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Digital Notes

Quantitative Analysis for

Business Decisions

MBA I Year II Semester

AY 2017-18

Brief History of Operations Research
Operations Research (Operational Research, O.R., or Management science) includes a great
deal of problem-solving techniques like Mathematical models, Statistics and algorithms to aid in
decision-making. O.R. is employed to analyze complex real-world systems, generally with the
objective of improving or optimizing performance.

OR defined as it is the application of scientific methods, techniques and tools to problems

involving the operations of a system so as to provide those in the control of the system with
optimum solutions to the problems.
In other words, Operations Research is an interdisciplinary branch of applied mathematics and
formal science which makes use of methods like mathematical modeling, algorithms statistics
and statistics to reach optimal or near optimal solutions to complex situations.
It is usually worried about optimizing the maxima (for instance, profit, assembly line
performance, bandwidth, etc) or minima (for instance, loss, risk, cost, etc.) of some objective
function. Operational Research aids the management to accomplish its objectives utilizing
scientific methods.
The name operations research evolved in the year 1940. During World War 2, a team of scientist
(Blackett‟s Circus) in UK applied scientific techniques to research military operations to win the
war and the techniques thus developed was named as operation research.
As a formal discipline, operations research originated from the efforts of army advisors at the
time of World War II. In the years following the war, the methods started to be employed
extensively to problems in business, industry and society. Ever since then, OR has developed
into a subject frequently employed in industries including petrochemicals, logistics, airlines,
finance, government, etc.
Thus, the Operational Research began during World War II in great Britain with the
establishment of groups of scientists to analyze the strategic and tactical problems associated
with military operations. The aim was to discover the most efficient usage of limited military

Resources by the application of quantitative techniques.

India was among the few nations which began utilizing O.R. In 1949, the first Operational
Research unit was established at Hyderabad which was named Regional Research Laboratory
located. At the same time an additional unit was launched in Defense Science Laboratory to fix
the Stores, Purchase and Planning Problems.

Phases in Operation Research Study:

Since, the main objective of operation research is to provide better quantitative information‟s for
making decision. Now our aim is to learn how we can have better decisions.

The procedure for making decisions with the OR study generally involves the following phases:
(i) Judgment Phase:
i. Determination of operation.

ii. Determination of objectives.
iii. Determination of effectiveness of measures.
iv. Determination of type of problem, its origin and causes.
(ii) Research Phase:
i. Observation and data collection for better understanding of the problem.
ii. Formulation of relevant hypothesis and models.
iii. Analysis of available information and verification of hypothesis.
iv. Production and generation of results and consideration of alternatives.
(iii) Action Phase:
i. Recommendations for remedial action to those who first posed the problem, this includes the
assumptions made, scope and limitations, alternative courses of action and their effect.
ii. Putting the solution to work: implementation.

Function of Operation Research

1. Allocation and Distribution in Projects:
(i) Optimal allocation of resources such as men materials machines, time and money to projects.
(ii) Determination and deployment of proper workforce.
(iii) Project scheduling, monitoring and control.
2. Production and Facilities Planning:
(i) Factory size and location decision.
(ii) Estimation of number of facilities required.
iii) Preparation of forecasts for the various inventory items and computation of economic order quantities
and reorder levels.
(iv) Scheduling and sequencing of production runs by proper allocation of machines.
(v) Transportation loading and unloading,
(vi) Warehouse location decision.
(vii) Maintenance policy decisions.
3. Programs Decisions:
(i) What, when and how to purchase to minimize procurement cost.
(ii) Bidding and replacement policies.
4. Marketing:
(i) Advertising budget allocation.
(ii) Product introduction timing.
(iii) Selection of advertising media.
(iv) Selection of product mix.
(v) Customer‟s preference of size, colour and packaging of various products.
5. Organization Behavior:
(i) Selection of personnel, determination of retirement age and skills.
(ii) Recruitment policies and assignment of jobs.
(iii) Recruitment of employees.
(iv) Scheduling of training programs.
6. Finance:
(i) Capital requirements, cash flow analysis.
(ii) Credit policies, credit risks etc.

