OPERATIONS RESEARCH

MANAGEMENT SCIENCE

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 I. INTRODUCTION TO THE SUBJECT MATTER

UNIT LEARNING OBJECTIVES – ABILITIES to:

1) Define What Operations Research/Management
Science is;
2) Explain Why It is Important to Be Knowledgeable
About OR;
3) Explain How and Why OR Methods have Been
Available in Managerial Decisions;
4) Discuss the Fundamental Utilities/Functions of OR;
5) Discuss Applications of OR in Decision Making;

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1.1 OR: Origin and Meaning:
Operations Research (OR) started just
before World War II in Britain with the
establishment of teams of scientists to study
the strategic and tactical problems involved
in military operations.
The objective was to find the most effective
utilization of limited military resources by
the use of quantitative techniques.
Following the war, numerous peacetime
applications emerged, leading to the use of
3
1.2 Features of OR:
Operations Research:
1) Primarily Addressed to the Managerial Decision
Making and Problem Solving;
2) Employs the Scientific Approach to Decision Making;
3) Employs Objective Measures (such as Profit, Return
on Investment, Cost) of Effectiveness as the Basis to
Compare the Alternative Courses of Action;
4) Interdisciplinary in Nature and Requires a Team
Approach to a Solution of the Problem;
5) Uses Digital Computer as an Integral Part of Its
Approach.
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1.3 The Scope of OR Applications to Business
Decision Making:
 The Breadth of Application of OR to Decision
Making is usually Wide, including:
1) Finance and Accounting
2) Marketing
3) Production Management
4) Personnel Management
5) General Management
6) Stock re-ordering policies
7) Transport schedules
8) Product mix and Production flows
9) Allocation problems i.e. which jobs should be allocated to
which machines
10) Time wasted queuing at issuing, counters
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1.4 Fundamental Utilities/Functions/Advantages /Purposes of OR

A. Provision of Scientific Basis for Decision Making;

B. Conversion of Complex Problems into Simple
Models;
C. Work for Trade-Offs;
D. Provision of System Integration;
E. Optimization of Resources;
F. Minimization of Costs;
G. Maximization of Profit;
H. Selection of Best Alternatives;
I. Provision of Solutions to Problems Having
Special Issues
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1.5 The Major Phases in an OR Study
Phase I: Formulation of the Decision Problem:
Involves a Statement of the Problem, Encompassing
the following Elements:
Controllable (Decision) Variables,
Uncontrollable Parameters,
Restrictions/Constraints on the Variables, and
Objective for Defining a Good or Improved
Solution.
Phase II: Constructing a Mathematical Model of the
Problem:
A Typical Mathematical Model Includes Three Basic
Sets of Elements:
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Phases Contnd……
Phase III: Driving the Solution from the OR
Model:
This Phase of the Study deals with the Mathematical
Calculations for Obtaining the Solution to the Model.
Phase IV: Validating the Model
A Model may be said to be Valid if It can Give a Reliable
Prediction of the System’s Performance.
Phase V: Controlling the Solution
This Phase of the Study Establishes Control over the
Solution (e.g., Standard Deviation) by Proper Feedback of
the Information on Variables which Deviated Significantly.
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Phases Contnd……

Phase VI: Implementing the Solution

This Phase of the Study would Basically Involves a
Careful Explanation of the Solution to Be Adopted
and Its Relationship with the Operating Realities.

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1.6 Modeling on OR

Q1. What is a Model, in General?

An Idealized Representation of a Real-Life
System;
Q2. What is a Model, as Used in OR?
A Simplified Representation of an Operation or a
Process in which only the Basic Aspects or the
Most Important Features of a Typical Problem
Under Investigation are Considered.
OR Employs Mathematical Models to Represent
the Problem of Analysis.
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Modeling Contnd………
Q3. What are the Significances and Advantages of
Models? Models:
 Assist in the Understanding of the Problem;
 Give a Clear Picture of the Problem;
 Assist in Modifying the Existing Design of System;
 Specify Inputs, Outputs, Objectives and Constraints of the
Problem;
 Can Be more Easily Manipulated and Analyzed than the
Real System;
 Provides an Indication of the Information Flow and Gaps
therein;
 Fundamental Tools in Decision Making to Help Managers
Decide on What Questions to Ask Themselves.
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Modeling Contnd………

Q4. How are Models Classified?

Models can Be Classified on the Basis of:
I. STRUCTURE:
a) Iconic/Physical Models
 Physical Representations of the Phenomenon (a) Under
Analysis.
 Images Looking Alike the Real Systems.
 Examples: Model Aircraft, Drawing of a Factory,
Photograph of a Machine, Glob
 Built with a Specific Purpose in Mind and are not
Suitable for Manipulation or Experimentation.
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 Just Descriptive in Purpose, Not Useful for Predictive
Modeling Contnd………
b) Analogue Models
 Use One Set of Properties to Represent Another Set of
Properties.
 Permit a Degree of Manipulation and Experimentation.
 More Abstract than the Iconic Models.
 Examples: Graphs, Contour Lines on Maps
C) Mathematical/Symbolic/Abstract Models
Use Symbols (Letters and Numbers) to Represent the
Problem Under Analysis;
The Most Abstract Models;
Useful for Descriptive, Predictive and Prescriptive
Purposes;
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Dynamic in Behavior,
Modeling Contnd………
II. Purpose
a. Descriptive Models: Describe the State of Nature as
It Exists.
b. Predictive Models: Predict the Occurrence of Events.
c. Prescriptive Models: Prescribes Techniques of
Solving Decision Problems.
III. Nature of Environment
d. Deterministic Models: Built Based on Certainly
Known Parameters.
e. Stochastic/Probabilistic Models: Built on
Parameters which are Uncertain.
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Modeling Contnd………
IV. Behavior
a) Static Models: Represent Physical Objects, not
the Movement of the Objects. Iconic Models are
Static Models; No Gap for Improvement.
b) Dynamic Models: Represent the Movement of
Objects, not Physical Features of the Objects.

