Quantiative Analysis & Decision Making - ITM Unviersity - MBA

Quantitative Analysis
i n Decision M a k i n g
Quantitative A n a l y s i s i n Decision Making
Table of Content eBook
1. Introduction to Quantitative Analysis in Decision Making 5
1.1 Introduction 6
1.2 Meaning of Decision Making 7
1.3 Operations Research (OR) 9
1.4 Methodology of Operations Research 11
1.5 Applications of Operations Research 15
1.6 Quantitative Analysis and Computer Information Systems 17
1. 7 Chapter Summary 19
2. Linear Programming: Formulation and Graphic Method 20
2.1 Introduction 21
2.2 Definition of Linear Programming 22
2.3 Basic Requirements of Linear Programming 22
2.4 Assumptions Underlying Linear Programming 23
2.5 Formulation of Linear Programming Problem 25
2.6 Solution to Linear Programming Problem: Graphic Method 27
2.7 Variations in Linear Programming Problems 35
2.8 Advantages and Limitations of Linear Programming 38
2.9 Chapter Summary 39
3. Linear Programming: Solving by Simplex 40
3.1 Introduction 41
3.2 Concept of Simplex Method 42
3.3 Converting LP Problem to Standard Form 43
3.4 Steps in Simplex Method 45
3.5 Simplex Method: Maximization Case 46
3.6 Simplex Method: M i n i m i z a t i o n Case 54
3.7 Duality in LP Problem 63
4. Transportation Problem (TP) 68
4.1 Introduction 69
4.2 Characteristics and Assumptions of Transportation Problem 70
4.3 The TP Algorithm 74
4.4 Initial Basic Feasible (!BF) Solution Methods 75
4.5 Optimality Test Methods 82
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5. Queuing Theory 94
5.1 Introduction 95
5.2 Queuing Theory 96
5.3 S t ru c t u r eof Queuing System 96
5.4 Queuing Theory: Operating Characteristics 100
5.5 Types of Queuing Models 102
5.6 Cost Analysis 113
6. Simulation 117
6.1 Introduction 118
6.2 Types of S i m u l a t i o n 119
6.3 Steps in S i m u l a t i o n 121
6.4 Monte Carlo S i m u l a t i o n and Its Steps 122
6.5 Monte Carlo S i m u l a t i o n Examples 124
6.6 Advantages and Disadvantages of S i m u l a t i o n Techniques 130
7. PERT/CPM Techniques 132
7 .1 Introduction 133
7.2 PERT and CPM Network 134
7.3 Rules of Network Construction 137
7.4 Network Analysis: Forward Pass and Backward Pass 139
7.5 Network Analysis: Floats 145
7.6 Critical Path Method (CPM) 146
7.7 Project Evaluation and Review Technique (PERT) 147
7.8 Importance and Umitations of CPM/PERT 153
8. Project Crashing and Resource Allocation 155
8.2 Project Crashing 157
8.3 Cost Associated with Project Crashing 157
8.4 Project Crashing Principles and Steps 159
8.5 Resource Allocation and Smoothing 165
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9. Decision Theory 171
9.2 Steps in Decision Making 173
9.3 One-stage Decision Making 174
9.4 Multi-stage Decision Making 187
9.5 Utility Theory 190
1 0 . Game Theory 194
10.2 Definition and History of Game Theory 196
10.3 Real World Applications of Game Theory 197
10.4 Game Theory: Assumptions and Common Terms 197
10.5 Types of Games 198
10.6 Strategies for Two-person Game 200
10. 7 Pure Strategy 201
10.8 Mixed Strategy 205
10. 9 Linear Programming (LP) Model Form 222
Appendix
227
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I n t r o d u c t i o n to
Quantitative
Techniques i n
Decision Making
Quantitative A n a l y s i s in Decision Making
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1 . 1 Introduction
Decision making is an important part of the management process. It is a very
complicated task which involves high cost of technology, labor, materials, and analysis
of external factors like political, social, and economic factors, which increases the
complexity of managerial decrsion making. When faced with a certain problem, a
manager selects a specific course of action from a set of possible options for a particular
project.
Today, due to growing knowledge and technology, the pace and complexity of decisions
that are required to be made is certainly greater than those faced by our forefathers.
Also, the number of alternative solutions available is confusing. Thus, these challenges
have led to the development of concepts and techniques to improve problem solving
abilities, so that wrong decisions, wrong production of products, and deliverance of
unsatisfactory services to customers are avoided.
Thus, some of the concepts and techniques include parameters like:
Disciplined thinking, which is the shift of focus to what is realistic and feasible.
Objective thinking, which means an unbiased evaluation of data.
Systematic thinking, which is a sequential step-by-step analysis of the problem.
Action-oriented thinking, which is a detailed search for the most economical solution
that can be implemented.
Therefore, this textbook provides a set of operational research techniques which can be
used by decision makers in order to make rational and effective decisions.
After reading this chapter, you will be able to:
Describe the quantitative approach in decision making
Explain the methodology of Operations Research (OR)
Describe the applications of Operations Research
Explain the role of quantitative analysis in computer information system
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1 . 2 M e a n i n g of Decision Making
A decision is the act of making-up one's mind about something. It is a choice among
various alternative courses of action for the purpose of achieving goals. Managerial
decision making is a process in which the management will select an appropriate course
of action from a set of possible options. Managers have to make decisions for the
purpose of attaining objectives and goals. Decision making may involve decisions under
certainty or uncertainty, under static or dynamic conditions, and against nature or any
rational opponent.
Decisions under Certainty or Uncertainty
Decision under certainty, as shown in Fig. 1.2a indicates that all the possible factors are
known and considered. Whereas, decisions under uncertainty are ones where the
happening of actual event is not known but probabilities can be assigned to various
possible occurrences.
Decision making under risk falls with a certain probability distribution between the two
extremes, that is, certainty and uncertainty.
Complete
Complete
Uncertainty Degree of Certainty Certainty
Decision Making Decision Making under Risk Decision Making
under Uncertainty under Certainty
Fig. 1.2a: Decision based on Degree of Certainty
Decisions under Static or Dynamic Conditions
Decisions taken for only a single period of time are known as static decisions. Whereas,
decisions taken in a sequence of interrelated decisions parallel or taken over several
time periods are known as dynamic decisions.
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Decisions against Nature or Any Rational Opponent
Decisions taken against nature, like digging oil wells, come under the category of
decisions against nature. Whereas, in case of rational opponent, it would be the
designing of an advertisement, while considering the competitor's actions.
Decision-making Process
Fig. 1 . 2 b represents the various steps involved in the decision-making process.
Objective Setting
Information Gathering
Generation of Alternatives
Evaluation of Alternatives
Selection of Alternative
Implementation
Monitor and Control
Fig. 1.2b: Decision-making Process
Objective Setting
It deals with defining the problem of the organization, which includes the organization's
objectives, and identifying the specific functional department that needs to be studied
before solving the problem.
Information Gathering
It deals with the collection of data, so as to estimate the factors that affect the
organization's problem.
Generation of Alternatives
It deals with analyzing data and imposing limits, in order to achieve feasible alternative
solutions. It also helps to know potential outcomes and allows examining the sensitivity
of the solution to changes or errors observed in the numerical values.
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Evaluation of Alternatives
It deals with the evaluation of alternatives on different parameters.
Selection of Alternative
It deals with the selection of the most feasible solution to meet the organization's
objectives.
Implementation
It deals with the translation of the selected alternative into action. A properly
implemented solution, according to the operations research techniques, will reduce the
chance of errors.
Monitor and Control
It deals with the constant monitoring of the process and control of the variations, if any,
in order to meet the organization's objectives.
1 . 3 Operations Research (OR)
The foundation of OR was laid during World War II. It serves managers with a
quantitative basis for decision making. A large number of operation problems are solved
using OR. It helps managers in the following manner:
By allocating of resources, like men, material, machines, money, and time.
By selecting a strategy, like disposition of resources and tactics.
By considering the factors, like competition and conflict.
Definitions
OR can be defined in many ways due to its wide scope of application. However, a few
definitions of OR are:
According to Morse and Kimball, "Operations Research is a scientific method of
providing executive departments with a quantitative basis for decisions under
their control."
According to Wagner, "Operations Research is a scientific approach to problem
solving for executive management."
According to T. L. Saathy, "OR is the art of giving bad answers to problems,
which otherwise have worse answers."
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According to D. W. Miller and M. K. Starr, "OR is an applied decision theory. It
uses scientific, mathematical or logical means to attempt to cope with the
problems that confront the executive, when he tries to achieve a thorough
going rationality in dealing with his decision problems."
Features of Operations Research
The important features of OR are:
Decision Making
OR addresses managerial decision making or problem solving. A general
systematic process has the following steps:
Step 1: the problem should be defined along with the criteria, such as
maximization of profits, rrururnization of costs, etc.
Step 2: choose the alternative courses of action for consideration.
Step 3: identify the model to be used and the values of the parameters of the
process.
Step 4: evaluate the alternatives and select the feasible one.
Systematic Approach
A system is a set of entities that are interrelated with each other for the
performance of a common goal. OR defines these interrelationships and helps find
an optimal solution, in favor of the organization.
Objective
OR tries to locate an optima l or feasible solution for a given problem. Therefore, it
is important to set a measure of effectiveness, based on organization goals, in
order to compare it with the alternative courses of action.
Inter-disciplinary Approach
OR follows inter-disciplinary approach, in order to get the perfect blend of people
with expertise in different areas, so that the problem can be analyzed evenly by
each i n d i v i d u a l and therefore, requires a team approach.
Scientific Approach
OR uses scientific methods to solve problems, it consists of the following steps:
Step 1: a problem is defined clearly and conditions for observation are
determined.
Step 2: observations under varying conditions are made to determine the
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behavior of the system.
Step 3 : on the basis of observations, a hypothesis is formulated.
Step 4: the results are analyzed.
Step 5 : the hypothesis is either accepted or rejected.
1 . 4 Methodology of Operations Research
The basic characteristic of operations research is that it translates a given problem into a
mathematical form, solves it, and then transforms it back to the original form. Fig. 1.4a
represents the steps involved in problem solving used by OR methodology.
Formulate Develop a Obtain
the Problem Model Input Data
Fig. 1.4a: Operations Research Methodology
Step 1: Formulate the Problem
In quantitative analysis, the first step is to identify the problem. It consists of the
following components:
Need Analysis
In this case, identify whether the problem needs to be solved and if it is cost
effective.
Cause and Effect Analysis
OR is typically involved in solving problems that are recognized as such. Therefore,
it is significant to identify all the controls (causes) and their effects. A cause and
effect diagram, Fig. 1.4b, represents the relationship between various parameters
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and their effects on the given problem. Hence, the identification of causes and
effects is important.
Problem
Date
Fig. 1.4b: Cause and Effect Diagram
Step 2: Develop a Model
After identifying all the major causes and their respective effects, the problem can be
defined, that is, constnuction of a practical model which clearly indicates the relationship
between the resources and activities. Resources that are scarce constitute a constraint
on the solution and these are required to be considered in order to construct the
mathematical model.
Once the data collection is done, the next step is to design the model, the model should
be designed in such a way that it ensures the problem is well-understood by the
concerned people. The mathematical model helps in internal communication between
the OR team members. After the data is collected and the model is designed, the
evaluation of the model takes place, wherein, the model is evaluated in terms of
communication, documentation, and as an experimental tool, in order to measure its
effectiveness.
The models are basically classified as physical and symbolic models:
Physical Models
With help of a physical model, a real thing is represented physically or
schematically. There are two major types of physical models:
o Iconic Model
They represent the system in the scaled-up/down versions. Iconic models
believe in being specific, concrete, and to-the-mark, so that few problems
are encountered during the translation of the findings to the real-life
situation. The major drawback of iconic models is that they don't lend to
manipulation for experimental purposes.
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o Analogue Model
They represent the system by the set of properties of the o ri g i n a l system but
do not resemble them physically. They are less specific, concrete, and
precise. Analogue models can be manipulated easily, as compared to iconic
models.
Symbolic Models
Generally, real life problems can be represented in symbolic models or a
mathematical form. They use letters, numbers, and symbols for the representation
of the variables and their interrelationship. Symbolic models yield more accurate
results under manipulation, as compared to iconic and analogue models. Also,
they are easier to manipulate under experimentation.
Step 3 : Obtain Input Data
Once the model is formulated, the appropriate data needs to be collected, which will be
an input for the model. As the quality of data determines the quality of the output, it is
important to collect accurate data. For example, company reports, documents, and
interviews can be used as a source of data collection.
Step 4: Solve the Model
Once the appropriate input is collected for the model, it is analyzed and the output is
interpreted in terms of the given problem. The solution of a problem is a set of decision
variables that yield a desired level of output. The model created needs to be solved
using techniques l i k e :
Feasibility Analysis
A feasible solution is one that satisfies all the constraints of the problem; whereas,
an infeasible solution rs one that does not satisfy all the constraints. The feasible
solution needs to be considered by the decision maker.
Optimality Analysis
Optimal solution, one of the feasible solutions, optimizes the objective, that is, the
decision variables help to find a set of values that provide the best solution.
Adaptivity Analysis
It is also known as sensitivity analysis, wherein, the sensitivity of the proposed
solution to the changes in environment, learning effects, and other dynamic
behavior are checked.
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Step 5 : Analyze the Results
In this case, the behavior of the model is studied, with respect to the changes in the
model input and specifications.
Step 6: Validate the Model
Model is validated by determining whether the model can adequately and reliably predict
the behavior of the real system that it seeks to represent. It involves:
The testing of structural assumptions.
The testing of the model penformance, with respect to the old data of the actual
system.
Step 7 : Implement the Solution
The recommended solution or modified solution must be implemented according to the
requirement. Implementation brings changes in the organization. It has the following
components to be considered:
Management Approval
During the implementation stage, it is important that an official gives approval and
full cooperation of the concerned departments; throughout the problem
formulation and modeling stage, user involvement will ensure cooperation and
commitment.
Test Operations
The proposed system should be simultaneously implemented to the existing
system w h i l e the correction of errors is conducted. If it is not possible to operate
simultaneously, a pilot operation should be implemented first.
Full Implementation
A system should have control mechanism in order to alert the management, and
corrective actions are to be suggested and implemented when the operation
deviates or falls below the standard of penfonmance.
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1 . 5 A p p l i c a t i o n s of Operations Research
As OR follows a problem solving approach, it has a wide scope of application rn every
function and for any type of problem. Some of them are:
Accounting
The m a i n function of the accounting department in an organization is to produce timely
financial records. OR finds its uses in few aspects of accounting:
Cash flow analysis
Credit policy and credit risk
Development of standard costs and cost for by-products
Marketing
The m a i n function of the marketing department in an organization is to communicate the
value of a product or service to the customers, so as to sell the product or service. Its
main approach is toward customer attraction. OR finds its application in few aspects of
marketing:
Selection of product mix
Advertising allocations
Sales effort allocation
Product introduction timing
Production Management
The main function of production management is to coordinate and control the activities
required to make a product, which involves effective cost management, resource
scheduling, operations performance, and quality and waste control requirements. OR
finds its use in few aspects of Production Management which are as follows:
Identifying location of facilities
Determining the number of facilities
Loading and unloading sites
Project scheduling
Allocation of resources
H uma n Resource Management
The main function of human resource management in an organization is to attract,
select, train, assess, and reward employees, based on their performance. OR finds its
application in few aspects of Human Resource Management which are as follows:
Manpower p l a n n i n g
Skill balancing
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Recruiting and job assignment
Research and Development (R&D)
The m a i n function of the research and development department in an organization is to
develop new products or discover and create new knowledge about scientific and
technological topics. OR finds rts uses in few aspects of research and development:
Project selection
Project scheduling
R e l i a b i l i t y and alternative designs
Control of R&D projects
Defense Operations
As OR has evolved during World War II, it finds its use in defense to solve war problems
in a team approach by using models like 'life transportation models', for the easiest and
shortest way of transporting arms and ammunition, food, etc. to the defense personnel
located at various locations. Other techniques, like resource allocation models, linear
programming, game theory, and inventory models were applied in order to achieve
victory. In the war field, it helps the communication and co-ordination between the air
force, the navy and the army, in order to make appropriate decisions.
Agriculture
With the increase in population, demand for food is increasing too but the land available
for agriculture does not fulfill the demand. Therefore, it becomes very important to look
for alternative methods to increase the agriculture yield. Thus, the selection of the
agricultural land and the inputs used should be done accurately, in order to fulfill the
demand in the budgeted cost and time.
Traffic Control
To ensure a smooth flow of traffic during peak hours, that is, deciding the t i m i n g of the
traffic signal according to the flow of the commuters, so that traffic jams are avoided.
This can be achieved by using the queuing theory approac h.
Hospitals
Usually, long queues and shortage of medicines are observed, which can be solved by
using various OR techniques, like queuing theory and assignment problems.
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Industry
To take critical decisions in various situations, managers use operational research
techniques, like decision trees, inventory models, and linear programming model,
transportation model, sequencing models, assignment models, and replacement models.
These models are generally used to minimize the cost of production, increase
productivity, and optimize the use of available resources.
1.6 Quantitative Analysis and Computer Information
Systems
Quantitative Analysis or Operations Research is an integral part of modern computer
based information systems. Quantitative analysis tools are used in different subsystems,
as mentioned below:
Management Information Systems (MIS)
A management information system works in a systematic way, in order to manage data
and information, so that the organization's operations are efficient and effective. Thus, it
follows the systematic procedures of identification, collection, processing, retrieval, and
circulation of the information. Its main goal is to deliver the right information to the right
people, in the right place, and at the right time.
For example, if the user department has to procure material, it w i l l identify the quantity
of the material required, collect the material specification, and then process the
information to the store's department via the computer system based on inventory
models.
Decision Support Systems (DSS)
DSS is developed to help the management improve decision making. It believes in
supporting the judgment of the management. It is user-friendly, so that managers can
make decisions for semi-structured problems. It tries to find answers for a l l the 'what if'
questions and attempts to use the different decisions or modified data and quickly find
their outcomes, so that the decrsion feasibility is known. It believes in effective decision
making, rather than the efficiency of the decision.
DSS models use techniques like break-even analysis, decision trees, and decisions tables
for decision m a k i n g .
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Artificial Intelligence and Expert Systems
Artificial Intelligence (AI)
The term 'artificial' means 'intelligence by machines', which was evolved during
the 1 9 5 0 s . AI has the ability to see, think, learn, and understand, like a h u m a n . It
has several subsystems, in order to have many broad implications.
Expert Systems (ES)
ES, an outgrowth of the research on artificial intelligence, are the information
systems that attempt to support or automate decision making. They behave like
rational and intelligent decision makers by accumulating data and knowledge of a
specific topic and draw conclusions based on the data received.
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1 . 7 C h apt e r S u m m a r y
Scientific methods are used in order to follow a systematic approach to decision
making.
Decision making can involve decisions under certainty or uncertainty, under static
or dynamic conditions, and against nature or some rational opponent.
Quantitative analysis or operations research gives a systematic and scientific
approach to problem solving, in order to make an appropriate decision for
executive management.
Operations research includes features, like decision making, scientific approach,
objectivity, inter-disciplinary approach, and use of digital computers.
Operations research methodology includes the following steps: step one, formulate
the problem; step two, develop a model; step three, obtain input data; step four,
solve the model; step five, analyze the results; step six, validate the model; and
step seven, implement the solution.
Quantitative analysis is an integral part of the modern computer based information
system, which uses subsystems like Management Information System (MIS),
Decision Support System (DSS), Artificial Intelligence (AI), and Expert Systems
(ES).
Linear
Programming:
Formulation and
G r a p h i c Method
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2 . 1 Introduction
In every organization, managers face a large number of decision problems, regarding
the allocation of resources to various activities, with the objective to either increase
profit or decrease cost or both. When resources are in excess, no problem is
encountered. However, when resources are scarce, the decision problem regarding
resource allocation arises. Therefore, managers have to make a decision to allocate
resources when there are several activities to be performed.
According to the thumb rule, even an experienced manager, in all aspects, will not be
able to provide the correct solution to the above scenario. Thus, to overcome this factor,
the decision problem can be formulated and solved as mathematical programming
problems.
Mathematical programming includes the optimization of a certain function, known as
'objective function' which is subject to certain constraints. The constraints may be in the
form of limited resources, like labor, time, raw material, and so on. Mathematical
programming is classified as Linear, Integer, and Non-Linear Programming.
Therefore, in this chapter, you will study about Linear Programming. It helps managers
make appropriate decisions.
Identify the basic requirements of Linear Programming
Discuss the assumptions underlying Linear Programming
Formulate problem as Linear Programming Problem
Solve maximization and minimization problems by using graphic method
Discuss the advantages and limitations of Linear Programming
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Quantitative A n a l y s i s i n Decision M a k i n g
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2 . 2 Definition of Linear P r o g r a m m i n g
The word 'linear' means the linear relationship between the variables in a model.
Whereas, the tenm 'programming' indicates the mathematical modeling of a problem and
solving it using the economic allocation of limited resources, by selecting an appropriate
course of action from a set of alternative options, in order to achieve the desired results.
Definitions
Linear Programming (LP) is a mathematical technique used in computer modeling
( s i m u l a t i o n ) to find the best possible solution in allocating limited resources like energy,
machines, money, materials, space, time, and personnel to achieve maximum profit or
m i n i m u m cost.
According to P. Rama Murthy, "A model, which is used for optimum allocation of
scarce or limited resources to competing products or activities under such
assumptions as certainty, linearity, fixed technology and constant profit per
unit, is linear programming."
According to J. K. Sharma, "Linear Programming is a mathematical technique
used for allocation of 'scarce' or 'limited' resources, to several competing
activities on the basis of a given criterion of optimality."
2.3 Basic R e q u i r e m e n t s of Linear P r o g r a m m i n g
There are some basic requirements to solve a LP problem:
An objective should be set, which should be clearly identifiable and measurable in
quantitative terms. For example, maximization of profit or m i n i m i z a t i o n of cost.
The activities to be included should be distinct and measured in quantitative
terms. For example, the decision regarding quantity of product, which is included
in the production planning problem.
The resources of the system to be allocated in order to reach the goal should be in
quantitative tenms and in limited supply. For example, in order to achieve the
goal, the allocation of the resources should be in such a way that it w i l l trade-off
the returns on investment.
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The relationships representing the objective, the constraint equations, and the
objective function should be linear in nature.
A series of feasible alternative courses of action should be available to the decision
maker.
When all the above requirements are fulfilled, the problem can be represented in
algebraic form, called the LP Problem.
2.4 A s s u m p t i o n s U n d e r l y i n g Linear P r o g r a m m i n g
A l i n e a r programming model rs based on certain assumptions:
Proportionality
Proportionality exists in the objective function and the constraint inequalities. For
example, if one unit takes 2 hours of labor of a certain type, 10 units would require 20
hours, 20 units would require 40 hours, and so on.
Additivity
It is an assumption that the value of the objective function and total amount of
resources is given by the sum total of each resource considered separately. Therefore,
the total profit in objective function is determined by the sum of the profit contributed
by each of the products separately.
Continuity
It is an assumption that the decision variables are continuous. There are three different
situations when this assumption is applied, namely:
When the decision is one shot.
If the problem relates to the continuum of time.
If obtaining an integer value of the decision variable is required.
Certainty
It is an assumption that parameters, like objective function, coefficients of
inequality/equality constraints, and the constraint (resource) values are known with
certainty. For example, when the profit per unit of the product, requirements of the
materials, labor per unit, and availability of materials and labor are known, then linear
programming is deterministic in nature.

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Finite Choices
It is an assumption that there are limited numbers of options available to the decision
maker and decision values are assumed to be non-negative values. For example, in case
of production problems, the output cannot be negative.
With these assumptions, linear programming can be applied to different problems in
different approaches, as mentioned below:
Manufacturing Industry
In the manufacturing industry, linear programming is related to the product choice
when, for different input requirements, various alternative outputs are determined. Also,
when the inputs are scarce, the objective is to maximize the profit.
Agriculture Industry
In agriculture industry, linear programming is related to the feed choice. The
combination of feed ingredients with different nutritional content is a main factor to be
observed along with the objective of minimizing cost.
Transportation Problem
In transportation problem, linear programming can be used in situations when the
inventory observed is low and various depots require the material at the same time. The
objective is to find the best optimum route to reach the end customers with the
m i n i m u m cost of transportation.
Scheduling Problem
In scheduling problem, linear programming can be used in situations when tasks/jobs
are to be allocated to the appropriate employees dunng job rotation issues and the
objective is to m i n i m i z e costs on meetings.
Finance
Finance being the crucial part of an organization, linear programming can be used in
cases when the manager has to select an appropriate financial instrument, so as to
check the fund requirement, in order to minimize cost.
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2.5 F o r m u l a t i o n of Linear P r o g r a m m i n g Problem
In operations research the term formulation refers to the process of the representing the
verbal description problem or the numerical data available with help of mathematical
expressions.
G u i d e l i n e s for constructing a LP model:
Step 1: understand the problem.
Step 2: collect data for all parameters of the model.
Step 3 : identify the decision variables.
Step 4: choose a numerical measure of effectiveness for the objective function.
Step 5 : represent this measure of effectiveness as a linear expression involving decision
variables.
Step 6: identify and represent all the constraints as linear expressions involving decision
variables.
Example 0 1 :
XYZ Limited manufactures three products: Tables, chairs, and stools. The availability of
the resources and their utilization and profit, with respect to the products, are as shown
in Table 2.Sa.
Manufacturing Furnishing
Wood
Products Department Department
(sq. ft.)
(hrs) (hrs)
Tables 12 8 2
Chairs 4 5 4
Stools 2 4 3
Available Resources 120 100 80
Table 2.Sa: Resources Available with XYZ Limited
The profit observed per unit is 130, SO, and 20 for tables, chairs, and stools,
respectively. XYZ Ltd. desires to maximize profit. Formulate this as Unear Programming
Problem.

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Solution 0 1 :
Let x. be the units of tables.
Let X2 be the units of chairs.
Let X3 be the units of stools.
From the given information:
Manufacturing Furnishing
Wood Profit
Products Department Department
(sq. ft.) {t')
(hrs) (hrs)
Tables 12 8 2 130
C h a i rs 4 5 4 50
Stools 2 4 3 20
Available
120 100 80
Resources
.
Table 2.Sb: InformationSummary
As observed in Table 2.Sb, when x. units of tables are manufactured, the profit
incurred is 130x,. Similarly, when x2 units of chairs and x3 units of stools are
manufactured, the profit incurred is SOx2 and 20x3, respectively. Therefore, the objective
function is fonmulated as:
Maximize Z = 130x, +SOx2 +20x3
Subject to three different constraints:
Availability of wood
Manufacturing department hours
Furnishing department hours
When the availability of wood is considered as the constraint, the x1 units of tables
require 12 sq. ft. of wood, that is, 12x1. Similarly, for x2 units of chairs and x3 units of
stools, the wood required is 4x2 and 2x3, respectively. Hence, the wood constraint is
formulated as:
12X1 + 4X2 + 2X3 ,; 120
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Similarly, for the constraints of manufacturing and furnishing department hours, the
constraints can be formulated as shown:
B x , + Sx2 + 4x3 s 1 0 0 (Manufacturing constraint)
2x, + 4x2 + 3x3 s 80 (Furnishing constraint)
Where x,, x2, and X3 are considered to be a non-negative values, as quantity cannot be
negative.
(Non-negative value)
Therefore, the problem can be fonmulated as:
Maximize Z = 130x 1 +50x 2 +20x 3
Subject to:
12x 1 + 4x2 + 2x3 ,; 120
B x , + Sx2 + 4x3 ,; 1 0 0
2x, + 4x2 + 3x3 ,; 80
X1, X2, X3 0
2.6 Solution to Linear Programming Problem: Graphic
Method
Linear programming can be solved by two approaches.
Linear Programming Problems
Graphic Method Simplex Method
Fig. 2 . 6 a : Approaches for Solving Linear Programming Problem
Graphic Method
Graphic method is restricted in application and can be used only when two variables are
involved. It can be applied in two situations, namely, maximization and m i n i m i z a t i o n .

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Simplex Method
Simplex method is also one of the approaches to solve the linear programming problem,
which w i l l be explained in the next chapter.
Steps to Solve LPP by Graphic Method:
Step 1: formulate the problem.
Step 2: draw a graph that includes all the constraints and identify the feasible region.
Step 3 : obtain the point on the feasible region that optimizes the objective function.
Step 4: interpret the results.
Consider the following example for the maximization case of LPP.
Example 02:
A company is producing two types of products, namely, Deluxe and Standard. The
material and labor requirements with respect to these and total availability of these
resources in the next month are shown in Table 2.6a.
Items Deluxe Standard Availability
Material A 3 kg/unit 6 kg/unit 6000 kg
Material B 10 pieces/unit 5 pieces/unit 5000 pieces
Labor 3 hrs/unit 5 hrs/unit 6000 hrs

. . .
Table 2.6a: Ava1lab1hty of Resources
The company earns <"500 on the sale of one unit of deluxe and <"750 on one unit of
standard. How many units of each type should the company produce next month rn
order to maximize its profits?
Solution 02:
Step 1: As our objective is to maximize the profit:
Let x, be the units of Deluxe
Let x2 be the units of Standard
The objective function is:
Maximize Z= 500x 1 + 750x2
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Subject to:
3x, + 6x2 s 6 0 0 0 ( Material A constraint)
10x, + 5x2 s 5 0 0 0 (Material B constraint)
3x, + 5x2 s 6 0 0 0 {Labor constraint)
X 1 2! 0 , X22!0 (Non-negative constraints)
Step 2: Plot the constraints on the graph.
First, remove the lnequalitv sign and find the coordinates of the each constraint. For
material A constraint, 3x, + 6x2 s 3000, any combination of x, and X2 should not exceed
3 0 0 0 . That is, with varying values of x1 and xz, the combination can assume a m a x i m u m
value of 3000. Since the graph requires only two points to plot a straight line,
alternately consider the values of x1 and x2 as zero, as shown in Table 2.6b.
x1 Coordinate x, Coordinate
Constraint
(When x , = 0) (When x, = 0)
Material A
(2000, 0) (0, 1000)
3x, + 6x2 = 6000
Material B
(500, 0) (0, 1000)
10x, + 5x2 = 5 0 0 0
Labor
(2000, 0) (0, 1200)
3x, + 5x2 = 6000
. . .
Table 2 . 6 b : Calculating the Coordinates of Constraints
So the values for Material A are:
xi = 2 0 0 0 and xa= 1 0 0 0
J o i n i n g the points ( 2 0 0 0 , 0) and ( 0 , 1000), you get the required straight l i n e . Similarly,
the other constraint can be plotted. Since all the constraints need to be satisfied, the
area should be bounded by all the three constraints. The region that is acceptable to a l l
the three constraints is triangle OPQ, which is the feasible region, as shown in
Fig. 2.6b.

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x,
2000
1500
Feasible Region
1000
Material A
P(O, 1000)
Material B
500
500 1000 1500 2000
Fig. 2.6b: Graphic Plot of Constraints
Step 3 : Obtaining the optimal solution.
There are two ways to find the optimal solution, namely, extreme points and iso-profit
line.
Extreme Points
According to the extreme points approach, in linear programming problem, the
solution will l i e only at one of the vertices of the feasible solution space, provided
that the problem has an optimal solution. Here, all the points within the shaded
area satisfy the three conditions of material A, material B, and labor. Therefore, as
shown in Fig. 2.6b, the feasible region is shaded accordingly.
Extreme Points Z = soox, + 750x2
Point O (0, 0) 500 x O + 750 x O = 0
Point P ( 0 , 1000) 500 x O + 750 x 1000 = ,750000
Point Q (500, 0) 500 x 500 + 750 x O = ,250000

. .
Table 2.6c: Analyzing the Extreme Points
Thus, point P gives the maximum value. The company should produce 1000 units
of standard products next month, in order to rnaxrrmze its profits.
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Isa-profit Line
To find the profitable option, another line is added to the graph called 'iso-profit
l i n e ' or 'constant-profit line'. All the points on the iso-profit l i n e represent the same
profit and produce the same amount of profit.
Objective function i s :
Maximize Z = 500x, + 750x2
Let the iso-profit line represent a profit of ,2,00,000. For this, use the objective
function equation, 500x, + 750x2 = 200000. The xr and X2 axis intercept are (400,
0) and (0, 266.67) respectively. The dotted line plotted as shown in Fig. 2.6c is
the iso-profit l i n e representing a profit of ,2,00,000.
As all the points that are on the iso-profit line fall within the feasible region, the
firm can generate a profit of ,2,00,000. Greater profits can be earned by moving
to other iso-profit lines. Other lines can be drawn parallel and farther away from
the origin or iso-profit line of profit ,2,00,000. While moving the iso-profit line
farther from o ri g i n , one of the lines touches the corner(s ) of the feasible region. In
this example, the iso-profit line touches the point P (0, 1000) of feasible region
OPQ as shown in Fig. 2.6c, which is farthermost corner satisfying all three
constraints. Point P represents optimal solution point for the problem. The iso
profit l i n e through optimal point P (0, 1000) realizes profit as calculated below:
Z = 500x, + 750x2 = 500 x O + 750 x 1000 = 7,50,000
So the company can realizes highest profit of ,7,50,000 by producing 1000 units
of standard product in next month.

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x,
2000
1500
Feasible Region
1000'
P(O, 1000) Material A
Material B
500
/Labor
'
'
'
' '
'
'
x,
0 '
500 1000 1500 2000
!so-profit line
!so-profit line
at 2,00,000
at 7,50,000
Fig. 2.6c: Determining the Optimal Solution using Iso-profit Line
The value of the equation 500x, + 750x, increases till the feasible region, which w i l l give
the m a x i m u m value, that is, point P ( 0 , 1000).
Consider the following example for the minimization case of LPP.
Example 0 3 :
M i n i m i z e Z = 500x, + 400x2
Subject to:
3x, + lx2 z 21 (Constraint 1)
4x, + 12x2 z 48 (Constraint 2)
xi + 3x2 18 (Constraint 3)
X11 X2 ::!: 0
Solution 0 3 :
As the problem is already fonmulated, the constraints can be directly plotted on the
graph.
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The constraint 1, 3x, + lx, " 21, states that any combination of x. and x,, which is
above 2 1 , is acceptable. However, with varying values of x. and x,, the combination can
assume a m i n i m u m value of 2 1 . Since a graph requires only two points to plot a straight
l i n e , alternately, the values of xi and x, are taken as zero.
x, Coordinate x, Coard in ate

Constraint
(When x, = 0) (When x, = 0)
Constraint 1
(7, 0) (0, 21)
3x, + lx, = 21
Constraint 2
(12, 0) (0, 4)
4x1 + 12x 2 = 48
Constraint 3
(18, 0) (0, 6)
x1+ 3x2 = 18
. . .
Table 2 . 6 d : Calculating the Coordinates of Constraints
So the values are: When x. = 0, then x, = 21 and when x, = 0, then x. =7
Joining the points (0, 21) and (7, 0) you get the required straight line. Any point
representing a combination of x. and x,, that falls on this line or above the line, would
satisfy the constraint. Since both x. and x, are non-negative, the area beyond the l i n e is
the area in which any point would satisfy the constraint 1. Similarly, the other
constraints can be plotted. Since all the constraints need to be satisfied, the region
acceptable by all the constraints is the shaded region, which is the feasible region, as
shown in Fig. 2.6d. The feasible region, here, represents a convex set.

