Quantitative Analysis For Management Decisions

By: Haile Michael M. (PhD)

 Operations Research
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.
• 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.)
• 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.
 Contd…
• 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.
• 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.
 Definitions…
• 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.
• As far as the definition of O.R. is concerned, there is no single
universally accepted definition.
• It is so because it has been defined by many authors in different ways.
 Contd….
• However, the 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.
• 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.
 Contd….
• 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.”
• 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.
 Definitions contd….
• 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.
• 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….
• It is 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.
• It is 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.
 Chapter Two
Linear Programming
 Chapter Two
Linear Programming

• 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.
•  Examples of limited resources: Plant capacity, Raw material
availability Labor power Market demand, etc
 contd

• Linear Programming Problems can be solved by using:

• i. The Geometric method called” Graphical Method”
• ii. The Algebraic method called” Simplex Method”
• The coefficients of the variables in the Objective
Function are called the profit or cost coefficients.
• They express the rate at which the value of the
Objective Function increases or decreases by including in
the solution one unit of each of the decision variables.
• The coefficients of the constraints’ variables are called
the input- output coefficients that indicate the rate at
which the given resources are depleted or utilized.
Example:
contd
 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. Interprite the results
 Maximization case

• 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. 
• How many sets of each model will be produced each day so
that the total profit will be as large as possible?
Solution contd
contd
contd
contd
 Contd…
• Interpretation:
• 12 units of product A and 11 units of product
B should be produced so that the total profit
will be $6350.
 Minimization Problem
• ==>Minimize Z with inequalities of constraints in > form
• Example:
• 1Suppose that a machine shop has two different types of
machines; machine 1 and machine 2, which can be used to
make a single product .
• These machines vary in the amount of product produced per
hr., in the amount of labor used and in the cost of operation.
• Assume that at least a certain amount of product must be
produced and that we would like to utilize at least the
regular labor force.
• How much should we utilize each machine in order to utilize
total costs and still meets the requirement? 
Min…
contd
• Corners Coordinates Z MinZ =25 X1 +
30X2
• A (0, 20/3 200 
• B (2.5, 3.33) 162.5
• C (7.5, 0) 187.5
• ____________________________________________
___________________
• X1 =2.5
• X2=3.33 and
• MinZ= 162.5
 Special Cases in Graphical solution
1. Redundant Constraint
• If a constraint when plotted on a graph doesn’t form part of the boundary
making the feasible region of the problem that constraint is said to be
redundant.
• Example:
• A firm is engaged in producing two products A and B .Each unit of product A
requires 2Kg of raw material and 4 labor-hrs for processing. Where as each unit
of product B requires 3Kg of raw materials and 3hrs of labor.
• Every unit of product A needs 4hrs to packaging and every unit of product B
needs 3.5hrs for packaging.
• Every week the firm has availability of 60Kg of raw material, 96 labor-hours and
105 hrs I the packaging department.
• [1 unit of product A sold yields $40 profit and 1 unit of B sod yields $35 profit. 
• Required:
• a. Formulate this problem as a LPP
• b. Find the optimal solution. 
• Solution
contd
Contd….
Redundant example
Contd…
• 4X1 +3X2 <96
• 4(18) +3(8) <96
• 96=96 ==>the entire labor hour will be consumed
• 4X1 +3.5X2 <105
• 100<105==>There is to be idle or unused capacity of 5hrs in the packaging
department.
• Note:
• The packaging hour’s constraint does not form part of the boundary making the
feasible region. Thus, this constraint is of no consequence and is therefore,
redundant. The inclusion or exclusion of a redundant constraint does not affect
the optimal solution of the problem.
• 2. Multiple optimal Solutions
• /Alternative optimal solutions/
• -This is a situation where by a LPP has more than one optimal solution.
• Multiple optimal Solutions will be found if two corers give optimal solution, then
the line segment joining these points will be the solution.
 Contd….
• ==>We have unlimited number of optimal solution with out increasing or decreasing
the objective function.
•  
• Example:
• The information given below is for the products A and B.
• _____________________________________________________________________
Machine hours per week Maximum available
• Department Product A Product B per week
• _____________________________________________________________________
•  Cutting 3 6 900
• Assembly 1 1 200
• Profit per unit $8 $16
• _____________________________________________________________________
• Assume that the company has a marketing constraint on selling products B and
therefore it can sale a maximum of 125units of this product.
 Contd…
• Required:
• a. Formulate the LPP of this problem
• b. Find the optimal solution
• Solution:
• Let X1 =The No of units f product A produced
per week
• X2 =The No of units f product B produced per
week
• The LPP Model of the problem is:
 
Contd…
 contd…..