(iii) Investment decision.
(iv) Profit plan for the company.
7. Research and Development:
(i) Product introduction planning.
(ii) Control of R&D projects.
(iii) Determination of areas for research and development.
(iv) Selection of projects and preparation of their budgets.
(v) Reliability and control of development projects thus it may be concluded that operation research can
be widely utilized in management decisions and can also be used as corrective measure.
Methodology of Operation Research:
Quantitative basis for decision making is provided to managers by O.R. it enhances a manager‟s
ability to make long range plans and to solve the routine problems of running a
enterprise/concern OR is a systematic and logical approach to provide a rational footing for
taking decisions. Operation research, like scientific research is based on scientific methodology
which involves following steps.

1. Formulating the Problem:

OR is a research into the operation of a man machine organisation and must consider the
economics of the operation in formulating a problem for O.R. study analysis must be made
of the following major components:
(i) The environment.
(ii) The objectives.
(iii) The decision maker.
(iv)The alternative courses of action and constraints out of the above four component,
environment is most comprehensive as it provides a setting for the remaining three. The
operation researcher shall attend conferences, pay visits, send observation and perform research
work thus succeeds in getting sufficient date to formulate the problems.

2. Constructing a Model to Represent the System under Study:

Once the project is approved by the management, the next step is to construct a model for the
system under study. The operation researcher can now construct the model to show the relations
and interrelations between a cause and effect or between an action and a reaction.Now the aim of
operation researcher is to develop a model which enables him to forecast the effect of factors
crucial to the solution of given problem. The proposed model may be tested and modified in
order to work under stated environmental constraints. A model may also be modified if the
management is not satisfied by its performance.

3. Deriving Solution from the Model:

A solution may be extracted from a model either by conducting experiments on it i.e., by
simulation or by mathematical analysis. No model will work appropriately if the data is not
appropriate. Such information may be available from the results of experiments or from hunches
based on experience.

The data collection can clearly effect the models output significantly. Operation researcher
should not assume that once he has defined his objective and model, he has achieved his aim of
solving the problem. The required data collection consumes time to prepare if date collection
errors are to be minimized

4. Testing the Model and the Solution Derived from it:

As has been pointed out earlier a model is never a perfect representation of reality. But if
properly formulated and correctly manipulated, it may be useful in providing/predicting the
effect of changes in control variables on overall system effectiveness.

The usefulness or utility of a model is checked by finding out how well it predicts the effect of
these changes. Such an analyze is usually known as sensitivity analysis. The utility or validity of
the solution can be verified by comparing the results obtained without applying the solution with
the results obtained when it is used.

5. Establishing Controls over the Solution:

The next phase for the operation researcher is to explain his findings to the management. It may
be pointed out that he should specify those conditions under which the solution can be utilized.

He should also point out weaknesses if any so that management will know what risks they are
taking while employing the model to generate results. Thus he should also specify the limits with
in which the results obtained from using the model are valid. He should also define those
conditions under which the model will not work.

6. Implementation of the Solution:

The last phase of the operation research methodology is implementation of solutions obtained in
the previous steps. In operation research though decision making is scientific but its
implementation involves so many behavioral issues. Therefore the implementing authority has to
resolve the behavioral issues. He has to sell the idea of utility of O.R not only to the workers but
also to superiors.

The distance between O.R scientist and management may create huddles thus the gap between
one who provides a solution and the other who wants to utilize it must be eliminated. To achieve
this both the management and O.R scientist should play positive role A properly implemented
solution obtained through application of O.R techniques results in improved working conditions
and gains the management support.

Tools of Operation Research:

In any area of human Endeavour, whether it is a production system, business system or service
system where an objective is to be optimized, the problem falls into the domain of operation

Some of the commonly used techniques of operation research are as follows:
1. Linear programming.
2. Waiting line theory or queuing theory.
3. Inventory control models.
4. Replacement problems.
5. Network Analysis.
6. Sequencing.
7. Dynamic programming.
8. Assignment problems.
9. Decision theory.
10. Integer Programming.
11. Transportation Problems.
12. Simulation.
13. Goal Programming.
14. Markov Analysis.
15. Game Theory.
16. Heuristic Models.
17. Routing Models.
18. Symbolic logic.
Model: The model is a collection of logical and mathematical relationships that represents
aspects of the situation under study. Models describe important relationships between variables,
include an objective function with which alternative solutions are evaluated, and constraints that
restrict solutions to feasible values.

