GAURAV SONKAR
OPERATION RESEARCH
(Q1) Define OR and discuss its scope. (Scope is areas of application) (ANS) O.R. simply defined as the research of operations. By E.L. ARNOFF & M.J.NETZORG
(03-04)
O.R. is the systematic, method oriented study of the basic structure, characteristics, functions and relationship of an organization to provide the executive with sound, scientific and quantitative basis for decision making.
By C. KITTEL
O.R. is an aid for the executive in making his decisions by providing him with the needed quantitative information based on the scientific method of analysis.
SCOPE OF O.R.
(I) Allocation and Distribution:
Optimal allocation of limited resources such as men, machine, and material. Location and size of warehouses, distribution centre, retail depot etc. Distribution policy.
(II) Production and Facility Planning: Selection, location and design of production plant. Project scheduling & allocation of resources.
GAURAV SONKAR
OPERATION RESEARCH
Forecasting. Maintenance policy. Scheduling & sequencing. (III) Procurement: What, when and how to purchase at minimum procurement cost Bidding and replacement policies. (IV) Marketing: Product selection, timing & competitive action Selection of advertising media. Demand forecast and stock level. Customers preference for size, colour & packaging of various products. (V) Finance: Capital requirement, cash flow analysis. Credit policies, credit risks etc. Profit plan of the company. Determination of optimum replacement policies. (VI) Personnel: Selection of personnel, determination of retirement age and skills Recruitment of policies & assignments of jobs. (VII) Research and Development: Determination of areas of Research and Development Reliability & control of development of projects. Selection of projects & preparation of their budgets.
GAURAV SONKAR
OPERATION RESEARCH
(06-07)
(ANS)
METHODOLOGY OF OR
The effective use of OR techniques, requires to follow the systematic sequence of steps. In general there are following six steps
GAURAV SONKAR
OPERATION RESEARCH
GAURAV SONKAR
OPERATION RESEARCH
Complexity:
In a big industry, the numbers of factor influencing a decision have been increased. Situation has become big & complex because these factors interact with each other in complicated fashion. There is, thus, great uncertainty about the outcomes of interaction of factors like technological, environmental, competitive, etc. For instance, consider a factory production schedule which has to take into account. a) Customer demand b) Requirement of raw materials c) Equipment capacity and possibility of equipment failure, and d) Restriction on manufacturing process. Evidently, it is not easy to prepare a schedule which is both economical and realistic where as operation research provides mathematical models to analyze the problem and gives the executive a quantitative basis for decision making.
Uncertainty:
There is a great uncertainty about the economic and general environment. With economic growth, uncertainty is also growing. This makes the decision costlier and time-consuming. OR is, thus, quite essential from reliability point of view.
Knowledge explosion:
Knowledge is increasing at a very fast rate. Majority of the industries are not up-to-date with the latest knowledge and are, therefore, at a disadvantage. OR teams collect the latest information for analysis purposes which are quite useful for the industries.
GAURAV SONKAR
OPERATION RESEARCH
In short OR is research of operations and is a problem solving and decision making science.
(Q4) Describe the rules for drawing the network diagram (decision tree) with suitable illustration. (07-08)
(Ans)
DECESION TREE
A decision tree is a graphical representation of the decision process indicating decision alternative, states of nature, probabilities attached to the states of nature and conditional benefits and losses. It consists of a network of nodes and branches. Two types of nodes are used- decision node represented by a square and state of nature (chance or event) node represented by a circle. Alternative course of action (strategies) originate from the decision node as main branches (decision branches). At the end of each decision branch, there is a state of nature node from which emanates chance events in the form of sub-branches (chance branches). The respective payoffs & the probabilities associated with alternative courses and the chance events are shown alongside these branches. At the terminal of the chance branches are shown the expected values of the outcomes. The general approach used in decision tree analysis is to work backward through the tree from left to right, computing the expected value of each chance node. We then choose the particular branch leaving a decision node which leads to chance node with the highest expected value. This is known as roll back or fold back process.
Steps in Decision Tree Analysis (i) (ii) (iii) (iv) (v) (vi) (vii)
Identify the decision points and the alternative courses of action at each decision point systematically. At each decision point determine the probability and the payoff associated with each course of action. Starting from the extreme right end, compute the expected payoff (EMV) for each course of action. Choose the course of action that yields the best payoff for each of the decisions. Proceed backwards to the next stage of decision points. Repeat above steps till the first decision points point is reached. Finally, select the course of action which yields maximum possible EMV.
GAURAV SONKAR
OPERATION RESEARCH
Illustration: Suppose we have the decision-making problem represented by the following table:
Probability
Alternative Actions Produce 25 units Produce 75 (A1) units (A2) 4000 4000 10,000 - 5,000
0.6 0.4
2 A1
S1 p=0.6 S1 S2 p=0.6
p=0.4 S2
1
A A2 2
DECISION NODE DECISION NODE
p=0.4
Rs.10, 000
S1
p=0.6
A2 3
S1
S2 p=0.4
p=0.6
S2
- Rs.5000
For a decision alternative (strategy) the EMV is calculated by summing the products of payoff of each state and its probability. EMV on node 2= Rs. (4,000X0.6 + 2,000X0.4) = Rs.3, 200 EMV on node 3= Rs. (10,000X0.6 - 5000X0.4) = Rs.3, 000 EMV on node 1= Max {3200, 3000} = Rs.3200. Thus the optimal alternative action is A1 i.e. produce 25 units.