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1.7 Methods of Driving the Solution to an OR
Model
I. The Analytical Method
Involves:
Expressions of the Model by:
Graphic Solutions or
Mathematical Calculations.
All the Tools of Classical Mathematics such as Calculus, Set
Theory, etc. are used for Analysis.
Example: The Geometric/Graphical Method of Solving LPPs .
II. The Numerical/Iterative/Trial and Error
Method
Starts from an Initial Solution/Trial, and Repeated with Certain
Rules so that the Initial Solution is Gradually Modified at each
Subsequent Step Till Optimal Solution is Obtained.
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OR Methods Contd……….

III. The Simulation/Stochastic Method:

 Using the Principles of Statistics and Probability.
 Example: Monte Carol Simulation in Queuing
Problem.

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1.8 Some Useful Techniques and Theories of OR:
Linear Programming Technique,
Goal Programing Technique,
Transportation Algorism Technique,
Assignment Algorism Technique,
Decision Theory and Decision Tree,
Game Theory,
Queuing Theory, etc.

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1.9 Limitations of OR in Practice (Managerial Activities):

1. Inaction Gap:
 In Practice there is an Inaction Gap Existing between Most
Managers and Operations Research.
2. Quantification Techniques:
 In Practice there are Huge Qualitative Measures of
Effectiveness in Managerial Activities.
3. Finite Variables:
 In Practice there are Unlimited Number of Variables in
Managerial Activities.
4. Limited Number of Constraints:
 In Practice there are Unlimited Number of Constraints in
Managerial Activities.
5. Single Objective Function:
 In Practice More than One Objective Function Exist in
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 UNIT-II:
LINEAR PROGRAMMING TECHNIQUES FOR
OPTIMAL ALLOCATION OF SCARECE RESOURCES

The Unit Learning Objectives are to be Able to:

1. Explain What Linear Programming is;
2. Discuss the Basic Terminology in Linear Programming;
3. List and Briefly Explain the Components of Linear
Programming Model;
4. List and Briefly Explain the Assumptions of LPM;
5. Formulate Linear Programming Models;
6. Solve LPP Involving the Optimal Solutions by Graphical
Method.
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2.1 What is Linear Programming (LP)?

