OR E-Note 28042017 060849AM PDF

1
BASICS OF OPERATION RESEARCH
Course Contents
1.1 Introduction
1.2 History of OR
1.3 Definition
1.4 Characteristics
1.5 Phases
1.6 Scope
1.7 Limitations
1.8 Operations Research and
Decision Making
Department of Mechanical Engineering Prepared By: Darshit S. Dadhaniya

Darshan Institute of Engineering & Technology, Rajkot Page 1.1
1. Basics of Operation Research Operation Research (171901)
1.1 Introduction
The subject operations research is a branch of mathematics - specially applied
mathematics, used to provide a scientific base for management to take timely and
effective decisions to their problems. It tries to avoid the dangers from taking decisions
merely by guessing or by using thumb rules. Management is the multidimensional and
dynamic concept. It is multidimensional, because management problems and their
solutions have consequences in several dimensions, such as human, economic social and
political fields. As the manager operates his system in an environment, which will never
remain static, hence is dynamic in nature. Hence any manager, while making decisions,
considers all aspects in addition to economic aspect, so that his solution should be
useful in all aspects. The general approach is to analyse the problem in economic terms
and then implement the solution if it does not aggressive or violent to other aspects like
human, social and political constraints.
1.2 History of OR
No science has ever been born on a specific day. Operations research is no exception.
Its roots are as old as science and society. Though the roots of OR extend to even early
1800s, it was in 1885 when Ferderick W. Taylor emphasized the application of scientific
analysis to methods of production, that the real start took place.
During World War II, the military management in England called on a team of
scientists to study the strategic and tactical problems of air and land defence. This team
was under the direction of Professor P.M.S. Blackett of Univ. of Manchester and a former
naval officer. 'Blackett's circus", as the group was called, included three physiologists,
two mathematical physicists, one astrophysicist, one army officer, one surveyor, one
general physicist and two mathematicians. Many of these problems were of executive-
type. The objective was to find out the most effective allocation of limited military
resources to the various military operations and to the activities within each operation.
The application included the effective use of newly invented radar, allocation of British
Air Force Planes to missions and the determination of best patterns for searching
submarines. This group of scientists formed the first OR team.
The name operations research (or operational research) was apparently coined in
1940 because the team was carrying out research on (military) operations. The
encouraging results of these efforts led to the formation of more such teams in British
Armed Services and the use of such scientific teams soon spread to Western Allies - the
United States, Canada and France. Thus though this science of operations research
originated in England, the United States soon took the lead. In United States these OR
teams helped in developing strategies for mining operations, inventing new flight
patterns and planning of sea mines.
Post - World War II: Immediately after the war, the success of military teams
attracted the attention of industrial managers who were seeking solutions to their
problems. Industrial operations research in U.K. and U.S.A. developed along different
lines. In U.K. the critical economic situation required drastic increase in production
efficiency and creation of new markets. Nationalisation of a few key industries further
increased the potential field for OR. Consequently OR soon spread from military to
government, industrial, social and economic planning.
Prepared By: Darshit S. Dadhaniya Department of Mechanical Engineering

Page 1.2 Darshan Institute of Engineering & Technology, Rajkot
Operation Research (171901) 1.Basics of Operation Research
Today, the impact of operations research can be felt in many areas. This is shown by
the ever increasing number of educational institutions offering this subject at degree
level. The fast increasing number of management consulting firms speaks of the
popularity of the subject. OR activities have spread to diverse fields such as hospitals,
libraries, city planning, transportation systems, crime investigation, etc. Some of the
Indian organisations using OR techniques are: Indian - Airlines, Railways; Defence
Organizations, Fertilizer Corporation of India, Delhi Cloth Mills, Tata Iron and Steel Co.,
etc.
1.3 Definitions of Operation Research

Many definitions of O.R. have been suggested from time to time. Some of the different
definitions are:
1. O.R. is an experimental and applied science developed to observing, understanding
and predicting the behavior of purposeful man-machine systems and O.R. workers
are actively engaged in applying this knowledge to practical problems in business,
government and society.
O.R. Society of America
2. O.R. is a scientific method of providing executive departments with a quantitative
basis for decision regarding the operations under their control.
Morse and Kimbal (1946)
3. O.R. is a management activity pursued in two complementary ways one half by
the free and bold exercise of commonsense untrammeled by any routine, and
other half by the application of a repertoire of well established precreated
methods and techniques.
Jagjit Singh (1968)
4. O.R. is the application of scientific methods, techniques and tools to problems
involving the operations of systems so as to provide these in control of the
operations with optimum solutions to the problem.
Churchman, Acoff, Arnoff (1957)
5. O.R. is a scientific approach to problem solving for executive management.
H.M. Wagner
6. O.R. may be described as a scientific approach to decision making that involves the
operations of organizational system.
Hiller and Lieberman

1.4 Characteristics of OR
From the definitions of OR following characteristics can be extracted out.
1. Use of Interdisciplinary Teams
OR involves many number of variables and constraints. For a single person it is not
possible to understand and analyze justifiably. Hence people from various
disciplines are required to understand the OR problem, who applies their special
knowledge acquired through experience to get a better view of cause and effects of
the events in the problem and to get a better solution to the problem. This type of
team approach will reduce the risk of making wrong decisions.
2. Complete System Orientation
A business may be considered as a system having various sub-systems. The decision
made by any sub-system will have its effect on other sub-systems. When dealing
with OR problems, one has to consider the entire system, and characteristics or sub-
systems, the inter-relationship between sub-systems and then analyze the problem,
search for a suitable model and get the solution for the problem. Hence it can be
concluded that OR is a Systems Approach rather, than individual approach.
3. Involvement of Scientific Method
Various scientific methods are involved in OR to solve different kinds of problems.
Scientific methods are based on derived logics and empirical relations from the past
experiences. So, application of scientific methods leads to logical and sequential
results, which are not depending on irrelevant assumptions.
4. Improvement in Quality of Decisions
OR provides various alternatives and let the user to select an optimal choice. This
will definitely help him in making better and quick decisions. Hence, quality of
decision can be improved.
5. Uncovering Hidden Problems
Sometimes, during solving the adopted problem, new problems are uncovered.
These problems are mostly overlooked. For example, excess inventory provides
flexibilities in managing the orders but on other hand it hides many problems
related to manufacturing, human, finance etc. As uncovered problem can also affect
the existing problem, it is very essential to solve these problem using different OR
techniques.
1.5 Phases of OR
An OR study is rooted in teamwork, where the OR analysts and the client work side
by side. The OR analysts expertise in modeling must be complemented by the
experience and cooperation of the client for whom the study is being carried out.
The principal phases for implementing OR in practice include
1. Definition of the problem.
2. Construction of the model.
3. Solution of the model.
4. Validation of the model.
5. Implementation of the solution.

1. Definition of the problem

Problem definition involves defining the scope of the problem under investigations.
This function should be carried out by the entire OR team. The aim is to identify
three principal elements of the decision problem: (1) description of the decision
alternatives, (2) determination of the objective of the study, and (3) specification of
the limitations under which the modeled system operates.
2. Construction of the model
Model construction entails an attempt to translate the problem definition into
mathematical relationships. If the resulting model fits one of the standard
mathematical models, such as linear programming, we can usually reach a solution
by using available algorithms. Alternatively, if the mathematical relationship are too
complex to allow the determination of an analytic solution, the OR team may opt to
simplify the model and use a heuristic approach, or they may consider the use of
simulation, if appropriate. In some cases, mathematical, simulation, and heuristic
models may be combined to solve the decision problem.
3. Solution of the model
Model solution is by far the simplest of all OR phases because it entails the use of
well-defined optimization algorithms. An important aspect of the model solution
phase is sensitivity analysis. It deals with obtaining additional information about the
behaviour of the optimum solution when the model undergoes some parameter
changes. Sensitivity analysis is particularly needed when the parameters of the
model cannot be estimated accurately. In these cases, it is important to study the
behaviour of the optimum solution in the neighborhood of the estimated
parameters.
4. Validation of the model
Model validity checks whether or not the proposed model does what it purports to
do - that is, does it predict adequately the behaviour of the system under study?
Initially, the OR team should be convinced that the models output does not include
surprises. In other words, does the solution make sense? Are the results intuitively
acceptable? On the formal side, a common method for checking the validity of a
model is to compare its output with historical output data. The model is valid if,
under similar input conditions, it reasonably duplicates past performance. Generally,
however, there is no assurance that future performance will continue to duplicate
past behaviour. Also, because the model is usually based on careful examination of
past data, the proposed comparison is usually favorable.
5. Implementation of the solution
Problem definition involves defining the scope of the problem under investigations.
This function should be carried out by the entire OR team. The aim is to identify
three principal elements of the decision problem: (1) description of the decision
alternatives, (2) determination of the objective of the study, and (3) specification of
the limitations under which the modeled system operates.

1.6 Scope of OR
When we broaden the scope of OR, we find that it has really been practised for
hundreds of years even before World War II. Whenever there is problem of
optimization, there is scope for the application of OR. Its techniques have been used in a
wide range of situations:
1. In Industry
In the field of industrial management there is of chain of problems starting from the
purchase of raw materials to the dispatch of finished goods. The management is
interested in having an overall view of the method of optimizing profits. In order to
take decision on scientific basis, OR team will have to consider various alternative
methods of producing the goods and the return in each case. OR study should also
point out the possible changes in the overall structure like installation of a new
machine, introduction of more automation, etc. OR has been successfully applied in
industry in the fields of production, blending, product mix, inventory control,
demand forecast, sale and purchase, transportation, repair and maintenance,
scheduling and sequencing, planning, scheduling and control of projects and scores
of other associated areas.
2. In Defence
OR has a wide scope for application in defence operations. In modern warfare the
defence operations are carried out by a number of different agencies, namely
airforce, army and navy. The activities performed by each of them can be further
divided into sub-activities viz. operations, intelligence, administration, training and
the like. There is thus a need to coordinate the various activities involved in order to
arrive at optimum strategy and to achieve consistent goals. Operations research,
conducted by team of experts from all the associated fields, can be quite helpful to
achieve the desired results.
3. Planning
In both developing and developed economies, OR approach is equally applicable. In
developing economies, there is a great scope of developing an OR approach towards
planning. The basic problem is to orient the planning so that there is maximum
growth of per capita income in the shortest possible time, by taking into
consideration the national goals and restrictions imposed by the country. The basic
problem in most of the countries in Asia and Africa is to remove poverty and hunger
as quickly as possible. There is, therefore, a great scope for economists, statisticians,
administrators, technicians, politicians and agriculture experts working together to
solve this problem with an OR approach.
4. Agriculture
OR approach needs to be equally developed in agriculture sector on national or
international basis. With population explosion and consequent shortage of food,
every country is facing the problem of optimum allocation of land to various crops in
accordance with climatic conditions and available facilities. The problem of optimal
distribution of water from the various water resources is faced by each developing
country and a good amount of scientific work can be done in this direction.

5. Public Utilities
OR methods can also be applied in big hospitals to reduce waiting time of
outdoor patients and to solve the administrative problems.
Monte Carlo methods can be applied in the area of transport to regulate train
arrivals and their running times. Queuing theory can be applied to minimize
congestion and passengers waiting time.
OR is directly applicable to business and society. For instance, it is increasingly
being applied in L.I.C. office to decide the premium rates of various policies. It has
also been extensively used in petroleum, paper, chemical, metal processing, aircraft,
rubber, transport and distribution, mining and textile industries.
OR approach is equally applicable to big and small organizations' For example,
whenever a departmental store faces a problem like employing additional sales girls,
purchasing an additional van, etc., techniques of OR can be applied to minimize cost
and maximize benefit for each such decision.
Thus we find that OR has a diversified and wide scope in the social, economic and
industrial problems of today.
1.7 Limitations of OR
1. Magnitude of Computations:
O.R. tries to find out optimal solution taking into account all the factors. In the
modern society these factors are enormous and expressing them in quantity and
establishing relationships among these require voluminous calculations which
can only be handled by machines.
2. Non-Quantifiable Factors:
O.R. provides solution only when all elements related to a problem can be
quantified. All relevant variables do not lend themselves to quantification.
Factors which cannot be quantified, find no place in O.R. Models in O.R. do not
take into account qualitative factors or economical factors which may be quite
important.
3. Distance between Manager and Operations Research:
O.R. being specialists job requires a mathematician or a statistician, who might
not be aware of the business problems. Similarly, a manager fails to understand
the complex working of O.R. Thus there is a gap between the two. Management
itself may offer a lot of resistance due to conventional thinking.
4. Money and Time Costs:
When the basic data are subjected to frequent changes, incorporating them into
the O.R. models is a costly affair. Moreover, a fairly good solution at present may
be more desirable than a perfect O.R. solution available after sometimes.
5. Implementation:

Implementation of decisions is a delicate task. It must take into account the

complexities of human relations and behavior. Sometimes resistance is offered
only due to psychological factors.
1.8 Operations Research and Decision Making

Operations research or management science, as the name suggests, is the science of
managing. As is known, management is most of the time making decisions. It is thus a
decision science which helps management to make better decisions. Decision is, in fact,
a pivotal word in managing. It is not only the headache of management; rather all of us
make decisions.
Decision-making can be improved and, in fact, there I a cope of large scale improvement.
The essential characteristics of all decisions are
a. Objectives,
b. Alternatives,
c. Influencing factors (constraints).
Once these characteristics are known, one can think of improving the characteristics so
as to improve upon the decisions itself.
For, example, if you have to reach at exam centre within time, using various
modes of conveyance. You have three conveyance modes. First is to go alone in own car,
second is to go by city bus and third one is to go in sharing car among friends. If you
choose first conveyance mode than you will definitely reach the exam centre in time, but
it will be definitely costly. If you choose second conveyance mode, it will be least costly,
but it might take more time in travelling, so you might get late at exam centre. If you
choose to travel by sharing among friends, it will let you reach within time, as well as it
will be both economical compared to first options. Although, the destination was
reached by using any conveyance mode, the best option is to select the third alternate,
which is economical and object oriented.
It is scientific quantification used in OR, which help management to make better
decisions. Thus in OR, the essential features of decisions, namely, objectives,
alternatives and influencing factors are expressed in terms of scientific quantifications
or mathematical equations. This gives rise to certain mathematical relations, termed as
a whole as mathematical model. Thus the essence of OR is such mathematical model.
However, with the advance of science and technology, decision-making in

business and industry has become highly complex and extremely difficult. The decision-
maker is not only faced with a large number of interacting variables, which at times do
not lend themselves to neat quantitative treatment but also finds them too numerous
and dynamic. Above all he has to take into consideration the action of the competitors
over which he has no control. This complexity of decision-making make made the
decision-makers look for various aids in decision-making. It is in these situations that
operations research comes to our help.

