Yardstick International College

Business Faculty
Department of Business Administration
(MBA) Program

Quantitative Analysis for Management

By: Shewayirga Assalf (Ass.Pro.)

November 2019 G.C

 Chapter One: Introduction
Origin and Development of OR
 The term Operations Research, was first coined in 1940 by McClosky
and Trefthen in a small town, Bowdsey, of the United Kingdom.
 This new science came into existence in military context.
 Its concept was derived from the fact that “Unity is strength”. Why
unity is strength?
 Because, when there is calamity to the nation, citizens of all shades
join their opinions together to do their might to solve the problem.
How this came to be proved? It was proved during World War II.
 Two blocks took part in the Second World War, namely, Axes Forces
and Allied Forces. Axes forces included Nazi German, Italy and
Japan in one block.
 Contrarily, the allied forces included America, Great Britain and
Russia.
 Contd…
 During World War II, there was a natural calamity to Great Britain
from Nazi German Forces.
 Superior weapons and strategy of Germans became a real threat to
Allied Forces.
 Consequently, Allied Forces were threatened on land, sea and air by
Axes forces, using superior weapons such as submarines, U-boats
and air crafts.
 Being challenged by this serious situation, the Government of
Great Britain appealed to the people and requested talents from all
walks of life to join together and find a solution to the problem in
order to overcome the threatening situation.
Cont…
 Based on an appeal made by Government of Great Britain,
military management called on scientists from various
disciplines and organized them into teams to assist in solving
strategic and tactical problems, i.e., to discuss, evolve and
suggest ways and means to improve the execution of various
military projects.
 Accordingly, scientists reported to the military management
and they were grouped into various teams and each team is
given strategic problem to come up with the possible solution.
 Contd…
 These combined efforts produced fantastic results.
 By their joint efforts, experience and deliberations, they suggested
certain approaches that showed remarkable progress.
 Based on suggestions provided by teams of scientists, Allied forces
defeated Axes forces.
 This signaled to the birth of Operations Research as a separate
discipline.
 This new approach to systematic and scientific study of
operations of the systems was called the Operations Research
(abbreviated as O.R.)
Cont..
 Following the end of World War II, the success of military teams
attracted the attention of industrial managers who were seeking
solutions to their complex executive type problems.
 During the year 1950, O.R. achieved recognition as a subject
worthy of academic study in the Universities
 Since then, the subject has been gaining more and more
importance for the students of Economics, Management,
Public Administration, Behavioral Sciences, Work,
Mathematics, Commerce and Engineering
 Contd…
 With a view to increasing the impact of O.R. and establish in
rapport between all its serious students and users, the Operations
Research society of America was formed in 1950.
 Other countries followed suit, and in 1957 the International
Federation of O.R. Societies was established.
 O.R. is, therefore, a systematic method consisting of stating the
problem in clear terms, collecting facts and data, analyzing
them, and reaching certain conclusions in the form of solutions
to the problem.
 The ultimate aim of it is to find out an optimum solution which is
most appropriate under the given circumstances.
 Meaning
 The term operations research consists of two terms, namely,
operations and research.
 Literally, the operations may be defined as some action that we
apply to some problems or hypotheses and the word research is an
organized process of seeking out facts about the same.
 Dictionary meaning of research is “a careful investigation or
inquiry especially through search for new facts”.
 It also means “systematized effort to gain new knowledge”.
 Thus, Operations Research could be thought of as a “systematized
efforts to solve a given problem through careful investigation”.
 OR is the application of scientific methods, techniques and tools to
problems involving the operations of a system.
 It is a scientific approach to problem solving for executive
management
.
 Defination
• As far as the definition of O.R. is concerned, there is no
single universally accepted definition.
 Tthe following definition is proposed for this study to be used in
common.
 Operations Research is a systematic analysis of a problem
through scientific methods, carried out by appropriate specialists,
working together as a team, constituted at the instance of
management for the purpose of finding an optimum and the most
appropriate solution, to meet the given objective under a given
set of constraints.
 According to the definition given by operational research society,
UK, Operations Research is the application of the methods of
science to complex problems in the direction and management of
large systems of men, machines, materials and money in industry,
business, government and defense
 Contd….
 The distinctive approach is to develop a scientific model of
the system incorporating measurements of factors such as
chance and risk, with which to predict and compare the
outcomes of alternative decisions, strategies or controls.
 The purpose is to help management in determining its policy
and actions scientifically.