• Corners Coordinates MaxZ=8 X1 + 16X2

• A (0, 0) 0 
• B (0, 125) 2000
• C (50, 125) 2400 
• D (100, 100) 2400
• E (200, 0) 1600 
• Interpretation:
• Both C and D are optimal solutions. Any point on the line segment CD will also lead to the same optimal
solution.
• ==>Multiple optimal solutions provide more choices for management to reach their objectives.  
• 3. Infeasible Solution
• A solution is called feasible if it satisfies all the constraints and the constraints and non-negativity condition.
• However, it is sometimes possible that the constraints may be inconsistent so that there is no feasible solution
to the problem. Such a situation is called infeasibility.

• Example:
• MaxZ=20X1+30X2
• St:
• 2X1+X2< 40
• 4X1+X2< 60
• X1 > 30
• X1, X2 > 0
• Solution:
contd……
 B. Simplex Method
• Steps in Simplex Method
• Step 1 Formulate LPP Model 
• Step 2 Standardize the problem
• i.e Convert constraint inequality into equality form by introducing a
variable called Slack variable.
• Slack Variables:
• A slack variable(s) is added to the left hand side of a < constraint to
covert the constraint inequality in to equality. The value of the slack
variable shows unused resource. 
• A slake variable emerges when the LPP is a maximization problem.
•  Slack variables represent unused resource or idle capacity.
• Thus, they don’t produce any product and their contribution to profit is
zero.
• Slack variables are added to the objective function with zero coefficients.
•  Let that s1, s2, and s3 are unused labor, machine and marketing hrs
respectively.
example
 Contd…

• Step 4 construct the initial tabula

contd
• Step 5 choose the entering variable with
maximum positive number in cj-zj row
• Step 6 choosing the leaving variable ration
RHS
contd
contd
 Minimization Problem
• MINIMIZATION PROBLEMS
– Minimize Z with inequalities of constraints in “> “form
• There are two methods to solve minimization LP problems:
• 1. Direct method/Big M-method/
– Using artificial variables
• 2. Conversion method
– Minimization by maximizing the dual
• Surplus Variable (-s):
– A variable inserted in a greater than or equal to constraint to create
equality. It represents the amount of resource usage above the
minimum required usage.
– Surplus variable is subtracted from a > constraint in the process of
converting the constraint to standard form.
– Neither the slack nor the surplus is negative value. They must be
positive or zero.
 Contd…
• Example:
• 2x1+x2 < 40 ==>is a constraint inequality
• x1= 12 and x2= 11==> 2x1+x2+s = 40 ==>2(12)+11+s = 40
• ==> s=5 unused resource
• 5x1+3x2 < 45
• x1= 12 and x2= 11==> 5x1+3x2+s = 45 ==>5(12)+3(11)+s = 45 
• ==> s=0 unused resource (No idle resource)
• 5x1+2x2 >20
• x1= 4.5 and x2= 2==> 5x1+2x2- s = 20 ==>5(4.5)+2(2)-s = 20
• ==> s=6 unused resource
• 2x1+x2 >40
• x1= 0 and x2= 0(No production)==> 5x1+2x2- s = 20 ==>5(4.5)+2(2)-s = 20
• ==> s=-6(This is mathematically unaccepted)
• Thus, in order to avoid the mathematical contradiction, we have to add artificial
variable (A).
• Artificial variable (A):
• Artificial variable is a variable that has no meaning in a
physical sense but acts as a tool to create an initial feasible
LP solution. 
• Note:
• Type of constraint To put into standard form
• < --------------------------------------------- Add a slack variable
• = ---------------------------------------------Add an artificial
variable
• > ---------------------- Subtract a surplus variable and add
artificial variable
 The Big M-method
• /Charnes Penalty Method/
• The Big-M Method is a method which is used in removing artificial
variables from the basis .In this method; we assign coefficients to artificial
variables, undesirable from the objective function point of view.
• If objective function Z is to be minimized, then a very large positive price
(called penalty) is assigned to each artificial variable.
• Similarly, if Z is to be maximized, then a very large negative price (also
called penalty) is assigned to each of these variables.
• Following are the characteristics of Big-M Method:
• High penalty cost (or profit) is assumed as M
• M is assigned to artificial variable A in the objective function Z.
• Big-M method can be applied to minimization as well as maximization
problems with the following distinctions:
 1. Minimization problems
• -Assign +M as coefficient of artificial variable A in the objective function Z
• Maximization problems:
• -Here –M is assigned as coefficient of artificial variable A in the objective
function Z
• Coefficient of S (slack/surplus) takes zero values in the objective function Z
• For minimization problem, the incoming variable corresponds to the highest
negative value of Cj-Zj.
• Solution is optimal when there is no negative value of Cj-Zj.(For minimization
case)
• Example:
• 1. Minimize Z=25x1 +30x2
• Subject to:
• 20x1+15x2 > 100
• 2x1+ 3x2 > 15
• x1 , x2 > 0
 Contd…..
• Solution
• Step 1
• Standardize the problem
• Minimize Z=25x1 +30x2 +0s1+0s2 +MA1+MA2
• Subject to:
• 20x1+15x2- s1+A1 = 100
• 2x1+ 3x2 –s2+A2 = 15
• x1, x2 , s1, s2 ,A1 ,A2 > 0  
• Step 2
• Initial simplex tableau
• The initial basic feasible solution is obtained by setting x1= x2= s1= s2=0
• No production, x1= x2= s1=0==>20(0) +15(0) - 0+A1 = 100 ==> A1 = 100
• x1= x2= s2=0==>0(0)+3(0) - 0+A2 =15==> A2 = 15
Contd…..
Contd…..
Contd….
 Sensitivity Analysis and Duality