The managers today make full use of the OR techniques in various functional areas.
It has been realized beyond doubt that intuition alone has no place in decision-making
since such a decision becomes highly questionable when it involves the choice among
several alternatives. OR provides the management much needed tools for improving the
various decisions.

6
REPLACEMENT MODELS
Course Contents
6.1 Introduction
6.2 Replacement of equipment
that deteriorates gradually
6.3 Time value of money does
not change
6.4 Present Worth Factor
6.5 Class Examples
6.6 Lab Examples
Department of Mechanical Engineering Prepared By: Khodaji Padsumbiya

6. Replacement Models Operation Research (2171901)
6.1. Introduction
The study of replacement is concerned with the situations that arise when some items
such as equipment need replacement due to changes in their performance. This change may
either be gradual or all of a sudden.
Broadly speaking, the requirement of a replacement may be in any of the following
situations:
(i) An item fails and does not work at all or the item is expected to fail shortly.
(ii) An item deteriorates and need expensive maintenance.
(iii) A better design of the equipment is available.
(iv) It is economical to replace equipment in anticipation of costly failure.
In this chapter, we are interested in the first two situations. Third situation has been
dealt when we studied the pay-off criteria.
When studying the problem of replacement, we may or may not consider the time
value of money.
6.2. Replacement of equipment that deteriorates gradually

Generally, the cost of maintenance and repairing of certain equipments increases
with time and ultimately the cost may become so high that it is more economical to replace
theses equipments with new ones. If the productivity of equipment decreases with time, this
may also be considered as a failure. At this point a replacement is justified.
The costs associated with aging increase at an increasing rate whereas the resale value
of the equipment decreases at increasing rate. The decreasing resale value results in
increasing depreciation, which is the difference between the purchase price and the resale
value. The depreciation of the item increases at a decreasing rate.
The optimal replacement policy for such items is to replace the equipment at a point
where the total cost curve intersects the total depreciation curve
Prepared By: Khodaji Padsumbiya Department of Mechanical Engineering

Operation Research (2171901) 6. Replacement models
6.3. Time value of money does not change

If the value of money does not change with time, then the user of the equipment does not
need to pay interest on his investments. We wish to determine the optimal time to replace
the equipment.
We make use of the following notations:
C = Capital cost of the equipment
S = Scrap value of the equipment
n = Number of years that the equipment would be in use
Cm = Maintenance cost function.
ATC = Average total annual cost.
Two possibilities are there
(i) Time t is a continuous random variable

In this case the deterioration of the equipment is being monitored continuously. The
total cost of the equipment during n years of use is given by
TC = Capital cost - Scrap value + Maintenance cost

= + 0 ()
1 1
() = = + ()
0

For minimum cost, () = 0

1 1
2
2 () + () = 0
0
1
= + 2 () = ()
2 0
2 ()
And 0 at () = ()
2
i.e., when the maintenance cost becomes equal to the average annual cost, the decision should
be to replace the equipment.
(ii) Time t is a discrete random variable

In this case

1 1
A(n) = = +

0
A (n) is minimum when
A(n + 1) A(n)and A(n 1) A(n)
Or, A(n + 1) A(n) 0 A(n) A(n 1) 0


1 1
A(n + 1) A(n) ( + ()) + ( + 1) ()
+1 +1
0
1
() + ( + 1) () 0
+1 +1
( + 1) ()
Similarly
() ( 1) 0
() ( 1)
Thus the optimal policy is
th
Replace the equipment at the end of n years if the maintenance cost in the (n+1)
th th
year is more than the average total cost in the n year and the n years maintenance cost is
less than previous years average total cost.
6.4. Present Worth Factor (Pwf):

The value of money over a period of time depends upon the nominal interest rate r
The value of one rupee today would be equal to Rs.1 (1+r %) after one year. Or the present
value of a rupee to be spent after one year is equal to Rs.1 (1 + r %)-1 at the interest rate r %
per year. Similarly, the present value of a rupee to be spent after -n years is equal to (1+r )-n ,
and is called as -Present Worth Factor (PWF) or -Present Value Interest Factor, PVIF (r%, n)
at the rate of r % per -n years. Sometimes, this is also known as -Compound Amount Factor
(CAF) of one rupee spent in n year duration.

6.5. Class Examples
Example-1
The cost of equipment is Rs. 62,000 and its scrap value is Rs. 2,000. The life of the
equipment is 8 years. The maintenance costs for each year are as given below:
Year 1 2 3 4 5 6 7 8
Maintenance
1000 2000 3500 5000 8000 11000 16000 24000
Cost in Rs.
When the equipment should be replaced?
Ans:-
C = 62,000/-
Cumulative
Resale Maintenance Maintenance Total Cost Annual
Year Total Cost
Price Cost Cost TC=C-S+
n
S Cm Cm Cm ATC =

1 2000 1000 1000 61000 61000

2 2000 2000 3000 63000 31500
3 2000 3500 6500 65000 21666.6
4 2000 5000 11500 71500 17875
5 2000 8000 19500 79500 15900
6 2000 11000 30500 90500 15083.3
7 2000 16000 46500 106500 15214.2
8 24000
As the avg. yearly cost is minimum for 6th year the equipment should be replace after 6
year.

Example-2
A manufacturer finds from his past records that the costs per year associated with a machine
with a purchase price of Rs. 50,000 are as given below:
Year 1 2 3 4 5 6 7 8
Maintenance
15000 16000 18000 21000 25000 29000 34000 40000
Cost in Rs.
Scrap value
35000 25000 17000 12000 10000 5000 4000 4000
In Rs.
Ans:-
C = 50,000/-
Cumulative
Maintenance Maintenance Total Cost Annual
Year Resale Price Total Cost
Cost Cost TC=C-S+
n S
Cm Cm Cm ATC =

1 35000 15000 15000 30000 30000

2 25000 16000 31000 58000 28000
3 17000 18000 49000 82000 27333.3
4 12000 21000 70000 108000 27000
5 10000 25000 95000 135000 27000
6 5000 29000 124000 169000 28166.6
7 4000 34000
8 4000 40000
As the avg. yearly cost is minimum for 5th year the equipment should be replace after 5
year.

Example-3
(a) Machine A cost Rs. 36,000. Annual operating costs are Rs. 800 for the first year, and then
increase by Rs. 8000 every year. Determine the best age at which to replace the machine. If
the optimum replacement policy if followed, what will be the yearly cost of owning and
operating the machine?
(b) Machine B costs Rs. 40,000. Annual operating costs Rs. 1,600 for the first year, and then
increase by Rs. 3,200 every year. You now have a machine of type A which is one year old.
Should you replace it with B, if so when? Assume that both machines have no resale value.
Ans:-
(a) Machine A
C = 36,000/-
Cumulative
Cost Cost TC=C-S+
n S
Cm Cm Cm ATC =

1 0 800 800 36800 36800

2 0 8800 9600 45600 22800
3 0 16800 26400 62400 20800
4 0 24800 51200 87200 21800
(b) Machine B
C = 40,000/-
Cumulative
Cost Cost TC=C-S+
n S
Cm Cm Cm ATC =

1 0 1600 1600 41600 41600

2 0 4800 6400 46400 23200
3 0 8000 14400 54400 18133.3
4 0 11230 25600 65600 16400
5 0 14400 40000 80000 16000
6 0 17600 57600 97600 16266.6

As the avg. yearly cost is minimum for 3rd year for machine A, machine A should be
replace after 3 year.
Avg. yearly cost for operating & owing the machine A is Rs. 20,800.
The avg. cost per year of operating & owing the machine B is less that of machine A.
Machine A should be replaced with machine B.
Nth year Cost of Nth year (Rs.)

2 45600-36800=8800
3 62400-45600=16800
As the cost of using machine A in 3rd year is more than avg. yearly cost of operating &
owing the machine.
Machine A should be replaced machine B after 2 years. i.e. 1 year from now because
of machine A is already 1 year old.

Example-4
The data on the operating costs per year and resale price of equipment A whose purchase
price is Rs. 10,000 are given below:
Year 1 2 3 4 5 6 7
Maintenance
1500 1900 2300 2900 3600 4500 5500
Cost in Rs.
Resale value
5000 2500 1250 600 400 400 400
In Rs.
(i) What is the optimum period of replacement?
(ii) When equipment A is 2 year old equipment B which is a new model for the same usage is
available. The optimum period for the replacement is 4 years with an average cost of Rs.
3,600. Should we change equipment A with that of B? If so when?
Ans:-
C = 10,000/-
Cumulative
Cost Cost TC=C-S+
n S
Cm Cm Cm ATC =

1 5000 1500 1500 6500 6500

2 2500 1900 3400 10900 5450
3 1250 2300 5700 14450 4816.6
4 600 2900 8600 18000 4500
5 400 3600 12200 21800 4360
6 400 4500 16700 26300 4383.3
7 400 5500
As the avg. yearly cost is minimum for 5th year for machine A, machine A should be
replace after 5 year.
The avg. cost per year of operating & owing the machine B is less that of machine A.
Machine A should be replaced with machine B.
Nth year Cost of Nth year (Rs.)
3 14450-10900=3550
4 18000-14450=3550
5 21800-18000=3800
Machine A should be replaced machine B after 4 years. i.e. 2 year from now because
of machine A is already 2 year old.

Example-5
A firm pays Rs. 10,000 for its equipment. Their operating and maintenance costs are about
Rs. 2500 per year for the first two years and then go up by approximately Rs. 1,500 per year.
When such equipment replaced? The discount rate is 10% per year.
Ans:-
C = 10,000/- i = 0.10
1 1
d= = = 0.909
1+i 1+0.1
Discounted
Discounted
Cumulative TC=C-
Discount Maintenance ATC =
Year Maintenance S+
Cm Factor Cost dn-1
n Cost Cm* dn-1
dn-1 Cm* dn-1
Cm* dn-1
1 2500 1 2500 2500 12500 1 12500

2 2500 0.909 2272.5 4772.5 14772.5 1.909 7738.3
3 4000 0.826 3304 8076.5 18076.5 2.735 6609.3
4 5500 0.751 4130.5 12207 22207 3.486 6370.3
5 7000 0.683 4781 16988 26988 4.169 6473.4
As the avg. yearly cost is minimum for 4th year the equipment should be replace after
4 year.