GAURAV SONKAR
OPERATION RESEARCH
(Q5) What techniques are used to solve a decision making problems under uncertainty? Illustrate any one technique with an example. (07-08)
(Ans) Under condition of uncertainty, the decision maker has knowledge about states of nature that
happens but lacks the knowledge about the probabilities of their occurrence. Situations like launching a product fall under this category. Under conditions of uncertainty, a few decision criterions are available which could be of help to the decision maker.
Laplace Criterion or
Criterion of
Rationality
i) Maximax Criterion:
This criterion provides the decision maker with optimistic criterion. The working method is summarizing as follow. (a) Locate the maximum payoff values corresponding to each alternative (or course of action or strategy), then (b) Select an alternative with maximum payoff value.
GAURAV SONKAR
OPERATION RESEARCH
ith regret = (maximum payoff ith payoff) for the jth event
(b) Determine the maximum regret amount for each alternative. (c) Choose the alternative which corresponds to the minimum of the maximum regrets.
(a) Choose
(b) Determine the maximum as well as minimum of each alternative and obtain P = . Maximum + (1-). Minimum
for each alternative.
(a) Determine expected value for each alternative; if n denotes the number of events and Ps
denote the payoffs, then expected value is given by 1\n[P1+P2+.+Pn]
GAURAV SONKAR
10
OPERATION RESEARCH
Illustration: Considering a manufacturing company that is thinking of various alternatives to increase its production to meet the increasing market demand.
State of Nature Moderate Low (Rs.) (Rs.) 25,000 - 25,000 30,000 - 40,000 15,000 - 1,000
Thus, according to maximax criterion the executive will choose alternative Construct
GAURAV SONKAR
11
OPERATION RESEARCH
(Q6) What techniques are used to solve a decision making problems under risk?
Illustrate anyone technique with an example.
(Ans) Here more than one state of nature exists and the decision maker has sufficient information to
assign probabilities to each of these states. These probabilities could be obtained from the past records or simply the subjective judgment of the decision maker. Under conditions of risk, a few decision criterions are available which could be of help to the decision maker.
Expected Opportunity
Loss Criterion or Expected Value of Regret
Conditional Profit Table Expected Profit Table Conditional Profit Table Conditional Loss table Expected Loss Table
Conditional Profit Table with P.I. Expected Profit Table with P.I.
Expected Value Criterion: The expected monetary value for a given course of action is the weighted sum of possible payoffs for each alternative. It is obtained by summing the payoffs for each course of action multiplied by the probabilities associated with state of nature. It consists of following steps: (a) Construct a payoff table listing the alternative decisions and the various state of nature. Enter the conditional profit for each decision event combination along with the associated probabilities. (Construct Conditional profit table). (c) Calculate the EMV for each decision alternative by multiplying the conditional profits by assigned probabilities and adding the resulting conditional values. (Construct expected profit table). (d) Select the alternative that yields the highest EMV.
GAURAV SONKAR
12
OPERATION RESEARCH
1. 2. 3.
Construct conditional profit table with perfect information. Construct expected profit table with perfect information. Determine EVPI from relation; EVPI = EPPI max EMV
Illustration: A newspaper boy has the following probabilities of selling a magazine: No. of copies sold Probability 10 0.10 11 0.15 12 0.20 13 0.25 14 0.30 Cost of the copy is 30 paisa and sale price is 50 paisa. He cannot return the unsold copies. How many should he order?
Solution from EMV approach: Cost Price = 30 paisa. Selling Price = 50 paisa. Profit = Selling price Cost price = 20 paisa.
GAURAV SONKAR
13
OPERATION RESEARCH
Step 1: Construct Conditional Profit Table: Possible Demand (No. of Copies) 10 11 12 13 14 Probability 10 Copies 0.10 0.15 0.20 0.25 0.30 200 200 200 200 200 Possible Stock Action 11 Copies 12 13 Copies Copies 170 220 220 220 220 140 190 240 240 240 110 160 210 260 260
Step 2: Construct Expected Profit Table: Possible Demand (No. of Copies) 10 11 12 13 14 Probability 10 Copies 0.10 0.15 0.20 0.25 0.30 20 30 40 50 60 Possible Stock Action 11 Copies 12 13 Copies Copies 17 33 44 55 66 14 28.5 48 60 72 11 24 42 65 78
Total Expected Profit 200 215 222.5 220 205 (paise) Thus, therefore, the newspaper boy must order 12 copies to earn the highest possible average daily profit of 222.5 paisa.
GAURAV SONKAR
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