Quantitative Analysis in Decision Making
02. Linear Programming: Formulation and Graphic Method eBook
x,
24
A(O, 21) /easible Reqion

20
16
12
IE----- Constraint 1
4 8 12 6 20 24
Constraint 2 Constraint 3
Fig. 2.6d: Graphic Plot of Constraints
Obtaining the O p t i m a l Solution
The feasible region is as shown in Fig. 2.6d, therefore, calculating the m i n i m u m point:
Extreme Points Z = 500x 1 + 400x2
A (0, 21) 500 x O + 400 x 21 = 8400
B (5.6, 4.2) 500 x 5.6 + 400 x 4 . 2 = 4480
C (18, 0) 500 x 18 + 400 x O = 9000

.
Table 2.6e: Analyzing the Extreme Points
Remark:
The coordinates for point B can be obtained by solving equations of constraint 1, 3x1 +
1x 2 = 21 and constraint 3, that is, x1 + 3x2 = 18, simultaneously. Thus, to minimize
costs, the firm selects point B, the m i n i m u m point because its value is the least.
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2 . 7 Variations in Linear P r o g r a m m i n g Problems
There are few variations observed while solving linear programming problems.
Mixed Constraints
These are special constraints occurring when a resource must be used in a fixed ratio
with other resources.
Equality Constraints
These are special constraints that cause all valid points to lie exactly on the constraint
line.
M u l t i p l e or Alternative Optimal Solution
With multiple resources that can be combined in various ways, it's possible that more
than one resource mix will lead to an equally optimal solution. In the graphic method,
this situation will occur only when the objective function's iso-profit or iso-cost line is
parallel to one of the problem's constraint.
Unbounded Solution
Solution to a problem with unlimited resources, that is, if the solution can be made
infinitely large without violating any constraints of the problem, then it is said to be an
unbounded solution. In the real world, such a situation is impossible. Consider the
following example for better understanding.
Example 04:
Maximize Z = 2x, + 3x,
Subject to:
x,+ x, 2: 10
x, 2: 5
x, 2: 4
X1 1
X2 ::!: 0

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Solution 04:
As the problem is already formulated, the constraints can be plotted, as shown in
Fig. 2.7a
c
12
A
10
G
E F
4
H
D B
0
5 10 15
Fig. 2.7a: Unboundedness
The feasible area is bounded by CGHF and co. If the iso-profit line is plotted, then the
objective function can keep on increasing. This is an example of unboundedness.
Infeasibility
In this case, there is no solution which satisfies all the constraints. Consider following
example.
Example 0 5 :
M a xi m i z e Z = 2x1 + 3x2
Subject to:
x l + x 2 ,;; 4
xl 2: 7
x2 2: 5
xl ,x2 2: 0
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Solution O S :
As the problem is already formulated, the constraints can be plotted, as shown in
Fig. 2.7a.
x, = 7
Region satisfying
.,...._+- only last two
constraint
. ....,-+-+---.-....1..........i.t-_...__.,..x2= 5
-
-
2
-
0 2
Region satisfying
only first constraint
Fig. 2.7b: Infeasibility

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2 . 8 Advantages and Limitations of Linear P r o g r a m m i n g
Advantages
Linear programming helps in obtaining optimal solutions.
It is one of the most widely used applications of operations research.
It assists in making optimum use of production factors.
It improves the quality of decisions by assessing options against a quantifiable
measure of effectiveness.
It helps in re-evaluation of the basic plan when conditions are changed.
Limitations
A major drawback is that rt holds all relationships as linear.
It handles only one objective at a time.
It is based on conditions of certainty and does not take effects of time and
uncertainty into account.
A linear programming problem does not assure to provide non-integer valued
solutions always.
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2 . 9 C hapt e r S u m m a r y
Linear programming is the optimization technique that deals with the problems of
product m i x .
The problem is modeled as a set of linear inequalities, which may consist of an
objective function either to maximize the profits or minimize the cost along with
the constraints having limited resources.
When only two decision variables are involved, the graphic method can be used
and it can be used in both maximization and minimization linear programming
problems.
Linear programming assumes proportionality, implying that the amount of
resources used and their contribution to the objective function is proportional to
the value of the variables.
There are other assumptions, like additivity, continuity, certainty, and finite
choices, which provide a concise approach in order to solve a linear programming
problem.
A l i n e a r programming model may have multiple solutions.
A linear programming model may have variations, like mixed constraints, equality
constraints, multiple or alternative optimal solution, and unbounded solutions.

Linear
Programming:
S o l v i n g by
Simplex
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3 . 1 Introduction
The previous chapter, Formulation of Linear Programming (LP) and graphic method
provided an excellent approach to find the optimal solution for a given problem;
wherein, there were a set of constraints, with the help of which the feasible region was
determined and the objective function helped in locating the optimal point, whether it is
a maximization or minimization problem.
When this approach is applied in real life situations, it becomes difficult, as the decision
variables observed are more than two, which is the biggest limitation of the graphic
method in l i n e a r programming.
Therefore, in order to overcome this issue in an efficient way, the simplex method was
introduced. It is helpful in solving the linear programming problems of any magnitude
with two or more decision variables to achieve the optimal solution, where the objective
function controls the development and evaluates each feasible solution of the problem.
Thus, in this chapter, you will study about simplex method algorithm and its application
in order to solve l i n ea r programming problems.
Describe the simplex method of LP
Solve maximization and minimization problems by using the simplex method
Explain Two-Phase and Big-M methods
Discuss variations in LP Problem solutions
Describe duality in LP
Convert primal problem to dual problem
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3 . 2 Concept of S i m p l e x Method
The simplex method lies on a similar line as the graphic method, where the extreme
points of the feasible region are analyzed so as to determine the optimal solution that
lies in any one of these extreme points. When there are more than two decision
variables, it is difficult to plot the feasible region in the graph but the optimal solution
will lie at one of the extreme points only. Therefore, the simplex method provides a
systematic approach to analyze the extreme points by conducting the same set of steps
of the algorithm until an optimal solution is obtained. Due to this reason, it is also known
as the iterative method.
The simplex method was introduced by George Dantzrq in 1947. It is an algebraic
process where, first, the designing of a basic feasible solution takes place and it then
proceeds toward the optimal solution by following the iterative process. The use of
simplex method in linear programming problem starts with converting the problem into
a standard fonm and then testing each feasible solution for optimality, to know whether
the solution is optimal or not. In case it is not an optimal solution, then redesign the
program and test for optimality until the test confinms optimality. Hence, the simplex
method depends on two concepts, known as feasibility and optimality.
The general form of Linear Programming ( LP ) Problem is expressed as:
"
Objective Function: Optimize (Maximize or Minimize) Z = Ic,x
1
J- J
"
Subject to constraints: Ia,,x, = b.: i=l, 2 ... m (Constraints)
,- J
And x, o for a l l j = 1, 2 ... n
03. Linear Programming: Solving by Simplex eBook
3 . 3 C o n v e rt i n g LP Problem to Standard Form
Simplex method can be applied to LP problem, only when it is in standard form. Thus, it
should have the following characteristics:
All the constraints should be expressed as equality equations by adding slack or
artificial variables or subtracting surplus variables.
The right-hand side of each constraint should be made non-negative, if negative.
The objective function should be of the maximization type.
The standard form of LP problem is expressed as:
" m
Optimize (Max or M i n ) Z = I; c , x , + I;s,

] I I I
"
Subject to constraints: I;a,,x, + s, = b,; i = l , 2 ... m (constraints)
Jl
And, x,,s, 2 o (non-negativity conditions)
The criterion to convert LP into the standard form is given in Table 3.3a.
Coefficient of Extra
Type of Variable in Objective

Extra Variable Needed
Function
Constraint
Max. Z Min. Z
Less than or
A slack variable ( S,) is added 0 0
equal to ( '5 )
A negative slack variable ( -S,)ls added

0 0
More than or (Or surplus variable Is subtracted)
equal to tz )
An arnftctal variable (A;) Is added -M M
Equal t o ( = ) O n l y an artificial variable (A;) Is added -M M
Table 3 . 3 a : Conversion Criterion from LP to Standard Form
Terminologies Used in Simplex Method
There are important terminologies that one should know before the applying the simplex
method:
Slack Variable
It represents an unused resource, either in the fonm of labor hours, money,
machine time, etc. As these variables are not associated with any profit, they are
added to the original objective function with zero coefficients.
Surplus Variable
It represents the amount of resources used above the minimum required. They
are also known as negative slack value and have a zero coefficient in the objective
function.
Artificial Variable
It is used as a tool for generating initial basis solution to LPP for more than or
equal to (z ) and equal to(=) type of constraints. It doesn't have any physical
importance. Therefore, to neglect it in the final solution, maximum cost value (M)
is assigned in minimization objective function and maximum loss value (-M) is
assigned in maximization case, which will be covered further in detail.
Structural Variable
In the standard form of LPP, the actual decision variables are known as structural
variables.
Basis Solution
It is a solution in which (n - m) variables are set to zero. Where 'n' is the number
of decision variables and 'm' is number of slack or surplus or artificial variables.
Basis Variables
The collection of variables that are not set equal to zero in order to obtain the
basic solution are called basis variables.
Basic Feasible Solution
A basis solution to the system AX = B i s called a basic feasible solution.
Degenerate Solution
If one or more of the basis variables vanish, then the basic solution to the system
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AX = B i s called degenerate.
Optimal Solution
A feasible solution that optimizes the objective function is called an optimal
solution.
3 . 4 Steps in S i m p l e x Method
To obtain the optimal solution, by the application of the simplex method, the following
procedure should be used:
Step 1: formulate the LP problem in standard form
Convert the LP model into the standard fonm by adding/subtracting slack, surplus
or artificial variables.
Assign cost or profit coefficient for these artificial variables in the objective
function.
Step 2: set-up the initial solution
Form an i n i t i a l simplex table to obtain an initial solution by assigning zero value for
structural variables; the remaining extra variables should be considered as basis
variables in the basis matrix.
Compute Zj and = c - z values.

1 1 1
Where, z; is the amount by which the value of objective z would be increased if
one unit of that variable is added to basis solution and 1',

J is the net profit or loss
for the same.
Step 3 : test for optimality (select the variable to enter the basis solution)
In this step, depending on the situation, the selection of the variable needs to be done,
which w i l l enter the basis solution as an incoming variable.
For LP problem with maximization objective
If a l l tJ. , s o , solution is optimal and if lJ.,> o, select the key column (KC) with the
largest positive .0.J.
For LP problem with minimization objective
If a l l tJ. , 2 o , solution is optimal and if lJ.,< o , select key column (KC) with largest
negative a, The respective variable of the key column will be the Incoming
Variable (IV) in basis solution.
Step 4: test for Feasibility (variable to leave the basis solution)
To check whether the solution is optimal or not, the following steps should be carried
out:
Step 1: select the Key Row (KR) with minimum positive Replacement Ratio (RR).
Step 2: respective basis variable of the key row will be the outgoing variable from basis
solution.
Step 3 : identify pivot or key element (k) at the intersection of KR and KC.
Step 4: if a l l replacement ratios (RR) are zero, then current solution is unbounded and
stops the solution.
Note: Replacement Ratio ( R R ) : The value obtained by dividmq the quantity (b,) of basis
variables with corresponding values in the key column rs called replacement ratio. The
outgoing variable represents a resource that is completely exhausted.
Step 5 : finding the new improved solution
In this step, the entries need to be updated in the next iteration simplex table, as
explained:
First, obtain new values of incoming variable for the new simplex table by dividing
the outgoing variable row element by the key element (k).
Values of the remaining basis variables for new simplex table are:
Corresponding Corresponding Corresponding element
= element in old old row element x of new incoming
,ow

of key column variable row
Fig. 3 . 4a : Formula for New Element
Step 6: if an optimal solution is not obtained, follow the procedure from step 3.
3 . 5 Simplex Method: Maximization Case
Maximization case is generally used to maximize the profit of an organization.
Example 0 1 :
Consider the following case: Maximize Z = 2 x , + 4x + 6x

2 3
Subject to:
Constraint 1
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3x + 2x + sx , s 30 Constraint 2
1 2
Sx + 10x + 15x s 60 Constraint 3

1 2 3
Non-negative constraint
Solution 0 1 :
Step 1: formulation of the LPP as Standard Form
As this is the maximization case, slack variables will be added up to convert the
inequalities to equalities.
Remark:
The process in which slack variables are added is known as augmentation. Also, the
original variables given in the problem, x 1, x2, and x3 are known as structural
variables.
Adding slack variables to the given problem in order to remove the inequalities:
Let s, be the slack variable for the first constraint, 2X + X + 6X S 18

1 2 3
Let sa be the slack variable for the second constraint, 3x 1 + 2x2 + Sx, s 30
Let s3 be the slack variable for the third constraint, Sx 1

+lOx 2
+15x 3
s60
The equation in the standard form can be written as:
Maximize Z = 2x + 4x + 6x + Os + Os + Os
1 2 3 1 2 3
Subject to:
2x1 + X2 + 6X3 + 51 + Os2 + 053 = 18 Constraint 1
3x + 2x + 5x + Os, + s + Os = 30 Constraint 2
1 2 3 2 3
Sx 1 + 1 o x 2 + 1 5 x 3 + O s , + Os2 + s, = 60 Constraint 3
Step 2: set-up the Initial Basic Feasible (IBF) Solution
By using the standard LPP form, the given data can be represented in a tabular format.
Table 3.Sa represents initial simplex (Iteration 0 ) .
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Contribution per unit
c, 2 4 6 0 0 0
Variables Quantities
Variables
In Basis
'B'
Basis
-
Xe Ca x, X2 X3 s, S2 S3
variables ' Constraint
with their s, 0 2 1 6 1 0 0 18 values

-<
coefficients
s, 0 3 2 5 0 1 0 30
in the
objective 53 0 5 10 15 0 0 1 60
function ,
'
Coefficient values from constraint equations
Table 3 . S a : Initial Simplex (Iteration 0)
As shown in Table 3.Sa, first, the coefficient values of each constraint equation are
written in horizontal format. To avoid complexity, the table is divided into columns,
depending on the number of variables. Suppose, in the problem there are six variables,
X1, X2, X3, s1, sz, and S3, they are divided into six columns, as shown in Table 3 . S a .
Now, to enter the value of constraint 1, which is 2x1 + x2 + 6x3 + s, + Os2 + O s 3 , the
coefficients of the variables X1, X2, X3, si, s2 and S3 are 2, 1, 6, 1, 0, and 0, respectively,
and so on for the remaining constraints. Once the coefficients are entered, then the
constraint value is written in the Quantities 'B' column, as shown. The top row CJ
indicates the coefficients of the variables in the objective function, which is,
Z = 2x 1 + 4x2 + 6x 3 + Os 1 + Os2 + Os3 and therefore, the values entered are 2, 4, 6, 0, 0,
and 0, as shown.
The next step is to identify the identity matrix in the table. As the identity matrix
consists of ls in diagonal form and the remaining values are Os, it can be observed that
variables sr, s,, and S3 correlate to the identity matrix. Therefore, they are termed as
basis variables and the remaining ones are termed as non-basis variables. Thus, in the
column of variables in basis, the coefficients of the variables s1, s, and s3 are written, as
shown.
The next step is to calculate z, and s, as shown in Table 3 . S b .
2 4 6 0 0 0
'1 -------
Variables In
Quantities
Variables
Basis 'B'
Xa Ca x, x, X3 s, 52 53
s, 0 2 1 6 1 0 0 18
s, 0 3 2 5 0 1 0 30
s, 0 5 10 15 0 0 1 60
z, = I;(c., xx,) 0 0 0 0 0 0
= C - 2 2 4 6 0 0 0
1 1 1
Table 3 . S b : Initial Simplex (Iteration 0 ) : Computing Profit
The value of z, is calculated as )c xx ).

61 1
Suppose, to calculate for xi variable, z, = (0 x 2) + (0 x 3) + (0 x 5) = o
S i m i l a r l y , the remaining values of z, are calculated. Now, to check whether the solution
is optimal or not t,, is calculated, which is given by the difference between ci and z,.
Therefore, to calculate the value of r,,, for x, variable is given as:
fl, = 2 - 0 = 2 and s i m i l a rl y , the remaining calculations are done.
Step 3 and 4: test for optimality of IBF solution
For LP maximization problem, the solution is optimal if all t> , o . As observed from
Table 3 .S b , a l l t> , o a n d therefore, the solution is not optimal. To improve the solution,
identify the i n c o m i n g variable with the highest"', value.
c; 2 4 6 0 0 0
Variables in Quantities
Variables
Basis 'B'
Xe Ca x, x, X3 s, s, 53
s, 0 2 1 6 1 0 0 18
s, 0 3 2 5 0 1 0 30
S3 0 5 10 15 0 0 1 60
ZJ =CBJ x Xj 0 0 0 0 0 0
LI J = C J - Z J 2 4 6 0 0 0
t
Incoming Variable (Key Column)
Table 3 . S c : Initial Simplex Table (Iteration 0 ) : Incoming Variable
From Table 3.Sc, it can be observed that the highest ,, , value is of variable X3, that is,
6. Therefore, X3 will become the incoming variable for the next iteration. To identify the
outgoing variable (key row), first, RR needs to be calculated, which is explained with the
help of Table 3 . S d .
RR can be calculated by dividing the elements of Quantities 'B' by the elements of the
key column. For instance, the RR for s, can be calculated as _1_8_ 3 and the remaining
6
RRs can be calculated accordingly. Once, all the RRs are known, the minimum value of
RR is selected as the outgoing variable, that is, the key row, which is s.. in this case.
The element where the intersection of key row and key column lies is known as key
element, which is 6, in this case.
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c, ______. 2 4 6 0 0 0
Variables in Quantities Replacement

Variables
Basis Ratio (RR)
'B'
Xa Ca x, X2 X3 51 52 53

s, 0 2 1 6_ 1 0 0 18 3
s, 0 3 2 s 1 0 30 6
53 0 s 10 15 "
0 o' -0 60 4
zJ =L(csJxxJ) 0 0 0 0 0 0

!"'- Key Outg oing
a J = C J - Z J 2 4 6 0 0 0 Element Vari able
( Ke y Row)
t
Incommg Variable
(Key Column)
Table 3 . S d : Initial Simplex Table (Iteration 0 ) : Outgoing Variable
Step 5 : finding the new improved solution
The new values for the basis variable can be calculated as shown in Table 3.Se
Values of Incoming Variable for New Simplex Table:
Obtain the incoming variable by dividing the outgoing variable row element by the key
element (k).
Values of Remaining Basis Variables for New Simplex Table
Element Corresponding Corresponding Corresponding element
in new = element in old old row element x of new incoming
row row of key column variable row
Fig. 3 . S a : Formula for New Element
Incoming Variable Other Basis Variables
(I.V.J= l"row/6 [old element - (key column element x I.V.
row element)]
Xa X3 s, S3
x, 2 + 6 = 1/3 3 - (5 x 1/3) = 4/3 5 - ( 15 x 1/3) = 0
x, 1 + 6 = 1/6 2 - (5 x 1/6) = 7/6 10 - ( 1 5 x 1/6) = 15/2
X3 6 + 6 = 1 5 - (5 x 1) = 0 15 - ( 1 5 x 1) = 0
s, 1 + 6 = 1/6 0 - (5 x 1/6) = -5/6 0 - ( 1 5 xl/6)= -15/6
s, 0 + 6 = 0 1 - (5 x O) = 1 0 - ( 1 5 x OJ = 0
53 0 + 6 = 0 0 - (5 x 0) = 0 l - ( 1 5 x 0 ) = 1
B 18 + 6 = 3 30 - (5 x 3) = 15 60 - ( 1 5 x 3) = 15
Table 3.Se: Calculation of New Basis Variables
By substituting the new values of the basis variables, new iteration Table 3.Sf is
formed:
C; _____.. 2 4 6 0 a I
0
Variables in
Variables B RR
Basis
Xa Ca x, x, X3 s, s, S3
X3 6 1/3 1/6 1 1/6 0 0 3 18
s, 0 4/3 7/6 0 -5/6 1 0 15 12.85
53 0 0 15/2.... 0 -15/6 0 1 15 2
z, = I;(c,, x x . ) 2 1 1 0 0
J

Outgoing Variable
b. 1 = C 1 - Z J 0 3 0" -1 0 0 (Key Row)
I'..
t -,
Incoming Vanable Key
(Key Column) Element
Table 3.Sf: Simplex Iteration Table 01
It is observed that since all t. , " s are not less than zero, the solution is not optimal.
Therefore, to improve the solution, new values for the basis variables need to be
calculated. From Table 3.Sf, the incoming variable is x, and outgoing variable is S3, with
15/2 as the key element.
Step 6: finding the new improved solution till optimum solution is obtained
The calculation for the new values of basis variables is shown in Table 3 . S g .
Incoming Variable Other Basis Varlables
(I.V.J = 3 [old element- (key column element x I.V. row
row/(15/2) element)]
x. X2 X3 52
x, 0 -c 1 5 / 2 = 0 1/3 - ( 1 / 6 x 0) = 1/3 4 / 3 - (7/6 x O) = 4/3
x, 15/2 -c 15/2 = 1 1/6 - ( 1/6 x 1) = 0 7 / 6 - (7/6 x 1) = 0
X3 O -c l 5 / 2 = 0 1 - ( 1/6 x 0) = 1 0- (7/6x 1) = O
s, - 1 5 / 6 -c 15/2 = - 1 / 3 1 / 6 - ( 1 / 6 x -1/3) = 2/9 -5/6 - (7 /6 x - 1 /3 ) = -4/9
s, O -c l 5 / 2 = 0 0 - ( 1/6 x 0) = 0 1 - (7 /6 x 0) = 1
53 l -c 15/2 = 2 / 1 5 0 - (1/6 x 2/15) = - 1 / 4 5 0- (7/6 x 2 /1 5 ) = -7/45
B 15 -c 15/2 = 2 3 - ( 1/6 x 2) = 8/3 15 - (7/6 x 2) = 38/3
Table 3 . S g : Calculation of New Basis Variables
By substituting new values of the basis variables, new iteration Table 3 . S h is formed.
CJ 2 4 6 0 0 0
Variables in
Variables B
Basis
Ca x, X2 X3 s, S2 S3
""
x, 6 1/3 0 1 2/9 0 -1/45 8/3
s, 0 4/3 0 0 -4/9 1 -7/45 38/3
x, 4 0 1 0 -1/3 0 2/15 2
2 4 6 0 0 2/5
0 0 0 0 0 -2/5
Table 3 . S h : Simplex Iteration Table 02
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Since, a l l t,, , ' s o , the solution is optimal.
The optimal value of decision variables are: X1 = 0, X2 = 2 and X3 = 8/3
The optimal value of objective function is: Z = 2 x O + 4 x 2 + 6 x 8/3 = 24
3.6 Simplex Method: M i n i m i z a t i o n Case
LP with m i n i m i z a t i o n objective can be solved by two approaches:
Two-phase Method
Big-M Method
3 . 6 . 1 Two-phase Method
As the name suggests, the problem is solved in two phases, namely, first and second
phase. In the first phase, the objective is to remove all the artificial variables from the
basis solution, by considering only artificial variables in the auxiliary objective function.
In the second phase, the feasible solution from the first phase is considered for further
solution by the simplex method for minimization. In every minimization LP, the criterion
for i n c o m i n g variables is that the L'ii value should be most negative.
To start up with the two-phase method, certain steps need to be taken into
consideration. Therefore, the steps for Phase 1 are as follows:
In a u x i l i a ry LP, assign zero cost coefficients to each decision variable and surplus
variable, whereas, for artificial variable assign coefficient value equal to one rn
auxiliary objective function.
Apply the minimization simplex algorithm for getting basic feasible solutions.
Consider the following example for two-phase method.
Example 0 2 :
Minimize Z = Sx, + i ox,
Subject to:
3x, + 12x 2 48
2
4x + 6x 60
1 2
Xu X
2
0
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Solution 0 2 :
Step 1: formulation of the LP problem as a standard form
As this is the minimization case, surplus variables will be subtracted and artificial
variables will be added to convert the inequalities to equalities. Therefore, the equation
in the standard fonm can be written as:
Subject to:
3x1 + 12x 2 - s, - O s , + A , + OA, = 48 Constraint 1
4x + 6x - Os - 5 + OA + A = 60 Constraint 2
1 2 1 2 1 2
Xu X
2
, 51
1
s2, A 1 1 A2 0
The a u x i l i a r y LP form is written as: Minimize Z = Ox + Ox + Os1 + Os + A1 + A

1 2 2 2
Subject to:
3x1 + 12x 2 - s, - Os2 + A1 + OA2 = 48 Constraint 1
4x1 + 6x2 - Os1 - s2 + OA1 + A2 = 60 Constraint 2
Step 2: set-up the IBF solution for first iteration of phase 1
In first iteration of phase 1, only artificial variables are considered as basis variables as
shown in Table 3 . 6 . l a .
---+ 0 0 0 0 1 1
Ci
Variables In
Variables B RR
Basis
Xa Ce x, x, s, s, A, A2
A, 1 3 12
.
-1 0 1 0 48 4
-
1 4 6 '\ 0 -1 0 1 60 10
A2
z, = I Cc,, xx,) 7 18 -1 1 1

Outgoing Variable
J= C J - Z J -7 -18 1 0 0 (Key Row)

"'-
1 1
t
Incoming Vanable Y
""" Ke
Table 3 . 6 . l a : Phase 1 : Iteration Table 01
From Table 3.6.la, it can be observed that incoming variable is X2 as it has the most
negative value ' - 1 8 ' and the outgoing variable is A,, whose RR is least positive, which is
'4' and the key element is 1 2 .
Step 3 and 4: test for optimality of IBF solution
For LP minimization problem, the solution is optimal rf all !!.,' s o . As observed from
Table 3.6.la, a l l !!. , ' s are not greater than zero. Therefore, the solution is not optimal.
So to improve the solution, new values of basis variables need to be calculated.
other Basis Variable

Incoming Variable
[old element- (key column
(I.V.) = irow/12
element x I. V. row element)]
Xe X2 A2
x, 3 + 1 2 = 1 / 4 4 - (6 x 1/4) = 5/2
x, 1 2 + 1 2 = 1 6 - (6 x 1) = 0
s, - 1 +12 = -1/12 0 - (6 x -1/12) = 1/2
s, 0 -e- 12 = 0 - 1 - ( 6 x 0 ) = - 1
A, 1 -e- 12 = 1/12 0 - (6 x 1/12) = -1/2
A, 0 -e- 12 = 0 1 -(6 x 0) = 1
B 48 -e- 12 = 4 60 - (6 x 4) = 36
Table 3 . 6 . l b : Calculation of Basis Variable
By substituting the new values of the basis variables, new iteration Table 3.6.lc is
formed.
---+ 0 0 0 0 1 1
C;
Variables in
Variables B RR
Basis
x. Ca x, x, s, s, A, A2
x, 0 1/4 1 -1/12 0 1/12 0 4 16
A, 1 5/2 0 1/2 -1 -1/2 1 36 14.4
z, = L(c,, x x.) 5/2 I"._ o 1/2 -1 -1/2 1
D. =
1
c
1
- z
1
-5/2

-1/2 1 3/2 0
Outgoing Variabl
(Key Row) J
T
Key
Incoming Variable
Element
(Key Column)
Table 3 . 6 . l c : Phase 1 : Iteration Table 02
Step 5 : finding the new improved solution till the optimum solution is obtained
The calculation for new values of basis variables is shown in Table 3 . 6 . l d
Step 6: test for optimality of IBF solution
As a l l n,' s o , the optimal solution has reached phase 1 and the final solution of phase
1 is used as initial solution for phase 2. The coefficients of decision variables are
replaced with o ri g i n a l variables and the column of artificial variables is e l i m i n a t e d .
Other Basis Variables

Incoming Variable
[ old element - (key column
(I.V.) = 2 row/(5/2)
element x I.V. row element)]
x. x, x,
x, 5/2 + 5/2 = 1 1/4 - (1/4 x l)= 0
x, 0 + 5/2 = O 1 - ( 1/4 x 0) = 1
s, 1/2 + 5/2 = 1/5 -1/12 - (l/4 x 1/5) = -2/15
s, - 1 + 5/2 = -2/5 0 - (1/4 x -2/5) = 1/10
A, -1/2+5/2 = -1/5 1/12 - (1/4 x -1/5) = 2/15
A, 1 + 5/2 = 2/5 0 - (1/4 x 2/5) = -1/10
B 36 + 5/2 = 14.4 4 - (1/4 x 14.4) = 2/5
Table 3 . 6 . l d : Calculation of Basis Variable
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Phase 2
The first iteration of the phase 2 is obtained from phase 1 .
Ci ----II> 5 10 0 0
Variables
Basis 'B'
Xa Ca x, x, s, s,
X2 10 0 1 -2/15 1/10 2/5
x, 5 1 0 1/5 -2/5 14.4
z, = 2)c,,, xx,) 5 10 -1/3 -1
.1. = c - ZJ 0 0 1/3 1
1 1
Table 3 . 6 . 1 e : Phase 2: Iteration Table
As all t>,' s 2 o , the solution is an optimal solution and therefore, no further calculations
can be taken.
The optimal value of decision variables are as follows: x, = 1 4 . 4 and X2 = 2/5
The optimal value of objective function is as follows: Z = 5 x (14.4l + 10 x (2/5l = 76
3.6.2 Big-M Method
Big-M method is another approach used for removing artificial variables from the basis
solution. In this method, the following steps should be considered.
1. Large undesirable cost coefficient (Ml is assigned to the artificial variable, with
respect to the objective function, whether maximization or m i n i m i z a t i o n .
2. For m i n i m i z a t i o n problem, assign largest cost ( + M l , whereas in maximization case
assign m a x i m u m loss ( -Ml to artificial variables.
3. In basis solution, for every ' 2: ' a n d ' = ' type constraints, consider artificial variable
in the basis solution. Also, for 's ', consider slack variable in basis solution.
4. Further, by applying simplex algorithm (for minimization problem), obtain the
optimal solution.
To understand this approach, solve Example 02 by the Big-M Method.
Solution 0 2 :
Step 1: formulation of the LP problem as a standard form
As this is the minimization case, surplus variables will be subtracted and artificial
variables with a very high value M will be added, in order to convert the inequalities to
equalities and eliminate artificial variables from the final solution. Therefore, the
equation in the standard form can be written as:
Minimize Z = Sx, + lOx 2 + Os, + Os2 + MA, + MA2
Subject to:
3x + 12x - s - Os + A + OA = 48 Constraint 1
1 2 1 2 1 2
4x + 6x - Os - s + OA + A = 60 Constraint 2
1 2 1 2 1 2
Step 2: set-up the Initial Basic Feasible {IBF) Solution
The !BF Table 3.6.2a for the minimization problem is obtained by setting,
x, = X2 = s, = sa = 0. Thus, the basis variable in !BF solution is: A, = 48 and A2 = 60.
Since, M is a very high number (say, 1 million), 18M would be the highest number.
Therefore, the most negative number would be 10 - 18M. Thus, the solution is not
optimal. Therefore, from Table 3.6.2a, it can be observed that the incoming variable is
X2, as it has the most negative value '10 - 18M' and the outgoing variable is A,, whose
RR is least positive, which is '4' and the key element is 1 2 .
<1 ---.. 5 10 0 0 M M
Variables in Replacement
Variables B
Basis Ratio (RR)
x. Ca x, x, s, s, A, A2
A, M 3 12 -1 0 1 0 48 4 ,-
-
A2 M 4 6
'\ 0 -1 0 1 60 10
z, = I;(c,, x x , ) 7M ISM -M M M
M
Outgoing Variable .,.__

LlJ= CJ - ZJ 5 - 7M 10 - ISM M 0 0

(Key Row)
T
Incommg Vanable Key
Table 3 . 6 . 2 a : Simplex Iteration Table 01
Steps 3 and 4: test for optimality of IBF Solution
For LP minimization problem, the solution is optimal if all ",' s o . As observed from
Table 3.6.2a, a l l ",' s are not greater than zero. Therefore, the solution is not o p t i m a l .
So, in order to improve the solution, new values of basis variables need to be calculated.
Other Basis Variable

Incoming Variable
[old element - (key column
(I.V.) = istrow/12
x. x, A2
x, 3 + 12 = 1/4 4 - (6 x 1/4) = 5/2
Xz 12 + 12 = 1 6 - ( 6 x 1 ) = 0
s, -1 + 12 = -1/12 0 - (6 x - 1 / 1 2 ) = 1/2
Sz 0 + 12 = 0 -1 - (6 x 0) = - 1
A, 1 + 12 = 1/12 0 - (6 x 1/12) = -1/2
A2 0 + 12 = 0 1 - (6 x 0) = 1
B 48 + 12 = 4 60 - ( 6 x 4) = 36
Table 3 . 6 . 2 b : Calculation of Basis Variable
By substituting the new values of the basis variables, new iteration Table 3.6.2c rs
formed.
5 10 0 0 M M
c, ------
Varlables In
Variables B RR
Basis
Xs Cs x, x, s, s, A, A,
x, 10 1/4 1 -1/12 0 1/12 0 4 16
A, M 0 1/2 -1 -1/2 1 36 14.4

5/2 "
'
z, = I;(c,, x x , ) 5/2+5M/2 -5/6+M/2 -M 5/6-M/2 M
'\10
J=CJ-ZJ 5/2-SM/2

5/6-M/2 M -5/6+3M/2 0
Outgoing Variab
(Key Row)
J
i
Incomin g Variable Key
(Key C o l u m n ) Element
Table 3 . 6 . 2 c : Simplex Iteration Table 02
Step 5: finding the new improved solution till optimum solution is obtained
The calculation for new values of basis variables is shown in Table 3.6.2d.
Other Basis Variables