Example-6
A manufacturer is offered two machines A and B. A is priced at Rs. 10,000 and running costs
are estimated as Rs. 1,600 for each of the first five years, increasing by Rs. 400 per year in
the sixth and subsequent years. Machine B which has a same capacity as A cost Rs. 5,000 but
will have a running coats of 2,400 per year for six year, increasing by Rs. 400 per year
thereafter.
If money is worth 10% per year which machine should be purchased? (Assume that
the machine will eventually be sold for scrap at a negligible price)
Ans:-
Machine A
C = 10,000/- i = 0.10
1 1
d= = = 0.909
1+i 1+0.1
TC=C-S+ ATC =
Year Cm* dn-1 Cm* dn-1
Cm dn-1 Cm* dn-1 dn-1
n

1 1600 1 1600 1600 11600 1 11600

2 1600 0.909 1454.4 3054.4 13054.4 1.909 6858.3
3 1600 0.826 1321.6 4376 14376 2.735 5256.3
4 1600 0.751 1201.6 5577.6 15577.6 3.486 4468.6
5 1600 0.683 1092.8 6670.4 16670.4 4.169 3999.6
6 2000 0.620 1241.2 7911.6 17911.6 4.789 3740.1
7 2400 0.564 1353.6 9265.2 19265.2 5.353 3598.9
8 2800 0.512 1435.8 10701 20701 5.866 3529.1
9 3200 0.466 1491.2 12192.2 22192.2 6.332 3504.8
10 3600 0.427 1525.3 13717.6 23717.6 6.755 3510.8
The avg. value of machine A is Rs. 3504.8/-

Machine B
TC=C-
ATC =
Year Cm* dn-1 Cm* dn-1 S+ Cm*
Cm dn-1 dn-1
n dn-1

1 2400 1 2400 2400 7400 1 7400

2 2400 0.909 2181.6 4581.6 9581.6 1.909 5019.1
3 2400 0.826 1982.4 6564 11564 2.735 4228.1
4 2400 0.751 1802.4 8366.4 13366.4 3.486 3834.3
5 2400 0.683 1639.2 10005.6 15005.6 4.169 3599.3
6 2400 0.620 1489.4 11495 16495 4.789 3444.3
7 2800 0.564 1579.2 13074.2 18074.2 5.353 3376.4
8 3200 0.512 1640.9 14715.2 19715.2 5.866 3361.1
9 3600 0.466 1677.6 16392.8 21392.8 6.332 3378.6
10 4000 0.427 1694.8 18087.6 23087.6 6.755
The avg. value of machine B is less than machine A. So we have to purchase machine B.

Example-7
A machine which requires an initial investment of Rs. 12,000 has its salvage value at the end
of the year as Rs. [7000-500(i-1)]. The operating and maintenance costs are given below:
Year 1 2 3 4 5 6 7 8 9
Maintenance
1100 1300 1700 2100 2300 2700 3100 3500 3900
Cost in Rs.
Determine optimal replacement year when money increased by 12% ever year.
Ans:-
C = 12,000/- i = 0.12
1 1
d= = = 0.8928
1+i 1+0.12
TC=C-S*
Cm * ATC =
S* dn-1 Cm* dn-1 dn-1+
n dn-1 S Cm dn-1 dn-1
Cm* dn-1

1 1 7000 6249.6 1100 1100 1100 6850 1 6850

2 0.892 6500 4796.8 1300 1160.6 2260.6 9074 1.892 4796
3 0.797 6000 4218 1700 1355 3615.7 11342.2 2.689 4218
4 0.711 5500 4002.7 2100 1494.3 5110 13610.8 3.401 4002
5 0.635 5000 3897.9 2300 1461.4 6571.4 15728.2 4.036 3897
6 0.567 4500 3871.3 2700 1531.5 8103 17822 4.604 3871
7 0.506 4000 3889.3 3100 1569.8 9672.8 19861.1 5.107 3889
8 3500
9 3900
As the avg. yearly cost is minimum for 6th year the equipment should be replace after
6 year.

Example-8
The following mortality rates have been observation for certain type of light bulbs
Month 1 2 3 4 5
Percent failing by
10 25 50 80 100
month end
There are 1000 bulbs in use and it costs Rs 10 to replace an individual bulb which has burnt
out. If all bulbs were replaced simultaneously, it would cost Rs 2.5 per bulbs. It is proposed
to replace all the bulbs at fixed interval, and individually those which fail between the
intervals. What would be the best policy to adopt?
Ans:-
Probability Pi
Cumulative % that a new bulb
Month % failure during the
failure up to the end shall fail during
i month
of month the month
1 10 10 0.10
2 25 15 0.15
3 50 25 0.25
4 80 30 0.30
5 100 20 0.20
Bulbs Cost of Average

Bulbs
failing Individual Cost of Group Cost per
Month replaced Total Cost
during Replacement Replacement month
i until ith TC=TCI+TCG
ith TCI TCG
month ATC =
month
1 100 100 1000 2500 3500 3500

2 160 260 2600 2500 5100 2550
3 281 541 5410 2500 7910 2636.6
4 377 918 9180 2500 11680 2920
5 349 1267 12670 2500 15170 3034
N0 1000
N1 N 0 P1
10
1000
100
100

N 2 N 0 P2 N1 P1
15 10
1000 100
100 100
160
N3 N 0 P3 N1 P2 N 2 P3
25 15 10
1000 100 160
100 100 100
281
N 4 N 0 P4 N1 P3 N 2 P2 N 3 P1
30 25 15 10
1000 100 160 281
100 100 100 100
377
N5 N 0 P5 N1 P4 N 2 P3 N 3 P2 N 4 P1
20 30 25 15 10
1000 100 160 281 377
100 100 100 100 100
349
Avg life = i Pi
1(P1 ) 2(P2 ) 3(P3 ) 4(P4 ) 5(P5 )
1(0.1) 2(0.15) 3(0.25) 4(0.3) 5(0.2)
3.35 months
1000
No. of bulbs replaced per months =
3.35
298 bulbs
Cost of individual replacement = 298 10
=2980 Rs.
As cost of group replacement after every 2nd month is less than cost of individual
replacement.
Group replacement policy after every 2 months is better.

6.6. Lab Examples
Example -1
The maintenance cost and resale price of machine M whose purchase price is Rs. 12,000 are given
as:
Year 1 2 3 4 5 6 7
Maintenance
2600 3000 3400 4000 4700 5600 6600
Cost in Rs.
Resale value
7000 4500 3250 2600 2400 2400 2400
In Rs.
(a) Suggest the optimal period for the replacement of the machine.
(b) When this machine is two year old, another machine N, which is a new model of machine
M, is available. The optimal period for replacement of this machine N is 4 year, with an
average cost of Rs. 4700. Should we change machine M with N? If so, when?
Ans:-
C=
Cumulative
Cost Cost TC=C-S+
n S
Cm Cm Cm ATC =


Example -2
For a machine, the following data are available
Year 0 1 2 3 4 5 6
Cost of spare in
- 200 400 700 1000 1400 1600
Rs.
Salary of
maintain staff - 1200 1200 1400 1600 2000 2600
In Rs.
Loss due to
- 600 800 700 1000 1200 1600
breakdown In Rs.
Resale value In
12000 6000 3000 1500 800 400 400
Rs.
Determine the optimum period for the replacement of the above machine.
Ans:-
C=
(Spare+ Cumulative
Maintenance+ Maintenance Total Cost Annual
Breakdown) Cost TC=C-S+
n S
Cost Cm Cm ATC =

Cm

Example -3
A piece of equipment costs Rs. 7,500 initially and requires Rs. 400 to be spent on its
maintenance in the first year. The maintenance cost would increases by Rs. 500 per year in
each of the subsequent years. Determine the optimal replacement for the machine when (i)
future costs are not discounted, and (ii) future costs are discounted at the rate of 10% p.a.
Ans:- C=
(i) Without Discounted
Cumulative Annual Total
Total Cost
Year Maintenance Cost Maintenance Cost Cost
TC=C-S+
n Cm Cm
Cm ATC =

(ii) Discounted at the rate of 10%, i = 0.1

1
d= =
1+i
Discounted Total Annual

Cumulative Cost Cumulative Total
Discount Discounted
Year Maintenance TC=C- Discount Cost
Cm Factor Maintenance
n Cost S+ Factor ATC =
dn-1 Cm* dn-1
Cm* dn-1 Cm* d n-1
dn-1


Example -4
A manufacturer has to decide between two machines M1 and M2, about which pertinent
information is given below:
M1 M2
Cost Rs. 5000 Rs. 2500
Rs. 800 p.a. for years 1,2,,5, Rs. 1,200 p.a. for years 1,2,,6,
Maintenance
increasing by Rs. 200 every increasing by Rs. 200 every year
cost
year thereafter thereafter
Scrap value Nil Nil
Cost of capital ( To be used as discounted rate) 10% p.a.
Determine optimal replacement period of M1 and M2. Which of the two is a better alternative?
Ans:-
1
d= =
1+i
(i) Machine M1,
C=

Discount Discounted
dn-1 Cm* dn-1
Cm* dn-1 Cm* dn-1 dn-1


(ii) Machine M2,
C=

Discount Discounted
dn-1 Cm* dn-1
Cm* dn-1 Cm* dn-1 dn-1


Example -5
Good lite Company has installed 2,000 electric bulbs of a certain brand. The company follows the
policy of replacing the bulbs as and when they fail. Each replacement cost Rs. 2. The probability
distribution of the life of the bulbs is as given here:
Life of bulb (weeks) 1 2 3 4 5

% of bulb 0.10 0.30 0.45 0.10 0.05
Determine the cost/ week of the replacement policy in long run.
Ans:-

Example -6
A large computer installation contains 2000 components of identical nature which are subject to
failure as per probability distribution that follows:
Month End 1 2 3 4 5
% Failure to date 10 25 50 80 100
Component which fail have to be replaced for efficient function of the system. If they are replaced
as and when failure occurs, the cost of replacement per unit is Rs. 45. Alternatively, if all
components are replaced in one lot at periodic intervals and individually replace only such failure
occur between group replacements the cost of component replaced is Rs. 15.
Assess which policy of replacement would be economical.
Ans:-
Probability Pi
that a new
Cumulative %
Month % failure during the component shall
failure up to the end
i month fail during the
of month
month
Cost of Total Average

Component Components
Individual Cost of Group Cost Cost per
Month failing replaced
Replacement Replacement TC= month
i during ith until ith
TCI TCG TCI+TC
month month ATC =
G

7
QUEUING MODELS
Course Contents
7.1 Introduction
7.2 Components of Queuing
System
7.3 Modelling arrival and
system processes
7.4 Kendall Lee notation for
queuing system
7.5 Class Examples
7.6 Lab Examples

7. Queuing Models Operation Research (2171901)
7.1. Introduction
Queueing theory is a set of mathematical tools for the analysis of probabilistic systems of
customers and servers. Among the oldest of Management Science tools, queueing theory can
be traced to the work of A. K. Erlang, a Danish mathematician who studied telephone traffic
congestion in the first decade of the 20th century.
Note: The arriving units may form one line and be observed through only one server may
form only one and be served through several servers, may form several lines and served
through as many servers.
Servers may be in parallel or in servers. When in parallel the arriving units may form a single
queue or individual queues in front of each server.
Example: Queuing system with single queue and single server
Example: Queuing system with single queue and multiple servers.
Definitions:
1. Arrival Rate refers to the average number of customers who require service within a
specific period of time.
2. Capacitated Queue is limited as to the number of customers who are allowed to wait
in line.
3. Customers can be people, work-in-process inventory, raw materials, incoming digital
messages, or any other entities that can be modeled as lining up to wait for some
process to take place.
4. Queue is a set of customers waiting for service.

Operation Research (2171901) 8. Queuing Models
The queue discipline:

Definition: It tells about the information of the queue, waiting and service. The basic one is
first come, first served other are last come, first served and service in random orders.
Attributes and properties of a queuing system which are concerned with waiting times, in
general, depend on queue discipline.
Notations:
FCFS First come, First serve
LCFS Last come, First serve
SIRO Service in Random order
We will discuss about FCFS only.
Customers behavior:
Generally, the behavior of customer is of four ways:
(i) Balking: A customer may leave the queue because the queue is too long and he
has no time to wait or there is not enough waiting space.
(ii) Reneging: this happens when a waiting customer leaves the queue due to
impatience
(iii) Priorities: In some applications, some customers are served before others
regardless of their other of arrival. These customers have priority over others.
Queuing problem:
The general problem of queuing is to determine the following:
(i) Probability distribution of queue length: if the nature of probability distribution

of the arrival and service pattern is given, the probability distribution of queue
length can be obtained.
(ii) Probability distribution of waiting time of customers: waiting is the time spent
by a customer in the queue before the commencement of his service. The total
time spent by him in the system is the waiting time plus service time.
(iii) The busy period distribution: suppose that the service is free initially and
customer arrives, he will be served immediately. During his service time, some
more customers may arrive and will be served. This will until no customer is left
un-served and the server becomes free again. Then we say that busy period has
just over.