OR Mathematical Modeling Technique, useful for

Economic (Cost-Effective, Efficient) Allocation of
“Scarce” or “Limited” Resources (such as Labor,
Material, Machine, Time, Warehouse, Space,
Capital, etc.) to Several Competing Activities (such
as Goods, Services, Jobs, New Equipment,
Projects, etc.) on the basis of a given Criterion of
Optimality.
 Supply of resources being limited, the
management must find the best allocation of
resources in order to Optimize (Maximize,
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 General Form of a LP Mathematical Model:
1.Optimize (i.e., Maximize/Minimize): Z (0r Zopt)
= ∑ C jX j
 Optimize: Z = C1X1 + C2X2 + C3X3 + … + CnXn
2.subject to Constraints: ∑aijXj (</˃/=/≤/≥)bi
a11X1 + a12X2 + a13X3 + … + a1nXn (</˃/=/≤/≥)b1
a21X1 + a22X2 + a23X3 + … + a2nXn (</˃/=/≤/≥)b2
……………………………………………………
………………………….
[am1X1 + am2X2 + am3X3 + … + amnXn]
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1) Variable ‘Z’ = Represents the Measure of
Performance Variable
(Profit/Cost/Time/Sale/Space, etc.), which is the
Function of X1, X2, …,Xn. (Quantities of
Activities);
2) Variables ‘Cj ‘= i.e., C1, C2, …,Cn = Represent the
Contribution of a Unit of the Respective Variable,
X1, X2, …,Xn to the Value of Z.
3) Variables ‘aij’s’ = Technical Coefficients that
Measure the Per Unit Consumption of the ith
Resource for Executing One Unit of Xj; they can
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2.2 Basic Terminology in LP:
1) Linear: a mathematical expression in which the
relationships among the variables are raised to and only to
the Power of 1;
2) Programming: the Planning of Activities to Obtain an
Optimum Result Among All Feasible Alternatives;
3) Linear Function: a Function which Contains Terms Each
of them Composed of a Single Continuous Variable
Raised to (and Only to) the Power of 1;
4) Objective Function: a Linear Function of the Decision
Variables to Be Maximized or Minimized. It is also called
the measure of performance such as profit, cost, revenue,
etc.
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6) Constraints: Limitations on the Resources;
7) Feasible Solution: any Set of Values of the
Decision Variables that Satisfies All the Constraints;
8) Feasible Region (Feasible Solution Space): the
Region (or Area, or Space) that Contains All the
Feasible Solutions;
9) Optimal Solution: a Feasible Solution that
Maximizes or Minimizes Value of the Objective
Function;
10) Optimum Value: Value of Z (the Objective
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2.3 Basic Assumptions of a Linear Programming Model (LPM)
 Certainty/Deterministic Assumption: States that All the
Parameters or the Coefficients in a LPM are Precisely
Known and that Their Values Do Not Change within the
Programming Period.
 Proportionality Assumption: States that the Total
Amounts of Each Input and the Associated Profit are
Directly Proportional to the Level of Output. Here,
Doubling (or Tripling) the Production of a Product will
Exactly Double (or Triple) the Profit and the Amount of
Resources Consumed.
 Additivity Assumption : States that the Total Amounts of
Each Input (I’s) and the Corresponding Profit (Z’s) are the
Sums
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of the Inputs and Profit for Each Individual Process.
26
 Divisibility Assumption: States that the Activity Levels are
Allowed to Assume Fractional Values as Well as Integer Values.
Assumes that the Activity Levels are Continuous Variables.
 Fixed Technology Assumption: States that the production
requirements are fixed during the Planning Period and will Not
Change in the same period.
 Constant Profit per Unit Assumption: States that the profit
contribution of one unit of a product remains constant, irrespective
of level of production and sales.
 Non-Negativity Assumption: States that All variables are
restricted to nonnegative values (i.e., the numerical values of the
Decision Variables will be ≥ 0).
 Static Behavior Assumption: States that only one decision is
required for the planning period. This implies that the linear
programming
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problem is a single stage decision problem. 27
2.4 Steps in the Formulation of a LPM
1. Identify Activities (Key Decision Variables) and
Symbolize them;
2. Identify the Objective Function as a Linear
Function of Its Decision Variables;
3. State All Resource Limitations/Technical
Constraints as Linear Equations or Inequalities in
Terms of the Decision Variables;
4. Add the Non-Negativity Constraints;
5. Use Mathematical Techniques to Find Out the Set
of Feasible Solutions;
6. Select the Optimal Solution (one of the corners)
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from the Feasible Solutions.
2.5 Graphical Method of Solving LPPs:
2.5.1 Steps in the Graphical Method of Solving a
LPP:
1. Formulate the Mathematical Model of the Given
LPP;
2. Convert Constraints’ Inequalities into Equalities;
3. Draw the Graph of Each Constraint by Identifying
X- and Y-Intercepts;
4. Identify the Feasible Region (or Solution Space) that
Satisfies All the Constraints Simultaneously;
5. Locate the Solution Points (Identify the Corner
Points from the Solution Space);
6. Determine the Optimal Solution (a Feasible Solution
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A. Example of a Maximization LPP:
I. The Problem Formulated:
A Company Produces Two Types of Steel. Type I
Requires: 2 Hours of Melting, 4 Hours of Cutting, and 10
Hours of Rolling Per Ton. Type II Requires 5 hours of
Melting, 1 Hour of Cutting, and 5 Hours of Rolling Per
Ton. The Total Available Hours for Melting, Cutting, and
Rolling are 40, 20 and 60, respectively. Each Ton of Type
I Yields, birr 240 Profit, and Each Ton of Type II Yields,
birr 80 Profit. Find the:
i. Maximum Possible Profit in Birr and
ii. Production Schedule that will Produce this Profit.
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II. The Model and Solution
Step I: Name the Decision Variables: Let:
x1 = Tons of Type I Steel to Be Manufactured and Sold;
X2 = Tons of Type II Steel to Be Manufactured and Sold.
Step II: Formulate the Mathematical Model of the
LPP:
i. Construct the Linear Objective Function:
Maximize: P = 240 x1 + 80x2
ii. Construct a System of Linear Constraint Functions:
Subject to:
a) 2 x1 + 5 x2 ≤ 40;
b) 4 x1 + x2 ≤ 20;
c) 10 x1 + 5 x2 ≤ 60;
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X x
The Standard LP Maximization Mathematical
Model:
Maximize: P = 240 x1 + 80x2

Subject to the Constraints:

a)2 x1 + 5 x2 ≤ 40;
b)4 x1 + 1x2 ≤ 20;
c) 10 x1 + 5 x2 ≤ 60
X1 , x2 ≥ 0.

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Step iii: Convert the Inequalities into
Equalities
a)2 x1 + 5 x2 = 40;
b)4 x1 + 1x2 = 20;
c) 10 x1 + 5 x2 = 60
Step iv: Draw the Graph of Each Constraint
by Identifying X- and Y-Intercepts:
A. The Y- and X-Intercepts of Constraints a, b and c:
 Constraint ‘a’ Intercepts (0, 8) and (20, 0);
 Constraint ‘b’ Intercepts (0, 20) and (5, 0);
 Constraint ‘c’ Intercepts (0, 12) and (6, 0).
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B. Draw the Graph of the Constraints:
25

20

15

10
B (0, 8)
C
The
( 2.5, 7)
5
Feasibl D (4, 4)
e
Region
0
A
0 (0,0) E (5,50) 10 15 20 25
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Step v: Identify Corner Points of the Feasible
Region and Determine the Optimal Solution and the
Optimum Value (Maximum Value in Our Case) :

C/Points Coordinates Maximize: Z = 240x1

+ 80x2

A (0, 0) Br. 0
B (0, 8) Br. 640
C (2.5, 7) Br. 1160
D (4, 4) [the Optimal Solution] Br. 1280 [ the Optimum
Value]
E (5, 0) Br. 1200

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Step vi: Interpret the Result Obtained:
The Result in the Previous Table Implies that 4
Tons of Type I Steel and 4 Tons of Type II
Steel [Optimal Production Schedule] should
be Manufactured and Sold so that the Total
Profit will be Birr 1280 [Maximum Possible
Profit, Optimum Value].

