LECTURE ONE: ANALTICAL DECISION MAKING

Analytic decision-makers examine much information before taking action. For example,
analytic leaders rely on direct observation, data, and facts to support their decisions

Analytical decision-makers carefully analyze data to come up with a solution

Precise analytical insights help solve multiple problems for business. Data-based decision
management often calls for entrepreneurs to mine data to obtain predictive and prescriptive
insights. When an organization makes decisions based on data and facts, the speed of decision
making dramatically increase

LIMITATION

 Can be time consuming.

 Higher levels of stress for the decision-maker.
 May lead to overanalyzing and not making a final decision

Techiniques in analytical decision making

LINEAR PROGRAMMING

Linear programming deals with optimization (maximization or minimization) of a function of

variables, known as objective function, subject to a set of linear equations or inequalities known
as constraints. T

optimization problem one seeks to maximize or minimize a specific quantity, called the
objective, which depends on a finite number of input variables. These variables may be
independent of one another, or they may be related through one or more constraints.

he objective function may be profit, cost, production capacity, or any other measure of
effectiveness which is obtained in the best possible or optimal manner. The constraints may be
imposed by different resources such as market demand, production process and equipment,
storage capacity, raw materials availability etc.

Generally speaking linear programming can be used for optimization problems if the following
conditions are satisfied;

1. There must be a well defined objective function which can be expressed as a linear
function of decision variables.
2. There must be constraints on the amount or extent of attainment of the objective and
these constraints must be capable of being expressed as linear equations or inequalities in
terms of variables.

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 3. There must be alternative courses of action eg a given product may be processed by two
different machines and the problem may be as to how much of the product to allocate to
which machine.
4. The decision variables should ne interrelated and non negative. Nin negativity means
linear programming deals with real life situations for which negative quantities are
generally illogical.

Generally speaking, linear programming can be used for optimisation problems if the following
conditions are satisfied:

1. There must be a well-defined objective function (profit, cost or quantities produced) which is
to be either maximised or minimised and which can be expressed as a linear function of decision
variables.

2. There must be constraints on the amount or extent of attainment of the objective and these
constraints must be capable of being expressed as linear equations or inequalities in terms of
variables. 3. There must be alternative courses of action. For example, a given product may be
processed by two different machines and problem may be as to how much of the product to
allocate to which machine.

4. Another necessary requirement is that decision variables should be interrelated and

nonnegative. The non-negativity condition shows that linear programming deals with real life
situations for which negative quantities are generally illogical.

3.2 Assumptions in Linear Programming Models

A linear programming model is based on the following assumptions:

1. Proportionality A basic assumption of linear programming is that proportionality exists in the

objective function and the constraints. This assumption implies that if a product yields a profit of
#10, the profit earned from the sale of 12 such products will be # (10 x 12) = #120. This may not
always be true because of quantity discounts. Further, even if the sale price is constant, the
manufacturing cost may vary with the number of units produced and so may vary the profit per
unit. Likewise, it is assumed that if one product requires processing time of 5 hours, then ten
such products will require processing time of 5 x 10 = 50 hours. This may also not be true as the

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processing time per unit often decreases with increase in number of units produced. The real
world situations may not be strictly linear. However, assumed linearity represents their close
approximations and provides very useful answers.

2. Additivity It means that if we use t1 hours on machine A to make product 1 and t2 hours to
make product 2, the total time required to make products 1 and 2 on machine A is t1 + t2 hours.
This, however, is true only if the change-over time from product 1 to product 2 is negligible.
Some processes may not behave in this way. For example, when several liquids of different
chemical compositions are mixed, the resulting volume may not be equal to the sum of the
volumes of the individual liquids.

3. Continuity Another assumption underlying the linear programming model is that the decision
variables are continuous i.e., they are permitted to take any non-negative values that satisfy the
constraints. However, there are problems wherein variables are restricted to have integral values
only. Though such problems, strictly speaking, are not linear programming problems, they are
frequently solved by linear programming techniques and the values are then rounded off to
nearest integers to satisfy the constraints. This approximation, however, is valid only if the
variables have large optimal values. Further, it must be ascertained whether the solution
represented by the rounded values is a feasible solution and also whether the solution is the best
integer solution.

4. Certainty Another assumption underlying a linear programming model is that the various
parameters, namely, the objective function coefficients, R.H.S. coefficients of the constraints and
resource values in the constraints are certainly and precisely known and that their values do not
change with time. Thus, the profit or cost per unit of the product, labour and materials required
per unit, availability of labour and materials, market demand of the product produced, etc. are
assumed to be known withcertainty. The linear programming problem is, therefore, assumed to
be deterministic in nature.