• Reading Assignment
 Chapter Four: Transportation problem
• Transportation problem deals with the distribution of goods from
several points of supplies (sources) to a number of points of
demands (destinations). 
• Consider a corporation engaged in the manufacture of products.
Most of such big corporations are of “multiple-product” and
“multi-unit” organizations having production units situated at
different places.
• Items are produced for sales. Sales take place at different
markets which are, again located at different places.
• It is not feasible to co-locate production and market. Markets
are located away from the manufacturing places. Hence products
are sent to factory warehouses set up near market outlets.
• Cost of product consists of production cost and distribution cost.
 contd

• There are 3 methods to find the initial feasible solution.

•  

• North-West Corner Method (NWCM)

• Least Cost Method (LCM)
• Vogel’s Approximation Method (VAM)
• The initial solution obtained by any of the three
•
methods must satisfy the following condition:
 

• The solution must be feasible

• i.e.: It must satisfy all the supply and demand
•
constraints
 

• The number of positive allocations must equal to m+n-1,

where m=the number of rows (or origins or supply centers) and n=
the number of columns(or destination centers or demand centers)
 contd

• Example 
• Suppose that a firm has three factories
/sources of supply/ & four warehouses
• /point of demand/.
• The firm's production capacity at the three
factories, the demand for the four distribution
centers located at various regions & the cost
of shipping each unit from the factories to the
warehouses through each route is given as
follows:
Contd soln
ontd
 Methods of feasible solution
• A. NORTH- WEST CORNER METHOD (NWCM)
• This method does not take into account the cost of transportation on
any route of transportation.
• The NWCM gets its name because the starting point for the allocation
process is the Upper Left-hand (Northwest) corner of the
transportation table.
• Therefore, allocate to the Northwest corner as many units as
possible. 
• Northwest corner rule
• The following set of principles guides the allocation:
•  
• 1. Begin with the upper left hand cell (Left, upper most in the table), &
allocate as many units as possible to that cell. This will be the smaller
amount of either the row supply or the column demand. Adjust the
row & column quantities to reflect the allocation.
 contd

• Subtract from the row supply & from the column demand
the amount allocated
• 3. If the column demand is now zero, move to the cell
next to the right, if the row supply is zero, move down to
the cell in the next row. 
• If both are zero, move first to the next cell on the right
then down one cell.
• 4. Once a cell is identified as per step (3), it becomes a
northwest cell. Allocate to it an amount as per step (1)
• 5. Repeat, the above steps (1) - (4) until all the remaining
supply and demand is gone.
•  
•  
example
solution
contd
exercise
 cont