Incoming Variable
[old element - (key column
(I.V.) = 2 row/(5/2)
Xe x, X2
x, 5/2 + 5/2 = 1 1/4 - (1/4 x 1)= 0
x, 0 + 5/2 = 0 1 - (1/4 x 0) = 1
s, 1/2 + 5/2 = 1/5 -1/12 - (1/4 x 1/5) = -2/15
52 - 1 + 5/2 = -2/5 0 - (1/4 x -2/5) = 1/10
A, -1/2 + 5/2 = -1/5 1/12 - (1/4 x -1/5) = 2/15
A2 1 + 5/2 = 2/5 0 - (1/4 x 2/5) = -1/10
B 36 + 5/2 = 14.4 4 - (1/4 x 14.4) = 2/5
Table 3 . 6 . 2 d : Calculation of Basis Variable
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Step 6: test for optimality of IBF solution
The coefficients of decision variables are replaced with original variables and column of
artificial variables is eliminated, as shown in Table 3.6.2e.
Ci ----ti,, 5 10 0 0
Variables
Basis 'B'
Xa Ca x, x, s, s,
X2 10 0 1 -2/15 1/10 2/5
x, 5 1 0 1/5 -2/5 14.4
z, = Z:Cc., xx,) 5 10 -1/3 -1
ti.J= CJ - z 0 0 1/3 1
1
Table 3 . 6 . 2 e : Simplex Iteration Table 03
As all n,' s z o , the solution is an optimal solution and therefore no further calculations
are required.
The optimal value of decision variables are: x, = 14.4 and x, = 2/5
The optimal value of objective function is: Z = 5 x (14.4) + 10 x (2/5) = 76
Variations in Linear Programming Problem Solutions
The different types of linear programming solutions are:
Alternative Optimal Solution
o Multiple or Alternative optimal solutions anse when the solution for m u l t i p l e
non-basis variables rs n,= c, - z, = o.
o When such non-basis variables are entered in the basis solution, the solution
changes but the objective function value remains unchanged.
Unbounded Solution
o In the replacement ratio column, if all the RR values are negative, then none
of the variables will be exiting the basis solution for improvement, then it is
a case of unbounded solution.
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Infeasible Solution
o Infeasibility occurs when there is no solution that satisfies a l l the constraints
of the LP problem.
o If in the final simplex table, t;J implies the solution is optimal but at least one
of the artificial variable is present in the basis solution then the solution is
said to be infeasible.
3.7 D u a l i t y in LP Problem
Generally, the term dual implies two or double. For every LP problem, there exists
another intimately related LP problem that would have an equivalent solution. Such a
problem is called dual problem of the original LP problem or duality.
In duality, the original problem is called the primal problem. If the primal has objective
function of maximization type then its dual will be of minimization type and vice versa.
Thus, duality focuses on detenmining the best marginal value for each resource, which is
known as shadow price.
Consider a production mix problem where the manager attempts to optimize resource
allocation by determining the quantities for each product mix to be produced for
m a x i m i z i n g the profit. However, through the dual LP approach, the manager attempts to
achieve a plan that optimizes resource allocation in a way that each product is produced
at that quantity, so that its marginal opportunity cost equals its marginal returns.
The Primal-Dual Relationship
If the primal LP problem is given as:
Objective function: Maximize Z = I;c,x,

,.,
Subject to:
"
Z:a x :s; b.: i = 1, 2, 3 ... m
11
1
J'
x, 2 oforall j
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The dual LP w i l l be:
Objective function: Minimize Z = Lb,y,

,_,
Subject to:
La v 11 1
c
1
; j= 1, 2, 3 ... m
1 = l
y, 0 for a l l i
Rules for Creating Dual from Primal
The basic rules which need to be followed during the conversion of primal to dual are
given below:
1. A dual variable (y,) is defined for each constraint in the primal LP problem and vice
versa. If 'm' constraints are there in primal then, 'm' dual variables are present in
dual.
2. The availability or requirement of resources ( b, ) becomes the coefficient of dual
variables in dual objective function.
3. The coefficients c; (c,, cz ... Cn) of primal variables xi, x, ... x., in the objective
function becomes the R . H . S constants for constraints in the dual LP problem.
4. For maximization primal LP with all ',;' type constraints, there exists minimization
dual LP with a l l ' ' type constraints.
5. If in primal LP '=' type constraint is present, then this equality equation is
converted into two inequality equations, that is, one w i l l be o f ' ,; ' type and second
will be o f ' ' type.
Example 0 3 :
Objective Function: Minimize Z = 6 x , - 8 x 2 + 10X 3
Subject to:
5X + 4X + 8X 12 (constraint 1)
1 2 3
X + 3X + 7X 8 (constraint 2)
1 2 3
6x
1
- 2x
2
- Bx, 15 ( constraint 3)
X - 9X + 3X 9 ( constraint 4)
1 2 3
2x, + 5 x -3x = 3 ( constraint 5)

2 3
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Solution 0 3 :
Step 1: Converting the constraint in same inequalities
The LP problem is with minimization objective, thus, every constraint should have ' 2: '
type inequalities. The constraint 3 is in ' :,, ' inequality fonm, thus, modified equation with
' 2: ' will be as follows:
- 6x 1 + 2x, + Bx, "-15 ( constraint 3)
Now, constraint 5 is in equality form, the modified one will have a pair of inequality
constraints:
2x, + sx, - 3x3 " 3
2x +Sx, -3x 5 3
1 3
Again convert the constraint 6 in ' 2: ' inequality fonm:
- 2x - Sx + 3x > -3
1 2 3 -
Thus, the primal fonm of the given LP problem is rewritten:
Objective Function: Minimize Z, = 6 x 1 - B x , + lOx,
Subject to:
Sx, + 4 x 2 + B x , "12 (constraint 1)
X1 + 3X2 + 7X3 :?: 8 (constraint 2)
- 6x 1 + 2x2 + Bx, "-15 ( constraint 3)
X - 9X + 3X :?: 9 ( constraint 4)
1 2 3
2x, + sx, - 3x3 " 3 ( constraint 5)
- 2x, - Sx, + 3x3 " -3 ( constraint 6)
X 1 1
X
2
, X
3
:?: 0
Thus, by applying the rules of conversion, the dual of primal is obtained:
Let the decision variable be 'y,'
Objective Function: Maximize Z = 1 2 y , + By, - l S y , + 9y 4

+ 3y - 3y
5 6
Subject to:
Sy, + Y -6y +Y 4
+2y -2y 5 6 (dual constraint 1)
2 3 5 6
4y 1
+ 3y, + 2y - 9y 4 + Sy - Sy 5 -8 (dual constraint 2)
3 5 6
Sy + 7y + Sy + 3y -3y + 3y 10 (dual constraint 3)

1 2 3 4 5 6 ,;
The Difference between Primal and Dual
The correlation between the primal and dual are explained in Table 3. 7a.
When a Primal Is Given With the

Then Its Dual Will Be
Following Conditions
Objective is to maximize Objective is to minimize
Number of constraints = m m = Number of variables
Number of variables = n n = Number of constraints
,; type constraint Non-negative variable
'=' type constraint Unrestricted variable
Unrestricted variable ' =' type constraint
Objective function coefficient for jtt. variable R . H . S constant for jtt. constraint
1"
Objective function coefficient for i
R . H . S constant for ;tt. constraint
variable
Coefficient (au) for jtt. variable in ;th Coefficient (a,;) for ;tt. variable in i'"
constraint constraint
Table 3 . 7 a : Difference between Primal and Dual
Economic Importance of Dual Variable
The economic interpretation of dual variable is expressed as follows:
Dual variable (y,) is always expressed in terms of return (or worth) unit of
resource 'i'. This is called dual price or simplex multiplier or shadow price of
resource ' i ' .
Thus, the shadow price value of any resource represents the maximum additional
price to be paid to obtain additional unit of scarce resource in order to maximize
the objective function.
The shadow price is also defined as the rate of change in the optimal objective
function value with respect to the unit change in the availability of a resource.
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3 . 8 Chapter S u m m a r y
The simplex method is an iterative process used to solve LP problems having more
than two decision variables.
Given LP problem is converted into standard fonm by adding slack or artificial
variables or by subtracting surplus variables from general LPP.
The i n i t i a l basis solution consists of basis variables, those variables having positive
value w h i l e assuming the value of structural variables to be zero.
The optimal solution is obtained by including the variables one-by-one in basis
solution, depending upon the net profit or loss value (6 ) in s i m p l e x table.

1
In case of minimization LP problem, artificial variables are removed from the basis
solution by applying Two-phase or Big-M method.
Duality in LP implies that each LP problem can be analyzed in two different ways
but would have equivalent solution.
Shadow price of dual variable represents the increase in the objective function
value due to one-unit increase in the availability of that resource.
Transportation
Problem (TP)
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4 . 1 Introduction
In today's competitive world, every company is going global, in order to serve global
customers, so as to remain profitable and competitive. Such companies have several
manufacturing units globally for serving global customers through numerous distribution
and retail centers, which make the distribution of products a major concern to remain
competitive. The distribution manager of an organization, from industries of FMCG,
automobile, electronics, etc., often deal with the strategic decision making of allocating
the distribution of a product from several sources to numerous locations, with an ability
to identify the optimal distribution plan with a goal of incurring the lowest shipping cost.
The study of transportation problem technique helps managers to identify optimal
shipping routes, among several supply origins to several demand destinations, along
with units of items to be shipped in order to minimize total transportation cost.
Describe the nature of Transportation Problem (TP)
Convert the transportation problem to general linear programming and tabular
format
Resolve the complication of unbalanced TP
Obtain Initial Basic Feasible (!BF) solution using various methods
Interpret the optimality of !BF solution using Stepping-Stone and Modified
Distribution methods
04. Transportation Problem (TP) eBook
4.2 Characteristics and Assumptions of Transportation
Problem
The transportation problem technique is a special case of linear programming that deals
with the decision of shipping commodities, items or products from the sources of supply
to demand destinations. The source origins can be production facilities, warehouses or
supply points with available supply capacities. The destinations can be warehouses,
retail shops, distribution centers or demand points with a requirement of demand. The
objective is to satisfy the demand requirement with the available supply by determining
the optimal shipping schedule that will minimize shipping or transportation costs.
Mathematical Model of Transportation Problem
Transportation problem involves 'rn' number of sources (S,) 51, 52, 53 ... Sm, with given
supply capacity of 'a,' (i = 1, 2, 3 ... m) per period for an item. Also, it involves 'n'
number of destinations (DJ) D,, 02, D, ... Dn, with given item demand 'bj' (j = 1, 2, 3 ...
n) per period. Let c,J be the item per unit transportation cost incurred when a unit is
shipped from ;th source to r destination. Let X;J represent the number of units of an item
to be shipped from ;tn source to jtn destination. Then the objective is to determine the
optimum shipping schedule so as to minimize the total transportation cost, while
satisfying the supply and demand conditions. Assume that the item to be shipped is
homogenous in nature and there is no transshipment between any two sources or
destinations. The problem can be represented with nodes and arcs, as shown in
Fig. 4.2a.
eBook
Sources (S1) Destinations (D1)
Cu, Xn
, ,-..+ b ,
0/b,
I
'
I
'
'
'
' '

r:
a m -+' \:./ on bn
<: /
Supply Demand
units units
Fig. 4.2a: Nodes and Arcs Representation of Transportation Problem
In general, transportation problem can be mathematically formulated in linear
programming, in the following manner:
m o
Objective Function: Minimize Z = L Lx c

11 11
1-1 J-l
Or
X11 C11 + X12C12 + + X1nC1n
z +X21C21 +X22C22 + ... +X2nCzn

M1mm1ze = . . .
. . .
. . .
Subject to:
Xu + X12 + + X1n = a1
X z 1 + X z z + ... +X2n =a2

Supply Constraints
Xm1 + Xmz + + Xmn = am
X11 + X21 + ... + Xnu = b1
X12 + X22 + + Xmz = bz

Demand Constraints
eBook
And x 2:': 0, i = l , 2 , 3 . . . m , j = l , 2 , 3 ... n

11
The same problem can be presented in a tabular format for getting further solutions, as
shown in Table 4.2a.
Distribution Points
o, o, ----- o, Supply
c,,
P1
L I
Xu X12 ---- x,,

c c,,
P2
L I
.,
..
0
x,, x,, ---- x,,

u I
_:_:_:_ I
_:_:_:_ I
_:_:_:_
...
... I
...
,

...
---- ---- ----
0
"' l...:'!.... L I Cij
P1

.,
Xi1
x,, ...
Xij
...
Demand b, b, bj
Table 4.2a: Transportation Problem in Tabulated Form
Prerequisites of Transportation Problem
The major prerequisite before solving transportation problems is to have balanced
problems. The problem is said to be balanced when the total demand is equal to total
m "
supply, that is, I; a , = I; b ,
1-1 J-l
If total supply and demand is not equal, then the problem is said to be an unbalanced
transportation problem. The unbalanced problem is balanced by adding an appropriate
dummy source or destination with shipping unit cost, c,, = 0 , depending on the situation,
as listed in Table 4.2b.
Unbalanced Situation For Balancing the TP
m Add dummy Source (Sa) with supply capacity:

Demand is in "
i: < I; b ,
excess
,_,
J I a , = IbJ - Ia, units
m Add dummy Destination (Dd) with demand

Supply is in "
i: > I; b ,
excess
,_,
J
requirement: b, = Ia, - IbJ units
Table 4 . 2 b : Converting Unbalanced TP to Balanced TP
Consider the following example of unbalanced transportation problem:
Example 0 1 :
D, D2 03 Supply
s, 5 4 3 100
s, 8 4 3 300
S3 9 7 5 300
Demand 300 200 300
.
Table 4.2c: Unbalanced Transportation Problem
Solution 0 1 :
Total demand = 300 + 200 + 300 = 800 units
Total supply = 100 + 300 + 300 = 700 units
Here, total demand is more than total supply by 100 units, thus the given transportation
problem is an unbalanced TP. To fulfill this extra demand, additional dummy source (Sa)
has to be added. The supply units of Sd = 100 units and unit cost, cu = 0. The balanced
transportation problem can be written as:
D, D2 03 Supply
s, 5 4 3 100
S2 8 4 3 300
S3 9 7 5 300
s. 0 0 0 100
Demand 300 200 300
.
Table 4.2d: Balanced Transportation Problem
eBook
4 . 3 The TP A l g o r i t h m
The transportation problem algorithm may be summarized into the following steps:
Step 1: check for the condition of balanced problem; if it is not balanced, add an
appropriate dummy source or destination.
Step 2: formulate the given problem and arrange the data regarding number sources,
destinations, supply capacities, demand requirements, and shipping cost values in
tabular format, as shown in Table 4.2a.
Step 3: obtain an Initial Basic Feasible (!BF) solution by allocating supply units between
the sources and destinations. !BF solution can be obtained with the following three
methods:
North-West Comer Method (NWCM)
Least Cost Method (LCM)
Vogel's Approximation Method (VAM)
The !BF solution obtained by any of these three methods should satisfy rim condition
and should not degenerate the solution.
Step 4: test the !BF solution for optimality with the following two methods: Stepping
stone (SS) method and Modified Distribution (MODI) method. Improve the solution by
repeating step 4 until the optimal solution is obtained.
Step 5 : calculate the total transportation cost of the optimal solution.
Rim Condition and Non-degenerate Solution
While obtaining the !BF solution, in the transportation table x,, units are allocated
between ;th source and i"' destination. The allocated cells are known as basic variables
and the remaining cells are known as non-basic variables. The rim condition is satisfied
when the total number of units allocated to the sources or destinations, match the
supply and demand constraints.
If in !BF solution, the total number of positive allocations are less than the required
number 'm + n - 1' (m = number of sources and n = number of destinations) then the
solution is said to be either degenerate or non-degenerate. If !BF solution degenerates,
it is i m po s s i b l e to test the solution for optimality.
4.4 I n i t i a l Basic Feasible ( I B F ) Solution Methods
4.4.1 North-West Corner Method (NWCM)
NWCM method does not take into account the shipping cost. The steps followed for this
method can be summarized as:
Step 1: For first allocation, start with the cell at the upper-left corner of the table, that
is, S,D, c e l l . The allocation unit will be equal to the minimum of supply or demand, that
is, x , , = m i n ( e . , b . ) . Then, update the balanced units of supply and demand in the table.
If the supply is exhausted, eliminate that source and if the demand is satisfied, then
e l i m i n a t e that destination by striking out that source or destination from transportation
table.
Step 2: For the next allocation, 1f the source is eliminated, then move vertically down to
the next c e l l . However, if the destination is eliminated, move horizontally to the right of
the allocated cell. The allocation procedure can be summarized, as shown in Table
4.4.la.
Condition Next Allocation Cell
If Xij = a, Move vertically down to next cell
If Xu = b; Move horizontally right to next cell
If Xij = ai = bj Move diagonally down to next cell
.
Table 4 . 4 . l a : Allocation Procedure for NWCM
Step 3: Repeat steps 1 and 2 until the lower-right cell is allocated. Then calculate the
total transportation cost.
Obtain the !BF solution for the following example by N W C M :
Example 0 2 :
U. L. & Co. has four plants P,, P2, PJ, and P. located at different regions with production
capacities of 90, 110, 150, and 100 units per week of a product, respectively. These
units are to be shipped to three warehouses D1, D2, and D3 with a requirement of 1 2 0 ,
180, and 150 units per week, respectively. The transportation cost per unit ( i n rupees)
from plants to warehouses is given in Table 4 . 4 . l b below. Obtain the !BF solution for
the U. L. & Co.
Warehouses
D, D, DJ a,
6 5 5
I I I
P, 90
3 9 7
I I I
P, 110

"'
c
"'
a. I
5
I
2 I
8
PJ 150
I 4 I 7 I 6
p. 100
b:i 120 180 150
Table 4 . 4 . l b : Transportation Problem for U. L. & Co.
Solution 02: (by NWCM)
For above the example, cell P,D, is the north-west corner cell in the table. According to
the NWCM, the first allocation will be done for cell P,D,. Plant P, has a capacity of
supplying 90 units, whereas, the requirement of warehouse D, is 120 units, thus, for
P,D, allocation units, X u m i n ( 9 0 , 120) 90units. Now, update the balanced units of
supply and demand for P, and D,. The supply of P, is exhausted thus eliminate the
source P, (draw dotted on row of P,), whereas, the warehouse D, still requires 30 units
to satisfy its demand. Since, source P, is eliminated for next allocation move down to cell
P,D,. The complete allocation is shown in the Table 4.4.lc and the step-by-step
allocation is summarized in Table 4.4.ld.
Warehouses
Dl D, D, a;
- - - - + - 6 . - -----!- 5 - - - - - - 1 - 5 - 99
pl
0
90
.
'
- - - - J- - 31 - - - - - - - - - - - - 1. -
P, 89
...
VI 30 80 0
c
.! 5 2 8
... P,
I I I
59
100 50 0
"
I
4' 7 6
I I I I
p I
0
i 100
489
bj 3&
0 0 0
Table 4 . 4 . l c : IBF Solution by North-West Corner Method
Balanced
Eliminate
North-West Allocation Units Supply and
Allocation Source or
Cell [X;; = min (a,, b;)] Demand
Destination
Units
Xu= min (90, 120) a1 = 0

First P1D1 P1
Xu= 90 b, = 30
xai = min ( 1 1 0 , 30) a,= 80

Second P2D1 D,
X21 = 30 b, = 0
x22 = min (80, 180) a,= 0

Third P2D2 P2
X22 = 80 b, = 1 0 0
x., = min (150, 100) a,= 50

Fourth P,D2 D2
X32 = 100 b, = 0
X33 = min (SO, 150) a,= 0

Fifth P,D, P,
X33 = 50 b, = 100
X43 = min (100, 100) a4= 0

Sixth P4D3 P 4 a n d D3
X43 = 100 b, = 0
. .
Table 4 . 4 . l d : Summarized Step-by-Step Allocation by NWCM
Since the supply and demand condition is fulfilled, the !BF solution is obtained. Also, the
number of allocations is equal to 6, which is equal to (m + n - 1 = 6 ) , the solution does
not degenerate.
Total Transportation Cost (TC) is calculated as:
TC = 6 x 90 + 3 x 30 + 9 x 80 + 2 x 100 + 8 x 50 + 6 x 100 = ,2550/-
4.4.2 Least Cost Method {LCM)
As seen in NWCM, the emphasis is not on the cost, hence the LCM was developed to
allocate maximum quantities to the cell with minimum unit transportation costs. The
steps of least cost method can be summarized as follows:
Step 1: From the transportation table, select the cell with minimum cost for allocation.
If there is a tie between costs, then select from those cells where m a x i m u m units can be
allocated. The allocation units will be equal to the minimum of supply or demand for that
cell, that is x,, = m i n (a. b . ) .
Step 2: Update the balanced units of supply and demand in table. If the supply capacity
is exhausted, then eliminate that source and if the demand is satisfied, then eliminate
that destination by striking out that source or destination from table.
Step 3: Repeat steps 1 and 2 until all supply or demand conditions are satisfied, then
calculate the total transportation cost.
Obtain the !BF solution for U. L. & Co. transportation problem by LCM (refer to
Table 4 . 4 . l b ) .
Solution 02: (By LCM)
Consider the same Example 02 rn Table 4.4.lb; the minimum cost value is ,2 for cell
P3D2, thus the first allocation will be done for this cell. The allocation for cell P3D2 is
x
32
= min ( 1 5 0 , 180) = 150 units. Now, update the balanced units of supply and demand
for P3 and D2. The supply of P3 is exhausted, thus eliminate the source P3, whereas,
warehouse D2 still requires 30 units to satisfy its demand. The complete allocation is
shown in Table 4.4.2a and the step-by-step allocations are summarized in
Table 4.4.2b.
As shown in Table 4.4.2a, all the supply and demand conditions are fulfilled, the !BF
solution is obtained. Also, the number of allocations is equal to 6, which is equal to (m +
n - 1 = 6 ) , the solution does not degenerate.
Total transportation cost is calculated as:
TC = 5 x 90 + 3 x 110 + 2 x 150 + 4 x 10 + 7 x 30 + 6 x 60 = <"1690/-
Warehouses
o, o, 03 a,
6 5 5
I I I
99
P,
0
90
3 9 7
I I I ,HQ
P2
0
110
J!l
c
.. I
5
I
2
I
8
458
ii: P3
0
150
P
10
I
4
30
I
7
60
I
6
-99
68
bi -,!&
0
- 38
0
458
e&
Table 4.4.2a: IBF Solution by Least Cost Method {LCM)
Balanced Eliminate
Minimum Allocation Units
Allocation Supply and Source or
Cost Cell [x,, = min (a,, b,)]
Demand Units Destination
First P3D2 X32 = min ( 1 5 0 , 180) a3 = 0 P3
X32 = 150 b2 = 30
Second P2D1 x21 = min ( 1 1 0 , 120) a,= 0 P2
X21= 110 b, = 10
Third P.D, x., = min ( 1 0 0 , 10) a.= 90 D,
X41 = 10 b, = 0
(Cells P,D2 and P,DJ have same minimum cost (<'5) but maximum allocation can be
done for cell P1D3. Prefer cell P1D3for allocation.)
Fourth P1D3 X13 = min (90, 150) a,= 0 P,
X13 = 90 b3= 60
Fifth PD2 X42 = min (90, 30) a.= 60 D2
X42 = 30 b2 = 0
Sixth P4D3 X43 = min (60, 60) a.= 0 P. and DJ
X43 = 60 b3= 0
Table 4.4.2b: Summarized Step-by-step Allocation by LCM
4.4.3 Vogel's Approximation Method (VAM)
VAM is based on the concept of opportunity cost. It minimizes the transportation cost by
minimizing the opportunity (or penalty or regret) cost that would have been incurred if
the allocation in certain cells with minimum unit cost is missed. By this method, the !BF
solution obtained is always closer to the optimal solution and is, thus, preferred.
The steps of VAM are:
Step 1: Calculate penalties (p) for each row by taking the difference between smallest
and the next smallest unit cost from the same row. Similarly, find penalties for c o l u m n s .
This penalty represents the extra cost that has to be paid if the allocation is not done
with least cost c e l l .
Step 2: Select the row or column with the largest penalty value. From high penalty row
or column select the least cost cell for allocation. The allocation units w i l l be equal to the
minimum of supply or demand units for that cell, that is x,, = min (a, b . ) . If there is a tie
in the values of penalties, select the cell with minimum cost. If again there is a tie in the
values of m i n i m u m cost cell, select the cell where maximum allocation is possible.
Step 3: Update the balanced units of supply and demand in the table. If the supply
capacity is exhausted, then eliminate that source and if the demand is satisfied, then
e l i m i n a t e that destination by striking out that source or destination from the table.
Step 4: Repeat steps 1, 2, and 3 until all supply or demand conditions are satisfied.
Then calculate the total transportation cost.
Obtain the !BF solution for the U. L. & Co. transportation problem by VAM (refer to
Table 4 . 4 . l b ) .
Solution 02: (By VAM)
The penalty cost for each row and column is calculated, as shown in Table 4.4.3a. In
the first round, maximum penalty is 4 for row P2. In row P2, minimum cost is 3 for cell
P2D1. Select cell P2D, for first allocation.
The allocation for cell P2D1 is x,. = min (110, 1 2 0 ) = 1 1 0 units. Update the balance units.
Now, for second round, again calculate the penalties ( exclude row P2) for rows and
columns. In the second round, maximum penalty is 3 for column D 2. Allocate, in this
c o l u m n , as per the rules of VAM. Similarly, calculate penalties and allocate the units. The
complete allocation is shown in Table 4.4.3a and the step-by-step allocations are
summarized in Table 4.4.3b.
As shown in Table 4.4.3a, all the supply and demand conditions are fulfilled, !BF
solution is obtained. Also, the number of allocations is equal to 6, which is equal to (m +
n - 1 = 6 ) , the solution does not degenerate.
Total transportation cost is calculated as:
TC = 5 x 30 + 5 x 60 + 3 x 110 + 2 x 150 + 4 x 10 + 6 x 90 = ,1660/-
Warehouses
01 o, o, a, p p p p
6 5 99
I
I $ I
pl I
99 0 0 0 0
I
30 60 0
I
- - - - 1 - } - - - _j_.9. ---1-2
P, 4 - - -
(I) I 0
.... 110
c
"'
a.
- - - 1 - S. -- -1-2- - - - 8-
-l!tQ
P, 3 3 - -

0
150
l\ 7 6 -w9
I I I I
p. 99 2 2 2 1
10 90 0
-HQ -l!tQ
-1,Q 39 99
bi
0 0 0
p 1 3 1
p 1 3 1
p 2 2 1
p - 2 1
Table 4.4.3a: IBF Solution by Vogel's Approximation Method {VAM)
The transportation cost for Example 02, by all three methods is summarized as follows:
1. By North-West Comer Method (NWCM) = ?2550/-
2. By Least Cost Method (LCM) = ,1690/-
3. By Vogel's Approximation Method (VAM) = ,1660/
Thus, VAM delivers the !BF solution with minimum cost.
Balanced
Maximum Eliminate
Minimum Allocation Units Supply and
Allocatlon Penalty Row Source or
Cost Cell [x,, = min (a,, b,)] Demand
or Column Destination
Units
x21 = min (110, 120) a2 = O

First P, P2 D1 P,
X21 = 110 b, = 10
x32 = min (150, 180) a3 = O

Second D, p3 02 P,
X32 = 150 b, = 30
x.11 = min (100, 10) a, = 90

Third D, P4 D1 D,
X,11 = 10 b, = 0
x., = min (60, 30) a1 = 30

Fourth D, P1 02 D,
X12 = 30 b, = 0
Xra = min (60, 150) a1 = 0

Fifth . P,
P1 03
X13 = 60 b, = 90
X,n = min (90, 90) a, = O

.
Sixth p4 03 Pa and 03
X43 = 90 b2 = 0
Table 4 . 4 . 3 b : Summarized Step-by-step Allocation by VAM
4 . 5 O p t i m a l i t y Test Methods
Optimal Solution
Optimal solution is a solution that has no other set of transportation route or allocations
or basic variables that will further reduce the transportation cost.
The !BF solution is tested for optimality by evaluating unallocated cells or non-basic
variables in terms of an opportunity of reducing total transportation cost. The
unallocated cell with most negative opportunity cost is considered for positive allocation,
such a cell is known as incoming variable. Due to the addition of incoming variable/cell
for allocation, the number of allocations increase more than (m + n - 1) by one, thus
forming a closed loop with the basic variables/allocated cells. Such a closed loop consists
of alternative vertical and horizontal lines which start from and end at incoming variable
cells and each corner of loop or the point of change in the direction of l i n e must coincide
with the allocated cells. By applying the rim condition of supply or demand, allocate the
m a x i m u m amount for incoming variable.
There are two methods for testing the optimality of !BF solution and improving the
solution, if not optimal. They are:
Stepping-Stone (SS) Method
Modified Distribution (MODI) Method
The Stepping-Stone method helps in comparing the relative advantage or opportunity
cost of alternative allocations for all unoccupied cells one-by-one, whereas, the MODI
method compares all unoccupied cells simultaneously, by applying the duality concept.
4 . 5 . 1 Stepping-Stone Method
In the Stepping-Stone method, increase or decrease ,n the total cost is identified by
assigning one unit for each unallocated cell one-by-one. The steps to evaluate the
unoccupied cells by this method are:
Step 1: Consider the !BF solution, select any unoccupied cell and assign +1 unit for that
cell. Form a closed loop starting from the same cell, with alternative horizontal and
vertical lines.
Step 2: Alternatively mark -1 and + 1 at the corners of the loop. If +1 is marked at one
end of the l i n e , then - 1 should be marked at the other end.
Step 3 : Calculate change in allocation cost for the cells in loop as:
d;j = I(+ l ) x C;j + I(-l)x C;j
Repeat steps 1 to 3 for each unallocated cell.
Step 4: If d;i > 0 for every unallocated cell, then the solution is optimal, further
improvement is not required. However, if d;i < 0 for at least one of the unoccupied cells,
then improve the solution by following further steps.
Step 5 : Cell with most negative d;i value is selected for new allocation. In the loop of this
cell, identify the lowest quantity (8) from the cells in the loop marked with -1 and
allocate the same unit (8) to the cell with the most negative du value.
Step 6: Perform addition or subtraction of 8 units at each corner of loop to satisfy the
rim condition.
Again, check for optimality for the new allocation by repeating steps 1 to 6.
Example 0 3 :
Conduct the optimality test for the following !BF solution of a transportation problem and
improve, if required.
01 o, DJ o. a.
'
pl I
5 I
7

220
120 10 90
P, 11 4
L2- I
I

150
150
9 10
PJ
L2- I J

80
70 10
b. 70 120 170 90
'
Table 4 . 5 . l a IBF Solution: Testing for Optimality
Solution 0 3 : ( b y SS method)
For the given !BF solution, the transportation cost is:
TC = 5 x 120 + 7 x 10 + 6 x 90 + 4 x 150 + 7 x 70 + 10 x 10 = ,2400/-
Also, the number of allocations are 6, which is equal to (m + n - 1 = 6)
Now, consider the unallocated cell P3D4, allocate + 1 to P3D4. Now, from this cell, form a
closed loop, which is PJD JDJ-P DJ-P D JD , as shown in Table 4 . 5 . l b .