5. Finite choices A linear programming model also assumes that a finite (limited) number of
choices (alternatives) are available to the decision-maker and that the decision variables are
interrelated and non-negative. The non-negativity condition shows that linear programming deals
with real-life situations as it is not possible to produce/use negative quantities. Mathematically

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these non-negativity conditions do not differ from other constraints. However, since while
solving the problems they are handled differently from the other constraints, they are termed as
non-negativity restrictions and the term constraints is used to represent constraints other than
non-negativity restrictions and this terminology has been followed throughout the book.

3.3 Applications of Linear Programming Method

Though, in the world we live, most of the events are non-linear, yet there are many instances of
linear events that occur in day-to-day life. Therefore, an understanding of linear programming
and its application in solving problems is utmost essential for today’s managers. Linear
programming techniques are widely used to solve a number of business, industrial, military,
economic, marketing, distribution and advertising problems. Three primary reasons for its wide
use are:

1. A large number of problems from different fields can be represented or at least approximated
to linear programming problems.

2. Powerful and efficient techniques for solving L.P. problems are available.

3. L.P. models can handle data variation (sensitivity analysis) easily. However, solution
procedures are generally iterative and even medium size problems require manipulation of large
amount of data. But with the development of digital computers, this disadvantage has been
completely overcome as these computers can handle even large L.P. problems in comparatively
very little time at a low cost. 3.4 Areas of Application of Linear Programming Linear
programming is one of the most widely applied techniques of operations research in business,
industry and numerous other fields. A few areas of its application are given below.

1. Industrial applications

(a) Product mix problems:

An industrial concern has available a certain production capacity (men, machines, money,
materials, market, etc.) on various manufacturing processes to manufacture various products.
Typically, different products will have different selling prices, will require different amounts of
production capacity at the several processes and will, therefore, have different unit profits; there

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may also be stipulations (conditions) on maximum and/or minimum product levels. The problem
is to determine the product mix that will maximise the total profit.

(b) Blending problems: These problems are likely to arise when a product can be made from a
variety of available raw materials of various compositions and prices. The manufacturing process
involves blending (mixing) some of these materials in varying quantities to make a product of
the desired specifications. (c) Production scheduling problems: They involve the determination
of optimum production schedule to meet fluctuating demand. The objective is to meet demand,
keep inventory and employment at reasonable minimum levels, while minimising the total cost
Production and inventory. (d) Trim loss problems: They are applicable to paper, sheet metal and
glass manufacturing industries where items of standard sizes have to be cut to smaller sizes as
per customer requirements with the objective of minimising the waste produced.

(e) Assembly-line balancing: It relates to a category of problems wherein the final product has a
number of different components assembled together. These components are to be assembled in a
specific sequence or set of sequences. Each assembly operator is to be assigned the task /
combination of tasks so that his task time is less than or equal to the cycle time.

2. Management applications

(a) Media selection problems: They involve the selection of advertising mix among different
advertising media such as T.V., radio, magazines and newspapers that will maximise public
exposure to company’s product. The constraints may be on the total advertising budget,
maximum expenditure in each media, maximum number of insertions in each media and the like.

(b) Portfolio selection problems: They are frequently encountered by banks, financial
companies, insurance companies, investment services, etc. A given amount is to be allocated
among several investment alternatives such as bonds, saving certificates, common stock, mutual
fund, real estate, etc. to maximise the expected return or minimise the expected risk.

(c) Profit planning problems: They involve planning profits on fiscal year basis to maximise
profit margin from investment in plant facilities, machinery, inventory and cash on hand.

(d) Transportation problems: They involve transportation of products from, say, n sources
situated at different locations to, say, m different destinations. Supply position at the sources,

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demand at destinations, freight charges and storage costs, etc. are known and the problem is to
design the optimum transportation plan that minimises the total transportation cost (or distance
or time). (e) Assignment problems: They are concerned with allocation of facilities
(men or machines) to jobs. Time required by each facility to perform each job is given and the
problem is to find the optimum allocation (one job to one facility) so that the total time to
perform the jobs is minimised.

3.5 Formulation of Linear Programming Problems First, the given problem must be presented in
linear programming form. This requires defining the variables of the problem, establishing
interrelationships between them and formulating the objective function and constraints. A model,
which approximates as closely as possible to the given problem, is then to be developed. If some
constraints happen to be nonlinear, they are approximated to appropriate linear functions to fit
the linear programming format. In case it is not possible, other techniq

FORMULATION OF LINEAR PROGRAMMING PROBLEMS

The first step in formulating a linear programming problem is to determine which quantities
you need to know to solve the problem. These are called the decision variables.