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B. Example of a Minimization LPP
Suppose that a machine shop has two different types of
machines: Machine I and Machine II, 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 per hr.
and in the costs of operations. 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
Itemson Each Machine in order
Resource Usedto Minimize the TotalRequired
Minimum Cost and
still Meet the Requirements? Hours
Machine 1 Machine 2
(X1) (X2)
Product/hr. 20 15 100

Labor/hr. 2 3 15
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 SOLUTION:
1. Formulate the Mathematical Model
of the LPP:
Minimize: Z = 25 x1 + 30x2
Subject to:

a)20x1 + 15x2 ≥ 100;

b)2 x1 + 3 x2 ≥ 15.
 x1, x2 ≥ 0
2. Draw Graph of the Constraint
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8

A (0, 20/3)
7
The Feasible Region
6

4
B (2.5, 3.33)
3

0
0 1 2 3 4 5 6
C (7.5, 0)
7 8
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 Minimize:
CORNER COORDINATES Z = 25x1 + 30x2
S
A (0, 20/3) 200
B (2.5, 3.33) 162.5
(Optimal) (Optimum)
C (7.5, 0) 187.5

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3) The Optimal Solution:
Since Our Objective is to Minimize the Total
Cost of Operations, the Minimum Amount
(162.5) will Be Attained at Point ‘B’ (2.5,
3.33).
4) The Interpretation:
In order to Minimize the Total Operations Cost and
Still Meet the Requirements, the Machine Shop
should Utilize 2.5 Labor Hours on Machine I and
3.33 Labor Hours on Machine II.
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2.6 Special Cases in LPPs:
 Multiple optimal solutions: This is the situation when more
than one optimal solution arises. This will happen whenever
the objective function equation represents a line parallel
to some edge of the bounded solution space.
 Unbounded solution: it exists when an LP problem has no
limit on the constraints i.e., the feasible region is not
bounded in any respect. Theoretically, the value of the
decision variable increases infinitely without violating the
feasibility, and value of the objective function can increase
to infinity. Mostly this situation occurs when the
assumption of finiteness is violated.
 Infeasible solution: infeasibility is a condition that exists
when there is no solution to an LP problem that satisfies all
the constraints and non-negativity restrictions. It means that
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 Redundant Constraint(s): If the constraint, when plotted
does not form part of the boundary marking the feasible
region of the problem, it is said to be redundant. The
inclusion or the exclusion of a redundant constraint
obviously does not affect the optimal solution to the
problem.

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UNIT III: SPECIAL TYPES OF LINEAR PROGRAMMING

3.1. Transportation
Problems
3.2. Assignment Problems
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3.1. Transportation Problems

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3.1.0 Section Learning Ojectives
Understand Issues in Transportation Problems;
Build Mathematical Models for TPs;
Find the IBFS to TPs by Applying various
Algorithms;
Test for Optimality of IBFS to a TP by the Use
of Stepping Stone and Modified Distribution
Techniques;
Modify the IBFS.

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3.1.1 Introduction and Objective:
 One important application of linear programming is
the area of physical distribution (transportation) of
goods from several supply centers (origins) to
several demand centers(destinations).
 The structure of transportation problem involves a
large number of transportation /shipping/ routes from
several supply origins to several demand
destinations.
 Objective: to Determine the Amount of
Commodities which should Be Transported from
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 Sources or Origins are the Places where Goods
Originate from (like plants, warehouses etc.).
 Destinations are Places where Goods are to Be
Shipped (like Markets).
 The Transportation Algorithm Applies to
Minimize the Total Cost of Transporting a
Homogenous Commodity (Product) from
Different Supply Origins to Different Demand
Destinations.
 However, It can also Be Applied to the
Maximization of Some Total Value or Utility, in
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3.1.2 General Transportation Problem Model
 A Transportation Problem Model, which has ‘m’
Sending Locations (Origins) and ‘n’ Receiving
Locations (Destinations), Provides a Framework
for Presenting All Relevant Data including:
 Quantity Supply of Each Origin (SSi)
 Quantity Demand of Each Destination (DDj)
 Unit Transportation Cost from Each Origin to
Each Destination (Cij)
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 To: D1 D2 …………… Dn Total SS
…

From:
S1 X11C11 …………… X1nC1n SS1
…

S2 X21C21 …………… X2nC2n SS2

…..
. . . . . .
. . . . . .

Sm Xm1Cm1 Xm2Cm2 …………… XmnCmn SSm

…..

∑SS

∑DD
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Total DD DD1 DD2 …………… DDm
50
Where:
SSi is the total quantity of commodity available at
origin i (total supply of origin i)
DDj is total quantity of commodities needed at
destination j (total demand of destination j)
Cij measures (represents) the costs of shipping
(transporting) one unit of commodity from source i
to destination j.
Xij is the quantity of commodities transported
from ith origin to jth destination.