There are three types of models that are commonly used in O. R.

(I ) Iconic models

(2) Analogue models

(3) Symbolic models

Iconic models represent the system as it is, but in different size. Thus Iconic models are obtained
by enlarging or reducing the size of the system. In other words they are images

In analogue models one set of properties is used to represent another set of properties. After the
problem is solved, the solution is re-interpreted in terms of the original system.

In symbolic models letters, numbers, and other types of mathematical symbols are used to
represent variables and the relationship between them. Thus symbolic models are some kind of
mathematical equations or inequalities reflecting the structure of the system they represent
Inventory models, Queuing models, Allocation models, Routing models etc; are the examples of
symbolic models.

Models maybe deterministic or probabilistic In deterministic models, everything is defined and

the results are certain. For example, in EOQ methods, we can easily determine economic lot size.
In probabilistic models (stochastic models), there is risk and uncertainty. Therefore input and

output variables assume probability distributions. For example. in a Game theory if the strategy
is not pure, we apply probabilistic model. We can only express the outcome in terms of chance

1. Analytic methods: In these methods all the tools of classical mathematics such as
differential calculus and finite difference are available for the solution of a model.
Various inventory models are solved by the use of these Analytic methods.
2. 2. Iterative method: Whenever the classical methods fail. we use iterative procedure. The
classical methods may fail because of the complexity of the constraints or of the number
of variables. In this procedure we start with a trial solution and a set of rules for
improving it. This process of improvement is repeated until either no further
improvement possible or the cost further calculation cannot be justified Monte Carlo
technique of simulation Darger and Koc define Monte Carlo method as "a combination of
probability methods and sampling techniques providing solutions to complicated partial
or integral differential equation". In short. Monte Carlo technique is concerned with
experiments on random numbers and it provides solutions to complicated O. R. problems

 Allocation models
 Sequencing
 Waiting or Queuing theory
 Inventory models
 Competitive Strategy models (Game theory):
 Decision Theory
 Simulation
 Search models

Model-Building Process When operations research is used to solve an organization‟s

problem, the following seven step model-building procedure should be followed
(1)Recognize the Problem
(2) Formulate the Problem
(3) Construct a Model
(4) Find a Solution
(5) Define the Process
(6) Implement the Solution
(7) Repeat and Refine


Linear Programming
Linear programming (LP) can best be defined as a group of mathematical techniques that can
obtain the very best solution to problems which have many possible solutions. Linear
programming can be used to solve a variety of industrial problems. In most of the situations,
resources available to the decision maker are limited. Several competing activities require these
limited resources. With the help of linear programming those scarce resources are allocated in an
optimal manner on the basis of a given criterion of optimality. In most of the situations, the
criterion of optimality is either maximization of profit, revenue or minimization of cost, time and
distance, etc.

Structure of all LPP has three important components. (1) Decision variables (activities) : These
are activities for which we want to determine a solution. These are usually denoted by x1 , x2 ,
...., xn . (2) The objective function (goal) : This is a function which is expressed in terms of
decision variables and we want to optimize (maximize or minimize) this function. (3) The
constraints : These are limiting conditions on the use of resources. The solution of LPP must
satisfy all these constraints

Application Areas of Linear Programming

LP is one of the most popular techniques to find best solution in variety of situations. Some of
the common applications of LP are

(1) Agricultural Applications: LP can be applied in agricultural planning. e.g. allocation of

limited resources such as acreage, labor, water supply and working capital, etc. in such a way so
as to maximize net revenue.

(2) Military Applications: LP can be applied to maximize the effect of military operations as
well as to minimize the travel distance and cost of operations.

(3) Production Management: Most of the examples of LPP are related to develop a suitable
product mix. A Company can produce several different products, each of which requires the use
of limited production resources. Product mix is developed using LP, knowing marginal
contribution and amount of available resource used by different product. The objective is to
maximize the total contribution, subject to all constraints. Similarly LP can be used in production
planning to minimize total operation costs, in assembly line balancing to minimize the total
elapse time, in blending problem to determine minimum cost blend and also to minimize the trim
losses in case of products of standard size.