Definition: A system is in transient state, when its operating characteristics are

dependent on time.
Definition: a system stead state when its operating characteristics are independent of
time. We consider only steady state analysis.
A Server can be a human worker, a machine, or any other entity that can be modeled as
executing some process for waiting customers.
Service Rate (or Service Capacity) refers to the overall average number of customers a
system can handle in a given time period.
Stochastic Processes are systems of events in which the times between events are random
variables. In queueing models, the patterns of customer arrivals and service are modeled as
stochastic processes based on probability distributions.
Utilization refers to the proportion of time that a server (or system of servers) is busy
handling customers.
Kendall Lee Notation:
In the literature, queueing models are described by a series of symbols and slashes, such as
A/B/X/Y/Z, where A indicates the arrival pattern, B indicates the service pattern, X indicates
the number of parallel servers, Y indicates the queues capacity, and Z indicates the queue
discipline. We will be concerned primarily with the M/M/1 queue, in which the letter M
indicates that times between arrivals and times between services both can be modeled as
being exponentially distributed. The number 1 indicates that there is one server; we will also
study some M/M/n queues, where n is some number greater than 1.
Symbols:
Performance Measure Random Variable Expected Value
Number of Customers in the System N L
Number of Customers in the Queue Nq Lq
Number of Customers in Service Ns Ls
Time Spent in the System T W
Time Spent in the Queue Tq Wq
Time Spent in Service Ts Ws

System Parameters
Number of Servers S
Arrival Rate (number per unit of time) (Greek letter lambda)
Service Rate (number per unit of time) (Greek letter mu)
Utilization Factor (Greek letter rho)
Formulas:
The utilization factor, or (rho), also the probability that a server will be busy at any point in
time:

S (i)
Idle time, or the proportion of time servers are not busy, or the probability that a server will
be idle at any given time:
1 (ii)
The average time a customer spends in the system:

1
W Wq Ws (iii)

The average number of customers in the queue:
2 2
Lq (iv)
1
The average number of customers in the system:

L Lq Ls (v)
The average time spent waiting in the queue:

Wq (vi)
1
Those who would commune more directly with the Arab mathematician al Jebr (whose name
is the source for our word algebra) will note that there is another formula for N:

1

2

Nq Ns N
1 1
1 1 1


Therefore:

L
1 (vii)
The single most important formula in queueing theory is called Littles Law:
L W (viii)
Basic queuing models:
(M/M/1): (=/FCFS) model (Erag model) (Birth and death model):
This model is symbolically represented as (M/M/1): (/FCFS). This tells Poisson arrival
(exponential inter arrival) Poisson departure (exponential service time) single server, infinite
capacity and first in, first out service discipline.
n

Pn 1 n (1 ) 1, n 0

Example -1
Patrons arrive at a reception counter at an average inter-arrival rate of 2 minutes. The
receptionist in duty takes an average of 1 minute per patrons. A) What is the chance that
patrons will straight way meet the receptionist. B) For what portion of time the receptionist is
busy. C) What is the average queue length? D) What is the average no. of patrons in the
system? E) What is the average waiting time of a patron? F) What average time a patron
spends in the system? G) Suppose management went to keep a second receptionist when the
average waiting time of an arrival excess 1.5 minutes, find what should be the average inter
arrival time to justify a second receptionist.
Ans:-
Here, = 30 per hour
= 60 per hour
30 1
A) 1 1 50%
ideal 60 2
30 1
B) 50%
60 2
2 302
C) Lq 0.5
60(60 30)
30
D) Ls 1
(60 30)
L 0.5 1
E) Wq q 1Min
30 60

1 1 1
F) Ws 0.5Min
60 30 30

G) Wq
( )
1.5

60 60(60 )
1.5(60 )
36 / hour
Example -2
Arrivals at a telephone booth are considered to be Poisson with an average time of 10 minutes
between one arrival and then next. The length of the phone calls is assumed to be distributed
exponentially with a mean of 3 minutes. (a) What is the probability that a person arriving at the
booth will have to wait? (b) What is the average length of the queue that is formed from time to
time? (c) The telephone company will install a second booth when convinced that an arrival
would have to wait at least three minutes for the phone to be free. By how much flow of arrivals
be increased in order to justify a second booth?
Ans:-
Here, = 6per hour
= 20 per hour
6
A) 0.3 30%
20
2 62
B) Lq 0.1286
20(20 6)

C) Wq
( )
3

60 20(20 )
(20 )
10 / hour
So, increase in arrival rate = 10 6 4

8
REPLACEMENT MODELS
Course Contents
8.1 Introduction
8.2 Types of inventories
8.3 Factors affecting inventory
8.4 Relevant inventory cost
8.5 The basic deterministic
inventory models
8.6 ABC analysis
8.7 Lab Examples

8. Inventory Models Operation Research (2171901)
8.1. Introduction
Inventory refers to stock of goods, commodities, or other economic resources that are
stored or reserved at any given period for future production or for meeting future demand.
Inventory planning is the determination of the type and quantity of inventory items
that would be required at future points for maintaining production schedules. Inventory
planning is generally based on information from the past and also on factors that would arise
in future.
Inventory management is the function of directing the movement of goods through the
entire manufacturing cycle from the requisition of raw materials to the inventory/stock of
finished goods in such a manner as to meet the objectives of maximum customer service with
minimum investment and efficiency.
In inventory control is primarily concerned with the inventory cost control. The
objectives of inventory control are: -
1. To minimize financial investments in inventories.
2. To ensure availability of the supply of stock at all time.
3. To allow flexibility in production scheduling.
4. To ensure that the value of the material consumed is minimum.
5. Reduce surplus stock.
8.2. Types of inventories

1. Direct inventories these include items which play a direct role in the
manufacturing process and become an integral part of the finished goods, e.g. raw materials,
work in progress inventories, finished goods inventories, spare parts.
2. Indirect inventories include those items necessary for manufacturing but do
not become an integral component of the finished product e.g.
a. Lubricants
b. Machinery/equipment
c. Labour
Inventory decisions
1. How much of an item to order?
2. When to replenish the inventory of the item?
8.3. Factors affecting inventory

1. Inventory or stock cost:-
There are several:

i) Purchase/Production cost cost of purchasing a unit of item
ii) Ordering/Acquisition/Set-up cost costs related to acquisition of purchased items i.e.
those of getting an item to a firms store e.g. transport, loading and off-loading,
inspection.

Operation Research (2171901) 8. Inventory models
iii) Inventory carrying/ holding costs costs associated with holding a given level of
inventory e.g. warehousing, spoilage, security, pilferage, administrative, insurance,
depreciation.
iv) Stock-out cost/ shortage costs incurred due to a delay in meeting demand or inability
to meet demand at all because of shortage of stock loss of future sales, cost associated
with future replenishment.
2. Order cycle the time period between placements of 2 successive orders.
3. Lead time time between placing an order and actual replenishment of item. Also
referred to as procurement time.
4. Time horizon this is the period over which the inventory level will be controlled.
5. Maximum stock the level beyond which stocks should not be allowed to rise.
6. Minimum stock level/buffer stock/safety stock level below which stock should not
be allowed to fall. It is the additional stock needed to allow for delay in delivery or for
any higher than expected demand that may arise due to lead time.
7. Reorder level point at which purchased order must be sent to supplier for the supply
of more stock. The level of stock at which further replenishment order should be
placed.
8. Reorder quantity the quantity of the replacement order.
ROP (Reorder Point) = Daily Demand X Lead Time
ROP = D/T x TL
Note that Demand is on daily basis
9. Average stock level
Minimum stock level Maximum stock level

Average stock level
2
10. Physical stock no. of items physically in stock at any given time.
11. Stock replenishment rate at which items are added to the inventory.
12. Free stock the physical stock plus the outstanding replenishment orders minus the
unfulfilled requirements.
13. Economic order quantity (EOQ) the quantity at which the cost of having stocks is
minimum.

14. Economic batch quantity (EBQ) quantity of stock within the enterprise. Company
orders from within its own warehouses unlike in EOQ where it is ordered from
elsewhere.
15. Demand:-
Customer's demand, size of demand, rate of demand and pattern of demand is

important
Size of demand = no. of items demanded per period
Can be deterministic (Static or dynamic) or probabilistic (governed by discrete or
continuous probability distribution)
The rate of demand can be variable or constant
Pattern reflects items drawn from inventory -instantaneous (at beginning or end) or
gradually at uniform rate
8.4. Inventory Costs

There are four major elements of inventory costs that should be taken for analysis, such as
(1) Item cost, Rs. C/item.

(2) Ordering cost, Rs. Co/order.
(3) Holding cost Rs. Ch/item/unit time.
(4) Shortage cost Rs. Cs/item/Unit time.
(1) Item Cost (C)
This is the cost of the item whether it is manufactured or purchased. If it is

manufactured, it includes such items as direct material and labor, indirect materials and labor
and overhead expenses. When the item is purchased, the item cost is the purchase price of 1
unit. Let it be denoted by Rs. C per item.
(2) Purchasing or Setup or Acquisition or Ordering Cost (Co)
Administrative and clerical costs are involved in processing a purchase order,

expediting, follow up etc., It includes transportation costs also. When a unit is manufactured,
the unit set up cost includes the cost of labor and materials used in the set up and set up
testing and training costs. This is denoted by Rs. Co per set up or per order.
(3) Inventory holding cost (Ch)
If the item is held in stock, the cost involved is the item carrying or holding cost.
Some of the costs included in the unit holding cost are
(1) Taxes on inventories,

(2) Insurance costs for inflammable and explosive items,
(3) Obsolescence,
(4) Deterioration of quality, theft, spillage and damage to times,
(5) Cost of maintaining inventory records.

This cost is denoted by Rs. Ch/item/unit time. The unit of time may be days, months, weeks
or years.
(4) Shortage Cost (Cs)
The shortage cost is due to the delay in satisfying demand (due to wrong planning);
but the demand is eventually satisfied after a period of time. Shortage cost is not considered
as the opportunity cost or cost of lost sales. The unit shortage cost includes such items as,
(1) Overtime requirements due to shortage,

(2) Clerical and administrative expenses.
(3) Cost of expediting.
(4) Loss of goodwill of customers due to delay.
(5) Special handling or packaging costs.
(6) Lost production time.
This cost is denoted by Rs. Cs per item per unit time of shortage.
8.5. THE BASIC DETERMINISTIC INVENTORY MODELS

1. EOQ Model with Uniform Demand
2. EOQ Model with Different rates of Demands in different cycles
3. EOQ Model with Shortages (backorders) allowed
4. EOQ Model with Uniform Replenishment
Notations used:-
Q = number of units per order
Q* = economic order quantity or optimal no. of units per order to minimize total cost
D = annual demand requirement (units per year)
C = cost of 1 unit of item
C0 = ordering (preparation or set-up) cost of each order
Ch = Cc = holding or carrying cost per unit per period of time
T = length of time between two successive orders
N = no. of orders or manufacturing runs per year
TC = Total Inventory cost
The optimal order quantity (EOQ) is at a point where the ordering cost = holding cost

Model 1- EOQ Model with Uniform Demand

Policy: Whenever the inventory level is 0, order Q items
Objective: Choose a Q that will minimize total Inventory Cost
The behavior of inventory at hand with respect to time is illustrated below:
Inv.
Level
Q
Average Inv.
Level
Time
This is the ordering quantity which minimizes the balance of cost between inventory holding
cost and ordering costs.
It is based on the following assumptions:
1. A known constant stock holding cost.
2. A known constant ordering cost.
3. The rate of demand is known (is deterministic).
4. A known constant price per unit.
5. Inventory replenishment is done instantaneously.
6. No stock-out is allowed.
7. Quantity discounts are not allowed purchase price is constant.
8. Lead time is known and fixed.
1. Annual ordering cost

Annual ordering cos t (no. of orders placed per year ) (ordering cos t per order )
Annual Demand
order cos t per order
no. of units in each order
D
Co (1)
Q

2. Annual holing ( or carrying) cost

Annual ordering cos t ( Average inventory level ) (carrying cos t per order )
Q
Ch (2)
2
3. Equating (1) and (2) above

Since the minimum TC occurs at the point where the ordering cost and the inventory carrying
costs are equal, we equate the 2 equations above.
D Q
Co C h
Q 2
Solve for Q
2 DCo Q 2Ch
2 DCo
Q2
Ch
2 DCo
Q*
Ch
2 DCo
EOQ
Ch
Note:
1. Inventory holding or carrying costs are often expressed as annual percentage(s) of the
unit cost or price.
Co or Ch as % of unit cost or price
I = annual inventory carrying charge (cost) as 1% of price
Ch = IC where C is the unit price of inventory item
2 DC o
EOQ = Q* =
Ch
2. Total cost is sum of annual Ch and annual ordering cost.

D Q
TC .Co .C h
Q 2
Put value of Q* in TC,
TVC 2DCoCh

Example -1
A supplier is required to deliver 20000 tons of raw materials in one year to a large manufacturing
organization. The supplier maintains his go-down to store the material received from various
resources. He finds that cost of inventory holding is 30 paisa per ton per month. His cost for
ordering the material is Rs. 400. One of the conditions of the supplier contract from the
manufacturing organization is that the contract will be terminated in the event of supply not being
maintained as a schedule. Determine (1) in what lot size is the supplier should produce the
material for minimum total associated cost of inventory? (2) At what time interval should he
procure the material? It may be assume that replacement of inventory is instantaneous.
Ans:-
Given Date
D = 20000 tons
T = 12 months
Ch = Rs. 0.30 per tons per
months
Co = Rs. 400
(1) Economic order quantity

2 DCo
EOQ
Ch
2(12000)(400)

0.30 12
Q* 2108 tons
(2) Tine interval

Q*
tco
D
2108

20000
1.26 month
Example -2
In the above example, if there is (i) 10 per cent increase in holding cost or (ii) 10 percent increase
in ordering cost, in each case determine the optimal lot size and corresponding minimum total
expected cost of inventory. Comment the result.