• Note:
• 1. Total Supply= Total demand ===> Balanced TP
• 2. Total Supply ≠ total demand ===> Unbalanced TP
• 3. Convert the unbalanced TP into a balanced TP by using
 dummy destination/dummy source.
• * If total Supply > Total demand, then create a fictitious
or artificial destination called dummy destination
• i.e: total Supply > Total demand===> Add dummy column
 
• * Excess demand (Supply < demand)
• - Add a dummy source
• - Add a dummy row
Develop initial feasible soln
 B. THE LEAST- COST METHOD (LCM) or
(LARGEST- PROFIT) METHOD

• LCM is the method used a minimum cost in the allocation. 

• It begins a solution by sequentially assigning to the ratios or cells with the
minimum cost as many units as possible.
• The first allocation be made to the cell with the lowest cost (the highest
profit in a maximization case) 
• The Least- Cost Method yields not only an initial feasible solution but also
one that is close to optimal in small problems.
 
• Example
• 1.Suppose that a firm has three factories / sources of supply /& four
warehouses/point of demand/ .
• The firm's production capacity at the three factories, the demand for the
four destination centers located at various regions & the cost of shipping
each unit from the factories to the warehouses through each route is given
as follows:
contd
contd
Least cost slon
Con…
Con…
 C. vogel's approximation METHOD (VAM)
or
PENALTY METHOD

•  
• VAM is preferred to the other two methods described above. In this
method each allocation is made on the basis of the opportunity (or
penalty or extra) cost that would have incurred if allocation in
certain cells with minimum unit transportation cost were missed. 
• In this method allocation are made so that the penalty cost is
minimized.
• The advantage of this method is that it gives an initial solution
which is nearer to an optimal solution or is the optimal solution
itself. 
• VAM determines the penalty for not using the minimum cost
routes, where the objective is to avoid large penalties so that the
penalty from not using the routes is minimized.
 Steps in VAM method
• 1. Calculate penalties for each row (column) by taking the smallest &
the next smallest unit transportation cost in the same row (column)
• This difference indicates the penalty or extra cost which has to be paid
if one fails to allocate to the cell with the minimum unit transportation
cost
• 2. Select the row or column with the largest penalty & allocate as
much unit as possible in the cell having the least cost in the selected
row or column satisfying the conditions.
• If there is a tie in the values of penalties, then it can be broken by
selecting the cell where maximum allocation can be made.
• 3. Adjust the supply & demand & cross out the satisfied row or column
• If a row or column is satisfied simultaneously, only one of them is
crossed out & the remaining row (column) is assigned a zero supply
(demand) .Any row or column with zero supply or demand should not
be used in computing future penalties.
contd
 Evaluating a Solution for Optimality

• The test for optimality for a feasible solution

involves a cost evaluation of empty cells.
• We shall consider two methods for cell
evaluation:
– The Stepping Stone Method
– The MODI Method
 The Stepping Stone Method

• Involves tracing a series of closed paths in the transportation

table, using one such path for each empty cell. Rules for
tracing Stepping-stone paths:
• All unoccupied cells must be evaluated.
• Except for the cell being evaluated, only add or subtract in
occupied cells.
• A path will consist of only horizontal and vertical moves,
starting and ending with the empty cell that is being
evaluated.
• Alter + and – signs, beginning with a + sign in the cell being
evaluated.
Evaluation Path for Cell C-1
 Empty Cell Evaluation
• Cell B-1: + 2 = 5 – 1 + 2 – 4
• Cell C-1: +10 = 7 – 3 + 9 – 1 + 2 – 4
• Cell A-3: -2 = 8 – 9 + 1 – 2
• Cell C-2: +11 = 6 – 3 + 9 – 1
• The negative value for cell A-3 indicates
an improved solution is possible
 The MODI method
• Involves the use of index numbers that are established for the rows
and columns. These are based on the unit costs of the occupied cells.
• The index numbers can be used to obtain the cell evaluations for
empty cells