 According to the definition given by operational research
society, America, operations research is concerned with
scientifically deciding how to best design and operate
man-machine system usually requiring allocation of
scarce resources.
 According to Daellenbach and George 1978, “Operations
Research is the systematic application of quantitative
methods, techniques and tools to the analysis of
problems involving the operation of systems.”
 Contd….
 According to S L Cook 1977, Operations Research has been
described as a method, an approach, a set of techniques, a
team activity, a combination of many disciplines, an
extension of particular disciplines (mathematics,
engineering, economics, etc.) a new discipline, a vocation,
even a religion.
 It is perhaps some of all these things.
 Here are many more definitions as various authors have defined the
term differently.
 As it has been written by many authors, discussing all the
definitions exhaustively is very impossible.
 Definitions contd….
 Meaning of O.R. is evident from the concept given in the
definitions here above. However, some more aspects of O.R. are
given here under to get better insight into it.
 1. O.R is the application of scientific methods, techniques and
tools to the problem to find out an answer.
 2. O.R. is a management tool, in the hands of a manager, to take a
decision.
 3. O.R. is a scientific approach to the decision-making process
 4. O.R. is an “Applied Research” which aims at finding a solution
for immediate problem facing a society, industry or a business
enterprise. It is not fundamental research.
 5. O.R. is a decision-oriented research, which provides
quantitative basis to managers of the organization for taking
decisions.
 Nature and characteristics of OR
 Some significant features of O.R. are given here under
 as follows:
 i) Decision-making. Primarily O.R. is addressed to managerial
decision-making or problem-solving. A major premise of O.R. is
decision-making.
 ii) Scientific approach. O.R. employs scientific methods for the
purpose of solving problems. It is a formalized process of
reasoning.
 iii) Objective. O.R. attempts to locate the best or optimal solution
to the problem under Prepared by consideration. For this purpose,
it is necessary that a measure of effectiveness is defined based on
the goals of organization.
 This measure is then used as the basis to compare the alternative
courses of action.
 Contd…..
 iv) Inter-disciplinary team approach. O.R. is interdisciplinary in
nature and requires a team approach to arriving at a solution of the
problem.
 Managerial problems have economic, physical, psychological,
biological, sociological and engineering aspects.
 This requires a blend of people with expertise in the areas of
mathematics, statistics, engineering, economics, management,
computer science and so on.
 v) Digital computer. Use of a digital computer has become an
integral part of the O.R. approach to decision-making.
 The computer may be required due to the complexity of the
model, volume of data required and the computations to be made.
 vi) Methodological Approach. O.R. is the application of scientific
methods, techniques and tools to problems involving the
operations of systems so as to provide optimum solutions to the
problems.
 Contd….
 The scientific method consists of observing and finding the
problem; formulating and testing the hypothesis; and analyzing the
results of the test. The data so obtained is then used to decide
whether the hypothesis should be accepted or not.
 If the hypothesis is accepted, the results should be implemented.
Otherwise, an alternative hypothesis has to be accepted.
 vii) Wholistic Approach. While arriving at a decision,
 an operations research team examines the relative
 importance of all conflicting and multiple objectives
 and the validity of claims of various departments of
 the organization from the perspective of the whole
 organization.
 Contd….
Itis not so easy to exhaustively list down the features of O.R. as the matter
of fact that it constitutes very broad area. However, the following features
can also be mentioned in addition to those already listed here above.
 Existence of a problem.
 Intention to solve the problem.
 Application of system concept and system analysis to
problem.
 Scientific approach to solving the existing problem.
 O.R. assists the management to take decision.
 O.R. role is that of recommendatory nature.
 Existence of a number of solutions to the problem.
 Solution must be optimum.
 Solution must be most appropriate.
 Solution must meet the objectives within the constraints.
 Solution must be given in quantifiable terms.
 Solution must be practical, application specific and result-oriented.
 APPLICATIONS OF OPERATIONS RESEARCH
Operation Research is mainly concerned with the techniques of
applying scientific knowledge, besides the development of science.
It provides an understanding which gives the expert/manager new
insights and capabilities to determine better solutions in his decision
making problems, with great speed, competence and confidence.
In recent years, O.R. has successfully entered many different areas of
research in Defence, Government, Service Organizations and
Industry.
Some applications of O.R. in the functional areas of management are
briefly presented here under:
Finance, Budgeting, and Investment
 i) Cash flow analysis, long range capital requirements, dividend
policies, investment portfolios.
 ii) Credit policies, credit risks and adequate account procedures.
 iii) Claim and complaint procedure .
 Contd….
 Marketing