Ans:-
(i) Ch = 1.1 Ch
2 DCo
EOQ
Ch '
2(12000)(400)

1.1 0.30 12
Q* 2010 tons
TAC 2Ch ' Co D
2 1.1 0.30 400 12000

7960 Rs.
(ii) Co = 1.1 Co
2 DCo '
EOQ
Ch
2(12000)(400)(1.1)

0.30 12
Q* 2211 tons
TAC 2ChCo ' D
2 0.30 1.1 400 12000

7960 Rs.
Example -3
A certain item costs Rs. 250 per ton. The monthly requirement is 5 tons and each time the stock is
replenished, there is an order cost of Rs. 120. The cost of carrying inventory has been estimated at
10% of the value of the stock per year. What is the optimal order quantity? If lead time is 3
months, determine the re order point. At what intervals the order should be placed?
Ans:-
Given Data
C = Rs. 250 per ton
Co = Rs. 120
Ch = 2500.1 = Rs. 25 per ton
per year

D = 512 = 60 tons
TL = 3 months
2 DCo
EOQ
Ch
2(60)(120)

25
Q* 24 tons
Q*
tco
D
24

60
0.4 year or 4.8 months
D
QR TL
T
60
3
12
15 tons
Example 4:
A manufacturer has to supply his customers with 1200 units of his product per annum. The
inventory carrying cost amounts to 1.2 per unit. The set-up cost per run is 160. Find:
i) EOQ
ii) Minimum average yearly cost
iii) Optimum no of orders per year
iv) The optimum time between orders (optimum period of supply per optimum order)
Ans:-
i) Economic order quantity

2 DCo
EOQ
Ch
2(1200)(160)

1.2
565.69 or 566 units
ii) Minimum average yearly cost

D Q
TC .Co .Ch
Q 2
DCo Q*Ch
TC (Q* )
Q* 2
1200(160) 566(1.2)

566 2
339.22 339.6
Rs 678.82 or Rs 679
iii) Optimum no. of orders per year (N*)

Demand
N*
EOQ
1200

566
2.1 orders 3 orders
iv) Optimum time between orders

no. of working days in a year
T*
N*
365

3
122
Example 5:
The annual demand per item is 6400 units. The unit cost is 12 and the inventory carrying
charges 25% per annum. If the cost of procurement is 300 determine:
i) EOQ
ii) No. of orders per year
iii) Time between 2 consecutive orders
iv) Optimum cost
Ans:-
i) EOQ
2 DCo
EOQ
Ch
2(6400)(300)

(0.25)(12)
1131 units

ii) N*
Demand
N*
EOQ
6400

1131
5.65 orders 6 orders
iii) Time between 2 consecutive orders

no. of working days in a year
T*
N*
365

5.65
64.60
OR
EOQ
T* 12 months
Demand
1131
12 months
6400
2 months 4 days
iv) Optimal cost
optimal cos t unit cos t demand 2 DC o C h

12 6400 2(6400)(300)(0.25 12)
80194.11
Model 2- EOQ Model with Different Rates of Demand

Assumptions of this model are same as those of model 1 except
Demand rate is different in different cycles. The total demand D is specified as
demand during time horizon T
Q d r
Holding Cost ( )
2 d
D Co
Order / set up cost =
Q
2rCo d
EOQ = Q* =
Ch d r

d r
TVC 2rCoCh ( )
d
Q*
tco
r
Example -6
A manufacturing company needs 4000 units of material every month. The delivery system from
the supplier is so scheduled that once delivery commences the materials is received at the rate of
6000 units per month. The cost of processing purchase order is Rs. 600 and the inventory carrying
cost is 30 paisa per unit per month. Determine the optimal lot size and interval at which the order
is to be placed. What is maximum inventory during a cycle?
Ans:-
Given Data
Co = Rs. 600
Ch = Rs. 0.30 per unit per
month
d = 6000 units per months
r = 4000 units per months
Optimal lot size

2rCo d
Q*
Ch d r
2 4000 600 6000

0.30 6000 4000
6928 units

Interval time
Q*
tco
r
6928

4000
1.732 months
Maximum inventory Qmax
Qmax Q * rt1
Q*
Where, t1
d
6928

6000
1.154 months
Q max 6928 4000 1.154
2309.33 units
Example -7
The demand for a certain item is 150 units per week. No shortages are to be permitted. Holding
cost is 5 paisa per unit per week. Demand can be met either by manufacturing or purchasing. With
each source the data are as follows:
Manufacture Purchase
Item cost Rs./ Unit 10.50 12
Set up/ Ordering cost Rs. / Order or set up 90 20
Replenishment rate units / week 260 Infinite
Lead time in weeks 4 10
Determine (a) the minimum cost procurement source and its economic advantage over its
alternative resource, (b) E.O.Q. or E.B.Q. as per the source selected, (c) the minimum
procurement level ( Re-order point)
Ans:-
For manufacture
Given Data
Co = Rs. 90
month
d = 260 units per weeks
r = 150 units per weeks

TL = 4 week
C = Rs. 10.50 per unit
d r
TVC 2rCoCh ( ) Cr
d
260 150
2 150 90 0.05 ( ) 10.50 150
260
1598.9 Rs. per week
For purchase
Given Data
Co = Rs. 20
month
r = 150 units per weeks
TL = 4 week
C = Rs. 12 per unit
TVC 2rCoCh C r
2 150 20 0.05 12 150

1817.32 Rs. per week
(a) Minimum TC is 1598.9 per week for manufacture
(b) E.B.Q
2rCo d
Q*
Ch d r
2 90 150 260

0.05 260 150
1129.76 units
(c) Re-order point

QR r TL
150 4
600 units

Model 3- EOQ Model with Shortages (backorders) allowed

Assumptions of this model are same as those of model 1 except Shortages is allowed.
2rCo Ch Cs
Q*
Ch Cs
Cs
TVC 2rCoCh ( )
Ch Cs
Q*
tco
r
Initial stock Io
Cs
I o Q * ( )
Ch C s
Example -8
A tractor manufacturing company has entered in to a contract with M/s Auto Diesel for delivering
30 engines per day. M/s Auto Diesel has committed that for every days delay in delivery; there
will be penalty of delayed supply at the rate of Rs. 100 per engine per day. M/s Auto Diesel has
the inventory holding cost of Rs. 600 per engine per month. Assume replenishment of engines as
instantaneous and ordering cost as Rs. 15000. What should be initial inventory level and what
should be ordering quantity for minimum associated cost of inventory? At what interval
procurement should be made?
Ans:-
Given Data
Co = Rs. 15000

Ch = Rs. 600 per engine per

month
Cs = 100*30 =3000 per engine
per month
r = 30*30 = 900 engine per
month
2rCo Ch C s
Q*
Ch Cs
2 900 15000 600 3000

600 3000
233 engines
Cs
I o Q * ( )
Ch C s
3000
233 ( )
600 3000
195 engines
Q*
tco
r
233

30
7.76 days
Example -9
In above example, find out optimum order quantity if shortage is not permitted. Compare this with
the value of obtained in above example and comment on the result.
Ans:-
2rCo
Q*
Ch
2 900 15000

600
212 engines
If shortage is not permitted, EOQ is reducing 233 engines per order to 212 engines per order.

Model 4- EOQ Model with Uniform Replenishment

Assumptions of this model are same as those of model 1 except Demand is variable
and Shortages is allowed.
2rCo d Ch Cs
Q*
Ch d r Cs
d r Cs
TVC 2rCoCh ( )( )
d Ch Cs
Q*
tco
r
Initial stock Io
Cs d r
I o Q * ( )( )
Ch C s d
Example -10
The demand for an item in a company is 18000 units per year and the company can produce the
item at a rate of 3000 units per month. The set up cost is Rs. 500 per set up and the annual
inventory holding cost is estimated at 20 percent of the investment in average inventory. The cost
of one unit short is Rs. 20 per year. Determine, (i) Optimal production batch quantity, (ii)
Optimum cycle time and production time, (iii) Maximum inventory level in the cycle, (iv)
Maximum shortage permitted and (v) Total associated cost per year. The cost of the items is Rs.
20 per unit.
Ans:-
Given Data
Co = Rs. 500

Ch = 0.20*20 = Rs. 4 per unit

per year
Cs = Rs. 20 per unit per year
r = 18000 unit per year
d = 3000*12 = 36000 unit per
year
2rCo d Ch C s
Q*
Ch d r Cs
2 18000 500 36000 4 20

4 36000 18000 20
3286 units
Q*
tco
r
3286

18000
0.18255 year
= 2.19 months
Q*
t po
d
3286

36000
0.091277 year
= 1.09 months
Cs d r
I o Q * ( )( )
Ch C s d
20 36000 18000
3286 ( )( )
4 20 36000
1369 units
Ch d r
S Q * ( )( )
Ch Cs d
4 36000 18000
3286 ( )( )
4 20 36000
273.88 units

d r Cs
TC 2rCoCh ( )( ) Cr
d Ch Cs
36000 18000 20
TC 2 18000 500 4 ( )( ) 20 18000
36000 4 20
365477.22
Model 5- EOQ Model with Quantity Discounts

Quantity discounts occur in numerous situations where suppliers provide an incentive
for large order quantities by offering a lower purchase cost when items are ordered in larger
lots or quantities. In this section we show how the EOQ model can be used when quantity
discounts are available.
EOQ without discounts

2rCo
Q*
Ch
EOQ with discounts

(C r Q* i C)
Qo* d
i (C Cd )
Max Net Saving with discounts

(C r Q* i C) 2
X max d Co
2 i r (C Cd )
Example -11
A wholesale dealer in bearings purchases 30000 bearings annually at intervals and order size
suitable to him. The price is Rs. 150 per bearing. The manufacturing company offers the
dealer a discount of Rs. 7 per bearing for the order size larger than earlier. The reorder cost is
Rs. 40 and the inventory carrying cost amounts to 20 percent of the investment in purchase
price. Decide the optimum order size for special discount offer purchase and the maximum
benefit he can derive from this order.
Ans:-
Given Data
Co = Rs. 40
Ch = 0.20*150 = Rs. 30 per
unit per year
C = Rs 150 per unit
Cd = Rs 7 per unit
i = 0.20

2rCo
Q*
Ch
2 30000 40

30
283 units
(Cd r Q* i C)
Qo*
i (C Cd )
(7 30000 283 0.2 150)

0.2(150 7)
7640 units
(Cd r Q* i C) 2
X max Co
2 i r (C Cd )
(7 30000 283 0.2 150) 2

40
2 0.2 30000(150 7)
27779
Model 6- Probabilistic Inventory Models

The inventory models that we have discussed thus far have been based on the
assumption that the demand rate is constant and deterministic throughout the year. We
developed minimum-cost order quantity and reorder-point policies based on this assumption.
In situations where the demand rate is not deterministic, models have been developed that
treat demand as probability distribution. In this section we consider a single-period inventory
model with probability demand.
The single-period inventory model refers to inventory situations in which one order is
placed for the product; at the end of the period, the product has either sold out, or there is a
surplus of unsold items that will be sold for a salvage value. The single-period inventory
model is applicable in situations involving seasonal or perishable items that cannot be carried
in inventory and sold in future periods. Seasonal clothing (such as bathing suits and winter
coats) is typically handled in a single-period manner. In these situations, a buyer places one
preseason order for each item and then experiences a stock out or hold a clearance sale on the
surplus stock at the end of the season. No items are carried in inventory and sold the
following year. Newspapers are another example of a product that is ordered one time and is
either sold or not sold during the single period. While newspapers are ordered daily, they
cannot be carried in inventory and sold in later periods. Thus, newspaper orders may be
treated as a sequence of single-period models; that is, each day or period is separate, and a
single-period inventory decision must be made each period (day). Since we order only once
for the period, the only inventory decision we must make is how much of the product to order
at the start of the period. Because newspaper sales are an excellent example of a single-period

situation, the single-period inventory problem is sometimes referred to as the newsboy

problem.
Optimum stock level
Cs
Pr
C s Ch
Example -12
A large industrial campus has decided to have its diesel generator system for street lighting,
security illumination and round the clock process systems. The generator needs a tailor made for
each other control unit which cost Rs. 18000 per number when ordered with the total equipment
of diesel generator. A decision needs to be taken whether additional numbers of this unit should
be ordered along with equipment, and if so, how many units should be ordered? These control
units, though tropicalized and considered quite reliable, are known to have failed from time to
time and history of failures of similar equipment give the following probability of failure.
No. of units having failed and

0 1 2 3 4 5 6
hence No. of spare Required
Probability 0.6 0.2 0.1 0.05 0.03 0.02 0
It is found that if the control unit fails, the entire generator system comes to a grinding halt. When
control unit fails and a spare unit is not available it is estimated that the cost rush order
procurement, including the associated cost of the downtime is Rs. 50000 per unit. Considering
that any investment in inventory is the cost of inventory, decide how many spare units should be
ordered along with the original order. Determine total associated cost for each no. of spare unit.
Ans:-
Let us consider the elementary approach as the population of demand varies only from 0
to 5.
I = 0,
TAC Cs 1 P1 Cs 2 P2 Cs 3 P3 Cs 4 P4 Cs 5 P5
50000(0.2 2 0.1 3 0.05 4 0.03 5 0.02)

