM)

➢ Find the cell with the lowest unit cost. Should there be a tie, choose randomly. Place in this cell a value that exceeds
neither supply nor demand constraint. Repeat this procedure until all supplies and demands have been allocated.

C. Vogel’s Approximation Method (VAM)

1. Subtract the lowest and second lowest values in each row and column. Select the cell in the row and column with the
largest opportunity cost (largest difference).
2. Insert the value in the selected cell the highest value that satisfies the supply and demand. Adjust the amount of
supply (or demand) accordingly.
3. Remove rows with no available supply and columns with no unsatisfied demand.
4. Repeat steps 1 to 3 for the remaining rows and columns until all cells are used up.
Example: Foster Electronics Problem

✓ Using NCM:

Distributors 3-Month
Supply
Boston Dubai Singapore London Capacity
Czech Republic

Brazil

China
3-Month
Demand

✓ Using MCM:

Distributors 3-Month
Supply
Boston Dubai Singapore London Capacity
Czech Republic

Brazil

China
3-Month
Demand

✓ Using VAM:

Distributors 3-Month
Supply
Boston Dubai Singapore London Capacity
Czech Republic

Brazil

China
3-Month
Demand

You TRY: Mr. Danny Atienza is the owner of Cement Exchange, a cement composites manufacturer with three plant locations.
Cement-bonded composites are important construction materials that are made of hydrated cement paste that binds wood or
fibers to make precast for building components. Cement Exchange is currently a top manufacturer of cement composites and
has been an exclusive supplier to four major distributors in Metro Manila. The total monthly purchase of each of the four
distributors are 1500, 2000, 2400 and 3500 boxes. The four distributors may receive deliveries from any of the three
manufacturing plants. However, there are limitations to the production capacity of each plant:
Plants Plant Capacity
Plant 1 3000
Plant 2 2700
Plant 3 3700

Mr. Atienza would like to reduce the logistics expenses by proper scheduling of shipments to the four distributors. The
company’s chief accountant submitted an estimate of the per box/unit shipping cost from each plant to each distributor. The
shipping costs are in Philippine currency:
Distributors
Plant
1 2 3 4
1 15 18 22 26
2 21 21 16 23
3 14 19 20 24

Based on the available data, the owner decided to use the transportation method to compute for the cheapest delivery
schedule.
Optimal Feasible Solution
The next step after obtaining the initial solution in the transportation method is to evaluate the net contribution of the
routes that were not used. In other words, we would like to determine how much will be the increase or decrease in the
objective function if any of the unused cells will be included in the route.

A. Stepping Stone Method (SSM). It is generally the easiest to visualize and understand. Its purpose is to determine the effect
on the total shipping cost should one unit of goods are to be delivered through the unused routes.
1. Evaluate the net contribution of unused routes.
a. Start with the cell to be evaluated and trace a closed path through other cells until you are back to the original
cell being evaluated. To make the closed path, it is allowed to skip overused or unused cells. Making a turn on
a closed path is only allowed on used squares. There will be a single closed path to a correctly formulated
transportation problem.
b. Assign a plus sign or a minus sign to each cell that is part of the route, beginning with a plus sign on the cell
being evaluated. Do the plus and minus signs alternately.
c. Add a unit to a cell being added (with a plus sign) and subtract a unit to a cell with a minus sign. Compute the
net contribution of the chain of adjustments by adding per unit costs to all routes with a plus sign and
subtracting per unit costs of all routes that contain a minus sign. The result may either be a positive, negative
or zero contribution.
2. Test for optimality. For a minimization problem, all unused cells with negative contribution values will be favorable
since they will reduce the transportation cost. Positive net contribution, on the other hand, will not be desirable as it
will represent cost increases.
3. Select new route. Select the route with the smallest or most negative net contribution for minimization cases. For
maximization problems, the route with the largest value must be selected.
4. Determine the quantity of goods to ship over the selected route.
5. Develop new solution (iteration). The final solution is determined once all unused routes become positive corners.
6. Repeat steps 1 to 5, if necessary.