The cell evaluations for each of the unoccupied cells are

determined using the relationship:
Cell Evaluations Using the MODI Method
 Developing an Improved
Solution
• Developing an improved solution to a transportation problem
requires focusing on the unoccupied cell that has the largest
negative cell evaluation.
• Improving the solution involves reallocating quantities in the
transportation table.
• The stepping-stone path for that cell is used for determining
how many units can be reallocated (both the magnitude and
direction of changes)
• The + signs in the path indicate units to be added, the – signs
indicate units to be subtracted. The limit on subtraction is the
smallest quantity in a negative position along the cell path.
Cell Evaluations Using the MODI Method
Optimal Solution
 Special Cases

1. Determining if there are alternate optimal

solutions.
2. Recognizing and handling degeneracy (too few
occupied cells to permit evaluation of a solution).
3. Avoiding unacceptable or prohibited route
assignments.
4. Dealing with problems in which supply and
demand are not equal.
5. Solving maximization problems.
Degeneracy
 Unacceptable route
 Certain origin-destination combinations may be
unacceptable due to weather factors, equipment
breakdowns, labor problems, or skill requirements that
either prohibit, or make undesirable, certain
combinations.
 In order to prevent that route from appearing in the
final solution, the manager could assign a unit cost to
that cell that was large enough to make that route
uneconomical and, hence, prohibit its occurrence.
 One rule of thumb would be to assign a cost that is 10
times the largest cost in the table (or a very big +M).
 Maximization case
• Transportation-type problems that concern
profits or revenues rather than costs with the
objective to maximize profits rather than to
minimize costs.
• Such problems can be handled by adding one
additional step at the start:
• Identify the cell with the largest profit and
subtract all the other cell profits from that
value.
• Replace the cell profits with the resulting
values.
 Un equal supply and Demand
• Situations in which supply and demand are not equal
such that it is necessary to modify the original problem
so that supply and demand are equalized.
• This is accomplished by adding either a dummy column
or a dummy row; a dummy row is added if supply is
less than demand and a dummy column is added if
demand is less than supply.
• The dummy is assigned unit costs of zero for each cell,
and it is given a supply (if a row) or a demand (if a
column) equal to the difference between supply and
demand.
example
Chapter Four
Assignment
Problems
 The Hungarian Method

• Provides a simple heuristic that can be used to

find the optimal set of assignments.
• It is based on minimization of opportunity
costs that would result from potential pairings.
These are additional costs that would be
incurred if the lowest-cost assignment is not
made
Requirements for Use of the Hungarian Method

• Situations in which the Hungarian method can

be used are characterized by the following:
 There needs to be a one-for-one matching of
two sets of items.
 The goal is to minimize costs (or to maximize
profits) or a similar objective
 The costs or profits are known or can be
closely estimated.
 The Hungarian Method

• Step 1: Locate the smallest cost element in each row of the cost table.
Now subtract this smallest from each element in that row.
• Step 2: Consider each column and locate the smallest element in it.
Subtract the smallest value from every other entry in the column.
• Step 3: Draw the minimum number of horizontal and vertical lines
required to cover the entire ‘zero’ elements. If the number of lines drawn
is equal to n (the number of rows/columns) the solution is optimal
• Step 4: Select the smallest uncovered cost element. Subtract this element
from all uncovered elements including itself and add this element to each
value located at the intersection of any lines.
• Step 5: Repeat steps 3 and 4 until an optimal solution is obtained.
• Step 6: Given the optimal solution, make the job assignments as indicated
by the ‘zero’ elements.
Example
contd
Determine the Minimum Number of Lines Needed to Cover
the Zeros

Further
FurtherRevision
Revisionofofthe
theCost
CostTable
Table
Optimal Assignments
 Example 2
• A production supervisor is considering how he should assign the
four jobs that are performed, to four of the workers working
under him. He want to assign the jobs to the workers such that
the aggregate time to perform the job in the least. Based on the
previous experience, he has the information on the time taken by
the four workers in performing these jobs, as given in below
The final assignments is 1-B, 2-D, 3-C,
 Special Situations

• Among those situations are the following:

• The number of rows does not equal the
number of columns.
• The problem involves maximization rather
than minimization.
• Certain matches are undesirable or not
allowed.
• Multiple optimal solutions exist.
 Unbalanced Assignment Problems
• In such situations, dummy column(s)/row(s),
whichever is smaller in number, are inserted with
zeros as the cost elements