4-P 1 1 4-P 4
01 o, 03 o. a,
pl 8 5 (+1) 7 (-1) 6
- 220
--
120 10 t 90
I
I
P, 11 4
l2- 150
I
150 I
110 (+l) 13
p3 7 9 (-1)
- 80
_ _ _ :,I,
70 10 -
b. 70 120 170 90
J
Table 4 . 5 . l b : Closed Loop Formation for Unallocated Cell
For this closed loop, mark +1 and -1 alternatively, at the comer of loop and calculate
the opportunity cost:
d34 = ( + 1) x 8 + ( -1) x 10 + ( + 1) x 7 + ( -1) x 6
d34 = -1
Table 4 . 5 . l c gives the summarized opportunity cost for each unallocated c e l l .
Unallocated Opportunity Cost

Closed Loop
Cell (d,;)
P D P D -P D -P D -P D -P D = + 8 - 7 + 10 - 7 = 4
1 1 1 1 1 3 3 3 3 1 1 1
du
P D P D -P D -P D -P D -P D d = + 7 - 4 + 10 - 7 = 6
2 1 2 1 2 3 3 3 3 1 2 1 21
P D P D -P D -P D -P D -P D d = + 11 - 4 + 7 - 5 = 9
2 2 2 2 2 3 1 3 1 2 2 2 22
P D P D -P D -P D -P D -P D d = + 9 - 6 + 7 - 4 = 6
2 4 2 4 1 4 1 3 2 3 2 4 24
P3D2 P D -P D -P D -P D -P D d = + 9 - 10 + 7 - 5 = 1
3 2 3 3 1 3 1 2 3 2 32
P3D4 P D4-P D -P D -P D4-P D4 d = + 8 - 10 + 7 - 6 = - 1

3 3 3 1 3 1 3 34
Table 4 . 5 . l c : Opportunity Cost Calculation for Unallocated Cells
As seen in Table 4.5.lc, the unallocated cell P D has the most negative opportunity
3 4
cost value (d34 = -1), thus !BF solution is not optimal. By allocating a single unit to
P D the cost will reduce by <"1 per unit. Here, improvement is done in allocation by
3 4,
considering P D as an incoming variable. Now, let +8 be the maximum allocation unit

3 4
for incoming cell P D Now, the 8 value is obtained as a minimum allocation value
3 4.
among the cells which are marked with -1 (refer to Table 4 . 5 . l b ) .
Here, 8 = minimum (90, 10) = 10 units.
Thus, new allocation for the cells in loop will be:
X34 = +8 = 10
X33 = 10 - 8 = 10 - 10 = 0
X13 = 10 + 8 = 10 + 10 = 20
X14 = 90 - 8 = 90 - 10 = 80
The improved transportation table, with improved allocation is shown in Table 4 . 5 . l d .
Again, the improved solution is tested for optimality of opportunity cost. The calculation
of opportunity cost for unallocated cells are summarized in Table 4 . 5 . l e .
D, D, 03 o. a;
P, 8 5 7 6
220
120 20 80
P, 7 11 4 9
150
150
P, 7 9 10 8
80
70 0 10
b. 70 120 170 90
I
Table 4 . 5 . l d : Improved Transportation Problem Solution
Unallocated Opportunity Cost

Closed Loop
Cell (d;;>
P1D1 P,D,-P1D4-P3D4-P3D,-P1D1 = + 8 - 6 + 8 - 7 = 3
dll
P2D1 -P2DrP1DrP1D4-P3D4- d = + 7 - 4 + 7 - 6 + 8 - 7
21
P D1
2
P3D,-P2D1 = 5
P D P D -P D -P -P -P D d = + 11 - 4 + 7 - 5 = 9
2 2 2 2 2 3 1D3 1D2 2 2 22
P D P D -P D -P D -P D -P D d = + 9 - 6 + 7 - 4 = 6
2 4 2 4 1 4 1 3 2 3 2 4 24
P3D2 P D -P D -P D -P D -P D d = + 9 - 8 + 6 - 5 = 2
3 2 3 4 1 4 1 2 3 2 32
P D -P D -P D -P D -P D = + 10 - 8 + 6 - 7 = 1
P3D3 3 3 3 4 1 4 1 3 3 3 d34
Table 4 . 5 . l e : Opportunity Cost Calculation for Unallocated Cells
of Improved Solution
For unallocated cells, since all the values of d .. are all positive, the improved solution is
OJ
optimal solution. Thus, the optimal transportation cost is calculated as:
TC = 5 x 120 + 7 x 20 + 6 x 80 + 4 x 150 + 7 x 70 + 8 x 10 = ,2390/-
4 . 5. 2 Modified Distribution (MODI) Method
MODI method is the most efficient way to find the opportunity cost without drawing
loops for every unallocated cell, as compared to the Stepping-Stone method. It applies
duality theorem to identify the incoming cell for improving the !BF solution. It is also
known as uv method, where the 'u' represents the dual variable supply constraint and 'v'
represents the dual variable of demand constraints.
Recollect the mathematical equation from section 4.2, the transportation problem can
be formulated as l i n e a r programming problem:
m "
Objective function: Minimi:te Z = L I x,,c,,

ll ]-I
Subjected to:
Supply Constraint
eBook
Demand Constraint
And x 2: 0, i = l , 2 , 3 . . . m , j = l , 2 , 3 ... n
11
Consider the above linear programming as primal form of transportation problem:
Let, u, = the dual variable for supply constraint and VJ = the dual variable for demand
constraint. Then, the dual of primal can be formed:
m "
Objective function: Maximize Z = Iu,a, + I vb,

I=! )=I
Subjected to:
And u, and VJ are unrestricted in sign for all i and j
Here, the dual form follows that for all positively allocated cells u, + v, = c, . In case of
1
unallocated cells, if u, + v, > c,,, then the solution obtained is an optimal solution, that is,
allocating a single unit to such cells will increase the total cost of transportation.
However, if for at least one of the unallocated cells u, + v, < c,,, then the solution
obtained is not optimal, that is, there is a further opportunity of reducing the
transportation cost by allocating units to such cells.
Steps in MODI Method
The steps of conducting optimality test and improving the solution by MODI method are
described:
Step 1: Consider the !BF solution; assign u, to rows and VJ to columns. Calculate u, and
VJ for rows and columns with help of dual relation 'u, + VJ = c,/ for allocated cells only.
Assign any u, or VJ zero value, particularly where there is maximum number of
allocations in rows or columns.
Step 2: Then for unallocated cells, compute opportunity cost, d,, = c,, - (u, + v,)
If a l l d,J > 0, the solution is optimal.
If a l l d,J = 0, the solution has alternative solution.
If any of d,J < 0, the solution is not optimal and can be improved further.
Step 3: If one or more cells have d;J < 0, then select the cell having highest negative d,J
value as an incoming variable or cell in solution. Form a closed loop from the incoming
cell.
Step 4: Allocate maximum quantity +8 to incoming cell. Mark alternative -8 and +8 to
the corner cells of the loop. At one end of the line, if '+8' is marked, then at the other
end, -8 should be marked.
Step 5: Then obtain the value of 8. The value of 8 is equal to the m i n i m u m of allocation
units (x,/s) from the corner cells of loop marked with -8.
Step 6: Obtain new improved solutions by adding or subtracting '8' units at each corner
of the loop to satisfy the rim condition. Compute the total cost of transportation.
Step 7 : Further, test the revised solution for optimality by repeating steps 1 to 6.
Solution 0 3 : (By MODI Method)
Reconsider Example 03 from Table 4.5.la, you get the cost Table 4.5.2a, as shown
below. Assign u 1, u2, and u3 to rows and vr, va, vs, and V4 to the columns of the cost
table.
V1 = V2 = V3 = V4 =
U1 = 8 5 7 6
U2 = 7 11 4 9
U3 = 7 9 10 8
Table 4.5.2a Cost and uv Matrix
The shaded cells in Table 4.5.2a represent the allocated cells, as given in Example 0 3 .
Now, calculate the u, and VJ values for allocated cells with the help of dual relation u, + VJ
= CIJ, First, assume one of the dual variable V3 = 0 (column with m a x i m u m allocation in a
matrix). The rest of the values are calculated as:
C13 = U1 + V3 or 7 = u, + 0 or ur = 7
C23 = U2 + V3 or 4 = U2 + 0 or U2 = 4
C33 = U3 + V3 or 10 = U3 + 0 or U3 = 10
C12 = U1 + V2 or 5 = 7 + V2 or V2 = -2
C14 = U1 + V4 or 6= 7 + V4 or V4 = -1
C31 = U3 + V1 or 7= 10 + v, or v, = -3
The calculated values of LI; and VJ are shown in the following table:
v, = -3 V2 = -2 V3 = 0 V4 = -1
u, = 7 8 5 7 6
U2 = 4 7 11 4 9
U3 = 10 7 9 10 8
Table 4 . S . 2 b : uv Values for Allocated Cells
Now, calculate the opportunity cost values for unallocated cells.
The calculations are:
d11 = c11 - ( u , + v1) = 8 - (7 - 3) = 4
d21 = C21 - ( U2 + V1) = 7 - ( 4 - 3) = 6
d22 = C22 - ( U2 + V2) = 11 - ( 4 - 2) = 9
d24 = C24 - (U2 + V4) = 9 - (4 - 1) = 6
d32 = C32 - (U3 + V2) = 9 - ( 1 0 - 2) = 1
d34 = C34 - (U3 + V4) = 8 - ( 1 0 - 1) = -1
As per the calculations, d34 < 0, that rs, P3D4 is an incoming v a ri a b l e . There is
opportunity to reduce the cost by allocating at P3D4 cell. Now, improve the allocation of
Table 4 . 5 . l a by allocating +8 units at cell P3D4. Closed loop is drawn from cell P3D4, as
shown in Table 4.S.2c, the closed loop path is P D4-P D -P D -P D -P D4. Assign +8 and
3 3 3 1 3 1 4 3
-8 units alternatively to the corners of the loop. Here, 8 = minimum (90, 10) = 10 units.
Thus, new allocation for the cells in loop will be:
X34 = +8 = 10
X33 = 10 - 8 = 10 - 10 = 0
X13 = 10 + 8 = 10 + 10 = 20
X14 = 90 - 8 = 90 - 10 = 80
The improved transportation table with improved allocation is shown in Table 4 . S . 2 d .
Again, the improved solution is tested for optimality.
01 o, 03 o. a,
pl 8 5 (+0) 7 (-0) 6
- 220
f" -
120 10 90-r
I
P, 11 1 4
t I
It
150
I
150 I
I I
p3 9 (-0) 110 (+O)
t I
80
_ _ _ ,I,
70 10 I+- -
bl 70 120 170 90
Table 4.S.2c: Forming Closed Loop for Improving Allocation
01 o, 03 o. a,
pl 8 5 7 6

- 220
120 20 80
P, 11 4
t
150
150
p3 7 9 10 8
- 80
70 0 10
b. 70 120 170 90
I
Table 4 . S . 2 d : Improved Transportation Problem Solution
The cost and uv matrix for improved TP solution is as shown in Table 4.4.2e. Now, for
allocated cells, obtain the values of u, and VJ by assuming u, = 0.
V1 = 5 V2 = 5 V3 = 7 V4 = 6
u, = 0 8 5 7 6
U2 = -3 7 11 4 9
U3 = 2 7 9 10 8
Table 4.5.2e: uv Values for Allocated Cells for Improved TP
Now, for unallocated cells, calculate the opportunity cost.
The calculations are:
d11 = c11 - (u, + v,) = 8 - (0 + 5) = 3
d21 = C21 - (u2 + v,) = 7 - (-3 + 5) = 5
d22 = C22 - (U2 + V2) = 11 - (-3 + 5) = 9
d24 = C24 - (U2 + V4) = 9 - (-3 + 6) = 6
d32 = C32 - ( U3 + V2) = 9 - (2 + 5) = 2
d33 = C33 - ( U3 + V3) = 10 - (2 + 7) = 1
For unallocated cells all d;; > 0, therefore, the solution is optimal and there is no further
improvement in the improved solution. According to Table 4.5.2d, the optimal
transportation cost is calculated as:
TC = 5 x 120 + 7 x 20 + 6 x 80 + 4 x 150 + 7 x 70 + 8 x 10 = <"2390/-
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4 . 6 C h apt e r S u m m a r y
The transportation problem technique deals with the decision of shipping
commodities, items or products from the sources of supply to demand
destinations, with an objective of minimizing transportation cost.
Initial basic feasible solution for TP can be obta ined by three methods: NWCM,
considers cell for allocation according to the position; LCM, considers cell for
allocation with least unit cost; VAM, considers cell for allocation to reduce the
opportunity cost.
!BF solution is tested for optimality only if the number of allocated cells equal to
(m + n - 1).
Optimal solution for TP rs the solution where further reduction in total
transportation cost is not possible. Optimality is tested by two methods: Stepping
stone (SS) Method and Modified Distribution (MODI) Method
While performing optimality test, opportunity cost for each unallocated cell is
obtained, and the cell with the most negative opportunity cost is considered for
further improvement.
Closed loop approach is applied for modification in the allotment.
Q u e u i n g Theory
eBook
5 . 1 Introduction
A common scenario observed at ATM outlets is that you have to wait in a queue. The
situation is similar at a bus stop, at the airport check-in counters or at a government
office. Usually, people don't like standing in a queue for a service and wasting their time.
A good understanding of the 'Queuing' mechanism helps the management to answer
questions of the actual and expected requirements of a system and the assumptions
made for the same.
The queuing system was first studied in the early 1900s; A. K. Erlang, a Danish
telephone engineer began a study of the congestion of telephone calls, in order to
determine the number of telephone circuits that are required to provide an acceptable
level of service, in tenms of waiting of calls.
This chapter focuses on the key models of the queuing theory and its benefits.
After reading this chapter you will be able to:
Describe the queuing theory
Explain the general structure of queuing system
Calculate the operating characteristics of a queuing system
Explain Single-server and Multi-server queue model
Explain constant service time and finite calling population queue model
05. Q u e u i n g Theory eBook
5 . 2 Q u e u i n g Theory
The queuing theory is also known as waiting line theory. A queue arises because the
customer has not been provided service on an immediate basis after their arrival at the
service station. Such a case arises when the service station is inefficient or number of
arrivals are more than that of serving capacity. Such queues may also take the form of
faulty machines and equipment waiting to be repaired, containers waiting for uploading
on port, items waiting on an assembly line to be assembled, and so on. All queues are
similar in nature, where a customer is anyone or anything wanting a service and a
server is a person or thing providing that service.
The elimination of waiting or lack of service can be done by increasing the service
capacity and efficiency, which may be a costly affair and uneconomic after a certain
period of t i m e in situations like a lag or state of stagnancy. A very low level of service
will cause a waiting line, which has a cost of customer frustration, loss of goodwill in the
long run and so on, whereas, a very high level of service will require a very high set-up
cost and will also increase the idle time for the service station. Therefore, the manager
should take an optimum decision on the level of service, which is neither too high nor
too low. Thus, the ultimate goal of queuing theory is to obtain an economic balance
between the cost of providing service and associated costs for the wait required for that
service.
5 . 3 Structure of Q u e u i n g System
Take an example of a single ticket booking center at a cinema hall, where the customer
will come and purchase movie tickets. The queuing process starts from customers
approaching the required queuing system for serving their needs. Here, the customer
comes from input population. If the server is busy, the customer has to wait in queue.
When it's the customer's turn, he/she will be served by the server, after which the
customer w i l l leave the system. The structure of a queuing system can be visualized in
Fig. S.3a.
The structure of the queuing system consists of the following components:
5 . 3 . 1 Arrival Process
5 . 3 . 2 Queue Structure
5.3.3 Service System
Service Customers
Input population Queue
system leave the
system
11111
Arrtal Queue Service
process structure
mechanism
Fig. S.3a: Structure of Queuing System
5 . 3 . 1 Arrival Process
The arrival process of customers from input population has four major characteristics. It
is important to consider the source of the input population, number of customers to be
served simultaneously, pattern of arrivals, and behavior of arrivals.
Source of C a l l i n g Population
The sources of customer or calling population can be finite or infinite. When the number
is very large, it can be considered infinite. For example, all the people of a city may be
potential customers at a supermarket. When the number is countable, it is considered
finite population. For example, in an office, there are twenty employees and one coffee
machine, therefore the coffee machine's calling population is finite, that is, twenty
customers.
Numbers of Customers
The customer a rr i v i n g at the service system may arrive individually or in groups. For
example, a customer arriving at the ATM is an individual arrival, whereas, a family
arriving at a restaurant for dinner rs an example of group arrival.
Pattern of Arrival
The arrival pattern of customers can be scheduled or it can be random. For example, the
arrival of the patient at a clinic can be scheduled by a doctor, whereas, the arrival of
customers at a cinema hall is in random. The arrivals are considered as random when
the t i m i n g s of arrival cannot be predicted exactly and are independent of others' arrival.
For a queuing system, the number of arrivals per unit of time or arrival rate can be
estimated by the Poisson probability distribution. The average arrival rate is denoted by
A, which is the mean of the Poisson distribution. Arrival pattern is also specified by the
inter-arrival time, the time between the successive arrivals of customers to the service
facility, which follows an exponential distribution. It is the reciprocal of the average
arrival rate, that is, ;,{ .
Behavior of Arrivals
In the queuing system, it is assumed that the customers are patient to wait in the queue
until they are served. However, in reality, after seeing the queue, the behavior of
customer changes to balk, renege or jockey between the queues. Balking occurs when
the arriving customers refuse to enter the queue after knowing that the queue is very
long and too much time will be wasted. Reneging customers join the queue, wait for
some time, and after growing impatient, leave the queue without being served. Some
customers attempt to switch between queues, in order to receive service quickly, such
behavior is known as jockeying.
5 . 3 . 2 Queue Structure
The queue structure is characterized by queue length and queue discipline. The queue
length can be either limited or unlimited, depending upon the maximum number of
customers, both in service and in the queue, permitted in service facility at the same
time. The driveway length at an automatic car wash center is an example of limited
queue length, whereas, toll booth serving arriving automobiles is an example of
u n l i m i t e d queue length.
The queuing discipline refers to the rule or order in which the customers are selected
from the queue, in order to provide service. The various queue disciplines are:
First-Come, First-Served (FCFS)
According to FCFS, customers are serviced in the order of their arrival. For
example, take-away food junctions, customers who come first are served first.
Last-Come, First-Served (LCFS)
According to LCFS, the customer that arrives last is served first. For example, rn
cargo h a n d l i n g situations, the last item to be loaded or stacked is removed first.
Service-in-random Order (SIRO)
According to this rule, the customer is selected rn such a way that each customer
has equal probability to be selected for the service.
Priority Services
Here, the customers are provided service on priority. For example, when a V.J.P
enters a function, security service is provided on immediate basis or when an
emergency case patient arrives at the hospital, pnonty is given to that patient.
5 . 3 . 3 Service System
The service system consists of servers or channels, giving service to customers
according to the requirement. The two major characteristics of service system are:
The structure or configuration of service system
Pattern of service times (Speed of service)
The Structure or Configuration of Service System
Structure of service system means how the facilities will exist. There are various aspects
in which the structure of service can be arranged, which are discussed here:
A Single Service Facility
The models that involve only single service facilities are known as single-server
models. For example, bill collections counter, a security check counter at the gate
of a m a l l , and so on.
Multiple, Parallel Facilities with Single Queue
In such a structure, more than one server is arranged in parallel, providing the
same facility. For example, at the multiplex, more than one counter is provided for
purchasing a movie ticket.
Multiple, Parallel Facilities with Multiple Queues
In this case, each server has a different queue, according to the service required.
For example, in a bank, different counters have different queues.
Service Facilities in a Series
Here, the customer may enter the first service station and acquire some portion of
the service, then proceed to the next service station, get another portion of
service, and so on. For example, a passenger has to go through various formalities
or checks before boarding the plane.
Pattern of Service Times (Speed of Service)
In a service system, service pattern can be either constant or random. In case of the
automatic machine, the service time is constant. The random pattern of service t i m e or
speed with which the service is provided can be expressed in either of the two ways:
In Terms of Average Service Rate
It w i l l provide details regarding the average number of customers served during a
particular time period. For example, customer per hour. Service rate is denoted by
'' and is assumed to follow a Poisson distribution.
In Terms of Average Service Time
It indicates the average amount of time needed to serve a customer, generally
expressed in minutes, hours or days per customer. The average service time
usually follows the negative exponential probability distribution. Service rate and
time are reciprocal to each other and each can individually identify the capacity of
a facility. Thus, the average service time is denoted by ,%' .
5 . 4 Q u e u i n g Theory: Operating Characteristics
Operating characteristics are perfonmance measures of any queuing system. It helps a
manager in evaluating the queuing system in terms of the customer service level and
utilization of facilities. The various operating characteristics that are explained below are
related to:
The waiting time of customers
The number of customers waiting
The probability of busy server
The cost of managing the queuing system
Waiting Time of Customers
Operating characteristics related to the waiting time of customers are queue waiting
time and system waiting time. The queue waiting time measures the average time

the customer or the unit spends in a waiting line or in a queue. It is denoted by Wq. The
system waiting time measures the average time the customer or unit spends in the
system, i n c l u d i n g waiting and servicing time. It is denoted by W,.
A long waiting time may increase customer dissatisfaction and potential revenue loss for
the future.
Number of Customers Waiting
Operating characteristics related to the number of customers waiting are queue length
and queue system length. Queue length is expressed as the expected number of
customers or units who are in queue for service. It is denoted by Lq. The queue system
length expresses the expected number of customers or units who are in queue or being
served. It is denoted by L.,.
A long queue indicates poor service facility design or a need for more space, whereas, a
s m a l l e r queue indicates excess of service facilities.
Probability of Busy Server
Operating characteristics related to the probability of busy server includes p (rho), Pw
and Pn. p (rho) gives the probability that the server is busy at any point of time. It is
also known as a server utilization factor. Pw gives the probability that an arriving
customer or unit has to wait before being served. Pn gives the probability that N number
of customers or units are in the queuing system.
Cost of Managing the Queuing System
The performance measures related to the cost of managing the system are service cost
and cost effectiveness. Under service cost, the system rs evaluated on the basis of the
average cost needed to manage or operate the system per unit of time. Under cost
effectiveness, the system is evaluated on the basis of the number of servers required to
achieve cost effectiveness, while balancing the service cost and the waiting cost of the
customer.
www.itmuniversityonline.org Page 1 0 1
5 . 5 Types of Q u e u i n g Models
The queuing models are categorized as deterministic and probabilistic queuing models. If
the arrival of customers and the time intervals are known with certainty, the queuing
model becomes deterministic in nature. In this model, customers arrive in the queuing
system at regular intervals and the service time for each of them is constant and known.
For example, at a pharmaceutical manufacturing company, a set of bottles arrive every
two minutes at the counter for labeling. The arrival time between any two sets of bottles
is two minutes ( 7j_ = 2). The arrival rate is 30 bottles per hour. If the worker at the
l abeling counter requires the same two minutes to take the set and label them, then the
inter-arrival and processing time ( = 2) will be the same for 30 sets of bottles in an
hour. Hence, there shall never be a queue and the worker will have continuous
workflow. Consider another case, if the worker requires three minutes to take the set
and label them, then only 20 sets of bottles will be processed per hour. The workers
would always be busy and the queue would keep increasing. Such situations can be
resolved by providing additional workers. In a deterministic queuing model, it is very
easy to determine that, if A s then there will be no waiting and no queue but if A > ,
then the queue w i l l be formed which will increase indefinitely.
On the other hand, if the arrival of customers and the time intervals are uncertain, the
queuing theory is a probabilistic one, which is the case most often. Probability models
are identified using Kendall's notation.
Kendall's Notation for Queuing Models
In 1953, D. G. Kendal classified different queuing models by using standard notations
(A/B/C), to which, in 1966, three more notations were added. Lately, the standard
format for describing the queuing models is:
(A/B/C : D/E/F)
Where,
A = Probability distribution of inter-arrival times
B = Probability distribution of service times
C = Number of identical servers in system, for single server C = 1 and for multiple
servers C = S.
D = Maximum length of the queue or service capacity. For restricted capacity, D = n and
for unrestricted capacity D = co.

E = Source population, that is, the maximum number of units that can arrive in the
queue. For finite population E = N and for infinite population E = co.
F = Queue discipline or queue structure. The discipline can be FCFS, LCFS, SIRO or
priority based.
For notations A and B, if the distribution is exponential, it is denoted by 'M', if the
distribution is deterministic and known, then they are denoted by 'D', and if no
assumption is made about the type of distribution, then they are denoted by 'G' general.
For example, {(M/M/1) : (00/00/FCFS)} notation indicates that the queuing system has
exponential inter-arrival and service time, with a single server, having infinite queue
capacity, source population with infinite numbers, and FCFS queue d i s c i p l i n e .
The various queuing models are discussed below:
Model A { { M / M / 1 ) : {co/co/FCFS)}
It represents a single-server queuing model with exponential inter-arrival and
service time. For example, information counters at a department store.
Model B {{M/M/S) : {co/co/FCFS)}
It represents a multi-server queuing model with exponential inter-arrival and
service time. For example, payment counters in supermarkets.
Model C { { M / D / 1 ) : {co/co/FCFS)}
It represents constant service time model with a single server, exponential inter
arrival time, and constant service time. For example, systems like an automated
vending machine for vending soft drinks.
Model D {{M/M/1) : {n/N/FCFS)}
It represents finite calling population model with a single server, exponential inter
arrival, and service time but considers the finite source population. For example,
the parking lot of supermarkets.
5.5.1 Model A: Single-server Queuing Model {{M/M/1) : { cc / cc / F C F S ) }
The following formulae are used to compute the operating characteristics of the single
queue model.
Where,
A = Average arrival rate
= Average service rate
Then, the utilization of server is given as p =

'!..' x
Regarding the Length of the Queue: L = - and L, = L, + -
q ( - '!..)
).. d 1
Regarding Waiting Time: W, = - = ( ) an W, = W, + -
).. - '!..
Regarding Probability Characteristics of Queue System:
P, = 1 - _,,I,_ = 1- p; probability of idle service facility

P. = p = ;i ; probability that the server is busy or the customer has to wait

P, = P{:r; probability that n number of units are present in the system
Example 0 1 :
Rico Transport Service
Rico Transport Service has one reservation counter. At the counter, a clerk handles
information on bus schedules and makes reservations. The customer follows a Poisson
distribution, with an arrival rate of five customers per hour. On average, it takes 7.5
minutes for a clerk to serve a customer, with an exponential probability distribution.
Obtain the operating characteristic of the technical support system. If Rico's customer
service g u i d e l i n e s state that 'no more than 35/o of all customers should have to wait for
making a reservation and that the average waiting time should be two minutes or less',
does the current arrangement of a single counter satisfy the guidelines?

Solution 0 1 :
Since Rico Transport Service has a single counter, the system follows the single-server
queue model.
Where,
A = Average arrival rate = 5 customers/hour
= Average service r a t e = (60/7.5) = 8 customers/hour
The operating characteristics of Rico Transport Service are:
)..2 52
Regarding the Length of the Queue: L, = (- ;\.) = - = 1.0417
8(8 5)
On an average, there are 1 . 0 4 1 7 customers in queue waiting to make reservations.
1. 5
L, =L, +-=1.0417+-=1.667
8
Regarding Waiting Time: w, = L, = i. = 1.o4l 7 = 0.2083

1. ( - i.) 5
The average time a customer waits for assistance is 0 . 2 0 8 3 hours or 1 2 . 5 m i n ut e s .
1 1
w, = w, + - = 0.2083 + - = 0.3333
8
The average time a customer is in the system is 0.3333 hours or 20 minutes.
;( 5
P0 = 1 - - = 1 - p = 1 - - = 0 . 3 7 5 0
8
The probability that the clerk remains idle is 0.375, that is, 3 7 . 5 % of the time, the clerk
is idle.
;(
P. = p = - = 0 . 6 2 5

The probability that the consultant is busy is 0.625 or 6 2 . 5 % , if a l l the customers have
to wait to make reservations.
Conclusion:
In Rico's system, 62.5% of all arriving customers have to wait for assistance, which is
more than that mentioned as standard (35/o). Also, the average waiting time for the
customer is more than two minutes, thus, the current arrangement of the single counter
does not satisfy the customer service guidelines. Such a condition indicates a fairly h i g h
probability that Rico will experience difficulty in serving customer queries efficiently.
5 . 5 . 2 Model B: Multi-server Queuing Model {{M/M/S): { co / co / F C F S ) }
The following formulae are used to compute the operating characteristics of the multi
server queue model.
Where,
k = Number of servers in system
A = Average arrival rate for the system
= Average service rate for each server
k = Overall service rate of the system
First, calculate the probability that all 'k' services are idle, which is given by the following
formula:
P o = [ ' - ' 1 ( "' ) " ] [ l ( "' J ' -.

;n! + k! k - A-
l x (Yi'.)'
Regarding the Length of the Queue: Lq = j J. j )
2
x P0 and L, = Lq + ;i
k - 1 . k - l
Regar
di
mg
W 't'
a, mg
T'
,me.
W
q =
x(Y,)'
)(
n
'i' x "o = -
Lq
1
,k-1 k 1 1 - ;! , -<
The probability that 'n' numbers of units are present in the system:
P, = I x Pa for n > k and Pn = ()" x Pa for O S n 2: k
The probability that an arriving unit must wait for service:
p
w
= .!.("'J'
k!
k
k - A.
Po

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Example 0 2 :
Rico Transport Service
To improve customer service, Rico Transport Service (refer Example 01) is
investigating the alternative of adding one more counter with the same service rate of
serving eight customers per hour. Would the alternative of two counters satisfy the
customer service guidelines?
Solution 0 2 :
If Rico Transport Service operates with two clerks in parallel at its counters, the system
follows the multi-server queue model.
Where,
k = Number of servers in system = 2 counters
A = Average arrival rate for system = 5 customers/hour
= Average service rate of each server= (60/7.5) = 8 customers/hour
k = Overall service rate of the system = 16 customers/hour
The operating characteristics of Rico Transport Service, as per the multi-server queue
model are:
First, calculate the probability that both the consultants are idle, which is calculated as
follows:
Thus, the probability that both the consultants will remain idle is 0 . 5 2 3 8 .
Regarding the Length of the Queue:
L, = '+' x (>;:)' x P, = 5 x 8 x (0.625f x 0.5238 = 0.0676
(k - 1) (k - ,.f (2 - 1 ) ( 1 6 - sf
On an average, there are 0 . 0 6 7 6 customers in queue, waiting to be attended to.
A 5
Ls = Lq + - = 0 . 0 6 7 6 + - = 0 . 6 9 2 6
8
00676
Regarding Waiting Time: w, = L, = = 0.0135
A. 5
Thus, the average waiting time of the customer in queue is 0.0135 hours or 0.81
minutes.
1
w, = w, + - = 0.0135 + 0.125 = 0.1385

The probability that an arriving unit must wait for service:
2
16
Pw = .!. [ " ) k k P = .!. ( ) x0.5238=0.1488
0
k! k - A. 2! 8 16-5
The probability that the consultant is busy is 0 . 1 4 8 8 or 1 4 . 8 8 % if all the customers have
to wait for support.
Conclusion:
If Rico adds one more counter, the average waiting time will be reduced to the 0.81
minutes, as compared to the single counter option, which is less than the standard
average waiting time of two minutes.
Also, the probability that the customer has to wait is reduced from 0 . 6 2 5 to 0 . 1 4 8 8 , that
is, 14.88% of customers have to wait for assistance, which is less than that of the
standard value of 3 5 % .
Thus, the alternative of operating with two reservation counters will significantly
improve the customer service level.

5 . 5 . 3 Model C: Constant Service Time Model { { M / D / 1 ) : { co / co / F C F S ) }
In this model, the system has constant service time, instead of exponentially distributed.
Since constant rate is certain, the values for lq, Wq, L., and W, are always less than that
of the variable service rate model and considered to be half of the model A. The
following formulae are used to compute the operating characteristics of the s i n g l e queue
model.
Where,
>,. = Average arrival rate
= Service rate
>,,
Then, the utilization of server is given as P = -

,.2 -<
Regarding the Length of the Queue: L = - and Ls = Lq + -
q 2( - -<)
L, ,. d 1
Regarding Waiting Time: W, = - = ( ) an w, = w, + -
;\. 2 - ;\.
Example 0 3 :
Fine Automatic Car Wash Center
At Fine Automatic Car Wash Center, it takes exactly seven minutes to wash each car.
During weekdays, the average arrival rate of cars is six per hour and on weekends, the
rate is 7 . 5 cars per hour. Each car takes approximately 20 feet of the driveway length.
How much driveway length will be required on average for cars waiting to be washed?
For how much time w i l l each customer be at the car wash on an average?
Solution 0 3 :
Since automatic car wash takes exactly seven minutes to wash each car, the model
applicable is a constant service time model.
Where,
For Weekdays
A1 = Average arrival rate of cars = 6 cars per hour
= Service rate = (60/7) = 8 . 5 7 cars per hour
The operating characteristics of the system can be given as:
Utilization of car wash center is given as p = >-, = 0. 7

, 2 2
1
6
L = "' = = 0.81
q 2( - i.. , ) 2 x 8 . 5 7 x (8.57 - 6)
Thus, on weekdays, on an average, there is one car waiting for service in queue.
0 81
Regarding Waiting Time: W, = L, = = 0.135
.-i, 6
Thus, on weekdays cars have to wait for, on an average, 0 . 1 3 5 hours or 8 minutes
rn queue.
For Weekends
A2 = Average arrival rate of cars = 7 .5 cars per hour
= Service rate = (60/7) = 8.57 cars per hour
The operating characteristics of the system can be given as:
Utilization of car wash center, p = >-, = 0.875

L = A,' = (7.5f = 3.06
q 2( - A ) 2 x 8 . 5 7 x ( 8 . 5 7 - 7.5)
2
Thus, on weekends, on an average, three cars wait in queue for service.
306
Regarding Waiting Time: w, = '::.s. = = 0.408
"2 7.5
Thus, on weekends cars have to wait for, on an average, 0.408 hours or 25
minutes in queue.
Conclusion:
Since the number of cars waiting on weekends is more than that on weekdays, the
length of drive-way should be such that at least three cars are allowed to wait in the
drive-way. Thus, the length of the drive-way = 20 x 3 = 60 feet long.

5 . 5 . 4 Model D: Finite Population Model { { M / M / 1 ) : {n/N/FCFS)}
In the finite c a l l i n g population model, the arrival rate decreases, as the number of units
in the system increases because with more units in the system, fewer units are available
for arrivals from the finite population.
The arrival rate is defined in terms of how often each unit arrives or seeks service. The
following formulae are used to compute the operating characteristics of the s i n g l e queue
model.
Where,
A = Average arrival rate
= Service rate
N = Size of the population
The probability that no units are in the system: P0 = [f N!l (1')"]
0 (N-n)
Regarding the Length of the Queue: L, = N - Jc + ( 1 - P ) and L, = L, - ( 1 - P)

0 0
Jc
1
Regarding Waiting Time: and W, = W , +

Regarding Probability Characteristics of the Queue:
The probability that an arriving unit has to wait for service: Pw = 1 - P0
The probability o f ' n ' units in the system: P n = (N!n)(JP 0 n
eBook
Example 04:
Max Textile Ltd.
Max Textile Ltd. uses a group of four identical machines for the purpose of production.
The arrival rate or the request for the repair service for each machine is 0.05 per hour.
One person from the maintenance department provides the repair service for these four
machines at the rate of 0 . 5 machines per hour. Compute the operating characteristics of
the repair process and comment on the efficiency of single operator.
Solution 04:
Since the c a l l i n g population for the maintenance department is o n l y four machines, the
repair process follows finite calling population queue model. The following formulae are
used to compute the operating characteristics of the single queue model.
Where,
A = Average arrival rate = 0 . 0 5 machines per hour
= Service rate = 0 . 5 machines per hour
N = Size of the population = 4 machines
First, compute the probability that the operator of the maintenance department is i d l e :
P = 1 _ 1 = 1
0
4
[ N N! ( ,. ) " ] - [ 4 41 (0.05)"] [ 41 (o 1 rJ
(N-n) (4-n) O:S (4-n)
p - 1
0
- [ w (0.1)
0
J + [ [3J (0.1)' J + [ITT (0.1)2 J + [ m (o 1)3 J + [[DJ (0.1)

4
1
06466
Po = 1 + 0 . 4 + 0 . 1 2 + 0 . 0 2 4 + 0.0024 =
5
L =N-"+(l-P )=4-0.05+0. (1-0.6466)=0.1126
0
' -< 0.05
Thus, 0 . 1 1 2 6 m a c h i n es are waiting for repair.
L, = L, + ( 1 - P ) = 0 . 1 1 2 6 + 0 . 3 5 3 4 = 0.466
0

W = Lq = 0.1126 = 0 6372
Regarding the waiting time:
q ( N - L , ),i (4-0.466)x0.05 .
The average waiting time for the machine is 0.6372 hours or 38 minutes.
Regarding Probability Characteristics of the Queue:
The probability that an arriving machine has to wait for service:
P. = 1-P
0
= 1 - 0 . 6 4 6 6 = 0.3534
Thus, 3 5 . 3 4 % of the arriving machines have to wait for service.
Conclusion:
With the present availability of a single operator and five machines, the system is
working efficiently but if the number of machines w i l l increase an extra operator w i l l be
required for better maintenance activity.
5 . 6 Cost A n a l y s i s
For cost analysis, 'Service Level Cost Model' rs developed, which consists of two
conflicting costs of maintaining the service level:
Waiting Cost (WC)
Waiting cost is the cost of delay in offering service to customers. Waiting cost is
based on the average number of customers in the system (waiting and being
served).
Service Cost (SC)
The service cost is the relevant cost associated with operating each service
channel. It is also referred to as the cost of offering service to customers.
To maintain optimal service level, managers have to determine the optimal service rate
and the number of service channels or servers in a way that avoids excessive delay in
offering the service.
Determining Optimal Service Level
The general, Service Level Cost Model can be graphically represented, as shown in
Fig. S.6a.
Total Cost
... (TC)

u /
Service Cost
c,
Waiting Cost
(Cw)
- , - ._ /
Optimal Service
Service Level Level
Fig. 5 . 6 a : Service Level Cost Model
For determining the optimal service level, consider the queuing model A: Single-server
model.
Where,
Cw = Waiting cost per time period for each customer
I..,, = Average number of customers in the system
C, = Service cost per time period for each server
k = Number of servers
TC = Total expected cost of waiting and service per unit time, given the service rate .
Then, the cost equation can be written as: TC = Service Cost + Waiting Cost
Service cost = Service r a t e ( ) x Cost per service per unit time (C,)
Waiting Cost = Number of customers in the system ( 1..,, ) x Waiting cost per unit
ti me per customer (Cw).
Therfore, TC=(xC,)+(L,xCw)
Since, for model A, L, = _i..