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3.1.3 Conditions of a Transportation Problem
1. Supplies (SS)and requirements (DD) must be
expressed in the same unit
 This condition means that shipments received at
any destination from different sources must be
indistinguishable. In other words, all shipments
must be measured in homogenous units
2. Total supply must equal to total demand ( = )
 The problem satisfying this condition is called
balanced transportation problem; otherwise it is
known as unbalanced transportation problem.
The condition is the necessary and sufficient
condition for the existence of feasible solution
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3.1.4 Assumptions of a Transportation Algorithm
1) All goods are homogenous, so that any origin is
capable of supplying to any destination.
2) Transportation costs are a linear function of the
quantity shipped over any route.
3) All the assumptions of the general LPP also hold
in the special case of the transportation problem.

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3.1.5 Methods of Solving Transportation Problems
The solution to the transportation problem can be
obtained in two stages.
1. Methods to Get the Initial Basic Feasible Solution:
A. The North-West Corner Method (NWCM)
B. The Least Cost Method (LCM), and
C. The Vogel’s Approximation Method (VAM).
2. Methods Used to Test Optimality and Improve the
Solution:
I. The Stepping Stone Method
II. The Modified Distribution Method

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Any initial solution to the transportation
problem can be accepted if it satisfies the
following conditions:
1. It must satisfy the rim Condition:
 The sum of allocations along each row equals
the supply of each row and the sum of the
allocations down each column equals the
demand or requirement of each column. This
condition is known as rim condition.
2. It must be a basic feasible solution
 A feasible solution is known as basic feasible
solution if the number of allocations is equal
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Steps of solving transportation problem using
NWC:
1. Start with the cell at the upper left hand corner,
and allocate as much as possible to that cell.
2.
i) If D1 > S1, move down vertically to the second row and
make the second allocation of the magnitude =min (S2,
D1 - X11) in cell (2, 1).
ii) ii) If D1 < S1 , move right horizontally to the second
column and make the second allocation of the
magnitude X12=min (S1 - X11,, D2) in cell (1, 2).
iii) iii) If D1 = S1 , there is a tie for the second allocation
because both the row and column are exhausted.
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3. Repeat step 2 until all the rim requirements are
satisfied.
4. Check the numbers of occupied cells are equal to
m+n-1.

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The steps involved in LCM are:
1. Select the cell with the lowest unit cost in the entire
transportation table and allocate as much as possible to
this cell, so that entire supply is exhausted or demand
is satisfied. In case the smallest unit cost cell is not
unique, then select the cell where maximum allocation
can be made.
2. After adjusting the supply and demand for all
uncrossed-out rows or columns, repeat the procedure
with the next lowest unit cost among the remaining
rows and columns of the transportation table and
allocate as much possible to that cell.
3. Repeat the procedure until the entire available supply
at various sources and demand at various destinations
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The steps involved in Vogel’s Approximation Method
(VAM) are:
1. For each row and column, compute the difference
between the lowest cost element and the next lowest
cost element of the row/column. The difference
between the lowest cost and the next lowest cost for a
given row or column is said to be the penalty number
for that row or column.
2. Select the row or column having the largest penalty
number. If there is a tie it can be broken by selecting
the cell where minimum cost of transportation is
found.
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3. Assign (allocate) the maximum number of units to
the lowest cost
cell in the corresponding row or column selected in
step 2. And
then eliminate a row or column whose supply is
exhausted or
requirement is satisfied.
4. Repeat step 1 to 3 until a complete initial solution is
obtained.
5. Check to be sure that all rim conditions are satisfied
and that
m+n-1 cells are allocated.
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Exercises on Transportation Problems:
I: Determine an initial basic feasible solution for the
following transportation problem by using NWC,
D D D
LCM and VAM.
1 2 D SS
3 4

A 11 13 17 14 250
B 16 18 14 10 300
C 21 24 13 10 400
DD 200 225 275 250 950

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Solution-1: IBFS by NWC,
TTC:
11*200+13*50+18*175+14*125+13*150+10*250 =
12,200 D1 D2 D3 D4 SS

A 11 200 13 50 17 14 0
B 16 18 175 14 125 10 0
C 21 24 13 150 10 250
0
DD 0 0 0 0 950

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Solution-2: IBFS by LCM,
TTC:
10*250+11*200+13*150+13*50+14*125+18*175 =
12,200 D1 D2 D3 D4 SS

A 11 200 13 50 17 14 0
B 16 18 175 14 125 10 0
C 21 24 13 150
10 250
0
DD 0 0 0 0 950

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 1.1 IBFS by VAM

SOLUTION BY VAM METHOD

D1 D2 D3 D4 SS Row Penalties

A 11200 1350 17 14 0 2 1 - - -

B 16 18175 14 10125 0 4 4 4 4th 4 -

C 21 24 13275 10125 0 3 3 3 3 5th 3

DD 0 0 0 125

Column 1st 5 5 1 0

Penalties - 2nd 5 1 0

- 3rd 6 1 0

- - 1 0

- - 6th -

TTC = (11*200)+(13*50)+(18*175)+(13*275)+(10*125)+(10*125) = 12,075

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I. Checking Optimality and Modifying the Solution by Applying
MODI Technique.
1) Select row element (ui) and Column element (vj) for each
row and column, such that:
 Ui + Vj = the actual cost of loaded cell. In transportation
problem, once any cell is loaded, its opportunity cost (U i +
Vj) – Cij) will be zero.
 Empty cells can be evaluated simultaneously and get the
opportunity cost of the cell by using the formula (U i + Vj) –
Cij, where Cij is the actual cost of the cell.
2) For any empty cell, (implied cost – actual cost) will give
opportunity cost.
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3) How to select Ui and Vj:
 Write arbitrarily any one of them against a row or
against a column.
 The written Ui or Vj may be any whole number
i.e. ui or vj may be ≤ or ≥ to zero.
 By using the formula (Ui+Vj) = Cij for a loaded
cell, we can write the other row or column
element.
 For example, if the actual cost of the cell Cij = 5
and arbitrarily we have selected ui = 0, then vj is
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given by U +V = 0 + vj = 5.
 Once we get all ui s and vj’s, we can evaluate empty cells by
using the formula (ui + vj ) – Actual cost of the cell =
opportunity cost of the cell, and write the opportunity cost
of each empty cell at left hand bottom corner.
Occupied
Unoccupied