A-1 B-4 C-3 D-2

 Constrained/Prohibited/ Assignment
Problems
• It happens sometimes that a worker cannot perform a certain job or is
not to be assigned a particular job. To cope with this situation, the cost
of performing that job by such person is taken to be extremely large
• Example: Determine the optimal set of pairings given the following
cost table. Note that assignment B-3 is undesirable, as denoted by the
M in that position:
 Multiple Optimal Solutions
• In some cases, there are multiple optimal solutions
to a problem. This condition can be easily
recognized when making the optimal assignments.
• Example: Given this final assignment table, identify
the optimal solutions:
• Chapter Five :
 Decision Theory

• Decision theory problems are characterized by

the following:
1. A list of alternatives.
2. A list of possible future states of nature.
3. Payoffs associated with each alternative/state of
nature combination.
4. An assessment of the degree of certainty of
possible future events.
5. A decision criterion.
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 Example
Example11-1
11-1

Suppose that a real estate developer must decide on a plan

for developing a certain piece of property. After careful
consideration, the developer has ruled out “do nothing” and
is left with the following list of acceptable alternatives:
1. Residential proposal.
2. Commercial proposal #1.
3. Commercial proposal #2.

Suppose that the developer views the possibilities as

1. No shopping center.
2. Medium-sized shopping center.
3. Large shopping center.

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Table 11–1 General Format of a Decision Table

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Table 11–2 Payoff Table for Real Estate Developer

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Table 11–3 If It Is Known That No Shopping Center Will be Built, Only the First
Column Payoffs Would Be Relevant

Decision Making under Certainty

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 Decision Making under
Complete Uncertainty

• Approaches to decision making under

complete uncertainty:
1. Maximin
2. Maximax.
3. Minimax regret.
4. Hurwicz
5. Equal likelihood

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 Table 11–4 Maximin Solution for Real Estate Problem

Maximin
The maximin strategy is a conservative one; it consists of identifying the
worst (minimum) payoff for each alternative and then selecting the
alternative that has the best (maximum) of the worst payoffs. In effect, the
decision maker is setting a floor for the potential payoff; the actual payoff
cannot be less than this amount.

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 Table 11–5 Maximax Solution for Real Estate Problem

Maximax
The maximax approach is the opposite of the previous one: The best
payoff for each alternative is identified, and the alternative with the
maximum of these is the designated decision.

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 Table 11–6 Payoff Table with Similar Maximum Payoffs

Minimax Regret
An approach that takes all payoffs into account. To use this approach, it is
necessary to develop an opportunity loss table that reflects the difference
between each payoff and the best possible payoff in a column (i.e., given a
state of nature). Hence, opportunity loss amounts are found by identifying
the best payoff in a column and then subtracting each of the other values in
the column from that payoff.

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Table 11–7 Opportunity Loss Table for Real Estate Problem

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Table 11–8 Identifying the Minimax Regret Alternative

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Table 11–9 Minimax Regret Can Lead in a Poor Decision

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 The Hurwicz (Realism) Criterion (Weighted
Average or Realism Criterion)
• The approach offers the decision maker a compromise
between the maximax and the maximin criteria.
– Requires the decision maker to specify a degree of optimism, in the
form of a coefficient of optimism α, with possible values of α ranging
from 0 to 1.00.
– The closer the selected value of α is to 1.00, the more optimistic the
decision maker is, and the closer the value of α is to 0, the more
pessimistic the decision maker is.

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Table 11–10 Equal Likelihood Criterion

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Table 11–11 Summary of Methods for Decision Making under Complete
Uncertainty

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Exhibit 11-1 Using Excel to Make Decisions under Complete Uncertainty

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 Decision Making under Risk

• Decision making under partial uncertainty

– Distinguished by the present of probabilities for
the occurrence of the various states of nature
under partial uncertainty.
– The term risk is often used in conjunction with
partial uncertainty.
• Sources of probabilities
– Subjective estimates
– Expert opinions
– Historical frequencies
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 Table 11–12 Real Estate Payoff Table with Probabilities

Expected Monetary Value (EMV) approach

Provides the decision maker with a value that represents an average payoff
for each alternative. The best alternative is, then, the one that has the
highest expected monetary value. The average or expected payoff of each
alternative is a weighted average: the state of nature probabilities are used
to weight the respective payoffs.