The second step is to decide what the constraints are in the problem. For example, there may
be a limit on resources or a maximum or minimum value a decision variable may take, or
there could be a relationship between two decision variables.

The third step is to determine the objective to be achieved. This is the quantity to be
maximised or minimised, that is optimised. The function of the decision variables that is to
be optimised is called the objective function.

EXAMPLE ONE

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A firm produces three products. These products are processed on three different machines.
The time required to manufacture one unit of each of the three products and the daily
capacity of the three machines is given in the table below;

Time per unit ( minutes)

Machine Product 1 Product 2 Product 3 Machine capacity

( minutes per day)

M1 2 3 2 440

M2 4 - 3 470

M3 2 5 - 430

The profit per unit for products I, 2 and 3 is sh 4, sh 3 and sh 6 respectively.

Required

Formulate a linear programming model that will maximize daily profit.

SOLUTION

Let x1, x2 and x3 respectively be amounts of products 1, 2 and 3 produced daily

Objective function will be

Maximize Z= 4x1+ 3x2+6x3

Subject to constraints

2x1+ 3x2+2x3<440………………..( i)

4x1+ 0x2+3x3<470………………..(ii)

2x1+ 5x2+0x3<430……………….(iii)

EXAMPLE TWO

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A person wants to decide the constituents of a diet which will fulfill his daily requirements of
proteins, fats and carbohydrates at the minimum cost. The choice is to be made from four
different types of food. The yields per unit of these foods are given in the table below;

Yield per unit

Food type Proteins Fats Carbohydrates Cost per unit ( sh)

1 3 2 6 45

2 4 2 4 40

3 8 7 7 85

4 6 5 4 65

Minimum 800 200 700

requirement

Required

Formulate a linear programming problem for the problem

SOLUTION

Let x1, x2, x3 and x4 respectively denote the number of units of food types 1,2,3 and 4
respectively.

Objective function will be

Minimize Z= 45x1+ 40x2+85x3+65x4

Subject to constraints

3x1+ 4x2+8x3+ 6x4> 800………………..( i)

2x1+ 2x2+7x3+ 5x4> 200………………..(ii)

6x1+ 4x2+7x3+ 4x4> 700……………….(iii)

EXAMPLE THREE

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A firm produces an alloy having the following specifications;

i) Specific gravity < 0.98

ii) Chromium > 8%

iii) Melting point > 450oC

Raw materials A, B and C having the properties shown in the table can be used to make the
alloy.

Properties of raw materials

Property A B C

Specific gravity 0.92 0.97 1.04

Chromium 7% 13% 16%

Melting point 440oC 490oC 480oC

Costs of the various raw materials per ton are: sh 90 for A, sh 280 for B and sh 40 for C.

Required

Formulate a linear programming model to find the proportions in which A, B and C can be
used to obtain an alloy of desired properties while the cost of the materials is minimum.

SOLUTION

Let the percentage contents of raw materials A, B and C to be used for making the alloy be
x1, x2 and x3 respectively

Objective function will be

Minimize Z= 90x1+ 280x2+40x3

Subject to constraints;

0.92x1+ 0.97x2+1.04x3 < 0.98………………..( i)

7x1+ 13x2+16x3 > 0.08………………………..(ii)

440x1+ 490x2+480x3 > 450………………….(iii)

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EXAMPLE FOUR

A firm produces three products P1,P2 and P3. The minimum number of units of P1, P2 and P3
that must be produced are 100,200 and 150 respectively. These products require two types of
raw materials M1 and M2 which the firm can purchase up to a maximum of 500 and 400 units
respectively. Design a production plan so as to minimize the profit if the respective
individual profits of P1,P2 and P3 are sh 2, sh 5 and sh 4 respectively. Consumption of raw
materials is shown in the table below;

Consumption of raw material per unit product

Raw material P1 P2 P3

M1 0.5 1 1

M2 2 0.5 0.2

SOLUTION

Let the raw materials consumption for product P1, P2 and P3 be denoted by x1, x2 and x3
respectively

Objective function will be

Minimize Z= 2x1+ 5x2+4x3

Subject to constraints;

0.5x1+ x2+ x3 < 500………………..( i)

2x1+ 0.5x2+0.2x3 < 400……………(ii)

x1 > 100…………………..……….(iii)

x2 > 200…………………………….(iv)

x3 > 150……………………….…….(v)

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