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 V1= 11 V2= 13 V3= 9 V4=6
SS
D1 D2 D3 D4
U1=0 200 50
0
A 11 13 17 14
U2=5 0
B 16 18 175
14 125 10
U3=4 150 250
0
C 21 24 13 10

DD 0 0 0 0
Total Cost = 11*200+13*50+18*175+14*125+13*150+10*250 = 12,200

i A D3 = (0+9) -17 =-8

ii AD4 = (0+6) -14=-8
iii BD1 = (5+11) -16=0
iv BD4 = (5+6) -10 = +1
v CD1= (4+11) -21=-6
vi CD2 = (5+13) -24=-6
vii CD2 = (4+13) -24 = -7
Since Pij for BD4 >0, then we have not reached the optimal solution; then recalculate penalty
for each unassigned cell and recheck for optimality of the current solution.

V1 = 11 V2 = 13 V3 = 8 V4 = 5

D D D D SS
1 2 3 4

U1 = 0 A 11200 1350 17 14 0

U2 = 5 B 16 18175 140 10125 (+) 0

(-)

U3 = 5 C 21 24 13275 10 125 (-)

0
(+)

DD 0 0 0 0 950
TTC = (11*200)+(13*50)+(18*175)+(13*275)+(10*125)+(10*125) = 12,075
 a.A D3 = (0+8) -17=-9
b.AD4 = (0+5) -14=-9
c.BD1 = (5+11) -16=0 ►Indifference of the Cell
d.BD3 = (5+8) -14 = -1
e.CD1= (5+11) -21=-5
f. CD2 = (5+13) -24=-6
 Since Pij’s for all unoccupied cells are ≤0, then we
conclude that we have reached optimality.
 Accordingly, the Optimum Transportation Cost (or the
Minimum Possible Total Cost) of the given
transportation Problem is 12,075 units of money.
 3.2 ASSIGNMENT PROBLEMS

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3.2.0 Section Learning Objectives
Know about variations of the assignment
problem;
Learn how to solve an unbalanced assignment
problem, profit maximization problem etc.
Understand how to solve a travelling salesman
problem

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3.2.1 INTRODUCTION
 In many business situations, management needs to assign
 personnel to jobs,
 jobs to machines,
 machines to job locations, or
 salespersons to territories.
 Consider the situation of assigning n jobs to n machines.
 When a job i (=1,2,....,n) is assigned to machine j
(=1,2, .....n) that incurs a cost Cij, then the objective is to
assign the jobs to machines at the least possible total cost.

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INTRODUCTION CONTD---------
This situation is a special case of the
Transportation Model And it is known as the
assignment problem.
Here, jobs represent “sources” and machines
represent “destinations.”
The supply available at each source is 1 unit And
demand at each destination is 1 unit.

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3.2.2 Assumptions:
1. There is a cost assignment matrix for the m
“people” to be assigned to m “tasks.” (If
necessary dummy rows or columns consisting of
all 0’s are added so that the numbers of people
and tasks are the same.)
2. All costs are nonnegative.
3. The problem is a minimization problem.

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3.2.3 THE HUNGARIAN ALGORITH
Initialization
1. For each row, subtract the minimum number
from all numbers in that row.
2. In the resulting matrix, subtract the minimum
number in each column from all numbers in the
column.

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3.2.4 ITERATIVE STEPS IN HUNGARIAN ALGORITH

1. Make as many 0 cost assignments as possible. If all

workers are assigned, STOP; this is the minimum cost
assignment. Otherwise draw the minimum number of
horizontal and vertical lines necessary to cover all 0’s in
the matrix. (A method for making the maximum number
of 0 cost assignments and drawing the minimum number
of lines to cover all 0’s follows.)
2. Find the smallest value not covered by the lines; this
number is the reduction value.
3. Subtract the reduction value from all numbers not
covered by any lines.
4. Add the reduction value to any number covered by both
77
3.2.4 Determining the Maximum Number of
Zero-Cost
Assignments
1. For each row, if only one 0 remains in the row,
make that assignment and eliminate the row and
column from consideration in the steps below.
2. For each column, if only one 0 remains, make
that assignment and eliminate that row and
column from consideration.
3. Repeat steps 1 and 2 until no more assignments
can be made. (If 0’s remain, this means that there
are at least two 0’s in each remaining row and
column. Make an arbitrary assignment to one of
these 0’s and repeat steps 1 and 2.) 78
3.2.5 Drawing the Minimum Number of Lines to Cover
All 0’s
1. Mark all rows with no assignments (with a “‧”).
2. For each row just marked, mark each column
that has a 0 in that row (with a “‧”).
3. For each column just marked, mark each row
that has an assignment in that column (with a
“‧”).
4. Repeat steps 2 and 3 until no more marks can be
made.
5. Draw lines through unmarked rows and marked
columns. 79
A. Row Subtraction

80
ROW SUBTRACTION RESULTANT
MINIMUM UNCOVERED NUMBER AFTER
ROW SUBTRACTION IS 2
B. COLUNM SUBTRACTION
RESULTANT:
MINIMUM UNCOVERED NUMBER IS 1
C. FINAL REDUCTION RESULTANT: READY FOR
ASSIGNMENT
UNIT-IV: DECISION THEORY AND
DECISION TREE

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4.0 Unit Learning Objectives
Understand what Decision Theory is;
Understand various Environments of Decision
Making;
Choose the Best Decisions Under various
Decision Making Environments.