_
- )..
Therfore, TC = C, + _i..
_ Cw
- )..

Optimum value of service level can be obtained by the concept of maxima and m i n i m a in
differential c a l c u l u s (or differentiating the TC" with respect t o ) :
d
- T C = C , + Cw = 0, as the necessary condition for maxim um or m i n i m um
2
d ( - z)
value o f .
Therefore, = x + ,.'w , the optimal service rate for maintianing the optimal service
level.
Determining Optimal Number of Servers
For determining the optimal number of servers, consider a multi-server queuing model
(Model B). In this case, the cost equation can be written as: T C = ( Cwls + Csk)
Now, compare the cost of the system by taking into account the various alternative
number of servers required. The alternative which has minimum cost is considered
optimal.
For example, consider the case of Rico Transportation Service (refer Example 01 and
Example 02), if the clerk is paid ,20 per hour and customer waiting time is valued at
,SO per hour, should Rico expand to the two-counter system alternative?
The cost analysis of operating with a single counter or two can be done as follows:
Cw = ,SO per customer per hour
C, = ,20 per clerk per hour
For Single Counter (k = 1 and L. = 1 . 6 6 7 ) :
The total cost is given as: T C = CwL. + C,k = (50 x 1 . 6 6 7 ) + (20 x 1 )
TC = , 1 0 3 . 35 per hour
For Two Counters (k = 2 and L, = 0 . 6 9 2 6 ) :
Total cost is given as: TC = CwL. + C,k = (50 x 0 . 6 9 2 6 ) + (20 x 2)
TC = ,7 5 per hour
Thus, the alternative of operating with two counters is more economical than that of
operating with a single one.
Queuing theory deals with situations where customers arrive and then wait for
service, get the service, and leave. The major objective is to serve the customer
with m i n i m u m waiting.
Queuing systems are analyzed for determining the optimal service level.
Queuing systems consist of arrival process, queue structure, and service system.
Operating characteristics are performance measures of any queuing system. It
includes determining the waiting time of customers, the number of customers
waiting, the probability of busy server, and the cost of managing the queuing
system.
For a workable queuing system, it is necessary that the arrival rate of customers
per unit of time should be less than the service rate.
The various queuing models are: Model A {(M/M/1): (00/00/FCFS)}: Single-server
queuing model; Model B {(M/M/S) : (00/00/FCFS)}: Multi-server queuing model;
Model C {(M/D/1) : (00/00/FCFS)}: Constant service time model; and Model D
{(M/M/1) : (n/N/FCFS)}: Finite calling population model.
An increase in service level increases cost but reduces the cost of waiting.
Economic analysis can be conducted with the help of a Service Level Cost Model.

Simulation
I T M
UNIVERSITY
ONLINE
06. Simulation eBook
6 . 1 Introduction
It is difficult to obtain optimum solutions by regular analytical techniques for models that
replicate real problems, for which decision variables do not follow the assumptions that
are assumed in models. The uncertainty in the working environment adds more
complexity in finding the various courses of action. Take a case of queuing models,
where formulas are based on certain assumptions about arnval distribution, service time
distribution or queue discipline. However, in real situations, such operating systems do
not follow the stated assumptions and are difficult to solve by queuing models. For such
situations, simulation becomes a flexible technique to analyze the behavior of the
system.
Simulation helps to analyze real world problems by replicating the characteristics and
dynamics of the real system in a probabilistic model. It utilizes repeated random
sampling for getting results, by using uncertainty in its inputs to generate a range of
possible outcomes, with the help of computers.
Describe the simulation technique
Describe the Monte Carlo simulation method and procedure
Apply Monte Carlo simulation to waiting line systems
and inventory control systems
List the advantages and disadvantages of simulation techniques

6 . 2 Types of S i m u l a t i o n
Definition
In general terms, simulation is the technique that involves the building of logical and
mathematical models of a system or a decision problem and conducting the experiment
with the model, in order to obtain insight into the system's behavior or to assist in
solving the decision problem.
Shannon defines simulation as, "the process of defining a model of a real system
and conducting experiments with this model for the purpose of understanding
the behaviour (within the limits imposed by a criterion or a set of criteria) for
the operation of a system."
Whereas, according to Naylor et al., "Simulation is numerical technique for
conducting experiments on a digital computer, which involves certain types of
mathematical and logical relationships necessary to describe the behaviour and
structure of a complex real-world system over the extended periods of time."
With the help of s i m u l a t i o n , decision maker creates an environment in which information
about alternative actions can be obtained through experiments. Thus, simulation can be
generalized as a decision making technique that uses a computer-aided experimental
approach for studying the problems that are impossible to solve by formal analytical
methods. As compared to the optimization model, which focuses on optimizing the goal,
simulation model generates a range of possibilities from the criteria given or in other
words, the value of decision variable is input. In this way, simulation gives a measure of
quality of a suggested solution and the variability in various performance measures, with
respect to randomness in inputs.
Replicating the
char-acte..istics
Probabilistic Model
Real System
Possible
Outcomes
Fig. 6.2a: Simulation Concept
Types of Simulation
There are various types of simulation models, some general types are listed below:
Deterministic and Probabilistic Simulation
In deterministic simulation, all the variables are assumed to be known with
certainty, that is, not random in their occurrence. In probabilistic simulation, one
or more independent variables are described by the probability distribution of their
occurrences. The best example of probabilistic simulation is the queuing system,
where the arrival rate of customers at booking counter is described by probability
distribution.
Static and Dynamic Simulation
In static s i m u l a t i o n , the occurrence time of an event is not important to know. For
example, in an inventory control situation, even though the daily demand of an
item is known, it is not important to know when (in the day) the item was
demanded. On the other hand, in dynamic simulation, it is important to know the
occurrence time of event precisely in advance. For example, in queuing situation,
the inter-arrival time between customers should be known.
Continuous and Discrete Simulation
Continuous simulation deals with the system whose behavior changes continuously
with time. For example, the problem of studying the world's population, with
respect to time. On other hand, discrete simulation deals with a system whose
behavior changes at specific discrete points. For example, in the queuing situation,
the state of queuing system changes when discrete events, like arrival or
departure of customers, occur.

6 . 3 Steps in S i m u l a t i o n
The process of s i m u l a t i n g a system consists of the following steps:
Step 1: Defining the Problem or System
At this step, the system or the decision problem is identified and studied in detail. After
the required analysis, the problem is clearly defined and the objective that the
simulation is intended to achieve rs also listed.
Step 2: Identifying the Decision Variables
At this step, decision variables that will provide performance measures of s i m u l a t i o n are
identified. For example, in case of inventory control system, the performance criterion,
in terms of inventory cost, depends on decision variables, like demand, lead time, re
order level, and safety stock.
Step 3 : Constructing the Simulation Model
While constructing the simulation model, the intimate relationship between the system
elements and the defined decision variables is required. For this purpose, the influence
diagram is used; that links together the various elements of the system.
Step 4: Testing and Validating The Model
A testing and validation process is required to validate the simulation model and find
whether it represents the actual system or not. First, the internal validation of the model
is done, then the external validation. Under internal validity, it is determined whether
the model is correct in logical and perfonnance sense. For this, the equations and
procedures in the model are checked for accuracy. After this, external validity is
conducted by substituting the actual historical values in the model and checking if it
replicates what happened in reality.
Step 5 : Designing of the experiment
Here, experimental design refers to the ways of controlling the conditions of study. It
requires:
Determining the factors to be considered as fixed or variable in the model.
Determining the resulting dependent measures.
Determining how many times and for what duration the model will be replicated.
For example, in the queuing situation, the number of servers and evaluation of waiting
time of customer may vary depending on the arrival and service rates.
Step 6: Running the Simulation Model
Once the model is validated and experimental design is defined, the next step is to run
it. If the model is deterministic, only a single run is required. Whereas, if the model is
probabilistic, then depending upon the accuracy required, the number of runs would be
decided to get a better picture about the model perfonmance. The statistical sampling
theory can be used to determine the sample sizes of run.
Step 7 : evaluating the Results
At this last step, the run results are analyzed and interpreted. The results are analyzed
for their reliability and correctness, as compared to the real system. F i n a l l y , according to
the simulation output, select the best course of action.
6.4 Monte Carlo S i m u l a t i o n and Its Steps
The major application of simulation is to analyze decision making under a situation of
risk. Under risk, the behavior of one or more factors is not known with certainty. For
example, risk situations like demand for products during the next month, number of
customer arrivals or return on investment. For simulating such situations, Monte Carlo
s i m u l a t i o n technique is used.
According to J. K. Sharma, "Monte Carlo involves conducting repetitive
experiments on the model of the system under study, with some known
probabilities to draw the random samples or observations using random
numbers." Monte Carlo simulation captures the random nature of the given system
with the help of a mechanism called 'random number generator'. The mechanism
consists of a device or the procedure by which the random number is determined, which
is based on the phenomenon that each number has an equal opportunity of being
selected.
The various random number generators could include the results of some device, like a
coin or a die, published tables of random numbers, the rrudsquare method or some other
sophisticated method.

Use of Random Number Table
Of a l l the mechanisms, it is convenient to use a random number table prepared on the
basis of some physical phenomenon. The first random number could be picked at
random from any point in the table and the subsequent ones are to be selected
preceding sequentially either in vertical or horizontal direction. Depending on the
requirement, the random numbers can be chosen in sets of single or two-digit numbers.
Table 6.4a is one of the tables published by the Rand Corporation (of USA): A Million
Random Digits.
Random Number Table
13962 70992 65172 28053 02190 83634 66012 70305 66761 88344
43905 46941 72300 1 1 64 1 43548 30455 07686 31840 03261 89139
00504 48658 38051 59408 16508 82979 92002 63606 41078 86326
61274 57238 47267 35303 29066 02140 60867 39847 50968 96719
43753 21159 16239 50595 62509 61207 86816 29902 23395 72640
83503 51662 21636 68192 84294 38754 84755 34053 94582 29215
36807 71420 35804 44862 23577 79551 42003 58684 09271 68396
19110 55680 18792 41487 16614 83053 00812 16749 45347 88199
82615 86984 93290 87971 60022 35415 20852 02909 99476 45568
05621 26584 36493 63013 68181 57702 49510 75304 38724 15712
Table 6.4a: From Rand Corporation: A Million Random Digits
Steps in the Monte Carlo Simulation Process
The Monte Carlo simulation technique consists of following steps:
Step 1: in the simulation model, set-up probability distribution for the variables to be
analyzed.
Step 2: build cumulative probability distribution for each random variable.
Step 3: generate random numbers and then, assign an appropriate set of random
numbers (RN) to represent a value or range (RN interval) of values for each random
variable. Normally, random numbers 00-99 ( 1 0 0 in count) are assigned to variables.
Step 4: conduct the simulation experiment using random sampling or according to the
given sets of random numbers.
Step 5: repeat step 4 until the required number of simulation runs have been
generated.
Step 6: design and implement a course of action and maintain control.
6.5 Monte C a r l o S i m u l a t i o n E x a m p l e s
Monte Carlo Simulation for Inventory Model
Example 0 1 :
Consider the case of a dealer of a certain product, for which probability distribution of
d a i l y demand and of the lead time are as shown in Table 6.Sa.
Daily Demand Probability Lead Time Probability
2 0.20 2 0.30
3 0.40 3 0.40
4 0.30 4 0.30
5 0.10
. . . . . .
Table 6.Sa: Probability D1str1but1on for Daily Demand and Lead Time
The ordering cost (0) is known to be \'80 per order, the holding cost (H) per unit per day
is estimated at \'2, and shortage cost (S) equals \'20 per unit per day. The objective of
inventory analysis is to determine the effect of specific re-order level and re-order
quantity, on the total inventory cost.
The two inventory polices are:
Policy A: Re-order quantity = 20 units re-order level = 10 units, and the

'
beginning inventory balance of 20 units.
Policy B: Re-order quantity = 20 units; re-order level = 15 units, and the
beginning inventory balance of 20 units.k
Simulate both the inventory policies for twelve days. For daily demand, use the following
random n u m b e rs : 71, 99, 52, 90, 90, 80, SS, 88, 92, 90, 1 5 , and 7 0 . For lead time, use
the random numbers: 60, 70, 15, and 90.
Solution O 1 :
As the probability distribution is already given, move to the calculation of cumulative
probability for, both, dally demand and lead time; the calculations of cumulative
probabilities are as shown in Table 6.Sb and Table 6.Sc, respectively.
Now, assign random number intervals for both distributions. Since the probabilities add
up to 1 . 0 0 , assign 1 0 0 random numbers of digits ranging from 0 0 - 9 9 to represent each
point of probability. Now, the probability of zero demand is 0.2, assign twenty random

numbers, 0 0 - 1 9 to zero demand. Similarly, the probability of single demand is 0.4, the
next forty numbers 2 0 - 5 9 would be assigned to this level. In a s i m i l a r manner, each of
the demand levels and lead times are assigned appropriate intervals, as shown in
Table 6.Sb and Table 6.Sc, respectively.
Daily
Probability Cumulative Probability Random Number Interval
Demand
2 0.2 0.2 00 - 19
3 0.4 0.6 20 - 59
4 0.3 0.9 60 - 89
5 0.1 1 90 - 99
. . . .
Table 6 . S b : Random Number Interval Assignment: Demand D1str1but1on
Lead Time Probability Cumulative Probability Random Number Interval
2 0.3 0.3 00 - 29
3 0.4 0.7 30 - 69
4 0.3 1 70 - 99
Table 6.Sc: Random Number Interval Assignment: Lead Time Distribution
Table 6.Sd shows the simulation of twelve months for demand and lead time, with
respect to alternative A. For instance, if the random number for day 3 is 52, then the
simulated demand will be three units. Thus, for day 3, balance units remaining are eight
units. Since the balance units are less than the re-order level of 10 units, place a new
order of 20 units. Now, the random number for first order rs 60, thus, the lead time for
this order w i l l be three days, that is, the order will be received on day 6.
Now, for day 3, the order is placed, so it will incur an ordering cost of ,80 and the
balance eight units are earned to the next day, it will incur cost of ,16. Similarly, the
costs are calculated for the remaining days.
Now, total cost is calculated as shown below:
Total Inventory Cost (TC) = Ordering Cost (0) + Holding Cost (H) + Shortage Cost (S)
Thus, total inventory cost for twelve days according to policy A i s :
TC = 1 6 0 + 1 6 6 + 200 = ,526
However, according to policy A, three out-of twelve days, the out-of-stock situation has
occurred.
Cost
Random Resulting Random Lead
Day Receipts Balance
Number Demand Number Time 0 H s
(1) (6) (7)
(2) (3) (4) (SJ (8) (9) (10)
0 20
1 71 4 16 0 32 0
2 99 5 11 0 22 0
3 52 3 60 3 8 80 16 0
4 90 5 3 0 6 0
5 90 5 -2 0 0 40
6 80 4 20 14 0 28 0
7 SS 3 11 0 22 0
8 88 4 70 4 7 80 14 0
9 92 5 2 0 4 0
10 90 5 -3 0 0 60
11 15 2 -5 0 0 100
12 70 4 20 11 0 22 0
160 166 200
. . . .
Table 6 . S d : S1mulat1on of Inventory Polley: Polley A
Table 6.Se shows the simulation of twelve months for demand and lead time, with
respect to policy B. Here, out of twelve days, for three days the re-order level reached
below the minimum level of 15 units, thus, the order was placed thrice but there is no
out-of-stock situation, according to policy B.
The total inventory cost, according to policy B, is shown below:
TC = 240 + 266 + 0 = 506
Since the total cost according to policy B is less than that of policy A, dealer w i l l prefer
policy B. As compared to policy A, the ordering cost is more in policy B but the shortage
cost is m a i n t a i n ed as minimum as possible.
Cost
Random Resulting Random Lead
Day Receipts Balance
Number Demand Number Time 0 H s
(1) (6) (7)
(2) (3) (4) (5) (8) (9) (10)
0 20
1 71 4 16 0 32 0
2 99 5 60 3 11 80 22 0
3 52 3 8 0 16 0
4 90 5 3 0 6 0
5 90 5 20 18 0 36 0
6 80 4 70 4 14 80 28 0
7 55 3 11 0 22 0
8 88 4 7 0 14 0
9 92 5 2 0 4 0
10 90 5 20 17 0 34 0
11 15 2 15 0 30 0
12 70 4 15 2 11 80 22 0
240 266 0
Table 6.Se: Simulation of Inventory Policy: Policy B
Monte Carlo Simulation for Queuing Model
Example 0 2 :
For single channel queuing system, the following is the distribution pattern of inter
arrival and service time for the customers:
Simulate the arrival and service of 10 passengers starting from 9 A.M. by using the
following random numbers in pairs, respectively, for arrival and service. Random
n u m b e rs : 65 08, 16 12, 20 18, 36 65, 50 25, 07 11, 08 80, 59 61, 53 77, 01 2 0 . Also,
determine the waiting time of customer and the idle time of the server.
Inter-arrival Time Arrival Service Time Service
(Minutes) (Probability) (Minutes) (Probability)
1 0.05 1 0.1
2 0.2 2 0.2
3 0.35 3 0.4
4 0.25 4 0.2
5 0.1 5 0.1
6 0.05
. . .
Table 6.Sf: Probability Distribution for Inter-arrival and Service Time
Solution 02:
First, develop cumulative probability and assign random number intervals for both inter
arrival time and service time, as shown in Table 6.Sg and Table 6.Sh, respectively.
Inter-arrival Time of Passengers
Time
Probability Cumulative Probability Random Number Interval
(Min.)
1 0.05 0.05 00 - 04
2 0.2 0.25 05 - 24
3 0.35 0.6 25 - 59
4 0.25 0.85 60 - 84
5 0.1 0.95 85 - 94
6 0.05 1 95 - 99
Table 6 . S g : Random Number Interval Assignment: Inter-arrival Time
Table 6.Si represents the simulation for the given queuing problem. The random
number for first arrival is 65, so the simulated inter-arrival time is 4 minutes. Thus, first
customer arrives at 9 . 0 4 hrs. The service random number for first customer is 08, thus,
the simulated service time is 1 minute. After service, the customer leaves the system at
9.05 hrs. Thus, the server was idle for four minutes. The random number for second
arrival is 16, so the simulated inter-arrival time is 2 minutes. Thus, the second customer
arrives at 9 . 0 6 hrs. Since the server got free at 9.05 hrs, the second customer is served
as soon the customer arrives. The further simulation is illustrated in Table 6.Si.

Service Time for Passengers
Time
Probability Cumulative Probability Allocated RN Interval
(Min.)
1 0.1 0.1 00 - 09
2 0.2 0.3 10 - 29
3 0.4 0.7 30 - 69
4 0.2 0.9 70 - 89
5 0.1 1 90 - 99
. . .
Table 6 . S h : Random Number Interval Assignment: Service Time
SI mu lated Arrival SI mu lated

Waiting Time
Arrlval Start Service Finish
Arrival Time Service
RN Time RN Time
Clerk Passenger
{Min.) {Hr.) {Min.)
...
65 4 9.04 9.04 08 1 9.05 4
...
16 2 9.06 9.06 12 2 9.08 1
... ...
20 2 9.08 9.08 18 2 9.1
36 3 9.11 9.11 65 3 9.14 1
... ...
50 3 9.14 9.14 25 2 9.16
... ...
07 2 9.16 9.16 11 2 9.18
... ...
8 2 9.18 9.18 80 4 9.22
...
59 3 9.21 9.22 61 3 9.25 1
...
53 3 9.24 9.25 77 4 9.29 1
...
01 1 9.25 9.29 20 2 9.31 4
Total 6 6
Table 6 . S i : Simulation of Queuing System
Thus, as calculated in the simulation Table 6.Si, within half an hour trial, the waiting
time for customer is six minutes, whereas, the idle time for clerk is also six minutes.
6.6 Advantages and Disadvantages of Simulation
Techniques
Advantages
At analyst or managerial level, simulation technique is one of the preferred techniques
for studying problem, due to a number of factors. The following are some of the
advantages of simulation technique:
Simulation technique is the process of experimenting on the model, rather than
working directly on the actual system.
It helps managers analyze large and complex problems, which are impossible to
solve mathematically using analytical methods.
It is very useful for sensitivity analysis of any system, by investigating the
consequences for a system, due to possible changes in parameters, with respect
to the model.
It helps the decision maker replicate and simulate the real system, without
incurring the costs of operating on the real system.
It enables the decision maker to reduce the risk involved in implementing new
policies by studying the consequences in advance.
It also enables the decision maker to identify the major variables that have
important influence on the system performance, so that it can be controlled in
future.
The knowledge of a system obtained in designing and conducting the s i m u l a t i o n is
very valuable in future applications.
It helps the decision maker evaluate the system on slower or faster time-scale, in
comparison to the real system.
Disadvantages
The major disadvantages of the simulation technique are listed below:
For situations requiring the aid of computers, simulation may be expensive and
time-consuming.
It involves a number of trails or runs at given input values to get approximation
value. It is not possible to get exact values by tnal and error approach.
It is easy to misuse simulation by stretching it beyond the limits of credibility. Slick
graphics, animation, tables, and others may tempt a user to assign unwarranted
credibility to output.
It does not produce the solution by itself. The user has to define assumptions and
provide a l l the constraints for the solutions, which have to be studied.

6.7 Ch apt e r S u m m a r y
Simulation allows a user to analyze large complex problems, for which analytical
results are not available.
Simulation is a quantitative procedure, which describes a process by developing a
model of that process and then, conducting a series of organized trial and error
experiments to analyze the behavior of the process over time.
Steps of simulation technique are: defining the problem; identifying the decision
variables; constructing the simulation model; testing and validating the model;
designing of the experiment; running the simulation model; and evaluating the
results.
Monte Carlo simulation generates a range of possrbrhties from the criteria given,
rather than optimizing the objective of the model.
Random numbers used in the simulation can be generated through devices like
coin or die, published tables of random numbers or by the midsquare method.
Simulation can be applied to inventory systems, in order to evaluate various
inventory policies against inventory cost.
Simulation can be helpful for managing queuing systems, which is impossible to
solve with regular queuing models.
PERT/CPM
Techniques
eBook
7 . 1 Introduction
Most managers are involved in the management of projects, which may be large or
small. With this, they get a full sense of responsibility toward the planning and
controlling of the project. A project is a temporary effort undertaken in order to create a
unique product or service. Also, managers are aware about the huge investments made
in such projects, l i k e money, equipments, labor, etc.
Therefore, to ease the work of managers in planning and scheduling the activities of
large-sized projects, network analysis is penformed, which is a graphic representation of
the activities and events involved in the project.
Two techniques of network analysis, PERT (Programme Evaluation and Review
Technique) and CPM (Critical Path Method), are used to estimate, plan, and evaluate the
project completion time. They also help in controlling the resources, in order to ensure
that the project is completed within the stipulated time and at minimum possible cost.
These techniques help in minimizing the errors, which may occur in the near future, by
providing a clear picture about all the time estimates for key and non-key activities of
the project.
Many managers, who apply PERT and CPM techniques claim that these techniques help
in drastically reducing the project completion time.
In this chapter, you will know how PERT and CPM are used to schedule projects and
m i n i m i z e t h e project completion time.
Explain PERT and CPM techniques
Discuss rules of network constnuction
Explain network analysis
Describe Critical Path Method (CPM)
Describe Project Evaluation and Review Technique (PERT)
www. itm universityonli ne.org Page 1 3 3

07. PERT/CPM Techniques eBook
7 . 2 PERT a n d C P M Network
PERT
PERT was developed in 1957, by the U . S . Navy Special Projects Office, Lockheed Aircraft
Corporation and the management consultant firm of Boaz, Allen, and Hamilton, in order
to control the Polaris missile project. As it was a very huge project, thousands of
i n d i v i d u a l tasks were to be coordinated, monitored, and controlled.
Due to the application of PERT, the project was completed two years ahead of its original
scheduled date. During this phase, it was observed that there is an element of
uncertainty in the time that each activity can take. Therefore, PERT considers this
uncertainty and provides the estimated probability of meeting the pre-set scheduled
dates allocated at the various stages of the project.
Therefore, PERT is, generally, used for projects where the time required to complete
various activities is not known as a priori. It is a probabilistic model and is primarily
concerned with the evaluation of time. PERT is an event-oriented technique.
CPM
CPM was developed in 1957, by a joint effort between DuPont and Remington Rand
Univac. Their goal was to find out a technique which would help in reducing the
required time to perform the plant overhaul, construction, and maintenance work. Their
core interest was in finding the optimum trade-off time that is between the project
duration and the total cost of the project. Also, the activities of the project were subject
to small variations, in order to measure the performance time of the activities in a
deterministic way, so as to arrive at a project schedule with minimized cost of total
project.
Therefore, CPM is commonly used for projects that are repetitive in nature and where
one has prior experience of handling similar projects. CPM is a deterministic model, and
places emphasis on the time and cost for activities of a project.
PERT and CPM Network: Benefits
The two techniques have the following benefits:
They are useful for monitoring and controlling projects.
They are mathematically simple and easy to understand.
They provide the critical path and slack time.
They provide project documentation and are used to monitor costs.

PERT and CPM Network: Managerial Applications
The two techniques help managers in the following way:
By predicting the deliverables of products and services.
By p l a n n i n g the resource requirements.
By controlling the resource allocation.
By reviewing the program internally and externally.
By evaluating the performance and are uniformly accepted by almost all the
organizations.
PERT and CPM Network: Components
To study the various components of PERT and CPM network, consider a set of activities
A, B, C, D, E, and F. An activity rs defined as the project element which could be a task
or a job which w i l l consume the required resources, including time. The interdependency
of each activity is studied in detail.
After the interdependency relationship among these activities is identified, they can be
depicted graphically in the fonn of a network or an arrow and node diagram, which is
explained further. Now, as a project begins with a list of activities and their precedence
relationships, the network can be structured in the form of arrows and nodes.
Arrow
An arrow leads from tail to head directionally, as shown in the Fig. 7.2a. It indicates the
activity, a time consuming effort that is required to perform a part of the work.
Node
A node is represented by a circle, as shown in the Fig. 7.2a. It indicates an event, a
point in time where one or more activities start and/or finish.
Arrow
1 2
Node
Fig. 7 .2a: Components of PERT and CPM

PERT and CPM Network: Representation of an Activity
Consider the starting activity, 'A' takes 3 days to complete, then the activity 'A' can be
represented in an arrow and node diagram, as shown in Fig. 7 . 2b .
A, 3 Days
1 2
Activity Activity
Be g i n s Ends
Fig. 7.2b: Representation of an Activity
Approaches for Project Network
There are two approaches for drawing the network diagram: Activity-on-Node (AON)
and Activity-on-Arrow (AOA).
Activity-on-Node {AON)
The nodes or circles represent activities and arrows show precedence
relationships, to indicate the sequencing requirements. In AON diagrams, dummy
activities are not present and therefore, it is easier to draw and interpret.
Node
A B c
Branch
Fig. 7.2c: Activity-on-Node {AON)

Activity-on-Arrow (AOA)
The arrows represent activities, as well as, the time required by the activity,
whereas, the nodes represent the events for points in time or instants, when the
activity starts and stops. AOA diagrams give a better flow of time throughout the
project.
Node
A c
Branch
Fig. 7.2d: Activity-on-Arrow (AOA)
7 .3 Rules of Network Construction
Few criteria are set, in order to handle the events and activities of a project, they are:
Each defined activity is represented by one and only one arrow in the network, so
that the same activity is not repeated twice. Also, the length of an arrow has no
significance.
The event numbered '1' is the starting event and an event with the highest
number is the ending event.
An event that represents the joint completion of more than one activity is known
as a merging event.
An event that portrays the initiation of more than one activity is called a bursting
event.
Before an activity can be undertaken, all activities preceding it must be completed.
That is, the activities must follow a logical sequence or precedence
interrelationship.
While assigning numbers to events in a network, there should not be any
duplication of event numbers.
A network should have only one start event and one end event.
When two or more parallel activities in a project have the same head and tail
events, dummy activities are needed to construct the network. For example, if you
have two parallel activities, A and B, you cannot have the same starting and
ending event (1 to 2) to represent A and/or B, which can be very confusing, as
shown in Fig. 7.3a.

eBook
1 2
Fig. 7 . 3 a : Unacceptable Representation of Activities
To resolve this issue, a dummy activity, from event 2-3, represented by a dotted
line, is introduced to avoid the confusion, as shown in Fig. 7 . 3 b and Fig. 7.3c. A
dummy activity, used when two or more activities have the same start and an end
event, is known as identity dummy (Fig. 7.3b and Fig. 7.3c).
2 3
\ A ,,.
\
I
\
\ ,,,
\
1 1
3 2
B
B
Fig. 7.3b: Dummy Activity 2-3 Fig. 7 . 3 c: Alternative Dummy Activity

7 . 4 Network A n a l y s i s : Forward Pass and Backward Pass
Network Analysis
A project network provides a means to derive a lot of information about the project.
After the network plan is completed, it is analyzed to answer the following questions:
When can the activities be scheduled?
How long w i l l it take to complete the project?
How much cushion is available for performing certain activities?
Which are the activities that cannot be delayed, in order to meet project
deadlines?
Scheduling of Activities
After a project network is created, the next important aspect is to calculate the time
required to complete the project. The network diagram can be used for t i m e calculation,
which involves the computation of forward pass and backward pass through the
network. Forward pass calculates the Earliest Start (ES) and Earliest Finish (EF) times,
w h i l e the backward pass calculates the Latest allowable Start (LS) and Latest Finish (LF)
times for each activity.
For example, consider an activity A, as shown in the Fig. 7.4a, which starts at event 1
and ends at event 2.
A, t
(ES, EF)
(LS, LF)
I 1 - ' 2 I
...
....

Fig. 7.4a: Representation of Earliest and Latest Times on Activity
The notations of Fig. 7.4a are explained in Table 7.4a.

Notations Description
t Time consumed by activity A
ES Earliest start time of activity A
EF Earliest finish time of activity A
LS Latest start time of activity A
LF Latest finish time of activity A
Table 7 . 4a : Description of the Notations
Scheduling of Activities at Earliest by Forward Pass
Forward pass helps in the determination of ES and EF times, where ES indicates the
earliest time an activity can start and EF indicates the earliest time an activity can f i n i s h .
A value of zero duration is assigned to the starting event of the project, as it marks the
beginning of the project. Therefore, each activity initiating from the starting node is
assumed to start at zero duration.
The EF time is obtained by adding the time duration of the activity to its ES time. The
subsequent activities are assumed to start as soon as possible, that is, as soon as all
their respective predecessor activities are completed. For activities, the EF w i l l be given
as: EF = ES + t (time taken by the activity)
Where,
For succeeding activity, ES = EF of preceding activity
In case of merging event, ES = maximum (EF of merging preceding activities)
Scheduling of Activities at Latest by Backward Pass
Backward pass helps in the determination of the LS and LF times, where LS is the latest
allowable start time, which means it is the latest time by which an activity must start
without extending the duration of the project. LF is the latest finish time; it is the latest
time by which an activity should complete, without extending the completion t i m e of the
project.
The computations of the backward pass proceed in a similar manner and are the mirror
image of forward pass calculations. Both the time values are calculated from project
finishing event and by moving backwards till the project starting event. To start with

backward pass from the finishing event, consider the latest finish equals to the earliest
finish of project:
LFproject = Efproiect
For activities, the LS can be given as, LS = LF - t (time taken by the activity)
Where,
LF = LS of succeeding activity
In case of bursting event, LF = minimum (LS of bursting succeeding activities).
Consider the following example of network analysis.
Example 0 1 :
Given in Table 7.4b are the network and activity time estimates. Determine ES, LS, EF,
and LF times and the expected project completion time.
Time Estimates
{Days)
Immediate Time
Activity
Predecessors {Days)
A - 3
B A 5
c A 6
D B,C 9
E c 4
F D 2
G E 8
H F, G 5
Table 7.4b: Information of Activities
Solution 0 1 :
Step 1: draw the Network Diagram
Fig. 7.4b represents the network diagram for the given information. Where, activity A is
the starting activity, it will start at event 1 and end at event 2, which w i l l take a duration
of three days to complete. Therefore, it is represented as A3 where, A is the activity and
3 indicates its duration. After the completion of activity A, activities B and C will start

from event 2, as shown. Similarly, the activity can be drawn, depending on the
completion of their preceding activity.
Here, the dummy activity 4-3 is introduced because acti vity D can only start when
activities B and C are completed. Therefore, as per the rules of network construction,
the dummy activity only shows the logical relationship and does not consume any
resource; also it is represented with a dotted line.
D, 9
3 5
B, 5
F, 2
fOummy, O
I H,5
A, 3
Start 7 Finish
2
1 8
c, 6
G,8
'-- E, 4
Fig. 7 .4b: The Network Diagram
Step 2: Forward Pass Calculation for Starting Activity
In Fig. 7.4c, as activity A is the starting activity, it will start at 0, as per the scheduling
of activities at the earliest by forward pass, as discussed earlier. Therefore, the ES
of activity A is O and EF = ES + t (time taken by the activity), that is, EF = 0 + 3 = 3
days.
D,9
3 5
B, 5
F, 2
I
A, 3
:oummy, o
(0, 3) H,5
Start Flnl5h
7
1 2 I 8
I
c, 6 I
G, 8
4 6
E,4
Fig. 7.4c: Starting Activity for Forward Pass

Step 3 : Forward Pass Calculation for the Network Diagram
Fig. 7.4d shows the calculations for the remaining activities. For activities B and C, the
preceding activity is A, therefore, they will be initiated only after the completion of
activity A, that is, after 3 days, which will be the ES for the activities B a n d C.
The dummy activity 4-3 is drawn, as both the activities B and C have the same starting
and ending point, therefore, the ES of dummy activity is 9 and the EF = 9 + 0 = 9.
Now, activity D will start after completion of activities B and C. As activity B will be
completed on the eighth day and activity C on the ninth day; activity D can only start
after the completion of both activities, that is, on the ninth day and therefore, ES time of
activity D = maximum (8, 9) = 9 and EF = 9 + 9 = 18. S i m i l a rl y , the remaining
calculations are done as shown in Fig. 7.4d.
In case of event 7, where activities F and G are merging, the ES of the succeeding
activity H equals to the largest value of the EF for all activities merging at that node.
Therefore, the ES time of activity H = maximum (20, 21) = 21.
D,9
,,---... ( 9, 18) ---....
3 5
F, 2
B, 5
(18, 20)
(3, 8)
H,5
A, 3
rburnmv, 0
(0, 3) (21, 26)
Start :(9, 9) Finish
7 8
1 2
C,6
G, 8
(3, 9)
(13, 21)
4 6
E, 4 '---'
(9, 13)
Fig. 7 . 4 d : Forward Pass Calculation
Therefore, the EF for the project will be EForoJect = 26 days.
Step 4: Backward Pass Calculation for the Network Diagram
For backward pass calculation, consider LFpmJect = EFomJect = 26 days. Fig. 7.4e shows
the calculations for the backward pass, starting from the last activity H. For activity H,

the latest finish time is 26 days, as that is the maximum limit for the project. Therefore,
its LS w i l l be, LF - t (time taken by the activity), that is, 26 - 5 = 21 days.
As per the scheduling of activities by backward pass, the rest of the activities are
calculated. Now, as activities F and G are succeeded by activity H, their LF w i l l be, LS of
succeeding activity, that is, 21 days as shown in Fig. 7.4e. Similarly, the remaining
calculations are done.
Activity A, which is a bursting activity, is succeeded by two activities B and C and their
LS are 5 and 3, respectively. Therefore, as per the scheduling of activities at latest
by backward pass, LF = minimum (LS of bursting succeeding activities) that is, LF =
minimum (5, 3) = 3 days. Therefore, LF of activity A rs 3 and L S = LF - t (time taken by
the activity) = 3 - 0 = 3 days.
D, 9
(9, 18)
(10, 19)
F, 2
B, 5 3
(18, 20)
(3, 8)
A, 3 (19, 2 1 ) H, 5
(5, 10)
(0, 3) (21, 26)
IDummy, O
(0, 3)
v--.... (21, 26)
Start :<9, 9) Finish
7 s
1 2
C,6
G, 8
(3, 9)
(13, 21)
(3, 9)
6
(13, 21)
E, 4
(9, 13)
(9, 13)
Fig. 7.4e: Backward Pass Calculation

7 .5 Network A n a l y s i s : Floats
W h i l e exercising control over time or resources, it is important to know how flexible the
activities of the project are. As observed in Example 01, Fig. 7.4e, some variations
were noticed. These flexibilities or variations can be seen in the form of float or slack.
A float or slack or free time is defined as the length of time where an activity and/or an
event can be delayed or extended without delaying the total project completion time.
The major types of floats are:
Total Float (TF)
Free Float (FF)
Total Float
Total float of an activity represents the amount of time by which it can be delayed
without delaying the project completion time. It is the free time associated with an
activity, which can be used during or after the performance of the activity.
For any activity, total float is calculated as:
Total float = Latest fi n i s h time - Earliest finish time
= Latest start time - Earliest start time
= Latest finish time - Earliest start time - Duration of the activity
In Example 0 1 , the float period of activity F can be calculated as: TF = 21 - 20 = 1 day
Therefore, the float period here is of one day, that is, activity F can be delayed by one
day and s i m i l a rl y the floats can be calculated for the remaining activities.
Free Float
Free float is that portion of total float within which an activity can be manipulated
without affecting the float of subsequent activities.
The free float for an activity can be given as:
Free float = Earliest start time of succeeding activity - Earliest finish time of activity
For example, in the case of activity B, the free float will be of 1 day, because the ES of
the succeeding activity D i s 9, while the earl y finish time of activity B is 8 days.