38500
I = 1,
TAC Ch 1 P0 Cs 0 P1 Cs 1 P2 Cs 2 P3 Cs 3 P4 Cs 4 P5
18000 0.6 50000 0.1 50000 2 0.05 50000 3 0.03 50000 4 0.02
29300

I = 2,
TAC Ch 2 P0 Ch 1 P1 Cs 0 P2 Cs 1 P3 Cs 2 P4 Cs 3 P5
18000 2 0.6 18000 0.2 50000 1 0.05 50000 2 0.03 50000 3 0.02
33700
I = 3,
TAC Ch 3 P0 Ch 2 P1 Ch 1 P2 Cs 0 P3 Cs 1 P4 Cs 2 P5
18000 3 0.6 18000 2 0.2 18000 1 0.05 50000 1 0.03 50000 2 0.02
44900
I = 4,
TAC Ch 4 P0 Ch 3 P1 Ch 2 P2 Ch 1 P3 Cs 0 P4 Cs 1 P5
18000 4 0.6 18000 3 0.2 18000 2 0.05 18000 1 0.03 50000 1 0.02
59500
I = 5,
TAC Ch 5 P0 Ch 4 P1 Ch 3 P2 Ch 2 P3 Ch 1 P4 Cs 0 P5
18000 5 0.6 18000 4 0.2 18000 3 0.05 18000 2 0.03 18000 1 0.02
76140
Cumulative Probability Table
No. of units

0 0.6
1 0.8
2 0.9
3 0.95
4 0.98
5 1.00
6 1.00
Cs
Pr
Cs Ch
50000

50000 18000
0.7352

As I = 1, total associated cost is minimum, 1 spare units should be ordered along with the
original order.
Pr is between 0.6 and 0.8
0.6 0.7352 0.8
Optimum stock level is 1.
Example -13
In the above problem as regular purchase price of control unit is almost one third of the estimated
rush order associated cost of one unit. The management decides to buy two spare units with the
first order. Having decided that, the management would like to know for what range of actual
values of shortage cost, the decision is justified.
Ans:-
For I = 2 to be optimum
Cs
Pr1 Pr2
C s Ch
Cs
Pr1
C s Ch
Cs
0.8
Cs 6000
24000 Cs
Cs
Pr2
C s Ch
Cs
0.9
Cs 6000
Cs 54000
Value of Cs is between 24000 and 54000
Example -14
Probabilistic demand of sweets in a large chain of sweet marts is rectangular between 1000 kg and
1400 kg. Profit per kg of fresh sweet sold is Rs. 14.70. If sweet is not sold fresh, next day it can be
sold at a loss of Rs. 2.30 per kg. Determine the optimum stock to have fresh sweet on hand every
day.
Ans:-
Given Data
Co = Rs. 14.70 per kg

Ch = Rs 2.30 per kg
Range = 1400-1000 = 400
1 1
f (r)
Range 400
I0
Cs

1000
f (r) dr
C s Ch
I0
1 14.70

1000
400
dr
14.70 2.30
1 14.70
(Io 1000)
400 17
I o 1.346 kg
Example -15
A newspaper boy buys daily papers from vendor and gets commission of 4 paisa for each paper
sold. As he is always demanding large number in a lot, he has agreed to pay 3 paisa per each copy
returned unsold. He has the past experience of the demand (its probability) as under.
23 (0.01), 24 (0.03), 25 (0.06), 26(0.10), 27(0.20), 28(0.25), 29(0.15), 30(0.10), 31(0.05), 32(0.05)
How many papers should he lift from vendor for minimum associated cost?
Ans:-
Given Data
Co = 4 paisa per paper
Ch = 3 paisa per paper
Cumulative Probability Table
No. of units

23 0.01
24 0.04
25 0.10
26 0.20
27 0.40
28 0.65
29 0.80
30 0.90
31 0.95
32 1.00

Cs
Pr
Cs Ch
4

43
0.571
Pr is between 0.6 and 0.8

0.4 0.571 0.65
Optimum stock level is 28 newspapers.
8.6. ABC analysis

ABC analysis is an inventory categorization method which consists in dividing items into
three categories (A, B, C):
A being the most valuable items,
C being the least valuable ones.
This method aims to draw managers attention on the critical few (A-items) not on the trivial
many (C-items)
The ABC approach states that a company should rate items from A to C, basing its ratings on
the following rules:
A-items are goods which annual consumption value is the highest; the top 70-80% of
the annual consumption value of the company typically accounts for only 10-20% of
total inventory items.
B-items are the interclass items, with a medium consumption value; those 15-25% of
annual consumption value typically accounts for 30% of total inventory items.
C-items are, on the contrary, items with the lowest consumption value; the lower 5%
of the annual consumption value typically accounts for 50% of total inventory items.
Percentage value of
Percentage of items
annual usage
Close day to day
Class A items About 20% About 80%
control
Class B items About 30% About 15% Regular review
Class C items About 50% About 5% Infrequent review

8.7. Lab Example
Example -1
M/s T.V. assembly, one man T.V. assembler entrepreneur, needs 10000 of tubes per year. The
cost of one procurement is Rs. 80. The holding cost per tube is Rs. 3 per year. The rush purchase
of tubes, if not in stock, amounts to equivalent shortage cost of Rs. 6 per tube per year. If stock
ordered is delivered all instantaneously, determine how much he should order, at what interval
and what will then be the total associated cost of inventory?
Ans:-
Given Data
Co = Rs. 80
Ch = 3/12 per tube per month
Cs = 6/12 per tube per month
r = 10000/12 = 833.33 tube per
month
2rCo Ch C s
Q*
Ch Cs
2 80 10000 12 6

12 3 63
894.42 tubes
Q*
tco
r
894.42

833.33
1.07 months
Cs
TVC 2rCoCh ( )
Ch C s
3 6
2 833.33 80 ( )
12 3 6
149 Rs. per month

Example -2
In above example, M/s T.V. assembly seeks to reduce holding cost to Rs. 2.4 per tube per annum,
and with patronized supplier manages to reduce procurement cost to Rs. 60 per order. What
percentage reduction in penalty cost for shortage should negotiates that his total associated cost of
inventory is reduced by 50 percent?
Ans:-
Given Data
Co1 = Rs. 60
Ch1 = 2.4/12 per tube per
month
TVC = 149/2 = 74.5 Rs.
Cs1
TVC 2rCo1Ch1 ( )
Ch1 Cs1
2.4 Cs1
74.5 2 833.33 60 ( )
12 2.4 Cs1
2.4 Cs1
5550.2 2 833.33 60 ( )
12 2.4 Cs1
Cs1
0.2775
2.4 Cs1
0.666 0.7225Cs1
Cs1 0.9217 Rs per tube per annum
6 0.9217
Percentage reduction in penalty cost = 100
6
84.63%
Example -3
A manufacturer requires 15000 units of a part annually for an assembly operation. He can produce
this part at the rate of 100 units per day. The set up cost for each production run is Rs. 50. To hold
one unit of this part in inventory costs Rs. 5 per year. Shortage cost is Rs. 15 per unit per year.
Cost of the part is Rs. 20 per unit. Assuming 250 working days per year, what will be the
optimum manufacturing quantity? What will be the time between two production runs? What will
be the total annual cost of the inventory system?
Ans:-
Given Data
C = 20 per unit
Co = Rs. 50
Ch = Rs. 5 per unit per year
Cs = Rs. 15 per unit per year


d = 100*250 = 25000 unit per
year
2rCo d Ch Cs
Q*
Ch d r Cs
2 15000 50 25000 5 15

5 25000 15000 15
1000 units
Q*
tco
r
1000
250 working days
15000
17 working days
d r Cs
TC 2rCoCh ( )( ) Cr
d Ch C s
25000 15000 15
TC 2 15000 50 5 ( )( ) 20 15000
25000 5 15
301500 per year
Example -4
A large scale truck fleet operator has to supply truck at the rate of 30 every day. If on account of
prolonged repairs and maintenance he is not able to supply the trucks, he has to incur the cost of
short supply, loss of profit at the rate of Rs. 100 per day per truck. On the other hand, if he has
road worthy trucks in excess of requirements he has to incur holding cost of Rs. 20 per day per
truck. Every time he orders the lot of truck from repairs department, he incurs the cost of Rs. 40
per order. How many trucks should be ordered from repair department at a time, and at what
interval should he put the order? What is the total associated cost of inventory then?
Ans:-
Given Data
Co = Rs. 40
Ch = Rs. 20 per truck per day
Cs = 100 per truck per day
r = 30 truck per day

2rCo Ch C s
Q*
Ch Cs
2 40 30 20 100

20 100
12 trucks
Q*
tco
r
12

30
0.40 days
Cs
TVC 2rCoCh ( )
Ch C s
100
2 30 40 20( )
20 100
200 Rs per day
Example -5
Farm equipment manufacture undertakes to have a transshipment delivery of 40 trailers every day
in a huge construction plant. His short supply results in the loss of Rs. 40 per unit per day. In case
he has more trailers on hand then required he has to incur the cost of Rs. 5 p trailer per day. If he
makes it a policy to receive the delivery at the fixed interval of 1 month, how much he should
order and what should be his stock at the beginning of the month?
Ans:-
Given Data
Ch = Rs. 5 per unit per day
Cs = 40 per unit per day
r = 40 units per day
tco = 30 days
Cs
I o Q * ( )
Ch C s
But,

Q*
tco
r
Q* tco r
40 30
1200 units
40
I o 1200 ( )
5 40
1067 units
Example -6
A newspaper stall sells feature magazine at a sale commission of Rs. 2 per copy. The sale is a
probabilistic rectangular distribution between 500 to 600 copies. If the vendor has decided to book
580 copies what price reduction he must be thinking to offer for the sale of old issues?
Ans:-
Given Data
Cs = Rs. 2 per copy
Io = Rs 580 copies
Range = 600-500 = 100
1 1
f (r)
Range 100
580
Cs

500
f (r) dr
Cs Ch
580
1 2
100 dr 2 C
500 h
1 2
(580 500)
100 2 Ch
2 Ch 2.5
Ch 0.5 Rs per copy

NETWORK ANALYSIS
9
Event Course Contents
Activity 9.1 Introduction
9.2 Terms Used in Network
Constraints Analysis
9.3 Fulkerson's Rule
Network Diagram
9.4 Network Diagram
Critical Path 9.5 Critical Path Methods
9.6 PERT for Project
Scheduling with Uncertain
Activity Times
9.7 Crashing that is Project
Time-Cost Trade Off
9.8 Lab Examples
EST EFT
Early Start Early Finish
Time Time
LST LFT
Late Start Late Finish
Time Time

9. Network Analysis Operation Research (2171901)
9.1 Introduction
Every management has limited resources both human and non-human. These
resources are provided to the project managers for completing the project with the constraints
of specified time. So, each manager has task to complete the project successfully as well as
within time. This leads the manager to have good project management approach.
Project management involves project planning, project scheduling and project

controlling. Project planning and project scheduling is the two steps which must be
performed before the starting of the project and project controlling starts as the execution of
the project is done.
Project planning involves identification of different tasks which are necessary to

complete the project and identification of resources required for completing those tasks.
These resources are men, material, machine and money. Project planning involves estimation
of time for each task.
Project scheduling involves the sequencing of the project tasks along the given time frame.
Scheduling also involves the computation of resources required at the particular time. It also
includes identification of tasks which are critical and limited, which may affect the time line
of the project.
Project controlling starts after the completion of the above two important tasks.
Controlling phase keeps an eye on the scheduled time of completion of project and actual
time of completion of the project. In other words, we can say that controlling phase finds the
deviations in actual progress.
To have efficient project management different tools are required to be implemented.

A network technique is one of the important and most widely used tools for project
management.
A network is symbolic representation of essential characteristics of the project. CPM

and PERT are two most widely used techniques as network techniques.

Operation Research (2171901) 9. Network Analysis
9.2 Terms Used in Network Analysis
Following are different terms used in network analysis:
1. Activity: It is physically identifiable part of a project which consumes time as well as

resources for its execution. It is represented by an arrow. The tail represents start of that
activity and head represents the finish of the activity. This arrow should be kept straight.
Activity is represented as
Each activity is represented by a one and only one single arrow. If an activity is further
subdivided into segments, each segment is represented by a separate arrow.
2. Event: It is representation the beginning and finishing points of an activity. Event does
not consume any time. It is represented by circle (node). Of an activity, the starting point
is called ith event and finishing point is called jth event.
3. Path: An unbroken chain of activity arrows connecting the initial event to some other
event is called a path.
4. Network Diagram: It is the graphical representation of logically and sequentially

connected arrows and nodes (representing activities and events) of the project.
5. Predecessor activities: In constructed network diagram, the activity which is required to

be completed before starting a particular activity is called predecessor activity.
6. Successor Activities: In constructed network diagram, the activity which must follow
any particular activity is called successor activity.
7. Dummy Activity: An activity which only shows the dependency of one activity on the
other, but does not consume any resource is called dummy activity. Dummy activities are
represented by dotted arrows. Dummy activity is an important activity when there is

dependency of starling the one particular activity is on more than one activity. For
example, if the activity C can only be started after the completion of activities A and B.
Also, activity E depends only on the completion of activity B. So, at that time, it is
necessary to introduce dummy activity as shown below:
8. Looping of Activities: Sometime in the network diagram, due to errors, the loop of
different activities is formed. This is actually a mistake of considering the activities at the
time of planning and this kind of loop must be avoided in the network diagram. The
looping is as shown below:
9. Dangling: It is also an error formed due to the mistake in project planning. In this kind of
error. Any activity may be disconnected before the completion of all activities. As shown
in figure below, the activity B, is disconnected from the flow of the project.