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4.1 THE DECISION THEORY:
4.1.1 AN INTRODUCTION
Decision Theory- is a methodology for making
management decisions which constitutes a
particular branch of operations research/decision
science.
Serves as the analysis of decision situations in
which certainty cannot be assumed.
Most of the time decision maker must choose
among several different courses of action in an
attempt to optimize his decision process.
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4.1.2 THE SIX STEPS IN DECISION
THEORY
1) Clearly define the problem at hand
2) List the possible alternatives
3) Identify the possible outcomes
4) List the payoff or profit of each combination of
alternatives and outcomes
5) Select one of the mathematical decision theory
models
6) Apply the model and make your decision

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 4.1.3 Components of Decision Making

• A state of nature is an actual event that may occur in the future.

•A payoff table is a means of organizing a decision situation, presenting
the payoffs from different decisions given the various states of nature.

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4.1.4 TYPES OF DECISION-MAKING ENVIRONMENTS

Type1: Decision-making under Complete certainty

 decision-maker knows with certainty the
consequences of every alternative or decision
choice
Type2: Decision-making under Complete
uncertainty (without probability)
 The decision-maker does not know the
probabilities of the various outcomes
Type3: Decision-making under risk (with
probability)
 The decision-maker does know the probabilities of
the various outcomes
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1. Decision Making Under Complete Uncertainty (without Probabilities)

Decision situation: An investor wants to decide which of the

three properties to buy.

92
A. THE MaxiMax CRITERION
 In the MaxiMax criterion the decision maker selects the decision
that will result in the maximum of maximum payoffs; an optimistic
criterion.

93
B. THE MaxiMin CRITERION
 In the MaxiMin criterion the decision maker selects the
decision that will reflect the maximum of the minimum
payoffs; a pessimistic criterion.

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C. THE MiniMax REGRET CRITERION

 Regret is the difference between the payoff from the best

decision and all other decision payoffs.
 The decision maker attempts to avoid regret by selecting the
decision alternative that minimizes the maximum regret.

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D. THE EQUAL LIKELIHOOD (or
Laplace) CRITERION
 The equal likelihood ( or Laplace) criterion multiplies the
decision payoff for each state of nature by an equal weight,
thus assuming that the states of nature are equally likely to
occur.
Decision Values
Apartment building $50,000(.5) + 30,000(.5) =
40,000
Office building $100,000(.5) - 40,000(.5) =
30,000
Warehouse $30,000(.5) + 10,000(.5) =
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20,000
 Decision-Making Under Complete Uncertainty:
Summary of Criteria Results
 A dominant decision is one that has a better payoff than another
decision under each state of nature.
 The appropriate criterion is dependent on the “risk” personality and
philosophy of the decision maker.
Criterion Decision (Purchase)
Maximax Office building
Maximin Apartment building
Minimax regret Apartment building
Equal likelihood Apartment building

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2. DECISION MAKING UNDER RISK (WITH PROBABILITIES):
A. EXPECTED (Monetary) VALUE CRITERION

Expected value is computed by multiplying each decision outcome

under each state of nature by the probability of its occurrence.

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THE CHOICE UNDER EXPECTED
VALUE CRITERION
 EV(Apartment) = $50,000(.6) + 30,000(.4) =
42,000
 EV (Office) = $100,000 (.6) – 40,000 (.4) =
44,000 (Choice)
 EV (Warehouse) = $30,000 (.6) + 10,000 (.4) =
22,000

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DECISION MAKING WITH
PROBABILITIES:
B. EXPECTED
OPPORTUNITY LOSSloss is the expected
 The expected opportunity value of
the regret for each decision.
 The expected value and expected opportunity loss
criteria result in the same decision.

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 CHOICE UNDER EOL
EOL(Apartment) = $50,000(.6) + 0(.4) =
30,000
EOL(Office) = $0(.6) + 70,000(.4) =
28,000
EOL(Warehouse) = $70,000(.6) + 20,000(.4) =
50,000

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Decision Making with Probabilities:
C. Expected Value of Perfect
Information
 The expected value of perfect information (EVPI) is the maximum
amount a decision maker would pay for additional information.
 EVPI equals the expected value given perfect information minus the
expected value without perfect information.
 EVPI equals the expected opportunity loss (EOL) for the best
decision.