B. Modified Distribution Method (MODI). It is a more efficient procedure in determining the net contribution of routes that
were not used. In this method, the focus is on the extensive use of the cost factors associated with each cell.
1. Evaluate the net contribution of unused routes.

Example: Foster Electronics Problem. Use SSM to solve for the optimal solution and optimal value of the problem.

Distributors 3-Month
Supply
Boston Dubai Singapore London Capacity
Czech Republic

Brazil

China
3-Month
Demand

Distributors 3-Month
Supply
Boston Dubai Singapore London Capacity
Czech Republic

Brazil

China
3-Month
Demand
 Distributors 3-Month
Supply
Boston Dubai Singapore London Capacity
Czech Republic

Brazil

China
3-Month
Demand

Example: Foster Electronics Problem. Use MODI to solve for the optimal solution and optimal value of the problem.

Distributors 3-Month
Supply
Boston Dubai Singapore London Capacity
Czech Republic

Brazil

China
3-Month
Demand

You TRY:
1. Cement Exchange Problem
2. Pilipinas Power Corporation buys fuel every month for five Metro Manila areas. The requirements for each area (in
hundreds of thousands of drums) are as follows:
Area Location Requirement
1 Taguig City 55
2 Muntinlupa City 65
3 Pateros 20
4 Las Piñas City 44
5 Parañaque City 76

Three companies from foreign countries have submitted their bid to supply the demand for fuel:
Foreign Countries Maximum Capacity
USA 80
Russia 60
China 120

The transportation costs for each company and each Metro Manila area are stated in the table below in dollar
currency:
Suppliers Taguig Muntinlupa Pateros Las Piñas Parañaque
USA 1.8 1.6 1.3 0.6 0.3
Russia 1.6 1.2 0.9 0.2 0.6
China 0.8 1.0 1.1 1.2 1.6

Pilipinas Power Company can order the entire quantity or portions from the said fuel suppliers. The company aims to
supply the demand of the five Metro Manila areas at the minimum total cost. Determine the contract award policy that
would be followed by the company.
ASSIGNMENT PROBLEM
The assignment model was developed and published in 1955 by Harold Kunn, an American mathematician. This
model is another type of distribution model, and its objective is to assign a number of origins to the equal number of
destinations at either minimum cost or maximum profit. Business situations that can utilize the assignment model are the
following: (a) assigning machines to produce the purchase orders; (b) assigning manpower to sales territories; (c) assigning
contracts to bidders through a methodical bid selection process; (d) assigning teaching loads to teachers; (e) assigning
account executives to different clientele; and so on.

Example: The management of Metro Utilities wants to assign three service teams to Luzon, Visayas, and Mindanao areas. Each
team has a certain degree of familiarity with the three geographical areas that affect the team’s level of efficiency as reflected
in the service cost. The management of Metro Utilities wants to come up with an efficient assignment schedule that will
minimize the total cost.

Geographical Areas
Service Teams
Luzon Visayas Mindanao
Service Team 1 20 15 30
Service Team 2 16 13 33
Service Team 3 18 19 27

Characteristics of the Assignment Problem:

The problem of Metro Utilities is typical of a management situation with the following characteristics:
➢ The entities under consideration, such as service teams, jobs, employees, account personnel, contracts, and projects,
are finite in number.
➢ The entities are assigned on a one-to-one basis to other objects.
➢ The results of each assignment can be expressed as profits, payoffs, or costs.
➢ The ultimate goal is to assign all entities in such a way that the total benefit is maximized or minimized for cases
involving total cost.
➢ Presentation of the Assignment Problem:

Geographical Areas
Service Teams Supply
Luzon (𝑍1 ) Visayas (𝑍2 ) Mindanao (𝑍3 )
Service Team 1(𝑆1 ) 20 15 30 1
Service Team 2(𝑆2 ) 16 13 33 1
Service Team 3(𝑆3 ) 18 19 27 1
Demand 1 1 1

Methods of Solving the Assignment Problem:

1. Complete Enumeration. The assignment problem is basically presented as a balance problem with the number 𝑛 of
items equal to the number of 𝑛 entities. Thus, there are 𝑛! (n factorial) different solutions to a given assignment
problem. One way of solving assignment problem is by comparing all possible solutions. However, this method may
not be practical when the number of possible solutions is already unmanageable.