(4) Financial Management: LP is used for deciding investment activity among several other
activities in such away which maximizes the total expected return or minimize risk under certain

(5) Marketing Management: LP may be used in determine the media mix to maximize the
effective exposure within constraints of budget and circulation / reach of various media. LP can
be used for determining location of warehouses and other facilities to minimize cost of
distribution of products.

(6) Personnel Management:- LP is used to allocate available manpower to different shifts /

duties to minimize overtime cost or total manpower. LP has also find applications in capital
budgeting, health care, diet- mix, cupala charging, fleet utilization and many more such situation

Linear Programming Assumptions

Linear programming requires linearity in the equations as shown in the above structure. In a
linear equation, each decision variable is multiplied by a constant coefficient with no multiplying
between decision variables and no nonlinear functions such as logarithms. Linearity requires the
following assumptions:

(1) Proportionality (Linearity) : The contribution of each activity (decision variable) in both the
objective function and the constraints to be directly proportional to the value of the variable.

(2) Additive: In LP models, the total contribution of all the activities in the objective function
and in the constraints to be the direct sum of the individual contributions of each variable.

(3) Certainty: In all LP models, all model parameters such as availability of resources, profit (or
cost) contribution of a unit of decision variable and use of resources by a unit of decision
variable must be known and constant.

Problem Formulation

With computers able to solve linear programming problems with ease, the challenge is in
problem formulation - translating the problem statement into a system of linear equations to be
solved by computer. The information required to write the objective function is derived from the
problem statement. The problem is formulated from the problem statement as follows:

1. Identify the objective of the problem; that is, which quantity is to be optimized. For
example, one may seek to maximize profit.
2. Identify the decision variables and the constraints on them. For example, production
quantities and production limits may serve as decision variables and constraints.
3. Write the objective function and constraints in terms of the decision variables, using
information from the problem statement to determine the proper coefficient for each
term. Discard any unnecessary information.
4. Add any implicit constraints, such as non-negative restrictions.

5. Arrange the system of equations in a consistent form suitable for solving by computer.
For example, place all variables on the left side of their equations and list them in the
order of their subscripts.

The following guidelines help to reduce the risk of errors in problem formulation:

 Be sure to consider any initial conditions.

 Make sure that each variable in the objective function appears at least once in the
 Consider constraints that might not be specified explicitly. For example, if there are
physical quantities that must be non-negative, then these constraints must be included in
the formulation.

Applications of Linear Programming

Linear programming is used to solve problems in many aspects of business administration


 product mix planning

 distribution networks
 truck routing

Linear Program Structure

Linear programming models consist of an objective function and the constraints on that function.
A linear programming model takes the following form:

Objective function:

Z = a1X1 + a2X2 + a3X3 + . . . + anXn


b11X1 + b12X2 + b13X3 + . . . + b1nXn < c1

b21X1 + b22X2 + b23X3 + . . . + b2nXn < c2

bm1X1 + bm2X2 + bm3X3 + . . . + bmnXn < cm

In this system of linear equations, Z is the objective function value that is being optimized, Xi are
the decision variables whose optimal values are to be found, and ai,bij, and ci are constants
derived from the specifics of the problem.

Usefulness of LP technique starts with modlling of a given situation in a standard form as shown
in section 1.5. Various steps involved in modelling of LPP are as follows.

(i) Indentify the decision variables and express them in terms of algebraic symbols. (Mostly
x1 , x2 ... xn ).
(ii) (ii) Indentify contribution of each of these decision variable in objective which is to be
optimized (maximize or minimize). Express objective function as shown in section
(iii)Identify different resources or conditions which are to be satisfied. Develop constraint
inequality for each constraint. Be careful for the sign (less than, equal to, greater than)
in writing constraints. Also add non negativity constraints for all decision variables.

Application areas of LPP

1 The Diet Problem Find the cheapest combination of foods that will satisfy all your nutritional

2. Portfolio Optimization Minimize the risk in your investment portfolio subject to achieving a
certain return. Can also be accessed from the NEOS

3. Crew scheduling An airline has to assign crews to its flights.

• Make sure that each flight is covered.