i) Product selection, timing, comparative actions.

ii) Advertising media with respect to cost and time.
iii) Number of salesmen, frequency of calling of account, etc.
 iv) Effectiveness of market research.
 Physical Distribution
 i) Location and size of warehouses, distribution centers, retail
outlets, etc.
 ii) Distribution policy.
 Purchasing, Procurement and Exploration
 i) Rules of buying.
 ii) Determine the quality and timing of purchase.
 iii)Bidding policies and vendor analysis.
 iv) Equipment replacement policies.
 Contd….
Personnel
 i) Forecasting the manpower requirement, recruitment
 policies and job assignments.
 ii) Selection of suitable personnel with due consideration for age and
skills, etc.
 iii)Determination of optimum number of persons for each service
center.
 Production

i) Scheduling and sequencing the production run by proper allocation

of machines.
ii) Calculating the optimum product mix.
iii) Selection, location and design of sites for the production plant.
 Contd….
 Production
 i) Scheduling and sequencing the production run by proper
allocation of machines.
 ii) Calculating the optimum product mix.
 iii) Selection, location and design of sites for theproduction plant.
 Research and Development
 i) Reliability and evaluation of alternative designs.
 ii) Control of developed projects.
 iii)Co-ordination of multiple research projects.
 iv) Determination of time and cost requirements.
 Besides the above mentioned applications of O.R. in the context
of modern management, its use has now extended to a wide range
of problems, such as the problems of communication and
information, socio-economic fields and national planning.
 Models and Model Building
 A model is a selective abstraction of reality.
 Model is a representation of real objects/situations
 It is a simplified and often idealized representation of real
world problems.
 A good model should capture the important details of reality
without including minor details
 Thus, it is important to carefully decide which aspects of reality
to include in a model.
 The classification of models is a subjective problem.
 Contd….
 They may be distinguished as follows:
1. Models by Function:
 These models consist of :

a. Descriptive Models: describe and predict facts and relationships

among the various activities of the problem.
These models do not have an objective function as a part of the
model to evaluate decision alternatives.
In this model, it is possible to get information as to how one or
more factors change as a result of changes in other factors.
b. Normative or Optimization Models: they are prescriptive in nature
and develop objective decision-rule for optimum solutions.
 Model contd…
Models by Structure and Abstraction :
a. Physical (icon) model
This is the representation of the situation, problem or
object.
 Itis also called Static Model. It is a representation of the real
object.
◦ Example:
 Model of an airplane
 Photograph of a machine
 Layout drawing of a factory
 Contd….
b. Analogue Models:
These are abstract models mostly showing inter and intra
relationships between two or more parameters.
For example:
◦ It may show the relationship between an independent variable
(input) with that of a dependent variable (output).
◦ For instance; histogram, frequency table, cause-effect diagram,
flow charts, Gantt charts, price-demand graph and others.
 Contd…..
c. Mathematical models
 This is also an abstract model. Here a set of relations is
represented in the form of mathematical equations, using symbols
to represent various parameters.
Example:
1. (x + y)2=x2+2xy+y2
2. Max.Z=3000x1 +2500x2
Subject to:
2x1+x2 < 40
x1+3x2 < 45
x1 < 12
x1, x2 > 0
x1 and x2 are decision variables
 Contd…
3. Models by Nature of an Environment :
 Depending on the degree of uncertainty we have about a
problem, we can classify models as Deterministic and
Probabilistic /Stochastic models.
a. Deterministic models: represent problems of decision
making under conditions of certainty.
That is to say, we use deterministic models when we know
all the numerical values in the model certainly. In
deterministic models, all uncontrollable inputs to a
model are known and cannot vary.
 Contd…
b. Probabilistic/stochastic models: deal with problems of
decision making under uncertainty or risk and the
probabilities of the alternative states of nature are known.
Unlike the deterministic models; here, any of the
uncontrollable inputs are uncertain and subject to
variation.
4. Models by Extent of Generality :
These models can be categorized in to:
a. Specific Models: when a model presents a system at
some specific time it is known as a specific model.
b. General Models: are models applicable to all
situations without time bound. Simulation and Heuristic
models fall under this category.
Chapter Two: Linear Programming
 Contd…
LP is a method for choosing the best alternative from a set of
feasible alternatives.
To apply LP, the following conditions must be satisfied:
a. Objective Function
:Is the goal or objective of a management, stated as an intent to
maximize or to minimize some important quantity such as
profits or costs.
b. Constraints
: Are limitations or restrictions imposed by the problems. And
constraints include:
1. Resourse constraints
Are restrictions that should be clearly identifiable and
measurable in quantitative terms, which arise from limitation of
available resources.
 Contd…
Examples of limited resources:
Plant capacity, Raw materials availability Labor power
Market demand, etc.
2. Non-negativity constraints:

Are constraints that require the decision variables not to take on

negative values
c. Linearity
The Objective Function and the constraints must be linear in nature in
order to have a Linear Programming Problems (LPP)
d. Feasible alternative
There should be a series of feasible alternative course of action
available to the decision-making determined by resource constraints.
Thus, we have to choose the best alternative
Linear Programming Problems can be solved by using:
i. The Geometric method called” Graphical Method”
ii. The Algebraic method called” Simplex Method”
Contd…
 2.2. GRAPHICAL SOLUTION
To use the graphic method, the following steps are needed:
1. Identify the problem
i.e: The decision variables, the objective function and the constraints
2. Draw a graph including all the constraints and identify the feasible region
3. Obtain a point on the feasible region that optimizes the objective function-
Optimal solution
4. Interprete the results
Graphical LP is a two-dimensional model. 
A. Maximization Problem ==>Maximize Z with inequalities of constraints
in < form
 Example: Consider two models of color TV sets; Model A and B, are
produced by a company to maximize profit. The profit realized is $300 from
A and $250 from set B. The limitations are
a. availability of only 40hrs of labor each day in the production department.
b. a daily availability of only 45 hrs on machine time
c. ability to sale 12 set of model A.