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 THE CHOICE UNDER EPVI
 Decision with perfect information: $100,000(.60)
+ 30,000(.40) = $72,000
 Decision without perfect information: EV(office)
= $100,000(.60) - 40,000(.40) = $44,000
 EVPI = $72,000 - 44,000 = $28,000 = EOL
(Office), $0(.60) + 70,000(.4) = $28,000

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4.2 THE DECISION TREE
4.2.1 INTRODUCTION
Decision-tree models offer a visual tool that can
represent the key elements in a model for decision
making under uncertainty and help organize those
elements by distinguishing between decisions
(controllable variables) and random events
(uncontrollable variables).
In a decision tree, we describe the choices and
uncertainties facing a single decision-making agent.
This usually means a single decision maker, but it
could also mean a decision-making group or a
company.
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4.2.2 REPRESENTING DECISIONS
In a decision tree, we represent decisions as square
nodes (boxes), and for each decision, the alternative
choices are represented as branches emanating from
the decision node.
These are potential actions that are available to the
decision maker.
In addition, for each uncertain event, the possible
alternative states are represented as branches
emanating from a chance node, labeled with their
respective probabilities.

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4.2.3 ANALYZING THE DECISION TREE
Whereas we build the tree left to right, to reflect the
temporal sequence in which a decision is followed
by a chance event, we evaluate the tree in the
reverse direction.
At each chance node, we can calculate the expected
payoff represented by the probability distribution at
the node.
This value becomes associated with the
corresponding action branch of the decision node.
Then, at the decision node, we calculate the largest
expected payoff to determine the best action.
This process of making the calculations is usually
referred to as rolling back the tree.
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4.2.4 DECISION TREES: RISK PROFILES
The distribution associated with a particular action
is called its risk profile.
The risk profile shows all the possible economic
outcomes and provides the probability of each: It is
a probability distribution for the principal output of
the model.
This form reinforces the notion that, when some of
the input parameters are described in probabilistic
terms, we should examine the outputs in
probabilistic terms.
After we determine the optimal decision, we can
use a probability model to describe the profit
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4.2.5 DECISION TREES FOR A SERIES OF
DECISIONS
Decision trees are especially useful in situations
where there are multiple sources of uncertainty and
a sequence of decisions to make.
For example, suppose that we are introducing a
new product and that the first decision determines
which channel to use during test-marketing.
When this decision is implemented, and we make
an initial commitment to a marketing channel, we
can begin to develop estimates of demand based on
our test.
At the end of the test period, we might reconsider
our channel choice, and we may decide to switch to
another channel.
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EXAMPLE:
 In the following example, we have depicted (in telegraphic
form) a situation in which we choose our channel initially,
observe the test market, reconsider our choice of a channel,
and finally observe the demand during full-scale
introduction.

Decision Tree with Sequential Decisions 109

 4.2.6 Principles for Building and Analyzing
Decision Trees
1. Determine the essential decisions and uncertainties.
2. Place the decisions and uncertainties in the appropriate
temporal sequence.
3. Start the tree with a decision node representing the first
decision.
4. Select a representative (but not necessarily exhaustive)
number of possible choices for the decision node.
5. For each choice, draw a chance node representing the
first uncertain event that follows the initial decision.
6. Select a representative (but not necessarily exhaustive)
number of possible states for the chance node.
7. Continue to expand the tree with additional decision
nodes and chance nodes until the overall outcome can be
evaluated.
110
4.2.7 Rollback Procedure for Analyzing Trees
1. Start from the last set of nodes—those leading to the ends
of the paths.
2. For each chance node, calculate the expected payoff as a
probability-weighted average of the values corresponding
to its branches.
3. Replace each chance node by its expected value.
4. For each decision node, find the best expected value
(maximum benefit or minimum cost) among the choices
corresponding to its branches.
5. Replace each decision node by the best value, and note
which choice is best.
6. Continue evaluating chance nodes and decision nodes,
backward in sequence, until the optimal outcome at the
first node is determined.
7. Construct its risk profile. 111
4.2.8 IMPERFECT vs. PERFECT
INFORMATION
When we have to make a decision before
uncertainty is resolved, we are operating with
imperfect information (uncertain knowledge) about
the state of nature.
When we can make a decision after uncertainty is
resolved, we can respond to perfect information
about the state of nature.
 Our probability assessments of event outcomes
remain unchanged, and we are still dealing with
expected values.
112
4.2.9 Expected Value of Perfect Information
(EVPI)
The expected payoff with perfect information must
always be at least as good as the expected payoff
from following the optimal policy in the original
problem, and it will usually be better.
The EVPI measures the difference, or the gain due
to perfect information.
The calculation of EVPI can also be represented
with a tree structure, where we reverse the sequence
of decision and chance event in the tree diagram,
just as we did in the calculations.

113
Decision Tree for the EVPI Calculation
UNIT-5: NETWORK ANALYSIS
(FOR MANAGEMENT ONLY)

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5.0 Learning Objectives
Understanding Basic Terminology in the Study of
Network Analysis;
Practicing how to use PERT or CPM techniques in
Network Analysis;
Explaining the Importance of Network Analysis in
Planning and Scheduling functions.

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5.1 BASIC TERMINOLOGY
 NETWORK:
 It is a graphical representation of logical and sequentially
connected activities and events of a project.
 Network is also called arrow diagram. PERT (Program
Evolution Review Technique) and (Critical Path Method) are the
two most widely applied techniques.
 ACTIVITY:
 Any individual operation, which utilizes resources and has an
end and a beginning, is called activity.
 A task or a certain amount of work required in the project
Requires time to complete, Represented by an arrow.
 These are usually classified into four categories: Predecessor
activity,
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Successor activity, Concurrent activity AND Dummy
117