• Meet regulations, eg, each pilot can only fly a certain amount each day.

• Minimize costs, eg: accommodation for crews staying overnight out of town, crews

• Would like a robust schedule. The airlines run on small profit margins, so saving a few percent
through good scheduling can make an enormous difference in terms of profitability. They also
use linear programming for yield management.

4. Manufacturing and transportation

Traveling Salesman Problem Given a set of cities, find the shortest route that visits each city
exactly once and returns to the home city.

Some railroad companies that also own freight train carriages use linear programming techniques
to decide how many carriages to store at a particular location. This is so the supply of carriages
matches the demand.
The classic example of the use of linear programming is in agriculture. Here the thing to be
maximized is usually profit and the inputs are constraints like the cost of fertilizer for different
crops, the amount of land available, the profit margin per unit of a particular crop,and the amount
of a particular crop that can be grown per area of land.
Linear programming was originally developed during World War II to plan spending on military
activities, so as to reduce the army's costs and increase losses for the enemy. Linear
programming remains one of many operational research techniques used by armed forces
Another application of linear algebra lies in telecommunications. If there are many telephone
calls being transmitted across a multipoint phone line network, linear programming provides a
technique to find where it is necessary to build extra capacity.
Call routing: Many telephone calls from New York to Los Angeles, from Houston to Atlanta,
etc. How should these calls be routed through the telephone network?

Network design: If we need to build extra capacity, which links should we concentrate on?
Should we build new switching stations?

Internet traffic: For example, there was a great deal of construction of new networks for carrying
internet traffic a few years ago.

The design of very large scale integration (VLSI) integrated circuits requires the laying of tracks
on a printed circuit board. These tracks must not cross and must be as short as possible. Linear
programming is used by VLSI design software to find the optimum layout of conductive tracks.
Guidelines for formulation of LPP

Key to a linear program are the decision variables, objective, and constraints.

Decision Variables. The decision variables represent (unknown) decisions to be made. This is
in contrast to problem data, which are values that are either given or can be simply calculated
from what is given

Objective. Every linear program has an objective. This objective is to be either minimized or
maximized. This objective has to be linear in the decision variables, which means it must be the
sum of constants times decision variables

Constraints. Every linear program also has constraints limiting feasible decisions.

 Formulate the above problem as a linear program

 What assumptions are made in formulating this problem as a linear program?
 Briefly describe the advantages of using a software package to solve the above linear
program, over a judgemental approach to this problem.

 The main steps in using mathematical modelling to support management are:

 1. Problem identification
o Diagnosis of the problem from its symptoms if not obvious (i.e. what is the
o Delineation of the subproblem to be studied. Often we have to ignore parts of the
entire problem.
o Establishment of objectives, limitations and requirements.
 2. Formulation as a mathematical model
 3. Model validation (or algorithm validation)
o Model validation involves running the algorithm for the model on the computer in
order to ensure:
 the input data is free from errors
 the computer program is bug-free (or at least there are no outstanding
 the computer program correctly represents the model we are attempting to
 the results from the algorithm seem reasonable (or if they are surprising
we can at least understand why they are surprising).
 4. Solution of the model
o Standard computer packages, or specially developed algorithms, can be used to
solve the model.
o In practice, a "solution" often involves very many solutions under varying
assumptions to establish sensitivity.
 5. Implementation
o This phase may involve the implementation of the results of the study or the
implementation of the algorithm for solving the model as an operational tool
(usually in a computer package).

To formulate the problem given in the question as a linear program we need to define:

 variables
 constraints
 objective

Corner Point Method

The optimal solution to a LPP, if it exists, occurs at the corners of the feasible region.
The method includes the following steps
Step 1: Find the feasible region of the LLP.
Step 2: Find the co-ordinates of each vertex of the feasible region.