7 .6 C r i t i c a l Path Method (CPM)
CPM is basically used to analyze the criti cal path, that is, to estimate the total project
duration and to assign the starting and finishing times to the activities involved in the
project, which w i l l , as a result, help in checking the status and progress of the project in
comparison with the scheduled one. The important features of CPM are:
Activities have deterministic task times.
Analysis is done by constructing AON network.
Activities are repetitive in nature.
Identification of the Critical Path
To identify the critical path, the following terms need to be considered, so that there is
no delay in it and also, the total project time estimation is obtained.
Path
A path is a connected sequence of activities leading from the starting event to the
ending event. In the critical path, the float value for activities is always zero.
Critical Path
The longest path (time) determines the project duration. Here, the forward and
backward pass values are the same and float values are zero.
Critical Activities
These are a l l activities that make up the critical path. Consider the following example:
There are 2 paths in order to reach the destination:
1. A-C-E-F-G = 8 + 6 + 6 + 3 + 4 = 27 days
2. B-D-E-F-G = 10 + 3 + 6 + 3 + 4 = 26 days
Therefore, the critical path is the path which consumes the m a x i m u m time, that is, A-C
E-G-H.
E,6 F, 3 G,4
Start Finish
5 6
1 7
B, 10 0, 3
Fig, 7 , 6 a : Critical Path Analysis

7 .7 Project E v a l u a t i o n and Review T e c h n i q u e ( P E R T )
CPM provides estimation of the time required to complete the project. As there are
critical and non-critical activities involved in the project, it is very difficult to maintain
uniformity among them. Therefore, in PERT, three times are estimated than a single
estimate of t i m e . The important features of PERT are:
Activities have multiple task time estimates (probabilistic nature).
Analysis is done by constructing AOA network.
Activities are non-repetitive in nature. For example, research and development
projects.
PERT uses three time estimates for an activity, which are:
Optimistic Time (a)
This is the shortest time the activity can take to complete. There is more than one
chance in a hundred of completing the activity with optimistic time.
Most likely Time (m)
It is the time that would be expected to occur most often if the activity was frequently
repeated under the same conditions.
Pessimistic Time (b)
It is the longest time the activity could take to finish. It is the worst time estimate and
represents activity in the worst scenario.

Depending on the values of time estimates of the activities (a, m, and b), they can be
graphically represented by beta distribution, as shown in Fig. 7 . 7 a .
:0
<ti
.0 Beta curve
e
a.
a m b
Time duration of activity
Fig. 7.7a: Beta Distribution of Activity Times
Therefore, using the values of a, m, and b, the expected time (t) of activities and their
standard duration can be calculated as follows:
a + 4m + b
The expected t i m e = t =
6
W h e r e ,
t = Expected t i m e of an activity
a = Optimistic time
m = Most l i k e l y time
b = Pessimistic time
The standard deviation (o) of the completion time of an activity is calculated as follows:
b-a
17 = - -
F ram t hi rs, t h e variance

. t. s : v
_, -
- (b -
6 a)'

Steps used to Solve PERT Problems
Step 1: compute the expected time and variance for all activities.
Step 2: determine the earliest and latest activity times and float.
Step 3: identify the critical path and compute the expected project completion time and
variance.
Step 4: determine the probability that the project will be completed in X number of days
or less.
Consider the following case for PERT.
Example 0 2 :
Activities A to J are involved in a project and their sequence is given in Table 7.7a.
Calculate the expected duration required to complete the project along with its standard
deviation and also, the probability to complete the project before week 42.
Preceding Times Estimates (Weeks)

Activity
Activity Optimistic Pessimistic Expected
A - 4 7 10
B A 2 8 20
c A 8 12 16
D B 1 2 3
E C,D 6 8 22
F c 2 3 4
G F 2 2 2
H F 6 8 10
I E,G,H 4 8 12
J I 1 2 3
. . . . .
Table 7 . 7 a : Estimated Times for the Act1v1ties

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Solution 02:
Step 1: compute the expected time and variance.
For all the activities, the expected time and variance is calculated, as shown in the
Table 7 .7 b .
Expected standard
Times Estimates (Weeks) Variance
Time Deviation
Preceding t =
Activity Optlml
Activity Expected Pesslmlstl a + 4m+ b b-a
stlc CJ = - - cr ' = ( b a r
(m) c (b) 6 6
(a)
A - 4 7 10 7 1 1
B A 2 8 20 9 3 9
c A 8 12 16 12 1.33 1 . 77
D B 1 2 3 2 0.33 0.11
E C, D 6 8 22 10 2.66 7.11
F c 2 3 4 3 0.33 0.11
G F 2 2 2 2 0 0
H F 6 8 10 8 0.66 0.44
I E,G,H 4 8 12 8 1.33 1 . 77
J I 1 2 3 2 0.33 0.11
Table 7 . 7 b : Computing the Expected Time and Variance
Step 2: determine the earliest and latest activity times and float.
First, draw the network diagram. Fig. 7.7b represents the network diagram; wherein,
there are two dummies, 4-5 and 7-8, drawn according to the rules of construction, as
shown in the Fig. 7 . 3 b and Fig. 7.3c.
B,9 D, 2
A, 7 E, 10 J, 2
1 , 8
Start Finish
}---;,( 9 }---;,(
1 10
C,12
1 Dummy
H,8
Fig. 7.7b: Network Diagram

Then calculate the earliest and latest scheduling times and floats for each activity, as
shown in Table 7.7c.
Earliest Latest Float

Duration
Activity Start Finish Start Finish
Time Total Free
ES EF LS LF
A 7 0 7 0 7 0 0
B 9 7 16 9 18 2 0
c 12 7 19 7 19 0 0
D 2 16 18 18 20 2 1
E 10 19 29 20 30 1 1
F 3 19 22 19 22 0 0
G 2 22 24 28 30 6 6
H 8 22 30 22 30 0 0
I 8 30 38 30 38 0 0
J 2 38 40 38 40 0 0
Table 7 . 7 c : Scheduling Times and Floats
Step 3: identify the critical path and compute the expected project completion time and
variance. There are 4 paths in order to reach the destination, they are:
1. A-B-D-E-1-J = 7 + 9 + 2 + 10 + 8 + 2 = 38 weeks
2. A-C-E-1-J = 7 + 12 + 1 0 +8 + 2 = 39 weeks
3. A-C-F-G-1-J = 7 + 12 + 3 + 2 + 8 + 2 = 34 weeks
4. A-C-F-H-1-J = 7 + 12 + 3 +8 + 8 + 2 = 40 weeks
Fig. 7.7c shows the network diagram, where the critical path is the one which consumes
m a x i m u m t i m e and is, therefore, highlighted.
D,2
B, 9
A, 7 E, 10 I, 8 J, 2
Start Finish
)----+{ 2 }----+{ }---, 9 }---,>(
1 10
C,12 .
.
'
, Dummy
;---,;( 7
H,8
Fig. 7.7c: Critical Path

The critical path is A-C-F-H-l-J and the expected project completion time is 40 weeks.
The variance along the critical path is 1+ 1.77 + 0 . 1 1 + 0.44 + 1 . 7 7 + 0.11 = 5.2.
Step 4: determine the probability that the project will be completed in 42 weeks.
A-C-F-H-l-J being the critical path requires the expected time of 40 weeks to complete
the project. The standard deviation of the critical path rs given as:
o = V a r i a n c e = 5.2 = 2 . 2 8 weeks.
The probability to complete the project in 42 weeks can be represented with the help of
normal distribution curve, as shown in Fig. 7.7d, where the area under the normal
curve is to the left of X = 42. The values of mean, is 40 weeks and standard deviation,
O" is 2 . 2 8 weeks.
Fig. 7.7d: Distribution of the Project Duration
Therefore, converting the normal distribution variable to standard normal variable (Z),
this is given as: z = X -

o
Therefore, calculating the value: z= 42 - 40 = 0.877
2.28
The point probability value of Z = 0.877 is 0.3078, as observed from the table of area
under normal curve (Refer Appendix). Thus, the required probability can be calculated
as 0 . 5 + 0.3078 = 0.8078.

eBook
Application Areas of PERT
PERT is used in the following areas:
Construction
Transportation
Oil Refineries
Computer Systems
Electric Generator Machines
Medical and Surgical
Libraries
7 . 8 Importance a n d L i m i t a t i o n s of C P M / P E R T
Importance of CPM/PERT
The significance of using CPM/PERT are mentioned below:
It helps in reducing cost and saves time.
It is useful in determining the sequences of activities.
It helps in e l i m i n a t i n g the risk involved in complex activities.
It provides flexibility in scheduling activities.
It evaluates alternative options.
It is useful in the effective control of projects.
It is useful in decision making and research work.
Limitations of CPM/PERT
CPM/PERT encounter few limitations, they are:
The specified precedence relationships have to be clearly stated.
The activity time estimates are subjective and depend on judgment.
PERT assumes a beta (13) distribution for time estimates but the actual time
distribution may be different.

eBook
PERT and CPM are the two network analysis techniques. CPM is a deterministic
technique while PERT is probabilistic in nature.
A project is defined as a series of activities directed to accomplish a desired
objective.
The set of activities in a project are shown in the fonm of network/arrow diagrams.
When times of all activities are known, the length of each path is determined. The
longest path is called critical path.
Critical activities have zero float.
Float is calculated as: Total float = Latest start - Earliest start of the activity
In PERT analysis, for every activity, three time estimates are taken: a (optimistic),
m (most likely), and b (pessimistic). With these, expected time and variation are
2
obtained as: t = a + + b ; 0" = ba
( )2

Project C r a s h i n g
and Resource
Allocation
eBook
8 . 1 Introduction
A project manager always faces problems regarding the speedy completion of the
project due to reasons like, late penalty costs, cost savings or monetary incentives. The
project manager's success depends on the skill with which they manage trade-offs
among project perfonmance, completion time, and project cost.
The project crashing concept deals with such difficult situations by aiding project
managers to analyze trade-offs between the project completion time and the total cost
of the project, w h i l e speeding the completion of the project.
This chapter introduces you to the basic concept of project crashing and also, explains
the resource allocation procedures.
Describe the concept of crashing the project
Apply crashing concept to reduce project completion time
Apply the resource allocation concept for reducing resource requirement

eBook
8 . 2 Project C r a s h i n g
In the previous chapter, you have learned how to schedule project activities in network
form in a logical sequence to find the critical path. The emphasis was on the activity
time and project completion time. The overall duration of the project is set by the critical
path. To reduce the project completion time, the critical path time has to be reduced.
However, in order to reduce the critical path, critical actrvrties have to be reduced and in
order to reduce the duration, activities require additional resources for consumption. The
various alternatives for employing additional resources are:
By working overtime.
By h i ri n g temporary staff for some period.
By renting more efficient equipment and machines.
By changing the type of resources and other measures.
Project crashing refers to the process of shortening the duration of the project by
crashing the duration of various activities. The crashing of activity is referred to as the
process of accelerating or shortening the duration of an activity by using additional
resources. With additional resources, the duration reduces but project cost increases.
So, the decision to reduce activity times must take into consideration the additional cost
involved. In effect, the project manager must make a decision that involves trading
between reduced activity time and additional project cost.
8 . 3 Cost Associated with Project C r a s h i n g
The execution of a project involves two types of costs, project direct cost (Dp) and
project indirect cost (Ip). The project direct cost (Dp) is indirectly proportional to the
project duration; it increases as the project duration reduces. Activity direct cost (D,)
refers to the cost of materials, equipment, and direct wages required in performing an
activity until complete. The sum total of the activity's direct cost till project completion is
known as project direct cost Dp (Dp = D,).
The project indirect cost (Ip) implies the overhead charges related to the project, which
includes supervision, rent, and other charges. The project indirect cost is directly
proportional to the project duration; it reduces as the project duration reduces.
Thus, the total project cost (TC) for any project can be given as:
Total Project Cost (TC) = Project Direct Cost (D,) + Project Indirect Cost (Ip)
08. Project Crashing and Resource Allocation eBook
Fig. 8.3a represents the time-cost graph, when, both, direct and indirect cost is plotted,
with respect to time. In the graph, as the duration is reduced, the project indirect cost
also decreases, whereas, the direct cost increases. As the duration is reduced, the total
cost decreases till the point 'P', after this point, the total cost starts increasing again.
Thus, the total cost (TCp) is minimum at point P and point P is known as optimal point.
At this point, the duration, tp, represents the minimum crashed duration of the project;
beyond which if it is reduced, the total cost will increase.
Optimal Point Total Project Cost
'P' >
- - - - - - ---,.__-- ( ..---- Project Indirect
Cost
Project direct
Cost
Time
Fig. 8.3a Time-cost Trade-off for Project Crashing
Crashing of Activity
Crashing of activity is done by shortening the duration of an activity, by using additional
resources. Crashing of activity incurs extra cost, when activity time is reduced from its
normal performance. However, any activity can be crashed to a certain limit from its
normal point of performance; this is known as crash point. The duration of activity at
normal and crash point are known as Normal Time (NT) and Crashed Time (CT),
respectively, and the cost related to Normal Time (NT) and Crashed Time (CT) are
known as a Normal Cost (NC) and Crashed Cost (CC). respectively. The relationship
between reduced duration and increased cost can be explained by the time-cost graph
(Fig. 8 . 3 b ) .

For example, an activity, at its normal point of performance 'A', is crashed to the crash
point B. The duration and cost at normal point are normal time (NT) and normal cost
(NC), respectively. The duration and cost at crash point are Crashed Time (CT) and
Crashed Cost (CC), respectively. The line AB represents the cost slope or crash cost per
unit time ( !!. ) , which is an estimation of relative change in cost, per unit change in time.
The calculation of cost slope is given as:
= Relative change in cost = CC - NC

6
Relative change in time NT - CT

- ,W
> Crashed
- 0
t u Activity
< Cost Slope = Crash
B
Cost per Unit Time (6)
Crash Cost
(CC)
----------- :
\ _ CC NC
Nrcr
Normal Cost -}- ,_.,,___Normal
(NC) Activity
Crash Time Normal Activity
(CT) Time (NT) Time
Fig. 8.3b Time-Cost Graph for Crashing an Activity
8.4 Project C r a s h i n g Principles a n d Steps
For any project, the completion time is set by the critical path duration only. Thus, if the
project has to be crashed, the duration of critical path has to be crashed. To reduce the
critical path, critical activities have to be reduced. Thus, the first principle of project
crashing can be explained as follows:
Principle 1: Always focus on critical paths when trying to shorten the project duration.
Crashing non-critical activity will not influence the project duration.
After considering the critical path, it is important to identify which of the critical activities
can be crashed. The critical activity that is less costly, for crashing, is preferred for
crashing. To identify the less costly activity, the crashing cost per period (!!.) for critical
activities are compared. The critical activity, with minimum crashing cost per period rs
selected for crashing. Thus, the second principle for project crashing can be explained as
follows:
Principle 2: W h i l e selecting the critical activity for crashing, select the activity with the
least crashing cost per period (cost slope), since it is not a very expensive activity for
crashing.
Steps in Project Crashing
The method for project crashing can be summarized as follows:
Step 1: consider a project with details for activities, such as Normal Time (NT), Normal
Cost (NC), Crash Time {CT), Crash Cost (CC), and Indirect Cost ( I d ) ,
Step 2: construct a network diagram. Determine the critical path and normal project
completion time. Also, list various paths of the project from start to end.
Step 3: calculate allowable crash time, (8 = NT - CT). Also, calculate cost slope rzs) for
. .t CC - N C
eac h ac t 1v1 y as: Ll = ---
NT - C T
Step 4: crash project by one unit of time, by identifying and crashing critical activity
with minimum cost slope (!',). Trace this change through the remainder of the network.
In case of m u l t i p l e critical paths, minimum cost slope activities from each of these paths
is considered simultaneously for crashing.
Step 5 : calculate project indirect cost, project direct cost, and total project cost for each
crashing. Continue crashing by repeating step 4 until the optimal project cost is
obtained.

eBook
Example 0 1 :
Consider the following precedence relationship for a particular project. The normal time
and cost for each activity are given. Determine minimum crashing cost with optimal time
for the given crash t i m e and cost infonmation. Also, the overhead cost for the project is
"70 per day.
Normal Normal Crash Crash
Immediate Time Cost Time Cost

Activity
Predecessor (In Days) (Inf) (In Days) (Inf)
NT NC CT cc
A --- 11 410 8 500
B --- 10 595 7 700
c --- 17 800 12 1000
D A 7 260 5 300
E B 12 700 8 800
F C, D, E 4 150 3 200
. . .
Table 8.4a: Precedence Relat1onsh1p for ProJect
Solution 0 1 :
The network diagram for the above project is shown below:
A, 11 D, 7
C, 17 F, 4
4 5
E, 12
Fig. 8.4a: Network Diagram
The various paths and their duration from the start to the end of the project are:
Path 1: A-D-F: Duration = 22 days
Path 2: C-F: Duration= 21 days
Path 3: B-E-F: Duration = 26 days
Since path 3 (B-E-F) has maximum duration, it is a cntical path. Thus, the project
duration is of 26 days. So, to crash the project duration, critical path duration has to be
reduced. The total cost for the project, without crashing, is given as:
Total Project Cost (TC) = Project direct cost (:i:Da) + Project indirect cost (1 0 )
Where,
Project direct cost (:i:Da) = 410 + 595 + 800 + 260 + 700 + 150 = <2915
Project indirect cost (Ip) = 26 days x <70 = <1820
Therefore, total project cost (TC) = <2915 + <1820 = <4735
Now, to identify activities with the least crash cost per day, calculate the crash cost per
day, as shown in Table 8.4b.
CC-NC
Activity NT NC CT cc 8 = N T - CT t.. =
NT-CT
A 11 410 8 500 3 30
B 10 595 7 700 3 35
c 17 800 12 1000 5 40
D 7 260 5 300 2 20
E 12 700 8 800 4 25
F 4 150 3 200 1 so
.
Table 8.4b: Calculation of Crash Cost per Day
Now, the critical activities are B, E, and F and their crash cost per day is <35, <25, and
<50, respectively. However, the lowest 6 is for activity E, which can be crashed by four
days. If activity E is crashed by four days, the duration of critical path B-E-F reduces to
22 days and still remains the critical path.

The various costs incurred due to crashing activity E in four days are:
Activity Crashing Cost = ,25 x 4 = ,100.
Project direct cost = Project direct cost (without crashing) + Activity crashing cost
Project direct cost = ,2915 + ,100 = ,3015
Project indirect cost = Crashed Project duration x indirect cost
Project indirect cost = 22 x ,70 = ,1540
Total project cost = ,3015 + ,1540 = ,4555
Thus, project cost is reduced to ,4555, from the previous cost of ,4735.
After first crashing, the duration for path B-E-F has become same as the duration of
path A-D-F, which is, 22 days, the highest value, thus both become critical paths. For
the next crashing, critical activities from both the paths have to be crashed. From path
B-E-F, as the activity E reached its crashing limit, move to the next economical activity,
that is, B, whose ti = ,35. From path A-D-F, the most economical activity for crashing is
activity D, whose ti = ,20. After crashing both the activities, Band D, by one day, the
duration of paths B-E-F and A-D-F becomes 21 days. Thus, the project duration is of 21
days.
The various costs incurred due to crashing activities B a n d D by one day each are:
Activity Crashing Cost = ,35 x 1 + ,20 x 1 = ,55
Project direct cost = Previous project direct cost + Activity crashing cost
The project cost is reduced to ,4540, from the previous cost of ,4555.
After the second crashing, the duration for paths B-E-F, A-D-F, and C-F has become the
same, that is, 21 days, thus all three paths are critical paths. For the next crashing,
critical activities from all three paths have to be crashed. From path B-E-F, the most
economical activity for crashing is still activity B, whose ti = ,35. From path A-D-F, the
most economical activity for crashing is still activity D, whose ti = ,20. From path C-F,
the most economical activity is activity C, whose ti = ,40. After crashing all the three
activities B, D, and C by one day, the duration of paths B-E-F, A-D-F, and C-F becomes
20 days. Thus, the project duration is of 20 days.
The various costs incurred due to crashing activities B, D, and C in one day each are:
Activity Crashing Cost = ,35 x 1 + ,20 x 1 + ,40 x 1 = ,95
Project direct cost = Previous project direct cost+ Activity crashing cost
The project cost is increased to ,4565, from the previous cost of ,4540, thus, if the
project is crashed beyond 21 days, the project cost gradually increases. Therefore, 21
days are optimal crashed days for this project, with a minimum cost of ,4540 for
crashing.
The project can be crashed up to 21 days, with a minimum cost of ,4540, beyond which
the cost will increase. The same crashing can be summarized in a table form, as shown
in Table 8.4c.
Paths
Sr. Crashing
A, Da Dp Ip TC
No. Duration
A-D-F C-F B-E-F
0 Nil Nil 22 21 26 Nil 2915 1820 4735
1 E 4 22 21 22 100 3015 1540 4555
D 1 20
2 21 21 21 3070 1470 4540
B 1 35
D 1 20
3 c 1 20 20 20 40 3165 1400 4565
B 1 35
. .
Table 8.4c: The Summary of Pro1ect Crashing

eBook
8.5 Resource Allocation and Smoothing
Resource Allocation
In every situation, resources, such as employees, money, material, machinery, and
many more, are limited or scarce. Often, it may occur that a project must be completed
without exceeding some specific level of resource usage, on per period basis. The
objective of resource allocation rs to prevent period-to-penod fluctuation in the required
resource level and to obtain unifonm resource requirement or minimal resource
requirement during project performance. In resource allocation, the fluctuations are
maintained low by applying the approach of resource smoothing.
Resource Smoothing
The resource smoothing approach helps the project manager reduce the peak
requirement for resources and to reallocate them among the activities of a project in
such a manner that the project duration remains unchanged.
The procedure for resource smoothing is:
1. Develop a network diagram. Calculate earliest start time (ES), latest finish time
(LF) and slack (float) for each activity. Identify critical path.
2. Draw time-scaled version (squared network) of the network. In this network, a
critical path is drawn along a straight line and non-critical activities are drawn on
both sides of the critical path.
3. Estimate resource requirement per period, with the help of a resource load chart.
Draw load histogram by considering time periods on X-axis and manpower
requirement on Y-axis.
4. Shift the start time of non-critical activities that have the largest float, in order to
smoothen the resources allocated to the project. Estimate resource requirement
per period. Estimate saving in the total project resource requirement.
eBook
Example 0 2 :
Immediate Time Manpower

Activity
Predecessor (In Days) Required
A --- 4 18
B --- 2 14
c --- 4 6
D --- 6 16
E A 10 8
F B 2 12
G c 10 12
H D, E, F 10 12
. . .
Table 8 . S a : Precedence Relat1onsh1p and Manpower Requirement for Project
Table 8.Sa has manpower requirement given for each activity. Draw the network
diagram of the project activities. Rearrange the activities suitably for reducing the
existing total manpower requirement, on per day basis.
Solution 02:
E, 10
D, 6 H, 10
1 5 6
F, 2
3
C,4
Fig. 8.Sa: Network Diagram for Project
In Fig. 8.Sa, the network diagram for the given project is drawn. The earliest and latest
allowable times for each activity are calculated, as shown in Table 8.Sb.

Earliest Latest
Total
Activity Duration Start Finish Start Finish
Float
ES EF LS LF
A 4 0 4 0 4 0
B 2 0 2 10 12 10
c 4 0 4 10 14 10
D 6 0 6 8 14 8
E 10 4 14 4 14 0
F 2 2 4 12 14 10
G 10 4 14 14 24 10
H 10 14 24 14 24 0
. . . .
Table 8 . S b : Determ1nat1on of Earliest and Latest Tomes and Floats
From Table 8.Sb, the total floats for activities A, E, and H are zero. Thus, the path A-E
H becomes the critical path, with the highest duration of 24 days. The network diagram
can be represented in time-scaled form, which is also known as squared network, as
shown in Fig. 8 .Sb. The squared network is drawn on the basis of earliest start time for
each activity. A critical path is drawn along a straight line and non-critical activities are
drawn on both sides of the critical path. The dotted line represents the total float on
activity and value in triangle represents the float value.
B,2 F,2 /\
(14 M) (12 M) L.!!G.

r'- -+( 3 }- """ 1- - - - - - - - - - - - - - - - ,
A, 4 E, 10 H, 10
(18 M) (8 M) (12 M)
1)-..,:,;;...;.'-t2)----:---:----'-...;.--+(s)--..:..--...;......; -+( ,
D,6 1 I
16M
I
t--"""""'""""------ - - - - --- - - --
I
C,4 G, 10 I
L-"-
6.:.M.1-.-+(, )------'-12._,M....,_ -Ht,-- J
0 2 4 6 8 10 12 14 16 18 20 22 24
------------- Project Duration (Days)
Fig. 8.Sb: Squared Network of Project
The resource requirement, on per day basis, is given in the resource load chart
(Table 8.Sc). Consider day 1, the activities A, B, C, and D require the manpower of 18,
14, 6, and 16 workers, respectively. Thus, the total manpower requirement for day 1 is
54 workers. S i m i l a rl y , per day resource requirements are determined for rest of the
days.
Now, draw a resource load histogram, with reference to the load chart, as shown in
Fig. B.Sc. It can be observed that there is fluctuation in the resource requirement level.
The maximum requirement for manpower is 54 workers, which occurs on the first and
second day of the project.
Manpower Required per Day
l 2 3 4 5 7 8 9 10 11 12 13 14 15 15 17 18 19 20 21 22 23 24
'
54 54 52 52 36 36 20 20 20 20 20 20 20 20 12 12 12 12 12 12 12 12 12 12
Table 8.Sc: Resource Load Chart
-o 60
i"
fil" 50
a'.
40
<ll
,:
8_ 30
c
"'
z 20
10
. . . . . . . . . . . . .
0 2 4 6 8 10 12 14 16 18 20 22 24
Project Duration (Days)
Fig. 8.Sc: Resource Load Histogram
To smoothen the load, activities are shifted, depending on the float times. Activity G has
a float time of 10 days; therefore, rt is shifted to the nght, so that the start is delayed by
10 days. S i m i l a rl y , activity D i s shifted to the right, so that its start is delayed by 8 days.
The path B-F is shifted to the right, so that its start is delayed by 4 days. After making
the necessary shift of non-critical activities, the squared network is drawn, as shown in
Fig. 8 .S d .

The resource load chart in Table 8.Sd indicates that the maximum requirement of
manpower is 24 workers. Whereas, the load histogram, as shown in Fig. 8.Se, indicates
that there is very less fluctuation in resource requirement.
B, 2 F, 2
.J14 M,012 M,. &

, - - - - - ---------.
A, 4 E, 10 H, 10
(18 M) (8 M) (12 M)
:r-....:.;;;.;.;'"-t{:, ----....:..--=...:....-+(:s .:.........:..----...r,
- - - - - _ Li\_ - - _.,.___ ...i.

<SD,
U 6:U..
- --1
C,4 /\ G, 10
______@ .. __..1:,2;.;M"-"------'
L--"'6'-'M""--l{ 4
0 2 4 6 8 10 12 14 16 18 20 22 24
------------- Project Duration (Days) ---------------;.
Fig. 8 . S d : Improved Squared Network
Thus, now the same project can be accomplished in the same duration of 24 days, with
a manpower requirement of 24 workers, instead of 54 workers.
Manpower Required per Day
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
24 24 24 24 22 22 20 20 24 24 24 24 24 24 24 24 24 24 24 24 24 24 24 24
Table 8.Sd: Improved Resource Load Chart
aj 30
,s
l
I
ID 20
8_ 15
c

10
. . . . . . . . . ' . . . . . .
0 2 4 6 8 10 12 14 16 18 20 22 24
Project Duration (Days)
Fig. 8.Se: Improved Resource Load Histogram
eBook
8 . 6 Chapter S u m m a r y
The time-cost trade-offs approach in CPM enables the project manager to
investigate the effect on the total cost, while shortening the project duration time.
The various costs that are affected by crashing are project direct cost and project
indirect cost.
As the project duration is reduced, the project direct cost increases and indirect
cost reduces.
While crashing the project, select the critical activity for crashing, with minimum
crashing cost per period.
Resource allocation deals with the allocation of limited resources in the best
possible way, by performing non-critical activities within their float t i m e .