9.3. Fulkerson's Rule

Once the network diagram is drawn in a logical sequence, every event is assigned a
number, which is placed inside the circle. The sequence of number should be such that it
represents the flow of the network. Following are the rules of D.R. Fulkerson for numbering
purpose.
1. The initial event which has no incoming arrow and all outgoing arrow is numbered 1.
2. Delete all the rows coming out from node 1, which will result into more nodes. This
new nodes will act as initial events for the new activity. Give 2, 3, and, 4... Numbers to
these new nodes.
3. Follow this procedure until final node is not reached. Final node must have all incoming
arrows and no outgoing arrow.
Network models are of two types:
1. Activity on Arrow (AOA)
In this type of network model, the each activity end at node (circle). These nodes represent
point of starting or ending. Here, the arrow itself indicates the span of time required to
complete the activity. These diagram starts with a single node with no predecessors may start.
The diagram then follows from left to right, ending with a single node, where no followers
come together. Dummy activities are also following the same treatment as real activity.
For example, if activity B and C must follow A activity, then following AOA diagram can
be drawn:
2. Activity on Node (AON)

As mentioned in the previous section, network diagram is also called, Arrow Diagram. So,
if we introduce dummy activities in the diagram, we have to number them as events and that
activity is required to be included to represent the precedence relationship between the

activities to maintain logical relationship. So, this results in increased number of activities,
lengthy and cumbersome networks and more time and effort for analysis.
To avoid above difficulty, activity is represented on node connected to the precedent
activity. This kind of diagrams is called Activity on Node (AON) diagrams. In the diagram,
the tail of each arrow is on the predecessor activity, while the head is on the successor
activity. The activity is indicated within the node. While the arcs show only the sequencing.
If we take the same case of AOA diagram, then following is the AON diagram.
9.4. Network Diagram (Steps & Important Points)

Following are the steps to be performed for preparation of network diagram:
l. Decide the number of activities.
2. Decide the order of the activities in a logical sequence.
3. Fix predecessor activities and successor activities.
4. Also, find out which activities can be done in parallel with other activities.
Some important points are to be taken care while drawing network diagram are as
follows:
l. Arrows should not cross each other. Where crossing is not possible to avoid, bridging
should be done.
2. No two or more activities can have same tail and head events.
3. An event is not finished until all the activities flowing into it are completed.
4. No subsequent activity can begin until its tail event is completed.
5. Only one initial event and one end event is to be there in network diagram.

Exampel-1
Draw a network corresponding to the following information.
Activity Predecessors Description

A - Locate facility
B A Order furniture
C F Interview
D - Hire & Train
E A Remodel
F B Furniture setup
G D,E,F Move in
Ans:-
Example-2
Draw a network corresponding to the following information.
Activity Predecessors Description

A None Obtain building permits
B A Build concrete forms
C A Excavate pool area
D B and C Pour and cure concrete
E None Install above-ground filter pump
F E Install electrical systems
G None Obtain building permits
Ans:-

9.5. Critical Path Method (CPM)

Each activity of the project requires pre-assumed time for completion. If the time of
any activity can be estimated perfectly, than this activity is called "Deterministic activity".
But, if any activity is performed first time, the uncertainty is high, so the pre-assumed time
may vary on any side. These activities are called "variable activities".
For evaluating the network having all activities as "deterministic activities", the technique
used is called "Critical Path Method (CPM)".
For analyzing the network diagram having "variable activities", the technique used is called
"Project Evaluation and Review Technique (PERT)".
In this section, we will work on CPM and in the next section the concept of PERT is
discussed.
Following are the steps for CPM:
Step 1: Calculate the time schedule for each activity: In this step, the determination of the
starting time by which the activity must begin and finishing time at which the activity must
be finished is determined. From that we can find out the earliest start time, earliest finish
time, the latest start time and latest finish time is determined.
Earliest start time (EST) is the time at which an activity can begin at the earliest. For EST it
is assumed that all preceding activities are finished before starting that activity. Sometimes,
the activity is depending on more than one activity, so until and unless both preceding

activities are not completed, that depending activity cannot be started. So, following is the
way to calculate EST.
If only, one activity converges on an event, its EST is given by EST's of the tail event of the
activity added with activity duration. If more than one activity converges on it, EST's via all
the paths would be calculated and the highest value is chosen and termed as EST.
Latest Finish Time (LFT) is that time by which the activity must be finished and the project
cannot be delayed more than that. This is calculated by, proceeding progressively from the
end event to the start event. The LFT for the last event is assumed to be equal to its EST.
LFT's for other events are calculated by the following rules.
If only one activity branches from an event, then compute LFT by subtracting activity
duration from the LFT of its head event. If more than one activity branches out from on
event, then compute LFT's via all the paths and lowest value is chosen and is termed as LFT.
Step 2: Calculate EFT and LST are calculated in following way:

EFT = EST + Time of the activity
LST = LFT - TIME of the activity
Step 3: calculate the float in the various activities of the project:
The float is determined based on EFT and LFT (or EST and LST). It is also termed as total
float. It is the positive difference between the finish times or starting times.
Float (total float) = LFT - EFT (or LST - EST)
The total time is calculated after considering the sequence of the project and the time required
to complete the each activity.
Step 4: Identify the critical activities and find the critical path:
Critical activities are those activities that must be started on the time and must be completed
on the time. Otherwise the project may get delayed. Those activities are critical activities and
the path through those activities is called critical path. That path is the longest path of the
project. The other activities are considered as non-critical activities.
Other Important Terminologies:-

A. Types of floats: There are three types of floats:-
1. Total Float: It is the difference between the start times (or Finish times).
So, Total Float (TF) = (LFT - EFT) or (LST - EST)

2. Free Float: It is the part of total float within which an activity can be manipulated without
affecting the floats of subsequent activities. It is calculated by subtracting the head event
slack from the total Float.
So, Free Float of i-j activity (FF): TF - (LFT - EST) of the head event
Thus, we can say that free float is the time by which completion of an activity can be delayed
without delaying its immediate successor activities.
3. Independent Float: It is that part of the total float within which an activity can be delayed
for start without affecting the floats of preceding activities. It is calculated by subtracting the
tail event slack from the free float.
So, Independent Float of i-j activity (IF) = FF - (LFT - EST) of the tail event
4. Interfering Float: It is that part of the total float which causes a reduction in the floats of
the succeeding activities. This float is that portion of activity float which cannot be consumed
without adversely affecting the floats of the subsequent activities. It is calculated by
subtracting free Float from total float of the activity.
So, Interfering Float of i7 activity (IF) = TF - FF
Thus, we can say that independent float is the time by which starting of an activity can be
delayed without delaying its immediate preceding activities.
B. Super critical Activity: An activity having negative float is called super critical activity.
Such an activity demands very special attention and action. This means that the time
available is less than actual time demands for its completion. So, management has to take
decision on how to compress that time.
C. Sub critical Activity: An activity having next higher float than the critical activity. Such
an activity provides freedom of action. The network may have more than one sub critical
path.
D. Slack: It is the difference between LFT and EST of the event" It is interpreted as the time
by which occurrence of an event can be delayed. So,
S = (LFT - EST) of the event.

Example-3
(a) Draw a network corresponding to the following information & determine scheduling
times and floats.
Time Time
Activity Activity
(days) (days)
1-2 8 68 10
13 2 7 10 12
14 6 89 3
15 12 8 10 6
24 5 9 12 8
27 9 10 12 18
35 3 10 14 9
36 7 11 12 7
4 10 4 11 - 14 4
5 11 10 12 13 11
6-7 2 13 - 14 4
(b) Find the earliest and latest scheduling times of various activity.
(c) Obtain the total interference float and independent float for each of the activity.
(d) Can this project be complete within 65 days?
(e) What would be the effect on the project length of reducing the resource to be used for
activity 8-10 by such an amount as would increase the time for this activity by 5 days?
(f) The HOD in which activity 6-8 is to be performed requests that the allowed to work
overtime so that the activity can be completed in 6 days. Should his request be considered in
the interest of project completion at an earlier date? How about a similar request from the
manager of activity 2-7?
(g) It has come to be known that are to non-availability of resources in time activity 3-5
would be
(1) The project completion time?
(2) The start of its successor activity by how much?
Ans:-


TF In F
Duration EFT LST IF FF
Activity EST LFT LST- FF
T =T+EST =LFT-T LFT-EST of tail event TF-IF
EST TFpedeccessor
1-2 8 0 8 8 0 0 0 0 0
13 2 0 2 6 4 4 4 0 0
14 6 0 6 25 19 19 12 7 7
15 12 0 12 30 18 18 18 0 0
24 5 8 13 25 20 12 12 0 0
27 9 8 17 17 8 0 0 0 0
35 3 2 5 30 27 25 18 7 3
36 7 2 9 13 6 4 4 0 0
4 10 4 13 17 29 25 12 0 12 0
5 11 10 12 22 40 30 18 18 0 0
6-7 2 9 11 17 15 6 0 6 2
68 10 9 19 23 13 4 4 0 0
7 10 12 17 29 29 17 0 0 0 0
89 3 19 22 39 36 17 17 0 0
8 10 6 19 25 29 23 4 0 4 0
9 12 8 22 30 47 39 17 0 17 0
10 12 18 29 47 47 29 0 0 0 0
10 14 9 29 38 62 53 24 0 24 24
11 12 7 22 29 47 40 18 0 18 0
11 - 14 4 22 26 62 58 36 0 36 18
12 13 11 47 58 58 47 0 0 0 0
13 - 14 4 58 62 62 58 0 0 0 0
(e) Activity 8-10 has total float of 4 days

For reducing resourcing for activity 8-10 by such an amount of increase the
completion of an activity by 5 days will increase the project completion time by 1
day.
(f) As activities 6-8 have total float of 4 days. So, overtime for that activity should not
be allowed.
As activity 2-7 is the critical activity. So, overtime for this activity should be allowed.
(g) As activity 3-5 has total float time of 25 days. So, delaying an activity 3-5 by 9
days will not affect. The overtime project completion time.

9.6. Programme Evaluation and Review Technique (PERT)

PERT is the technique which used for "variable activities". In PERT, the time is
combination of three different time estimations. PERT system is based on usually
probability distribution. Following are the three different time estimations:
1. The Optimistic Time estimate (t0): The minimum time required for completion of the
activity as per the predetermined conditions. No delays or setbacks are considered for this
time estimation.
2. The Pessimistic Time estimate (tp): The maximum time that activity will take under worst
conditions. Here major catastrophes like flood, earthquakes, storms etc. are not considered.
3. The Most Likely Time estimate (tm): The time an activity will take if executed under
normal condition.
For time estimation expert opinion is taken having their experience in relevant field.
Important Terms in Pert Analysis:

1. Expected time or average time (te): Since, there are three time values available in PERT,
average time is to be calculated. Following formula is used in PERT analysis:
t0 4tm t p
te
6
2. Variance (V): Variance is given by following formula:
2
t t
V p o
6
3. Standard Deviation (): It is square root of the summation of activities variance.
V12 V22 V 23 ........

4. Probability of completion of project (z): It is calculated in order to estimate that how
many percentages are the chances of completion of the project in certain time (t). Here, tcp
is the time for completion of project on critical path and t is any certain time, then
probability of completion of project in that time t, is given by,
t tcp
Z


Example-4
The following table gives the list of various activities involves in launch of new CREDIT
CARD service by a company their immediate predecessor & their expected duration (in days)
Immediate Expected Durations

Activity
Predecessor to tm tp
A - 10 12 14
B A 14 15 17
C B 2 3 4
D C 4 6 8
E C 10 12 14
F B 20 25 27
G C 10 17 20
H F 5 6 7
I D 7 12 14
J H,I 14 17 20
K C 1 2 3
L K 10 15 20
M L 3 5 7
N M,J 13 15 17
O N 20 21 22
P O 7 9 14
Q P 2 3 4
R Q 2 2 2
S P 7 10 13
T S 5 7 9
U T , R, G 4 8 12
(a) Draw an error diagram for project.