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 Approaches to Incorporating Probabilities in the
Decision Making Process
• Expected Monetary Value (EMV) approach
– Provides the decision maker with a value that represents an average
payoff for each alternative.
• Expected Opportunity Loss (EOL)
– The opportunity losses for each alternative are weighted by the
probabilities of their respective states of nature to compute a long-
run average opportunity loss, and the alternative with the smallest
expected loss is selected as the best choice.
• Expected Value of Perfect Information (EVPI)
– A measure of the difference between the certain payoff that could
be realized under a condition of certainty and the expected payoff
under a condition involving risk.
• EVPI=Expected value with perfect information - expected value with-out
perfect information.
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Exhibit 11-2 Using Excel to Make Decisions under Risk

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 Figure 11–1 Decision Tree Format
Decision trees are used by decision
makers to obtain a visual portrayal of
decision alternatives and their possible
consequences.

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Figure 11–2 Decision Tree for Real Estate Developer Problem

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Figure 11–3 Real Estate Problem with a Second Possible Decision

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Exhibit 11–3 Initial TreePlan Dialog Box

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Exhibit 11–4 Decision Tree Initially Developed by TreePlan

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Exhibit 11–5 TreePlan Dialog Box to Add Branches, Decision Nodes,
or Events

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Exhibit 11–6 Modified Decision Tree with Three Branches

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Exhibit 11–7 TreePlan Dialog Box to Add or Change Decision Nodes
or Events

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Exhibit 11–8 Modified Decision Tree with Three Branches and the Added Event
Node with Three Nodes

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Exhibit 11–9 Excel Solution to the Real Estate Developer Decision Tree Problem

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Figure 11–4 Sequential Decision Tree for Unicom Inc.
(Example 11-3, part a)

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Exhibit 11–10 Excel Solution to the Unicom Inc. Sequential Decision Tree Problem

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Figure 11–5 Conceptual Portrayal of Market Test Example

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 Test Market Payoffs

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Figure 11–6 Summary of Analysis of Market Test Example

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Table 11–13 Reliability of Market Test

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Table 11–14 Probability Calculations Given the Market Test Indicates a Strong
Market

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 Table 11–15 Probability Calculations Given the Market Test Indicates a
Weak Market

Conditional probabilities express the reliability of the

sampling device (e.g., market test) given the condition of
actual market type.

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Exhibit 11–11 Calculation of the Revised Probabilities for the Market Test Example

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 Figure 11–7 Format of Graph for Sensitivity Analysis

Sensitivity Analysis enables decision makers to identify a range of

probabilities over which a particular alternative would be optimal.

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Figure 11–8 The Expected Value Line for Alternative a.

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Figure 11–9 Example of Finding the Expected Value for Alternative a when P(#2)
Is .50

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Figure 11–10 All Three Alternatives Are Plotted on a Single Graph

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Figure 11–11 The Line with the Highest Expected Profit Is Optimal for a Given Value
of P(#2)

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 Utility

• Utility (of a payoff)

– A measure of the personal satisfaction associated with a payoff.
• Risk
– A decision problem in which the states of nature have probabilities
associated with their occurrence.
• Risk Averters
– Individuals that avoid taking risks. The decision maker has less utility
for greater risk.
• Risk Takers
– Individuals that like taking risks and that have a greater utility for the
potential winnings even though their chances of winning are very low.

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Figure 11–12 Converting P(#2) Ranges into P(#1) Ranges

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Exhibit 11–12 Solved Problem 1: Decision Making under Complete Uncertainty—A
Profit Maximization Problem (Part f)

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Exhibit 11–13 Solved Problem 2: Decision Making under Complete Uncertainty—A
Cost Minimization Problem (part f)

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Exhibit 11–14 Calculation of the Revised Probabilities and Expected Value of Perfect
Information for Solved Problem 3 (part c)

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Exhibit 11–15 Calculation of the Revised Probabilities for Solved Problem 5
(part c)

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 Exhibit 11–16 TreePlan Dialog Box to Add Branches, Decision Nodes, or Events

Exhibit
Exhibit11–17
11–17 TreePlan
TreePlanDialog
DialogBox
BoxtotoAdd
Addor
orChange
ChangeDecision
DecisionNodes
Nodesor
orEvents
Events

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Exhibit 11–18 Decision Tree for Solved Problem 5 (part c)

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