Decision Theory
I T M
UNIVERSITY
ONLINE
eBook
9 . 1 Introduction
In everyday life, situations arise wherein you have to make decisions, like where to
invest your money, which is the best car to purchase or which phone to buy. While
making such decisions, you use a combination of experience, intuition, judgment, and
common sense. However, when it comes to important decisions like business decision
making, you have to use ngorous methods. Business decisions like whether to expand
the capacity or buy from outside, how much to store so that the cost remains as low as
possible, requires rigorous methods for making decisions but all these decisions have to
be taken in the environment that is either known or unknown or known with certain
probabilities.
Decision theory is the study of principles and algorithms, for making these decisions in
order to achieve better outcomes, with respect to goals.
Identify the steps in decision making
Solve one-stage decision making problems under uncertainty
Solve one-stage decision making problems under risk
Solve multi-stage decision making problems with the help of a decision tree
Explain the utility theory as a basis for decision making

09. Decision Theory eBook
9 . 2 Steps in Decision Making
According to Render, Stair, and Hanna, "Decision theory is an analytic and
systematic way to tackle problems."
Decision theory is also known as decision analysis; according to Anderson and
Sweeney, "Decision analysis is used to develop an optimal strategy when a
decision maker is faced with several decision alternatives and an uncertain or
risk-filled pattern of future events."
While conducting decision analysis, two important factors are considered. First, is a set
of possible circumstances or state of nature or chance events, which are not under the
control of the decision maker and the second factor is a number of alternatives or course
of action or strategies, which has to be determined by the decision maker. Each
combination of courses of action and the possible state of nature has an outcome or
consequence, which are known as payoff. Payoffs can be expressed in terms of profit,
cost, time, distance or any other measure appropriate for decision anal ys i s .
Consider an example of Blazzer Corporation. The manager decides to expand the
business by erecting a new factory. The various alternatives under consideration are to
build a large, medium or small capacity factory. The manager has identified possible
circumstances for the demand of the product in the future, as high demand and low
demand.
Thus, the various courses of action or strategies before Blazzer Corporation are:
Alternative 1: Build new factory with large capacity
Alternative 2 : Build new factory with medium capacity
Alternative 3 : Build new factory with small capacity
Whereas, various chance events or state of nature are identified as:
State of Nature 1 : There will be high demand
State of Nature 2 : There will be low demand
If the manager considers the alternative of building a new factory with medium capacity,
then, depending upon the state of nature in the future, there will be two different
consequences, one payoff when the demand is high and other when the demand is low.
The decision making process involves the following steps:
Step 1: identification of the various possible outcomes, called states of nature or events
(E;), for the decision problem (i = 1, 2 ... n; represents 'n' number of states of nature).
Step 2: identification of all courses of action (Ai) or strategies that are a v a i l a b l e to the
decision maker Ci = 1, 2 ... m; represents 'm' number of alternatives).
Step 3 : determining the payoff function that describes the consequences, resulting from
the different combinations of acts and events. The payoffs are designated as VIJ, the
payoffs resulting from the i'" event and i'" strategy.
Step 4: choosing an alternative among the various alternatives, based on some criterion
depending on the situation, like certainty, risk or uncertainty.
Depending on the levels of decision making process, there are two types of decision
making, namely, one-stage decision making and multi-stage decision making.
In one-stage, decisions under consideration depend only on the payoffs resulting from
the given combination of courses of action and states of nature. In multi-stage, the
decision under consideration depends on the previous decision taken or considered.
Multi-stage decision making is also known as a sequential decision making process, in
which, following each decision, a chance event occurs, which, in turn, influences the
next decision.
9 . 3 One-stage Decision Making
The selection of appropriate criterion depends on a major factor of decision situation,
that is, the information known while making the decision. If the decision maker has no
idea at all regarding which of the states of nature would occur in the future, then the
situation is known as decision making under uncertainty. If the decision maker has a
certain idea of states of nature, in terms of probability of occurrence, then the situation
is known as decision making under risk.
9.3.1 Decision Making Under Uncertainty
There are several different criteria or principles of decrsion making under uncertainty.
Some important principles discussed in this chapter are:
Laplace Principle
Maximax Principle
Maximin Principle

eBook
Hurwicz Principle
Savage P ri n c i p l e
Laplace Principle
Laplace p ri n c i p l e is based on a simple philosophy that if there is uncertainty about
various events, then treat them as equally probable to occur, that is, each state of
nature or chance event is assigned an equal probability. It is also known as equal
probabilities criterion. In this assumption, the expected value or average payoff for each
course of action or strategy is determined and the strategy with the highest mean value
is adopted.
Maximax ( M i n i m i n ) Principle
Under maximax principle, the decision maker ensures that the opportunity to achieve
the largest possible profit or payoff is not missed. For this, the decision maker takes the
maximum payoff under each action or strategy and then selects the best of those
maximum payoffs. If the payoff is in terms of cost, then the decision maker ensures that
the opportunity to achieve the lowest possible cost is not missed. For a situation like
this, take the minimum cost payoff under each action and select the lowest of m i n i m u m
cost payoffs. It is also known as optimistic decision criterion, since the decision maker
selects an alternative with the largest (or lowest) possible payoff value.
Maximin (Or M i n i m a x ) Principle
Under maxi m i n principle, the decision maker evaluates the decision alternative, in terms
of the worst payoff that can occur or the alternative that provides the best of a l l possible
payoffs is selected. Under maximin principle, take the smallest payoff under each action
and then select the largest of those minimum payoffs. This principle is also known as
pessimistic decision criterion. If the decision situation requires minimization, this
principle identifies the alternative payoffs that will minimize the m a x i m u m payoffs.
Hurwicz Principle
It stipulates that a decision maker's view may fall somewhere between the extreme
pessimism of the maxi min principle and the extreme optrrmsrn of the maxi max principle.
This principle provides different levels of optimism or pessimism, by defining the
coefficient of optimism, a, which ranges from O to 1. An a = 0 indicates extreme
pessimism, while a = 1 indicates extreme optimism. Hurwicz principle suggests that the
decision maker must select an alternative that minimizes:
H = a x (maximum payoff of strategy) + (1 - a) x (minimum payoff of strategy)
Savage Principle
Savage p ri n c i p l e is based on the concept of opportunity loss or regret. This principle
states to select the alternative or the course of action that minimizes the maximum
regret. It is also known as principle of minimax regret. The working method can be
summarized as follows:
From the given payoff matrix, construct an opportunity loss matrix. The
opportunity loss table is obtained by subtracting all other payoff values in the state
of nature row from its highest payoff value.
For each course of action identify the worst or maximum regret value and out of
those regret values, select minimum value, and the corresponding course of action
will be selected to be the best.
Example 0 1 :
A retailer purchases apples every morning at <"50 a case and sells them for <"90 a case.
Any case that remains unsold at the end of the day can be disposed of the next day at a
salvage value of <"20 per case. Past sales have ranged from 10 to 13 cases per day. Find
out how many cases should the retailer purchase per day to maximize his profit. Apply
Laplace, maximax, maximin, and savage principle for decision making. If the coefficient
of optimism is 0 . 4 , then find the course of action that maximizes profit.
Solution 0 1 :
Let E, be the state of nature or event, that is, daily demand for cases of apples, and AJ
be the courses of action or the act of purchasing a number of cases of apples.
The various alternatives with retailers are as follows:
Alternative A, = Purchase 10 cases of apples
Alternative A2 = Purchase 1 1 cases of apples
Alternative A3 = Purchase 12 cases of apples
Alternative A4 = Purchase 13 cases of apples
Whereas, the various states of nature that can occur are as follows:
State of nature or event E1 = Demand for 10 cases of apples

Now, the retailer will have marginal profit if all the cases are sold but will also have
marginal loss if some cases are unsold.
Marginal Profit ( M P ) = Selling price - Cost= ,90 - ,SO = ,40
Marginal Loss (ML) = Loss of unsold cases = ,SO - ,20 = ,30
Thus, the conditional profit or payoff values for each act-event combination are given by
the following equations:
Conditional profit (V1Jl = MP x Cases sold - ML x Cases unsold
VIJ = ,40 x Cases sold - ,30 x Cases unsold
The resulting conditional profit or payoff values computed are:
Course of Action
States of Nature
(Cases Purchased per Day) (A.)

(Daily Demand)
(Inf)
(E)
A 10 A 11 A 12 A : 13
1: 2: 3: 4
E 10 400 370 340 310

,
E 11 400 440 41 0 380

2:
E 12 400 440 480 450

2:
E 13 400 440 480 520

2:
M i n i m u m Payoff 400 370 340 310
Maximum Payoff 400 440 480 520
Table 9 . 3 . l a : Calculation of Conditional Payoff
Laplace Principle
According to the Laplace principle, the average pay-off for each course of action is
determined and the strategy with the highest mean value is adopted. The
calculations are done as follows:

Average Payoff
A.
I
( I n f)
A, (400 + 400 + 400 + 400)/4 = 400
A, (370 + 440 + 440 + 440) /4 = 4 2 2 . 5
A, (340 + 410 + 480 + 480)/4 = 4 2 7 . 5
A ( 3 1 0 + 380 + 450 + 520) /4 = 4 1 5
Table 9 . 3 . l b : Calculation of Average Payoff
Since the largest average payoff is for course of action A3, the retailer must
purchase 12 cases of apples, according to the Laplace principle.
Maximax Principle
According to the maximax principle, the decision maker takes the m a x i m u m payoff
under each course of action or strategy, and then selects the best of those
maximum payoffs. As shown in Table 9.3.la, the maximum payoff row, the
highest payoff from each action is listed and maximum payoff of the highest value
is for action A., that is, V,i = ,520. Thus, if retailer is optimistic, then the
alternative of purchasing 13 cases of apples w i l l give the highest return.
Maximin Principle
Under m a x i m i n principle, the decision maker takes the smallest payoff under each
action and then selects the largest of those minimum payoffs. As shown in Table
9.3.la, the minimum payoff row, the smallest payoff from each action is listed
and maximum payoff of the lowest value is for action A,, that is, Vu = ,400. Thus,
if the retailer is pessimistic, then the alternative of purchasing 10 cases will give
optimal return.
Savage ( M i n i m a x Regret) Principle
This principle states to select the alternative or course of action that m i n i m i z e s the
maximum regret. Thus, the first opportunity loss table is obtained from the
conditional payoff table. The maximum payoff of 400 will be obtained if event E,
occurs. Similarly, maximum payoffs of 440, 480, and 520 w i l l be obtained if events
E2, E3, and E4 will occur, respectively. Thus, the opportunity loss table is obtained
as shown in Table 9 . 3 . l c .

A : 10 A : 11 A 12 A :13
l 2 3: 4
E 10 400 - 400 = 0 400 - 370 = 30 400 - 340 = 60 400 - 3 1 0 = 90

r'
E 11 440 - 400 = 40 440 - 440 = 0 440 - 4 1 0 = 30 440 - 380 = 60

2:
E 12 480 - 400 = 80 480 - 440 = 40 480 - 480 = 0 480 - 450 = 30

2'
E 13 520 - 400 = 120 520 - 440 = 80 520 - 480 = 40 520 - 520 =O

2:
Maximum
120 80 60 90
Regret
.
Table 9 . 3 . l c : Opportunity Loss Table
As shown in Table 9 . 3 . l c , the minimum value from the maximum regret row is
60, for the course of action A3. Thus, according to savage principle, the retailer
should purchase 12 cases of apples to minimize the maximum regret.
Hurwicz Principle
Given the coefficient of optimism, a = 0.4, the coefficient of pessimism will be
1 - a = 0 . 6 . Then select the course of action that w i l l optimize the payoff value 'H'.
H = a x (maximum payoff of a ct i o n ) + (1 - a) x (minimum payoff of action)
Best Worst
A. H
I
Payoff Payoff
A, 400 400 400
A, 440 370 398
A, 480 340 396
A 520 310 394
. . . .
Table 9 . 3 . l d : Calculation for Hurw1cz Pr1nc1ple
The course of action A1 optimizes the value of H, thus the retailer should purchase
10 cases of apples, according to Hurwicz principle.
9 . 3 . 2 Decision Making under Risk
As explained before, the decision making under risk is a probabilistic decision situation.
In such a situation, the decision maker has sufficient infonnation to assign probabilities
of occurrences to each state of nature. If the probabilities are known, the best decision
is to select the course of action that has the largest expected payoff. Here, the expected
payoff value for each alternative rs calculated by rn u l t i p lv r n q the payoff values with their
respective probabilities and then adding up those products.
The various criteria for evaluating the decision under risk are:
Expected Monetary Value (EMV) criterion
Expected Opportunity Loss (EOL) criterion
Expected Value of Perfect Information (EVPI) criterion
Expected Value of Sample Infonnation (EVSI) criterion
Expected Monetary Value (EMV) Criterion
Expected monetary value for a given course of action is the weighted sum of possible
payoffs for each alternative. Mathematically, EMV is stated as:
EMV (A ) = I P ( E , ) x V, , j = 1, 2 . . . m
1 1
,_,
Where,
n = Number of states of nature or events (E,)
m = Number of strategies or courses of action (A;)
P() = Probability of occurrence of event E,
VIJ = Payoff corresponding to ;th event of i"' strategy
Find the EMV for each course of action and select the course of action that yields
maximum EMV.
Expected Opportunity Loss ( EOL) Criterion
Expected opportunity loss criterion is an alternative approach to EMV criterion. First,
prepare the opportunity loss matrix, as explained in Savage Principle, then multipl y
each regret payoff with the respective probability of state of nature and add those
products to get the EOL for each alternative. Mathematically, EOL is stated as:
EOL ( A , ) = I P ( E , ) x L,p j = 1, 2 . . . m
,_,

Where,
LiJ = Opportunity loss due to state of nature (E,) and course of action (AJ)
Find the EOL for each course of action and select the course of action that yields
minimum EOL value.
Expected Value of Perfect Information (EVPI) Criterion
If the decision maker can get perfect information about the various states of nature,
then the decision maker would be able to select a course of action that yields the desired
payoff for whatever state of nature that actually occurs.
Expected value of perfect information (EVPI) represents the maximum amount of payoff
the decision maker has to pay, in order to get this additional information about the
occurrence of various state of nature, before the decision is made. EVPI can also be
referred to as an expected value of additional information, if it were of any worth for
decision m a k i n g . Mathematically, it is stated as:
EVPI = (Expected payoff with perfect information) - (Expected payoff without perfect
information)
EVPI = [ t, P ( E , ) x m a x ( V , , ) ] - E M V * , j = l , 2 ... m
Where,
max (ViJ)= The best payoff when the action, A; is selected in the presence of state of
nature or event E1
EMV* = M a x i m u m expected monetary value
The procedure for calculating EVPI rs:
Step 1: determine the expected monetary value (EMV*) of the optimal course of action.
Step 2: determine optimal returns corresponding to each state of nature or event.
Compute the expected value for these optimal returns, in order to get the expected
profit with perfect information (EPP!).
Step 3 : subtract EMV* from the EPP!, in order to get EVPI.
Expected Value for Sample Information (EVSI) Criterion
Expected value of sample information (EVSI) is the additional expected profit possible
through knowledge of the sample or survey information. In addition to the perfect
information in the decision making process, sample information can also be obtained by
conducting the sample survey regarding the states of nature. Mathematically, EVSI is
stated as:
EVSI = (Expected payoff with sample infonnation) - (Expected payoff without sample
information)
EVSI = EPSI - EMV*
Where,
EMV* = M a x i m u m expected monetary value without any sample information.
The expected payoff with sample infonnation (EPSI) is obtained by applying Bayes'
theorem. According to Bayes' theorem, an initial probability statement to evaluate the
expected payoff is called 'prior probability distribution' and the revised probability
statement for state of nature after sample survey is known as posterior probability
distribution.
Let E,, E2 . . . Eo be the mutually exclusive and exhaustive outcomes, events, or state of
nature. Their probabilities P(E,), P(E2) ... P(En) are known. Let B be the experimental
outcome of survey with given probabilities P(BIE,), P(BIE2) ... P(BIEo), Given the
information that outcome B has occurred, the revised conditional probabilities of
outcomes E,, that is, P(E,IB), are determined by using the following conditional
probability relationship:
P(E I B) = P(E, and B) = P(E, n B)
' P(B) P(B)
Where,
P(B) = P(E, n B) + P(E2 n B) + . . . + P(E0 n B) = L P(E, n B)
1= I
Since each joint probability can be expressed as the product of a known marginal (prior)
and conditional probability, P(E, n B) = P(E, )x P(B I E, )
The posterior probability E, given that the outcome B has occurred can be given as:
P(E, I B) = ;(E,)x P(B I E, )
L P ( E, ) x P(B I E , )
1 = 1

Example 0 2 :
A manufacturing company has recently acquired a piece of land in the outskirts of the
city, on which it plans to construct a manufacturing unit. The company has to decide the
size of the unit. Depending on the capacity, three options are considered, small-sized,
medium-sized, and large-sized unit. The company feels that overall product demand
would be either low or high. The payoffs (in ,000) expected under various event-action
combinations, together with the estimated probabilities are:
Course of Action (A.)

States of I
Probability
Nature
P(E;) A : Small- A : Medium- A : Large-sized
1 2 3
(E)
sized unit sized unit unit
E : High
1
0.4 2,000 2,500 4,500
Demand
E Low
2:
0.6 1,200 800 -1,500
Demand
Table 9.3.2a: Payoff Table
Furthermore, services of marketing research firms could be employed to provide a
detailed survey of the market. Suppose that the past record of the research firm on
s i m i l a r studies has led to the following estimates of relevant probabilities:
Market Research Report Outcome (B)
States of Nature
Favorable Market Unfavorable Market

(E;)
(B,) (B,)
E High Demand 0.8 0.2

1:
E : Low Demand 0.3 0.7

2
. .
Table 9 . 3 . 2 b : Probab1hty Table for Research Outcome
The marketing research firm has asked for <'3,50,000 as the fee for undertaking the
study. How should the construction company proceed?
Solution 02:
The payoff Table 9.3.2a for the problem rs reproduced in Table 9.3.2c for the
calculation of expected monetary value.
Conditional Payoff Expected Payoff

E. P(E)
'
' A, A, A, A, A, A,
E, 0.4 2,000 2,500 4,500 800 1000 1800
E, 0.6 1,200 800 -1,500 720 480 -900
Expected Monetary Value (EMV) 1520 1480 900

.
Table 9 . 3 . 2 c : Expected Monetary Value (EMV) Calculation
The expected payoff is obtained by multiplying probability with the conditional payoff. As
per Table 9.3.2c, the maximum EMV is for course of action A,. Thus, with no additional
information, the company should choose course of action A1, with EMV* = ,15,20,000.
The calculation for expected payoff of perfect information (EPP!) is calculated as:
Optimal Course Conditional Expected

E. P{E.)
' '
of Action Payoff Payoff
E, 0.4 4,500 1800

"-a
E, 0.6 A, 1,200 720
EPPI 2520
.
Table 9 . 3 . 2 d : Expected Payoff of Perfect Information (EPPI) Calculation
Thus, under conditions of complete information, the expected profit would be
,2,520,000. From this, the expected value of perfect information (EVPI) can be
calculated as: EVPI = EPP! - EMV* = 2520 - 1520 = 1000
So, to get perfect information, the company must pay ,10,00,000.
In Table 9.3.2b, the probability of 0.8 represents the conditional probability that the
marketing research survey shall give a favorable report, given that the state of nature
eventually turns out to be a high demand, that is, P(B1IE,) = 0.8.

Now, calculate the posterior probabilities for events E, and E2 under the conditions (a)
that favorable report is given and (b) an unfavorable report is given by the research
firm. According to the Bayes' theorem, the mathematical fonm of posterior probability i s :
P(i; I ) = P(E, n B) = P(E,) x P(B I i; )

8
P(B) i; P ( E , ) x P ( B l i; )
1 = 1
(a) When a favorable report is given:
Prior Conditional Joint Conditional
E. Probability Probability Probability Probability
'
P(E,) P(B,I E,) P(E, n B ) P(i;I B)
E, 0.4 0.8 0.32 0.73
E, 0.6 0.2 0.12 0.27
"
P(B,)= :[ P ( E , ) x P ( B , I i; ) 0.44
1= 1
Table 9 . 3 . 2 e : Calculation of Posterior Probabilities under Favorable Report
Condition
Thus, under favorable report condition, the revised probability of state of nature E1
would be 0. 73 and that of E2 would be 0.27. Thus, according to the revised
probabilities, the expected values can be obtained as follows:

E. P(E
1)
'
A, A, A, A, A, A,
E, 0.73 2,000 2,500 4,500 1460 1825 3285
E, 0.27 1,200 800 -1,500 324 216 -405
Expected Monetary Value (EMV) 1784 2041 2880
Table 9.3.2f: Determination of Optimal Source of Action under Favorable
Report Condition
Since EMV for the course of action Aa is the highest, under favorable report condition,
the best course of action would be to construct a large-sized unit to get the expected
payoff of '1' 2 8 , 8 0 , 0 0 0 .
(b) When an unfavorable report is given
Prior Conditional Joint Conditional
E. Probability Probability Probability Probability
'
P(E,) P ( B , I E, ) P(E, " B ) P(i; I B)
E, 0.4 0.2 0.08 0.16
E, 0.6 0.7 0.42 0.84
P(B,) = L P(E,) x P(B, I E,) 0.50

i= I
. . . .
Table 9 . 3 . 2 g : Calculation of Posterior Probabi11t1es under an Unfavorable
Report Condition
Thus, under unfavorable report condition, the revised probability of state of nature
E, would be 0.16 and that of E2 would be 0.84. Thus, according to the revised
probabilities, the expected values can be obtained as follows:

E. P(E.)
'
'
A, A, A, A, A, A,
E, 0.16 2,000 2,500 4,500 320 400 720
E, 0.84 1,200 800 -1,500 1008 672 -1260
Expected Monetary Value (EMV) 1328 1072 -540
Table 9 . 3 . 2 h : Determination of Optimal Source of Action under Unfavorable
Report Condition
Since EMV for the course of action A, is the highest, under an unfavorable report
condition the best course of action would be to constnuct small-sized unit to get
expected payoff of , 1 3 , 2 8 , 0 0 0 .
Thus, when the research report is favorable, A3 would be the optimal course of action
with EMV = , 2 8 , 8 0 , 0 0 0 ; whereas, when unfavorable, A1 would be the optimal course of
action with EMV = ,13,28,000. However, these decrsions are conditional, in the sense
that either of them can be taken only when the nature of the report is known.
Thus, based on the market research infonmation, the expected payoff of sample
information (EPSI) is calculated, as shown in Table 9.3.2i. The expected payoff of the

optimal decision is , 2 0 , 0 3 , 2 7 0 ; if it is based on market research, as against <" 1 5 , 2 0 , 0 0 0 ,
without any kind of infonmation.
Report
Optimal Course of Conditional Expected
Condition P{B;)
Action Payoff Payoff
{B;)
E, 0.44 A3 2880 1267.2
E, 0.50 A, 1328 664
EPSI 1931.2
Table 9 . 3 . 2 i : Calculation of Expected Payoff of Sample Information
Thus, the expected value of samp le information (EVSI) can be calculated as follows:
EVSI = EPSI - EMV* = , 1 9 , 3 1 , 2 0 0 - ,15,20,000 = , 4 , 1 1 , 2 0 0
Thus, the company can invest up to ,4,11,200 for doing research repcrt. Here, the fee
of doing research by the research firm is ,3,50,000, which is less than the EVSI,
therefore, it is worth to do research through the marketing research fi r m .
9 . 4 M u l t i - s t a g e Decision Making
Also known as sequential decision problems, multi-stage decision making problems are
characterized by a sequence of decisions in which, following each decision, a chance
event occurs which, in turn, influences the next decision. A decision tree is one of the
most systematic tools of decision making theory. Such decision trees are particularly
helpful in situations of complex multi-stage decision problems.
For example, when you need to plan and organize a sequence of decisions, you have to
take into account how the choices were made at earlier stages and their outcomes of
possible external events. In addition, you will have to determine the types of decisions
and events to be made at later stages of that sequence.
eBook
Decision Tree
Decision tree represents sequential and complex decisions in a pa rt i c u l a r connected way.
A decision tree comprises nodes, branches, and payoff values.
I Decision Tree
I
,,
'" '"
Nodes Branches Payoff
I I I I I I
I I
w w w w
Decision Chance Decision Chance
Nodes Nodes Branches Branches
Fig. 9 . 4a : Elements of Decision Tree
There are two types of nodes, decision nodes and chance nodes. In addition, there are
two types of branches joining the nodes, decision branches, and chance branches.
The decision tree can be shown as following:
Chance
Branches
Chance
Nodes
State of Nature, E1
Decision
Payoff
Branches Probability, P(E1)
State of Nature,
Course of Payoff
Decision
Probability, P(E2)
Node
State of Nature, E1
Payoff
Probability, P(E,)
State of Nature,
Payoff
Probability, P(E2)
Fig. 9.4b: Presentation of Decision Tree
The decision node is represented by a square. At decision nodes, the decision maker has
to select one alternative course of action among the available actions. Alternative
courses of action or strategies are shown on the decision branches, emerging from

decision nodes. Each course of action may result in chance nodes, which are represented
by circles.
Chance node is a node at which the decision maker will discover the responses or the
state of nature of the decisions. The leading chance branches, from the chance nodes,
represent the responses or the state of nature with the probabilities of occurrence of
state. The payoff gives the consequences, profit value, or cost for each branch of
decision or the state of nature, which is pursued.
The determination of optimal decision in tree is based on backward pass calculation.
There are three steps for this calculation:
Step 1: compute the expected payoff for each state of nature by multiplying the
probability with payoff.
Step 2: then, at the extreme right chance nodes, compute the expected monetary value
( EMV) by adding each expected payoff at that node.
Step 3: finally, at the decision node, the EMV is obtained as an EMV of the best course
of action, leading from that decision node. Again, if there are chance nodes, repeat steps
1 to 3.
Example 0 3 :
The manager of a manufacturing firm intends to match the market demand. The
chances of the market being favorable are 60/o. The manager has to decide among,
starting overtime production, arranging subcontracting or constructing a new production
facility. The estimated profit under favorable market condition and unfavorable condition
is given in the following table.
Estimated Profit
(f)
Alternatives
Market Market
Favorable( 0.6) Unfavourable(0.4)
Overtime Production 80,000 -7,000
Subcontracting 1,00,000 -12,000
Construct New Facility 1,40,000 -90,000
Table 9.4a: Payoff Table
Show this decision situation in the form of a decision tree.
Solution 0 3 :
A decision tree that represents possible courses of action and the states of nature is
shown in Fig. 9.4c. The expected payoff is calculated in the extreme right side of the
tree. Chance node 3 has the highest EMV, therefore, the decision at node D, will be to
choose the course of action A2, that is, arrange for subcontracting.
Payoff Expected Payoff
(EMV), = 48000- 2800

E11 Favorable Market
(EMV), = 45200 80,000 I I _o
__.6
_ x
_ 8
_ o
_ oo
_ o
_ =
_ 4
8_o
_ oo
__
P(E,) = 0.6
E2, Unfavorable Market I _ 7000 1 1 0.4 x (-7000) = - 2800 I
P(E,) = 0.4
(EMV)z = 60000 - 4800 E1, Favorable Market I 1 1
(EMV)z = 55200 ,r""'"

-,P
"'(
""E
=
, ="'
o "'
6
. ,-- . 1,00,000 . L. _o
_6_
. x
_ 1
0_00
_ 0
_ 0
_ =
_ 6
_ 0
00_0

E2, Unfavorable Market I - 12,000 1 1 0.4 x (-12000) = - 4800 I
P(E2) = 0.4
E1, Favorable Market I I
= . _ 1,40,000 _ I 0.6 x 140000 = 84000

1
(EMVh = 84000 - 3600 E2, Unfavorable Market I - 90,000 II 0.4 x (-90000) = - 36000
(EMVh = 48000 P(E2) = 0.4
Fig. 9.4c: Decision Tree
9.5 U t i l i t y Theory
Utility is the measure of the total worth of a particular outcome. Utility reflects the
decision maker's attitude toward a collection of factors, such as profit, loss or risk. Utility
theory is a non-monetary criterion for decision making. Numerically represented values
(utilities) are easy to use in decision making. Utilitarian moral theory postulates that
individuals should maximize the utility resulting from their actions. Von Neumann and
Morgenstern proposed an index of measurement of utrhtv, which is a special type of
cardinal measure. Utility indexes are designed for predictive purposes. The utility theory
postulates that a rational decision maker will always decide to maximize utility.

The expected utility of a risky alternative is defined as the aggregate of the products of
utility values of a l l its possible outcomes and their respective probabilities. For example,
given an alternative A, if there are two possible outcomes x. and X2, with the
probabilities of a and ( 1 - a ) , and respective utilities u,, and u , , , we get:
Expected utility of A: Eu. = au,, + ( 1 - a)U,,
A utility function should possess the property of completeness. The function is said to be
complete if it measures the utility for all possible alternatives available. For deriving the
utility function, two points are selected at random and they are assigned any arbitrary
values.
For example, arbitrarily assign zero util to the smallest value and 10 utils to the highest
value (Util is a unit in which utility may be measured and expressed). A person is asked
to select one alternative from the following alternatives:
Alternative A: Guaranteed cash award of <"6000
Alternative B: A bet involving a loss of <"5000 or a gain of <" 1 0 , 0 0 0 , occurring with
equal probabilities.
Now, assign the 'O' util to the lowest value and 10 utils to the highest value.
Therefore, Uc sooo= 0 util and U10000 = 10 utils. Thus, expected utility for alternative B i s :
Us = ( 0 . 5 ) Uc.sooo + ( 0 . 5 ) U10000 = 0 + 5 = 5 utils.
If the person selects alternative A of cash award of <"6000, then the utility of alternative
A is more than the utility of alternative B. That is, Usooo > 5 utils. However, if the person
selects the alternative B of betting, then the utility of alternative A is less than the utility
of alternative B. That is, Uooo < 5 utils.
If the guaranteed amount keeps depreciating from <"6,000 but more than <"5,000 and
asking for preferences between alternatives, a value will be obtained, at which the
person would be indifferent between the two. Then, at an indifferent value of <"5500, the
utilities are equal for both alternatives.
Ussoo = (0.5) U-sooo+ (0.5) U10000 = 0 + 5 = 5 utils
Next, if the probabilities keep on varying, the utility values for several amounts are
obtained and plotted in the form of a graph, as shown in Fig. 9. S a .
Utils
10
-5 -2 0 2 4 6 8 10
Amount of Money ('000 ?)
Fig. 9.Sa: Utility Curve

9 . 6 Chapt e r S u m m a r y
Decision theory is concerned with decision making under conditions of certainty,
uncertainty, and risk.
The decision process involves four major steps: identification of possible
outcomes; course of action; payoff function; and choosing appropriate action.
Among the rules taken for decision making, Laplace, maximin, minimax, maximax,
and expectation principles are important.
Along with the determination of an optimal course of action, the expected value of
sample information (EVSI) can also be calculated, as the difference of expected
payoff with and without sample information.
The decision tree approach to decision making rs used in situations where multi
stage decisions are needed.
The expected utility criterion is also used for taking decisions that are based on
non-monetary value.
G a m e Theory
I T M
UNIVERSITY
ONLINE
10. Game Theory eBook
1 0 . 1 Introduction
Generally, a game refers to a situation where two or more intelligent opponents play
together with conflicting objectives, in order to make a decision of certain outcome over
a period of time. The intelligent opponents or competitors are referred to as players.
Where, the player could be an individual, a group of people or an organization.
Game theory is applied in the situation where two or more competitors interact with
conflicting objectives in the decision making circumstance, in order to get an optimal
solution. It is a series of mathematical models helpful to explain the interactive decision
making concepts, where two or more competitors are involved under conditions of
conflict and competition.
For example, the pricing of a product is not only done according to the organization's
selection of the price level but also by the prices set by its competitors. Another instance
would be of the success of an advertising campaign which depends on the services
offered to customers. Therefore, in this chapter, you will study about game theory and
its application, in order to solve conflicts and anrive at an optimal solution.
Describe two-person zero-sum games: Pure strategy and Mixed strategy
Apply m i n i m a x and maximin principles for pure strategies game
Calculate probabilities for mixed strategies
Apply dominance principle for reducing m x n payoff matrix
Solve m x 2 and 2 x n payoff matrix by graphic method
Convert payoff matrix into linear programming form
1 0 . 2 Definition a n d History of G a m e Theory
Game theory is the study of how people interact and make decisions under competing
and conflicting conditions.
Definitions
According to K. Shridhara Bhat, "Game theory is a mathematical theory based on
which strategy steps are employed to win a game played in a conflicting
situation to maximize the benefits (or profit) or to minimize the damage
(or loss)."
According to P. Rama Murthy, "Game theory is a body of knowledge that deals
with making decisions when two or more intelligent and rational opponents are
involved under conditions of conflict or competition. The competitors in the
game are called players."
In short, game theory applies mathematical models to interaction between competitors,
under the assumption that each person's behavior impacts the well-being of all other
participants in the game. These models are often simplified abstractions of real-world
interactions but offer a tractable way of predicting likely outcomes.
History of Game Theory
Game theoretic notions go back thousands of years, evidenced in Talmud and Sun Tzu's
writings. It came into existence during the 20"' century. However, its contemporary
codification is credited to John Von Neumann and Oskar Morgenstern, who in the year
1944 published the book, 'Theory of Games and Economic Behavior'. This provides
information on how different businesses apply the game theory, in order to find out the
best strategy, when in a competitive business environment. Also, the author emphasized
on the principle of 'best out of the worst'.
In the early 1950s, John Nash (of Beautiful Mind fame) generalized these results and
provided a basis for the modem field. A rapid rise in theoretical developments led to
finding the first academic journal devoted to the field by Oskar Morgenstern in 1972.

10.3 Real World Applications of G a m e Theory
Game theory finds its application in the real world, a few of which are:
Economists
o Innovated antitrust policy.
o Auctions of radio spectrum licenses for cell phones.
o Program that matches medical residents to hospitals.
Computer Scientists
New software algorithms, routing protocols, and game artificial intelligence (AI).
Military Strategists
Nuclear policy and notions of strategic deterrence.
Sports Coaching Staff
Run versus pass or pitch-fast balls versus sliders.
Biologists
What species have the greatest likelihood of extinction?
1 0 . 4 G a m e Theory: Assumptions a n d C o m m o n Terms
Assumptions of Game Theory
There are a few assumptions made for game theory, which are:
The conflict should focus on a central value and there should be a finite set of
possible actions for each player. The set of actions may vary from player-to
player.
The players act rationally and are aware of the competitor's strategies too.
Every player has a finite set of alternatives. Players should consider their
strategies simultaneously and concurrent decisions, as to which strategy to apply.
One player tries to maximize the gain, whereas, other player tries to m i n i m i z e the
loss.
Individual decisions are taken by players before they play, without directly
communicating with each other.
If A is g a i n i n g and B i s losing with the same amount, then the game is said to be a
zero sum game (amount of gain = amount of loss).
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Common Terms
A few common tenms that are used are mentioned below along with their definitions:
Person
Person refers to one of the opposing interests or players, either a group or
individual or an organization.
Game
Game refers to a set of rules that defines what can be done and what is to be
avoided. Rules must be followed and no change in them is possible later.
Strategy
Strategy refers to a complete plan of action that a player will take, given the set of
circumstances that might arise within the game.
Payoff
The payoff is refenred to as the payout a player receives from arriving at a
particular outcome. The payout can be in any quantifiable form, from rupees
to utility.
Set
Set is infonmation available at a given point in the game. The term information set
is mostly applied when the game has a sequential component.
Equilibrium
The point in a game where both players have made their decisions and an
outcome is reached is called equilibrium.
1 0 . 5 Types of G a m e s
Games are classified on the basis of different parameters, namely, number of players
involved, the sum of the gains or losses, and the number of strategies used in the game.
On the Basis of Number of Players
In a game, when there are two or more players, conflicts will arise. Therefore, it is
classified as a two-person game and n-person game.
o Two-person Game
It indicates that the game has two players.
o N-person Game
If there are more than two players in the game, then it is called 'n-person'
game.