(b) Find the expected project completion time.
(c) Determine probability of the completing the project in 165 days.
(d) What is probability of completing in 155 days?
(e) If manager wants to 95% sure that about project completing time when we should start
project?
Ans:-


Activity te V2 EST EFT LFT LST TF

A 12 4/9 0 12 12 0 0
B 15 1/4 12 27 27 12 0
C 3 1/9 27 30 30 27 0
D 6 4/9 30 36 61 55 25
E 12 4/9 30 42 42 30 0
F 24 49/36 42 66 66 42 0
G 16 25/4 30 46 151 35 105
H 6 1/9 66 72 72 66 0
I 11 49/36 36 47 72 61 25
J 17 1 72 89 89 72 0
K 2 1/9 30 32 69 67 37
L 15 25/4 32 47 84 69 37
M 5 4/9 47 52 89 84 37
N 15 4/9 89 104 104 89 0
O 21 1/9 104 125 125 104 0
P 9 49/36 125 134 134 125 0
Q 3 1/9 134 137 149 146 12
R 2 0 137 139 151 149 12
S 10 1 134 144 144 134 0
T 7 4/9 144 151 151 144 0
U 8 16/9 151 159 159 151 0
(b) Critical Path:-

1 2 3 4 6 8 9 11 12 13 14 16 17 18
So, Time tcp = 159 days
(c) tcp = 159 days, t = 165 days
4 1 1 4 49 1 4 1 49 4 16
Critical Path 2 1 1
9 4 9 9 36 9 9 9 36 9 9
319

36
2.976
t tcp 165 159
Z 2.01
2.976

For Z = 2.01, Area under curve e = 0.4778

Probability to completing project P = 0.5 + 0.4778 = 0.9778 = 97.78 %
(d) t = 155 days
t tcp 155 159
Z 1.344
2.976
For Z = 1.344, Area under the curve e = 0.4099
Probability to completing project P = 0.5 + 0.4009 = 0.9009 = 90.01 %
(e) P = 0.95, for this, e = 0.95 0.5 = 0.45
For e = 0.45, Z = 1.65
t tcp
Z

t 159
1.65
2.976
t 164 days
9.7. Crashing of Network

Each activity of the project consumes resources. So, the project manager has to calculate
the project cost and it is required that project cost must be within the budget. This total
project cost includes two types of costs: Direct cost and indirect cost.
Direct cost is that type of cost which depends on the resources involved in the project.
These resources are men, machines and materials included in the project.
On the other hand, some indirect is involved which includes fixed cost and variable
cost. Fixed costs such as license fees, rent, general and administrative expenses etc.

which is irrelevant of the progress of the project. Variable costs such as interest on
capital, depreciation are depending on the time consumed by the project. The sum of
both costs gives total project cost.
Total project cost depends on the time of the project. Direct cost is high in the beginning
of the project due to purchase of the material and machines. So, as the time goes on the direct
cost decreases. Since, indirect cost is depending on the time, it increases with time. When, the
total project cost curve is drawn, the total cost will have minimum value at certain point of
time and that point of time is called optimum time and that corresponding cost is called
optimum cost.
Crashing of Network:
Now, many cases it is necessary to complete the project earlier than the duration of
the time calculated based on CPM. When the project time is required to be reduced from
Critical time, then it will cause more cost to the company. If we say, the time associated with
CPM as normal time (tn) and cost associated with CPM as (Cn), then the normal time (tn) will
reduce to crashed time (tc), when it is required to finish the project early. This early finish
will increase the cost of project from normal project cost (Cn) to the crashed cost (Cc). This
process of time reduction is called the crashing of the project. Based on above data cost slope
is calculated:

Cost Slope = (Crash Cost Normal Cost)/ (Normal Time Crash Time) = (Cc - Cn)/ (tn - tc)
It is important to select that critical activity for crashing which has minimum cost
slope. Cost Slope means the ratio of increase in cost due to crashing to the decrease in time
due to crashing. So, for selecting the crashing, the critical activity which has minimum cost
slope is selected.
This crashing is carried out by reducing the time normal time period of the critical
activities of the project by incurring more cost than normal cost. If all the critical activities of
the project are crashed, then the time is the minimum time or crashed time. This will increase
the cost and that cost is called crashing cost of the project.
If all the activities of the project are crashed then, it will cost more and more cost, but it will
not give additional advantage over and above the one obtained by crashing only the critical
activities. So, there is no need to go for crashing of noncritical activities.
However, in the process of crashing the critical activities, it may so happen that some
of the non-critical activities become critical. Therefore, it is essential to proceed step by step
and crash each activity and check whether any other non-critical activity has become critical.
Following are the steps for crashing of the network:

1. Determine the normal project completion time and associated critical path.
2. Find out the cost slope for all activities.
3. For reducing the total project completion time, identify and crash an activity time having
lowest cost slope. This lowest cost slope activity which is crashed is to be crashed up to
any of the following stage is reached.
1) Either the other critical path is generated or
2) That crashing activity is reached maximum possibility of crashing.
4. If the critical path under crashing determined in the step l, then continue crashing the same
path. Now, crash the next activity of the critical path having lowest cost slope.
5. Stop this procedure when each critical activity has been crashed to its lower possible time.

Example-5
The following table shows for each activity of a project the normal & crash times as also the
normal & crash costs. The contract includes a penalty clause of Rs. 200 per day in excess of
19 days. The overhead cost in Rs. 400 per day.
(a) Draw the network for the project & determine the critical path.
(b) Find the cost of completing the project in normal time.
(c) Crash the project activities & determine the cost of completing the project in the
minimum time.
(d) What is the optimal duration of the project & what is the cost involves?
Time (days) Cost (Rs.) Crashing
Activity cost/day
Normal Crash Normal Cost (Rs.)
1-2 6 4 600 1000 200
1-3 4 2 600 1400 400
2-4 5 3 500 1500 500
2-5 3 1 450 650 100
3-4 6 4 900 2000 550
4-6 8 4 800 3000 550
5-6 4 2 400 1000 300
6-7 3 2 450 800 350
Ans:-

(a)
Duration
Path-A 1-2-4-6-7 22 (Critical)
Path-B 1-2-5-6-7 16
Path-C 1-3-4-6-7 21
(b) Normal Cost = 600+600+500+450+900+800+400+450 = 4700
Crash Crash Direct Cost Indirect Cost Total

Crashing Path T
Activity Duration Normal Crash Overhead Penalty Cost
1-2-4-6-7 22
X 1-2-5-6-7 16 --- --- 4700 --- 8800 600 14100
1-3-4-6-7 21
1-2-4-6-7 21
I 1-2-5-6-7 15 1-2 1 4700 200 8400 400 13700
1-3-4-6-7 21
1-2-4-6-7 20 200+
II 1-2-5-6-7 14 6-7 1 4700 350 8000 200 13450
1-3-4-6-7 20 =550
1-2-4-6-7 19 550+
1-2 1
III 1-2-5-6-7 13 4700 200+400 7600 --- 13450
1-3 1
1-3-4-6-7 19 =1150
1-2-4-6-7 13 1150+
2-4 2
1000+
1-2-5-6-7 13 1-3 1
IV 4700 400+550 5200 --- 15200
3-4 1
1-3-4-6-7 13 +2200
4-6 4
=5300

9.8. Lab Example

Example-1
A project comprises the following activities:
Activity Immediate Predecessors Activity Time (days)
A - 12
B - 6
C A 13
D A, B 12
E C, D 11
F D 13
G E, F 11
a) Construct Project network diagram which will provide an overview of the planned project.
b) How soon could the project be completed?
c) Which activities need to be completed on time in order to ensure that the project is
completed as soon as possible?
Ans:-
Project Duration = 47 days

Critical Path B D F G ( 1 3 4 6 7 )

Example-2
A project has the following activity details:
Activity Immediate Predecessors Activity Time (weeks)

A - 3
B - 4
C - 3
D C 12
E B 5
F A 7
G E, F 3
Draw a Network diagram to represent the project; determine those activities comprising the
critical path; and estimate the project duration.
Ans:-
Project Duration = 15 days

Critical Path C D ( 1 4 6)

Example-3
The optimistic, most probable, and pessimistic times (in days) for completion of activities for
a certain project are as follows:
(a) Find the critical path.
(b) Find the probability that all critical activities will be completed in 35 days or less.
Immediate Expected Durations

Activity
Predecessor to tm tp
A - 4 5 6
B - 6 8 10
C A 6 6 6
D B 3 4 5
E B 2 3 4
F C,D 8 10 12
G E 6 7 8
H C,D 12 13 20
I F,G 10 12 14
Ans:-
ACTIVITY te V
A 5 0.11
B 8 0.44
C 6 0
D 4 0.11
E 3 0.11
F 10 0.44
G 7 0.11
H 14 1.78
I 12 0.44

(a) Critical Path:- 1 3 4 6 7 OR B - D F - I
(b) ) t = 35 days
V12 V2 2 V 23 ........
0.112 0.442 0.112 0.112 0.442 0.112 1.782 0.44 2
1.2
t tcp 35 34
Z 0.833
1.2
Probability to completing project P = 0.7967 = 79.67 %

Example-4
The project detailed below has the both normal costs and "crash" costs shown. The crash time
is the shortest possible activity time given that extra resources are allocated to that activity.
Immediate Normal Time Crash Time

Activity Normal Time Crash Time
Predecessors Cost (Rs.) Cost (Rs.)
A - 5 2000 4 6000
B A 8 3000 6 6000
C B 2 1000 2 1000
D B 3 4000 2 6000
E C 9 5000 6 8000
F C, D 7 4500 5 6000
G E, F 4 2000 2 5000
Assuming that the cost per day for shortening each activity is the difference between crash
costs and normal costs, divided by the time saved, determine by how much each activity
should be shortened so as to complete the project within 26 days and at the minimum extra
cost.
Normal Cost = 2000+3000+1000+4000+5000+4500+2000 = 21500

Cost / Day =


Normal Time Crash Time

Activity Normal Time Crash Time Cost (Rs.) / Day
Cost (Rs.) Cost (Rs.)
A 5 2000 4 6000 4000
B 8 3000 6 6000 1500
C 2 1000 2 1000 0
D 3 4000 2 6000 2000
E 9 5000 6 8000 1000
F 7 4500 5 6000 750
G 4 2000 2 5000 1500
Crash Crash Direct Cost Total

Crashing Path T
Activity Duration Normal Crash Cost
1-2-3-4-6-7 28
X --- --- 21500 --- 21500
1-2-3-5-6-7 27
1-2-3-4-6-7 27
I E 1 21500 1000 22500
1-2-3-5-6-7 27
1-2-3-4-6-7 26
II B or G 1 21500 1500 24000
1-2-3-5-6-7 26
Activity E and B (or G) crash 1 day each so project completed 26 days with
minimum total cost of Rs. 24000.


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1

BASICS OF OPERATION RESEARCH

Department of Mechanical Engineering Prepared By: Darshit S. Dadhaniya

Prepared By: Darshit S. Dadhaniya Department of Mechanical Engineering

1.3 Definitions of Operation Research

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Prepared By: Darshit S. Dadhaniya Department of Mechanical Engineering

1. Definition of the problem

Department of Mechanical Engineering Prepared By: Darshit S. Dadhaniya

Prepared By: Darshit S. Dadhaniya Department of Mechanical Engineering

Department of Mechanical Engineering Prepared By: Darshit S. Dadhaniya

Implementation of decisions is a delicate task. It must take into account the

1.8 Operations Research and Decision Making

However, with the advance of science and technology, decision-making in

Prepared By: Darshit S. Dadhaniya Department of Mechanical Engineering

Department of Mechanical Engineering Prepared By: Darshit S. Dadhaniya

Department of Mechanical Engineering Prepared By: Khodaji Padsumbiya

6.2. Replacement of equipment that deteriorates gradually

Prepared By: Khodaji Padsumbiya Department of Mechanical Engineering

6.3. Time value of money does not change

Two possibilities are there

(i) Time t is a continuous random variable

TC = Capital cost - Scrap value + Maintenance cost

(ii) Time t is a discrete random variable

Department of Mechanical Engineering Prepared By: Khodaji Padsumbiya

6.4. Present Worth Factor (Pwf):

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6.5. Class Examples

1 2000 1000 1000 61000 61000

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1 35000 15000 15000 30000 30000

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1 0 800 800 36800 36800

1 0 1600 1600 41600 41600

Department of Mechanical Engineering Prepared By: Khodaji Padsumbiya

Nth year Cost of Nth year (Rs.)

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1 5000 1500 1500 6500 6500

Department of Mechanical Engineering Prepared By: Khodaji Padsumbiya

1 2500 1 2500 2500 12500 1 12500

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1 1600 1 1600 1600 11600 1 11600

The avg. value of machine A is Rs. 3504.8/-

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1 2400 1 2400 2400 7400 1 7400

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1 1 7000 6249.6 1100 1100 1100 6850 1 6850

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Bulbs Cost of Average

1 100 100 1000 2500 3500 3500

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6.6. Lab Examples

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Department of Mechanical Engineering Prepared By: Khodaji Padsumbiya

(ii) Discounted at the rate of 10%, i = 0.1

Discounted Total Annual

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(i) Machine M1,

Discounted Total Annual

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(ii) Machine M2,

Discounted Total Annual