These co-ordinates can be obtained from the graph or by solving the equation of the lines.
Step 3: At each vertex (corner point) compute the value of the objective function.
Step 4: Identify the corner point at which the value of the objective function is maximum (or
minimum depending on the LP)
The co-ordinates of this vertex is the optimal solution and the value of Z is the optimal value
Example: Find the optimal solution in the above problem of decorative item dealer whose
objective function is Z = 50x + 18y.
In the graph, the corners of the feasible region are
O (0, 0), A (0, 80), B(20, 60), C(50, 0)
At (0, 0) Z = 0
At (0, 80) Z = 50 (0) + 18(80)
= 1440
At (20, 60), Z = 50 (20) +18 (60)
= 1000 + 1080 = Rs.2080
At (50, 0) Z = 50 (50 )+ 18 (0)
= 2500.
Since our object is to maximize Z and Z has maximum at (50, 0) the optimal solution is x = 50 and
y = 0.
The optimal value is 2500.
If an LPP has many constraints, then it may be long and tedious to find all the corners of the
feasible region. There is another alternate and more general method to find the optimal solution of
an LP, known as 'ISO profit or ISO cost method'
Method of Solving Linear Programming Problems
Suppose the LPP is to
Optimize Z = ax + by subject to the constraints

This method of optimization involves the following method.
Step 1: Draw the half planes of all the constraints
Step 2: Shade the intersection of all the half planes which is the feasible region.
Step 3: Since the objective function is Z = ax + by, draw a dotted line for the equation ax + by = k,
where k is any constant. Sometimes it is convenient to take k as the LCM of a and b.
Step 4: To maximise Z draw a line parallel to ax + by = k and farthest from the origin. This line
should contain at least one point of the feasible region. Find the coordinates of this point by
solving the equations of the lines on which it lies.
To minimise Z draw a line parallel to ax + by = k and nearest to the origin. This line should
contain at least one point of the feasible region. Find the co-ordinates of this point by solving the
equation of the line on which it lies.
Step 5: If (x1, y1) is the point found in step 4, then
x = x1, y = y1, is the optimal solution of the LPP and
Z = ax1 + by1 is the optimal value.
The above method of solving an LPP is more clear with the following example.

Two -Phase method

The 2-Phase method is based on the following simple observation: Suppose that you have a
linear programming problem in canonical form and you wish to generate a feasible solution (not
necessarily optimal) such that a given variable, say x3, is equal to zero. Then, all you have to do
is solve the linear programming problem obtained from the original problem by replacing the
original objective function by x3 and setting opt=min.

If more than one variable is required to be equal to zero, then replace the original objective
function by the sum of all the variables you want to set to zero.

Observe that because of the non-negativity constraint, the sum of any collection of variables
cannot be negative. Hence the smallest possible feasible value of such a sum is zero. If the
smallest feasible sum is strictly positive, then the implication is that it is impossible to set all the
designated variables to zero.

Big M Method is a technique used to solve linear programming problems. Generally the methods
used to solve LP must start from the Basic feasible solution(BFS) - (0,0). Now this assumption
holds good for LESS THAN or EQUAL TO ( <= ) constraints for which simplex algorithm is
commonly used. If an LP has any > or = constraints, a starting basic feasible solution may not be
readily apparent. The Big M method is a version of the Simplex Algorithm that first finds a basic
feasible solution by adding "artificial" variables to the problem creating the artificial region and
then moves to real region thus improving the objective solution.
Steps to Solve LP using Big M method:

1. Modify the equations : The RHS should be non-negative
2. Add the variables to the constraints according to the signs ( <= , >= or = )
3. Rewrite the objective function with -M coefficient if it is maximization problem (or)
+M if it is minimization problem, for all the artificial values introduced.
4. Create and work the tableau similar to simplex method
5. Discard artificial variables and obtain the solution.

Duality is – a unifying theory that develops the relationships between a given linear program and
another related linear program stated in terms of variables with this shadow-price interpretation.
Steps in Primal to Dual problem
1. In primal problem there exist „m‟ Constraints and „n‟ Variables in dual constraints
number turn onto variables and variables in to constraints.
2. Constants b1,b2,… of primal LPP become the coefficient of Dual variables .
3. In primal LPP if the objective function is Max and ,<= type constraints in dual they will
turn in to Min and >= type.