On the Basis of Sum of the Gains or Losses
On the basis of sum of gains or losses, the game is classified into two factors,
namely, zero-sum game and non-zero-sum game.
o Zero-Sum Game
In a game, when the sum of gains or losses is zero, it is termed as zero-sum
game or constant-sum game. Here, the ga,n of one player is equal to the
loss of another player. For example, in a chess game, if the winner w i n s ,SO,
then at the same time, the loser loses that amount.
o Non-Zero-Sum Game
In a game, when the sum of gains or losses is not equal to zero, then it is
termed as a non-zero-sum game.
On the Basis of Number of Strategies
On the basis of number of strategies, the game is classified as finite and infinite.
o Finite
When each player in the game has the option of selecting from a finite set of
strategies, it is termed as finite.
o Infinite
When the players in the game do not have the option to select from a finite
set of strategies, the game is classified as infinite.
In this chapter, two-person zero-sum game will be considered with a finite set of
strategies available to the players.
Payoff Matrix for Two-person Game
The payoffs can be in the form of gains or losses. When the players select their
appropriate strategies, represented in the form of a matrix, it is known as payoff
matrix. In a zero-sum game, the gain of one player is equal to the loss of another. For
example, in a chess game, if the winner wins ,SO, then at the same time, the loser loses
that amount. Therefore, it can be concluded that one player's payoff table w i l l have the
same amount as that of the other players payoff table, with the sign changed.
Suppose, if player A has a set of strategies A,, A2 ... Am and player B has a set of
strategies B,, 82 . . . Ba and if a;J represents the payoffs for i"' action of A (for g a i n ) and i'"
action for B, then the payoff matrix for player A is as follows:
Player B's Strategies (BJ)
B, B, B"
VI a,,
-
A, a" a"'
<{
.,
VI
., -
A, a,, a,, a.,,
>, "'
"'
a: e

VI
Am
am am, ama
Where,
A; = Number of strategies for player A
BJ = Number of strategies for player B
au is the payoff that player A will gain from player B, if A selects strategy A; and B
selects strategy BJ
1 0 . 6 Strategies for Two-person G a m e
Strategy is a list of all possible actions a player can consider for each payoff or outcome
that might arise. A plan by which the players can optimize their gains or losses, without
knowing the competitor's strategies, is known as optimal strategy. The expected
outcome or payoff per play when the players follow their optimal strategy is known as
the value of g am e . The different types of strategies used in game theory are:
Pure strategy
Mixed strategy
Pure Strategy
It is the decision rule always considered by the player to select a particular strategy
from the known feasible options, irrespective of the other player's strategy. The player's
m a i n focus is to m a x i m i z e the gain and minimize the loss.
Mixed Strategy
When the courses of actions are selected with some fixed probability on a particular
occasion, it is known as mixed strategy. In this case, the players focus to maximize the

expected gains or m i n i m i z e the expected losses by making a decision among the pure
strategies with fixed probabilities.
In order to achieve the respective objectives and optimize the respective payoffs of both
the players, minimax-maximin principle is used, which gives the best possible selection
of strategies for both players. Fig. 10.6a represents the procedure for selecting
respective strategies and finding the value of game.
Two-person Game: Strategy
Apply Minimax and Maximin Principle for Saddle Point
With Saddle Without Saddle

Two-person Zero-Sum: Two-person Zero-Sum:
Point Point
Pu re Strategy Mixed Strategy
Apply Dominance Rule
for Reducing Strategies
J I
(2 x 2) Order Payoff (2 x n) or (m x 2) (m x n) Order Payoff
Matrix Order Payoff Matrix Matrix
' ' '

Algebraic Method Linear Programming
Graphic Method
Shortcut Method (LP) Method
Fig. 10.6a: Strategy Selection Procedure {m x n)
10.7 Pure Strategy
The major principles used for pure strategies are:
Maxim in Principle for Player A
The maximizing player A will select the best of worst strategies for m a x i m i z i n g its
gain, by finding out the row minima which represents the least gain (minimum
payoff) from each of its strategies and select a strategy that gives the maximum
g a i n among row m i n i m a .
Minimax Principle for Player B
Player B will select the best of worst strategies for m i n i m i z i n g its loss, by finding
out the column maxima, which represents the maximum loss (maximum payoff)
from each of its strategies and select a strategy that incurs minimum loss among
column maxima.
Optimal Strategy (Saddle Point)
If m a x i m i n value of player A is equal to minimax value of player B, then the game
is said to have a saddle (equilibrium) point and the corresponding strategies are
called optimal strategies.
Value of Game (V)
Value of game is the amount of payoff at saddle (equilibrium) point.
Steps for Solving Pure Strategy Problems
The following steps need to be considered while solving a pure strategy problem:
Step 1: Find the row minima for Player A. Find the strategy with minimum gain for a l l
t h e strategies of player A.
Step 2: Select the strategy with the maximum gain among row minima.
Step 3 : Find the column maxima for Player B.
Find the strategy with maximum loss for all the strategies of player B.
Step 4: Select the strategy with the minimum loss among column m a x i m a .
Step 5: Find the optimum strategy for both the players, A and B. Find the saddle point,
that is, the intersection of the highest row minima and lowest column m a x i m a .
Consider the following example of pure strategy.
Example 0 1 :
Find the optimum Research and Development {R&D) strategies for competing firms A
and B in terms of investing in R&D. The following are the various strategies that can be
practiced by both f i rm s :
No R&D
Moderate R&D
Heavy R&D
Table 10.7a illustrates the payoff table from player A's viewpoint.

Firm B
Firm A
None (B,) Moderate (B2) Heavy (B,)
None (A,) 10 0 -10
Moderate (A2) 15 5 3
Heavy (A3) 20 10 10
Table 1 0 . 7 a : Payoff Table as per Player A's Viewpoint
Solution 0 1 :
Let Player A represent firm A and Player B represent firm B. Therefore, as per the
minimax-maximin principle:
Step 1: to find the row minima for player A.
To find the strategy with minimum gain for strategy A1, the minimum value is -10, as
compared to 10 and 0, as shown in Table 10.7b. Similarly, the remaining values are
found.
Firm B
Firm A
Row
None Moderate Heavy
Minima
(B,) (82) (B,)
None (A1) 10 0 -10 -10
Moderate (A2) 15 5 3 3
Highest row
Heavy (A3) 20 10 10 10 + -
minima value
Table 1 0 . 7 b : Row Minima for Player A
Step 2: select the strategy with the maximum gain among row minima.
As observed from Table 10.7b, the row minima values for strategies A,, A2, and A3 are
-10, 3, and 10, respectively. Now, select the strategy that gives the maximum gain
among row minima, that is, maximum (-10, 3, 10) = 10. Therefore, to maximize the
minimum gain, firm A should adopt the maximin strategy of A3 which is investing in
heavy R&D.
Step 3 : find the column maxima for player B.
To find the strategy with maximum loss for strategy 81, the maximum value is 20 as
compared to 15 and 10, as shown in Table 10.7c. Similarly, the remaining values are
found.

Firm 8
Firm A
Row
None Moderate Heavy
Minima
{81) (82) (83)
None (A1) 10 0 -10 -10
Moderate (A2) 15 5 3 3
Heavy (Aa) 20 10 10 10 Highest row

- minima value
Column Maxima 20 15 10
T
Lowest column
maxima value
Table 1 0 . 7 c : Column Maxima for Player B
Step 4: select the strategy with the minimum loss among column maxima
As observed from Table 10.7c, the column maxima values for strategies B,, 82, and B,
are 20, 15, and 10, respectively. Now, select the strategy which gives the minimum loss
among column m a x i m a , that is, minimum (20, 15, 10) = 10. Therefore, to m i n i m i z e the
maximum loss, firm B should adopt the minimax strategy of B,, which is investing in
heavy R&D.
Step 5 : find the optimum strategy for investing in R&D for both the firms, A and B:
For player A, strategy A3 maximizes the minimum gain with value 10 and for player B,
strategy B, m i n i m i z e s the maximum loss with value 1 0 . Thus, saddle point occurs where
the maximum value of the minimum gain and minimum value of the maximum loss
coincide with each other, which is value 10 as highlighted in Table 1 0 . 7 d .
Firm 8
Firm A
Row
None Moderate Heavy
Minima
(81) (82) (83)
None (A1) 10 0 -10 -10
Moderate ( A2) 15 5 3 3
Heavy (Aa) 10 10 10 Highest row

2ui
,#
minima value
Column Maxima 20 15 10
/
T
Intersection of highest row minima and/
Lowest column
lowest column maxima is at A3B3
maxima value
Table 1 0 . 7 d : The Optimal Strategy for Both the Firms

Thus, player A will select the optima l strategy of heavy investment in R&D. Similarly,
player B w i l l also select the optimal strategy of heavy investment in R&D. So, there is no
loss and gain. This is a pure strategy game, as there is no loss no gain and no conflict.
Therefore, the value of game is 10 as maximin value for A = m i n i m a x value for B = 1 0 .
1 0 . 8 Mixed Strategy
In pure strategy, the saddle point is obtained to find the optimal strategy, whereas, in
mixed strategy there is no saddle point and players have to determine optimal mixture
of the strategies. The optimal strategy mixture is determined by assigning individual
probabilities to the strategies.
Mixed strategies are the probabilistic combination of the available choices of strategies.
The value of game by mixed strategy represents the least payoff, which player A can
expect to win and the least which player B can lose. A mixed strategy can be solved by
different approaches, namely:
Algebraic Method
Arithmetic Method or Short-cut Method
Dominance Rule
Graphical Method
Linear Programming Method
10.8.1 M i x e d Strategy: Algebraic Method
Algebraic method is used to determine the probability of using different strategies by
players A and B. it is preferred for 2 x 2 order payoff matrix without saddle point. The
payoff table format is as shown in Table 10.8.la.
Player B's Strategies
(B;)
81 82 Bn p,
A1 a11 a,2 ... a,n Pi

Player A's
A2 a,, a22 ... a2n P2
Strategies
. ...
(A;)
...

Am am, am2 ... ama Pm
q; q, q, ...
q"
Table 1 0 . 8 . l a : Algebraic Method for Mixed Strategy

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Where,
p, is the probability with which player A select strategy A;; i = 1, 2, 3 m.
qJ is the probability with which player B select strategy BJ; j = 1, 2, 3 n.
Let V be the expected value of the game.
The expected gain for player A when player B selects strategies B,, 82 . . . B, one-by-one
is given by the following simultaneous equation:
a11P1 + a21P2 + a31P3 . . . + am1Pm V
a12P1 + a22P2 + a32p3 + am2Pm 2 V
P, + P, + P, . . + P m = 1
P, O for a l l I
The expected loss for player B when player A selects strategies A,, A2 . . . Ao is given by
the following simultaneous equation:
a 1 1 q 1 + a12q2 + a13q3 . . + alnqn :-:::; V
a21q1 + a22q2 + a23q3 . . . + a2nqm :-:::; V
amlql + am2q2 + am3q3 + amnqn ,S: V
ql + q2 + q3 + qm = 1
p, Oforall j
To get the value of the probability, the above inequalities are considered as an equation
and solved simultaneously.

Consider the following example of algebraic method.
Example 0 2 :
By algebraic method
Solve the following game whose payoff matrix is given in Table 1 0 . 8 . l b .
Player B
Player A
B, B2
A, 5 2
A2 -1 3
Table 1 0 . 8 . l b : Payoff Matrix
Solution 0 2 :
By algebraic method
Step 1: select the strategy with the maximum gain among row m i n i m a .
Player B
Row
Player A
Minima
B, B2
.
A, 2 Maximin
5 2
A2 -1 3 -1
Table 10.8.lc: Row Minima for Player A
As observed from Table 10.8.lc, the row minima values for strategies A1 and A2 are 2
and -1, respectively. Now, select the strategy with the maximum gain among row
minima, that is, maximum (2, -1) = 2. Therefore, to maximize the minimum gain,
player A should adopt the maximin strategy of A 1

10. Game Theory e8ook
Step 2: select the strategy with minimum loss among column m a x i m a .
Player B
Row
Player A
Minima
81 82
A, 5 2 2 Maxim in
A2 -1 3 -1
Column 3
5
Maxima
+
I
Minimax
Table 1 0 . 8 . l d : Column Maxima for Player B
As observed from Table 10.8.ld, the column maxima values for strategies 81, and 82
are 5 and 3, respectively. Now, select the strategy that gives the minimum loss among
column m a x i m a , that is, minimum (5, 3) = 3. Therefore, to minimize the m a x i m u m loss,
player 8 should adopt the minimax strategy of 82.
Step 3 : to find the optimum strategy.
For player A, strategy A, maximizes the minimum gain with value 2 and for player 8,
strategy 82 m i n i m i z e s the maximum loss with value 3. Thus, the two strategies do not
coincide with each other and thus, the saddle point does not occur.
Since, no saddle point is achieved. Let p, and P2 be the probabilities of selecting strategy
A, and A2, respectively and qi, q2 be the probabilities of selecting strategy B, and B2,
respectively, as shown in Table 1 0 . 8 . l e .
Player B
Player A P
81 82
A, 5 2 P1
A2 -1 3 P2
q; q, q2
Table 1 0 . 8 . l e : Probabilities for Both the Players

The expected g a i n for player A, when player B selects strategies B, and 82:
Sp,+ (-l)p 2 V
2p, + 3p, V
P, + P2 = 1
Considering expected gain (V) under both conditions rs equal, the probabilities for the
player are calculated as:
Sp + (-l)p, = 2p + 3p
1 1 2
Substitute, p, = 1 - p,
Sp, - 1 ( 1 - p . ) = 2p + 3( 1 - p . )
1
Sp - 1 + p = 2p + 3 - 3p
1 1 1 1
6p, - 1 = -lp, + 3
7p, = 4
4 3
P, = - and p, = -
7 7
The expected g a i n for player B, when player A selects strategies A, and A2:
Sq, + 2q2 V
(-l)q, + 3q, V
q, + q2 = 1
Considering expected gain (V) under both conditions is equal, the probabilities for the
player are calculated as:
Sq, + 2q2 = (-l)q

1
+ 3q2
Substitute, q, = 1 - q,
S q , + 2 ( 1 - q . ) = -q1 + 3 ( 1 - q . )
Sq, + 2 - 2q1 = -q
1
+ 3 - 3q1
sq, + 2 = -4q, + 3
7q, = 1
1 6
q, = and q, =
7 7

Strategy played by player A: (A,, A,): (4/7, 3/7)
Strategy played by firm B: are (B,, B,): (1/7, 6/7)
Value of game, V, can be obtained by substituting p, and q, values in any gain or loss
equations as follows:
1 6 17
V = S x - + 2 x - = -
7 7 7
Thus, expected value for both, player A and player B, are the same.
10.8.2 Mixed Strategy: Arithmetic Method/Short-cut Method
Arithmetic method is an easy way to determine the probability of using different
strategies by players A and B. It is preferred for 2 x 2 order payoff matrix without a
saddle point. The payoff table fonmat is as shown in Table 10.8.2a.
Player A's Player B's Strategies (B;)
Strategies p,
{A;) B, 82
A, au ara p,
A2 ear a22 P2
q; q, q,
Table 1 0 . 8 . 2 a : Arithmetic Method for Mixed Strategy
The probabilities can be obtained by using the fonmulae:
P, = (1 - P , ) ; q, = (1 - q . ]
Where,
D = a11 + a22 - ( a 1 2 + a2J
Consider Example 02 and solve it using arithmetic method.
Solution 0 2 :
By arithmetic method
Step 1 and Step 2 are to find the maximin and minimax, as shown in Table 10.8.lc
and Table 1 0 . 8 . l d , respectively.
Step 3 : to find the optimum strategy
For player A, strategy A, maximizes the minimum gain with value 2 and for player 8,
strategy 82 m i n i m i z e s the maximum loss with value 3. Thus, the two strategies do not
coincide with each other and thus, the saddle point does not occur.
Since no saddle point is achieved, let p1 and p2 be the probabilities of selecting strategy
A1 and A2, respectively and q1, q2 be the probabilities of selecting strategy 81 and 82,
respectively, as shown in Table 10.8.2b.
Player B
Player A p,
B, B2
A, 5 2 p,
A2 -1 3 P2
q; q, q2
Table 1 0 . 8 . 2 b : Probabilities for Both the Players
The value of D i s :
D = a11 + a22 - ( a 1 2 + a2J
D = 5 + 3 - (2 - 1)
D = 7
The expected g a i n for player A:
a - a 3 + 1 4
22 21
P i = D = -7
- = 7
P2 = (1 - P 1 ) = (1 - ; ) =
The expected g a i n for player B:
a22 - a12 3 - 2 1
q, = D = -- = 7
7
q, = (1 - q,) = ( 1 - ) =
The value of game, V:
v = a 1 1 a 22 - a21a12
V = S x 3 - [ ( - l ) x 2 ] = 17
7 7
Strategies played by player A: (A,, A2): (4/7, 3/7)
Strategies played by firm B: (B,, 82): {l/7, 6/7)
10.8.3 The Rules of Dominance
In order to find the optimal strategy for mixed strategy numerical, the rule of dominance
is applicable, which states that when a player finds out that one strategy seems to
be more appropriate than the other strategy, it is said to dominate the other
strategies. It helps in reducing the payoff matrix, by eliminating the strategies that are
not in favor of the player, that is, reducing m x n matrix to 2 x 2 matrix. The
dominance rules for each player are given.
For player A (Maximizing the gain)
If elements of strategy A, is less than or equal to the corresponding elements of
strategy Ac or the average of other two A's strategies, then strategy A, is said to
be dominated by Ac.
Player A w i l l never use strategy A, because A will gain less and will always neglect
to play strategy A,.
Therefore, remove strategy A, from the payoff table.
For player B ( M i n i m i z i n g the loss)
If elements of strategy B, are greater than or equal to the corresponding elements
of strategy Be or the average of other two B's strategies, then strategy B, is said to
be dominated by Be.
Player B w i l l never use strategy B, because B will lose more and w i l l always neglect
to play strategy B,.
Therefore, remove strategy B, from the payoff table.
Example 0 3 :
Solve the following game whose payoff matrix is given in Table 1 0 . 8 . 3 a .
Firm 8
Firm A
81 82 83 84
A1 3 -2 5 2
A2 7 1 8 4
A3 -3 3 0 6
A4 4 -3 6 3
Table 10.8.3a: Payoff Matrix
Solution 0 3 :
Step 1: find the saddle point.
Since the saddle point does not exist, reduce the 4 x 4 matrix using the dominance rule.
Find out the strategy for A which is less useful, like the elements of A, are less, as
compared to all the elements of A2, that is, A, (a,i) :5 A2 (a2il Therefore, A2 is
dominating A,; hence, the A, strategy is eliminated, as shown in Table 10.8.3b.
Finn 8
Firm A
8, 82 B, 84
--Ar---- - - - - - -3- - - - - - - - - - - ---.;!- - - - - - - - - - - - - 5- - - - - - - ----1--
A, 7 1 8 4
A, -3 3 0 6
A 4 -3 6 3
Table 1 0 . 8 . 3 b : Eliminating Strategy A1
The Table 10.8.3c is obtained after eliminating strategy A1.
Firm 8
Firm A
81 82 83 84
A2 7 1 8 4
A3 -3 3 0 6
A4 4 -3 6 3
Table 10.8.3c: New Payoff Matrix
Step 2: B's strategy is to minimize the losses.
If B, (a;,) ;,: B, (a.), then B, is a dominated strategy, firm B will eliminate strategy B,.
From Table 10.8.3c, it is observed that the elements of 84 are greater, as compared to
the elements of 82, that is, 84 (a;4) ;,: 82 (a;2). Therefore, 84 is dominated by 82 and,
thus, 84 is eliminated, as shown in Table 10.8.3d.
Firm 8
Firm A
81 82 83
A2 7 1 8
A3 -3 3 0
A4 4 -3 6
Table 1 0 . 8 . 3 d : Eliminating Strategy 84
As observed from Table 10.8.3d, the elements of 83 are greater as compared to the
elements of 81 and 82, that is, 83 (a;3) ;,: 82 (a; 2 ). Therefore, firm B will eliminate strategy
83, as shown in Table 10.8.3e.
Firm 8
Firm A
81 82
A2 7 1
A, -3 3
A 4 -3
Table 1 0 . 8 . 3 e : New Payoff Matrix
Step 3 : A's strategy is to maximize the gains.
To maximize the minimum profits, firm A will eliminate strategy A4, as the values of its
elements are less, as compared to the elements of A2, that is, A4 (a4J) s A2 (a2i), as
shown in the Table 10.8.3f, which gives 2 x 2 reduced payoff matrix.
Firm 8
Firm A
81 82
A2 7 1
A, -3 3
Table 10.8.3f: 2 x 2 Reduced Payoff Matrix
Since the saddle point does not exist, the payoff matrix can be further solved using the
arithmetic method, as shown in Table 10.8.3g.
Firm B
Firm A p,
81 82
A2 7 1 p,
A, -3 3 P2
q; q, q2
. . .
Table 1 0 . 8 . 3 g : Applying Arithmetic Method
Let p1 and p2 be the probabilities of selecting strategy A2 and A3, respectively and q 1, q2
be the probabilities of selecting strategy 81 and 82, respectively, as shown in Table
10.8.3g.
The value of D:
D = a11 + a22 - (a12 + a2J
D = 7 + 3 - ( 1 - 3 )
D = 12
The expected g a i n for firm A:
a22 - a21 3 + 3 6 1
P, = D = 12 = 12 = 2
P, = (1-p,) =(1- ) =
The expected g a i n for firm B:
a - a 3 - 1 2 1
22 12
q, = D - 12 = 12 = 6
q, = (1 - c . ) = ( 1 - !) =
The value of game, V:
v = a11a22 - a21a12
V = 7 x 3 - [(-3)x 1] = 24 =
2
12 12
For firm A, mixed strategies are (A,, A2, A3, A.): (0, 1/2, 1/2, 0)
For firm 8, mixed strategies are (81, 82, 83, 84): (1/7, 6/7, 0, 0)
10.8.4 Mixed Strategy: Graphic Method
The graphic method is applicable for games, where the payoff matrix is reduced to size
m x 2 or 2 x n, that is, one of the players will have 2 un-dominated pure strategies in
the two-person zero-sum game. To find the optimal strategies, both the players assign
non-zero probabilities to the same number of pure strategies. Therefore, if player A is
having only 2 strategies, then player 8 will also have 2 strategies. Therefore, the graphic
method helps to find out which of the two strategies can be used.
Considering a 2 x 3 payoff matnx, as shown in Table 10.8.4a, let p1 and p, be the
probabilities of selecting strategy A1 and A2, respectively.
Player B
Player A p,
B, 82 83
A, au ara an P1
A2 a21 a22 a23 P2
Table 10.8.4a: Payoff Matrix
For each of the pure strategies available to player 8, the expected payoff for player A
will be as shown in Table 10.8.4b.
B; A's Payoff
8, a11P1 + a21P2
82 a 12P1 + a22P2
83 a 1JP1 + a23P2
Table 10.8.4b: B's Pure Strategies
Consider the following example for 2 x n matrix.
Example 04:
Solve the following game using graphic method.
Player 8
Player A
81 82 83
A, 2 2 3
A2 4 3 2
.
Table 10.8.4c: Payoff Matrix
Solution 04:
Step 1: to find the optimal solution.
As the saddle point does not exist, let p1 and p, be the probabilities for the strategies A1
and A2, respectively. Therefore, the expected payoff for player A is shown in Table
10.8.4d.
8; A's Payoff
81 2p, + 4p2
82 2p, + 3p2
83 3p1 + 2P2
Table 1 0 . 8 . 4 d : A's Expected Payoff Matrix
Step 2: plot the graph.
Fig. 10.8.4a represents the graphic solution for player A, wherein, the x axis denotes
the probability which ranges from O to 1. The expected payoff is measured on y axis for
player A. If player 8 plays strategy 81, then the expected payoff of player A is 2 when
strategy A, is played with p, = 1; also, the payoff of A is 4 when player A plays the
strategy A2 with p, = 0, as shown in the Fig. 10.8.4a. Then, the two points are joined,
which represents a straight line of strategy 81. Similarly, as shown in the graph,
strategies 82 and 83 are plotted.
A, A,
3 [:;? ::=;:] 3
l --,:;:B.._,.J 2

: (Maxlmln Point)
1 1

' p, 1/2
( 1, 0) -+------------+- (0, 1)
Lower Envelope
P(A 1 )=p 1 = 1 (Minimum Gain Area for A) P(A,)=p 1 = 0

P(A,)=p,= 0 P(A,)=P,= 1
Fig. 10.8.4a: Graphic Solution for Player A
As player A's objective is to select the best strategies that will help in maximizing the
minimum gain, therefore, from Fig. 10.8.4a, it can be observed that point X gives the
maxim in point, which is the intersection of strategies 82 and 83.
At equilibrium point (maximin point) X, player A plays strategies A, and A2, whereas,
player 8 selects 82 and 83 as optimum strategies for zero-sum game.
Thus, the 2 x 3 matrix is reduced to 2 x 2 matrix, as shown in Table 10.8.4e. Find the
probabilities p, and P2 for player A and also, q, and q2 for player 8.
Plaver 8
Player A
82 83
A, 2 3
A2 3 2
Table 10.8.4e: 2 x 2 Reduced Payoff Matrix
Step 3 : finding the probabilities and value of game.
Substitute P = 1 - P,
2
2p + 3p = 2p + 3(1 - p . )
1 2 1
And, 3p + 2p = 3p + 2(1 - p . )
1 2 1
For player A:
Zp, + 3(1 - p . ) = 3p, + 2(1 - p . )
- P, + 3 = P, + 2
- 2p, = -1
1 1
P, = and P, =
2 2
For player A, mixed strategies are: (A,, A2): (1/2, 1/2)
For player 8:
2q, + 3 ( 1 - q , ) = 3q, + 2 ( 1 - q,)
- iq, + 3 = q, + 2
- Zq, = -1
1 1
q, = and q, =
2 2
For player 8, mixed strategies are: (8,, 82, 83): (0, 1/2, 1/2)
1 1 5
Value of game at point X i s given as: V = 2 x - + 3 x - = -
2 2 2
Consider the following example f o r m x 2 matrix.
Example 0 5 :
Solve the following game using graphic method.
Player B
Player A
81 82
A, 1 3
A2 3 5
As 4 1
qj q, q,
.
Table 10.8.4f: Payoff Matrix
eBook
Solution O S :
Step 1: to find the optimal solution.
As the saddle point does not exist, let q, and q2 be the probabilities for the strategies B,
and 82, respectively. Therefore, the expected payoff for player B is shown in Table
10.8.4d.
A; B's Payoff
A, lq, + 3q2
A2 3q, + Sq2
A3 4q, +lq2
Table 10.8.4g: B's Expected Payoff Matrix
Step 2: plot the graph.
Fig. 10.8.4b represents the graphic solution for player A, wherein, the x axis denotes
the probability q, which ranges from O to 1. The expected payoff is measured on y axis
for player B. Now, if player A plays strategy A,, then the expected payoff of player B is 1
when player A plays the strategy A, with q, = 1; also, the payoff of player B is 3 when
player A plays the strategy A2 with q, = 0, as shown in Fig. 10.8.4b. Then, the two
points are joined which represents a straight line of strategy A,. S i m i l a rl y , as shown in
the graph, strategies A2 and A3 are plotted.
B, B,
Upper Envelope
(Maximum Loss Area for B)

5
A,
)
2
2
A,
I
I
( i, 0) >------------< (0, 1)
c, = 3/5
P(B,)=q, = I P{B )=Q = 0

1 1
P(B,)=q,= 0 P(B,)=q,= I
Fig. 10.8.4b: Graphical Solution for Player B
As player B's objective is to select the best strategies that will help in minimizing the
maximum loss, therefore, from Fig.10.8.4b, it can be observed that point X gives the
m i n i m a x point, which is the intersection of strategies A2 and A3.

At equilibrium point (minimax point) X, player A plays strategies A2 and A3, whereas,
player 8 selects 81 and 82 as optimum strategies for zero-sum game.
Thus, the 2 x 3 matrix is reduced to 2 x 2 matrix, as shown in Table 10.8.4h. Find the
probabilities q, and q2 for player 8 and also, p, and p:, for player A.
Player 8
Player A
81 82
A2 3 5
A3 4 1
Table 10.8.4h: 2 x 2 Reduced Payoff Matrix
Step 3 : finding the probabilities and value of game.
Substitute q = 1 - q,
2
3q1 + 5q2 = 3q1 + 5(1 - q1)
And, 4q1 + q2 = 4q1 + (1 - qi)
For player 8:
3q1 + 5 ( 1 - q i ) = 4q1 + ( 1 - q i )
- 2q1 + 5 = 3q1 + 1
-Sqi=-4
4 1
q1 = and q2 =
5 5
For player 8, mixed strategies are: (B,, 82): (4/5, 1/5)
Value of game at point X is given as:
For player A:
3p, + 4 ( 1 - P1) = 5P1 + ( 1 - P 1 )
-1P1+4=4P1+1
-5P1 = -3
3 2
p1 = - and p2 = -
5 5
For firm A, mixed strategies are: (A,, A2, As): (0, 3/5, 2/5)
Value of game at point X i s given as:
10.9 Linear Programming (LP) Model Form
Linear programming problem rs useful for solving a two-person zero-sum game, as it
helps to solve the larger dimension payoff matrix for mixed strategy games. In this
topic, the only concern is the formulation of the game in LP fonm. Therefore, to solve the
m x n matrix using LP model, the following rules need to be followed.
Expected payoff for player A:
Ia p 1 1
:?: V , j = i , 2 , 3 ... n
,-1
m m
Ia x 11
1
2: 1 and Ix,= 1
1-1 1-1
Linear Programming Model
Objective Function:
M i n . ZP = X
1 + X2 + X3 + . . . Xm
Subject t o :
m m
Ia, x, 1 and I x , = 1
1
,-1
,-1
x, 2: 0
i = 1, 2, 3 . . . m and j = 1, 2, 3 . . . n
Expected payoff for player B:
'
La, q :s: V , i = l , 2 , 3 ... m
1 1
1-1
fa 3!. ,; 1
c: 'lV I
1-1
' '
Ia,,y, s l a n d :[ y , = 1
J-1 J-1

Linear Programming Model
Objective Function:
Min.Zq =v, +y 2
+y 3
+ ... v;
Subject t o :
0 0
La, y slandLY, = 1
1 1
l l
v, 2 0
i = 1, 2, 3 . . . m and j = 1, 2, 3 . . . n
Example 0 6 :
Consider the following game, as shown in Table 10.9a.
Player 8
Player A 81 82 83
A, 5 7 4
A2 6 4 5
A3 -2 3 1
Table 10.9a: Payoff Matrix
Solution 0 6 :
Since, no saddle point exists, let pr, p,, and p3 be the probabilities for the strategies A,,
A2, and A3, respectively and q,, q2, and q3 be the probabilities for the strategies 81, 82,
and 83, respectively Therefore, the expected payoff for player A is to maximize the
minimum gain. Therefore, for player A, the payoff matrix is given, as shown in
Table 1 0 . 9 b .
Player 8 p;
Player A 81 82 83
A, 5 7 4 P1
A2 6 4 5 P2
A3 -2 3 1 p3
q; q, q2 q3
Table 10.9b: Payoff Matrix for Player A

The expected g a i n for player A will be as follows:
S p , + 6p - 2p 2 V (if Buses strategy 8 )

2 3 1
7p 1 + 4p2 + 3p3 2 V (if Buses strategy 82)
4p1 + Sp2 + p3 2 V (if B u s es strategy 83)
P, + P2 + P, = 1
P1t P2, P3 0
Where, V i s the value of the game
Now, d i v i d i n g each inequality and equality by V:
Sp, + 6p2 _ 2p,

2 1
v v v
7p, + 4p, + 3p, l

2
v v v
4p, + Sp, + P, 2 1
v v v
El_ + P2 + P3 = __!__
v v v v
In order to simplify the terms, new variables are defined.
Let x = 2_,_ x =P, x =p'

1 v ' 2 v ' 3 v
Therefore, the simplified problem for player A is:
M i n i m i z e Z,(= ) = x, + x2 + x3
Sx 1 + 6x2 - 2x3 2 1
7x 1 + 4x2 + 3x3 2 1
4x + Sx + x 1
1 2 3
X
11
X
2
, X
3
0

S i m i l a r l y , the expected loss for player B will be as follows:
M a x i m i z e Z,(= ) = Y, + Y2 + Y3
S y , + 7y + 4y 2 1
2 3
7y 1 + 4y 2 + 3y 3 2 1
- 2 y , + 3 y , + y 3 2 l
Y11Y2,Y30
Where,
3
Y, = .9i., Y2 = q , , Y3 = q
v v v
The LP problem of player A rs dual of the LP problem of player B. Therefore, initial
simplex table is obtained for player B, as shown in Table 10.9c, by introducing slack
variables.
M i n i m i z e Zq == y1 + y2 + y + Os1 + Os + Os
3 2 3
Subject t o :
Sy,+7y,+4y3+S,=l
7y 1
+4y 2
+3y 3
+5 2
=1
- 2y, + 3y2 + y3 + s, = 1
YuY2,Y 3 0
C; 1 1 1 0 0 0
Variables Quantity Replacement

Variables
in Basis B Ratio
x. c. V, V2 V3 s, 52 53
s, 0 5 7 4 1 0 0 1 1/5
52 0 7 4 3 0 1 0 1 1/7
53 0 -2 3 1 0 0 1 1 -1/2
21 =LCB1 x X, 0 0 0 0 0 0
ll , = C , - Z , 1 1 1 0 0 0
Table 1 0 . 9 c : Initial Simplex Table
And then, the calculations are done as per simplex method.

1 0 . 1 0 Chapter Su mma ry
Theory of games is concerned with decision making in situations where two or
more rational players, each with a set of strategies, are involved in conditions of
competitions and confticting interests.
For a game involving two-person and zero-sum (where the g a i n for one is equal to
loss of the other) with a given set of payoff, the payoff is expressed from the
viewpoint of the 'maximizing' player.
A game with saddle point (maximin of maximizing player equals to minimax of
minimizing player) is known as pure strategy.
In a game without saddle point, players have to select the proportion of their
strategies, such a condrtron is known as mixed strategy.
To solve mixed strategy problems, there are various approaches, namely:
Algebraic Method, Arithmetic Method/Short-cut Method, Dominance Rule,
Graphical Method, and Linear Programming Method
The rule of dominance states that when a player finds out that one strategy seems
to be more appropriate than the other strategy, it is said to dominate the other
strategies.

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Quantitative Analysis

Table of Content eBook

1. Introduction to Quantitative Analysis in Decision Making 5

1.2 Meaning of Decision Making 7

1.3 Operations Research (OR) 9

1.4 Methodology of Operations Research 11

1.5 Applications of Operations Research 15

1.6 Quantitative Analysis and Computer Information Systems 17

2. Linear Programming: Formulation and Graphic Method 20

2.2 Definition of Linear Programming 22

2.3 Basic Requirements of Linear Programming 22

2.4 Assumptions Underlying Linear Programming 23

2.5 Formulation of Linear Programming Problem 25

2.6 Solution to Linear Programming Problem: Graphic Method 27

2.7 Variations in Linear Programming Problems 35

2.8 Advantages and Limitations of Linear Programming 38

2.9 Chapter Summary 39

3. Linear Programming: Solving by Simplex 40

3.2 Concept of Simplex Method 42

3.3 Converting LP Problem to Standard Form 43

3.4 Steps in Simplex Method 45

3.5 Simplex Method: Maximization Case 46

3.6 Simplex Method: M i n i m i z a t i o n Case 54

3.7 Duality in LP Problem 63

3.8 Chapter Summary 67

4. Transportation Problem (TP) 68

4.2 Characteristics and Assumptions of Transportation Problem 70

4.3 The TP Algorithm 74

4.4 Initial Basic Feasible (!BF) Solution Methods 75

4.5 Optimality Test Methods 82

4.6 Chapter Summary 93

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Table of Content eBook

5.2 Queuing Theory 96

5.3 S t ru c t u r eof Queuing System 96

5.4 Queuing Theory: Operating Characteristics 100

5.5 Types of Queuing Models 102

5.6 Cost Analysis 113

5.7 Chapter Summary 116

6.1 Introduction 118

6.2 Types of S i m u l a t i o n 119

6.3 Steps in S i m u l a t i o n 121

6.4 Monte Carlo S i m u l a t i o n and Its Steps 122

6.5 Monte Carlo S i m u l a t i o n Examples 124

6.6 Advantages and Disadvantages of S i m u l a t i o n Techniques 130

6.7 Chapter Summary 131

7. PERT/CPM Techniques 132

7.2 PERT and CPM Network 134

7.3 Rules of Network Construction 137

7.4 Network Analysis: Forward Pass and Backward Pass 139

7.5 Network Analysis: Floats 145

7.6 Critical Path Method (CPM) 146

7.7 Project Evaluation and Review Technique (PERT) 147

7.8 Importance and Umitations of CPM/PERT 153

7.9 Chapter Summary 154

8. Project Crashing and Resource Allocation 155

8.1 Introduction 156

8.2 Project Crashing 157

8.3 Cost Associated with Project Crashing 157

8.4 Project Crashing Principles and Steps 159

8.5 Resource Allocation and Smoothing 165

8.6 Chapter Summary 170

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