Alternative Solutions Combination Total Cost

1
2
3
4
5
6

2. Simplex Method. The simplex method can be used but not very efficient for solving assignment problems.
3. Transportation Method. Assignment problems can also be solved using the transportation method. However, there
are more efficient methods.
4. Hungarian Method. This method is the most efficient way of solving large or more complex assignment problems. Also
called as Flood’s Technique, it is an algorithm that provides an efficient solution procedure for solving large, balanced
assignment problems. It was developed by Dénes König, a Hungarian mathematician and is based on the concept of
opportunity loss. The procedure was based on the following theorem:

If one subtracts (or adds) a constant number from all entries in any row or column of the
assignment matrix, then the total cost of each of the 𝑛! possible assignments is reduced (or
increased) by the constant number subtracted (or added).
Steps of Solving the Assignment Problem by Hungarian Method:
1. Construct the “total opportunity cost” matrix. The first step concerns
the transformation of the cost matrix to a “total opportunity cost”
matrix.
2. Evaluate optimality. All values in the “total opportunity cost” matrix is
non-negative, and the minimum possible cost will be at zero. A
feasible assignment with a total opportunity cost value of zero is
already considered optimal. In testing for optimality, the matrix table
must contain enough zeros for each row and column. A simple
procedure to test this is by drawing straight lines, horizontally or
vertically, to cover all zeros in the matrix.
3. Improve the “total opportunity cost” matrix. This step requires three
operations:
✓ Find the entry with the smallest value in the uncovered cells
or cells without a line. Then subtract this entry from all
entries in the uncovered cells.
✓ Add the lowest entry to cells in which lines intersect.
✓ Cells that are with a single line through them are to be
transferred with no change to the improved matrix table.
4. Establish an optimal assignment. The optimal assignment is made using the values to the cell with a zero entry. The
one-to-one entry requirement must be maintained. If one solution is found, drop the row or column from the matrix
and repeat the procedure. If there will be two or more zeros in a row or column, then choose arbitrarily.

Example: Metro Utilities Problem

Geographical Areas
Service Teams Supply
Luzon (𝑍1 ) Visayas (𝑍2 ) Mindanao (𝑍3 )
Service Team 1(𝑆1 ) 20 15 30 1
Service Team 2(𝑆2 ) 16 13 33 1
Service Team 3(𝑆3 ) 18 19 27 1
Demand 1 1 1
You TRY!
1. A hospital in Quezon City would like to find the optimal assignments of personnel to specific jobs. The cost figures in
the matrix indicate the effectiveness of personnel for a particular job in proportion to the salary rates they receive.
Compute for the least-cost method by using the Hungarian method.
Maintain Patient Technical Emergency Room Monitoring of
Hygiene Treatments Initial Assessment ICU Patient
Physicians 5 10 18 15

Head Nurses 7 11 22 13

Nurses 10 12 17 19

Nursing Aides 23 14 9 8

2. Springhill Clothing Manufacturing has given the following data on the cost allocation using the five sewing machines
to five sewing processes: (a) skirt waist banding; (b) attaching a lining; (c) making sleeves; (d) making abound
pocket; and (e) stitching a lapped zip. Determine the least cost-allocation of the available machines to the five sewing
processes.
Sewing Processes
Machines
A B C D E
1 24 28 30 41 36

2 22 19 35 18 26

3 39 38 26 20 33

4 34 27 28 40 32

5 24 42 36 23 45

Prepared by: Mr. JOHN LLENORD C. VILLANUEVA, Instructor