Chapter five

Quantitative decision making

 Operations Research

 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.
 Cont’d…
• 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.
 Cont’d…
• 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.
 Cont’d…
• Since then, the subject has been gaining more and more importance for the
students of Economics, Management in general, 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.
• 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.
 Cont’d….
• 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.
 Cont’d…..
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.

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.

 Cont’d….
• 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) Holistic 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.

 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 Defense,

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.

 Cont’d….
• 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.

 Cont’d….

• 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.
 Cont’d….
• 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.

 Cont’d….
• 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.

 Cont’d…

2. 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
 Cont’d….

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.
 Cont’d…..

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

 Cont’d…

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.
 Cont’d…

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.

Linear Programming
 Cont’d…

• 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. Resources constraints

Are restrictions that should be clearly identifiable and measurable in quantitative

terms, which arise from limitation of available resources.
 Cont’d…
• 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”

Cont’d…
 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.
Solution cont’d
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….