Dualizing a minimization problem Write out the problem in short table form, flip it over, and
write it back out in words: Primal problem: Minimize C = 3u + 4v subject to 5u + 6v ≥ 7, 8u +
9v ≥ 10, u, v ≥ 0.
Dual problem: Maximize P = 7x + 10y subject to 5x + 8y ≤ 3, 6x + 9y ≤ 4, x, y ≥ 0 This is
solved exactly as in section 4.1, except stop at the final tableau. Reading the answer is done
somewhat differently.


The transportation problem is a special type of linear programming problem where the
objective is to minimize the cost of distributing a product from a number of sources or origins to
a number of destinations. ... The origin of a transportation problem is the location from which
shipments are dispatched

Types of Transportation problems

1. North west corner rule
2. Least cost entry
3. Vogel‟s approximate method.
Definition: The North-West Corner Rule is a method adopted to compute the initial feasible
solution of the transportation problem. The name North-west corner is given to this method
because the basic variables are selected from the extreme left corner .The Total cost can be
computed by multiplying the units assigned to each cell with the concerned transportation cost.

Definition: The Least Cost Method is another method used to obtain the initial feasible solution
for the transportation problem. Here, the allocation begins with the cell which has the minimum
cost. The lower cost cells are chosen over the higher-cost cell with the objective to have the least
cost of transportation.

The Least Cost Method is considered to produce more optimal results than the North-west
Corner because it considers the shipping cost while making the allocation, whereas the North-
West corner method only considers the availability and supply requirement and allocation begin
with the extreme left corner, irrespective of the shipping cost.

Vogel’s Approximation Method

Definition: The Vogel’s Approximation Method or VAM is an iterative procedure calculated
to find out the initial feasible solution of the transportation problem. Like Least cost Method,
here also the shipping cost is taken into consideration, but in a relative sense.

The following is the flow chart showing the steps involved in solving the transportation problem
using the Vogel‟s Approximation Method

Optimization of basic feasible solution of Transportation can be calculated by using two models

1) Modified Distribution method /MODI/UV method

2) Stepping Stone Method

Modified Distribution Method

Definition: The Modified Distribution Method or MODI is an efficient method of checking
the optimality of the initial feasible solution.

Stone Method
Definition: The Stepping Stone Method is used to check the optimality of the initial feasible
solution determined by using any of the method Viz. North-West Corner, Least Cost Method or
Vogel‟s Approximation Method. Thus, the stepping stone method is a procedure for finding the
potential of any non-basic variables (empty cells) in terms of the objective function.

Through Stepping stone method, we determine that what effect on the transportation cost would
be in case one unit is assigned to the empty cell. With the help of this method, we come to know
whether the solution is optimal or not.

The series of steps are involved in checking the optimality of the initial feasible solution using
the stepping stone method:

1. The prerequisite condition to solve for the optimality is to ensure that the number of
occupied cells is exactly equal to m+n-1, where „m‟ is the number of rows, while „n‟ is equal to
the number of columns.
2. Firstly, the empty cell is selected and then the closed path is created which starts from the
unoccupied cell and returns to the same unoccupied cell, called as a “closed loop”. For creating a
closed loop the following conditions should be kept in mind:
 In a closed loop, cells are selected in a sequence such that one cell is
unused/unoccupied, and all other cells are used/occupied.
 A pair of Consecutive used cells lies either in the same row or the same column.
 No three consecutive occupied cells can either be in the same row or column.
 The first and last cells in the closed loop lie either in the same row or column.
 Only horizontal and vertical movement is allowed.
Once the loop is created, assign “+” or “–“sign alternatively on each corner cell of the
loop, but begin with the “+” sign for the unoccupied cell.
Repeat these steps again until all the unoccupied cells get evaluated.
Now, if all the computed changes are positive or are equal to or greater than zero, then
the optimal solution has been reached.
But in case, if any, value comes to be negative, then there is a scope to reduce the
transportation cost further. Then, select that unoccupied cell which has the most negative change
and assign as many units as possible. Subtract the unit that added to the unoccupied cell from the
other cells with a negative sign in a loop, to balance the demand and supply requirements.

Variations in transportation problems are

1) Unbalanced problem

2) Degeneracy problem

Unbalanced problems are typically encountered in transportation problems in operations

research where the total supply does not equal the total demand. The main objective of a
transportation problem is to determine the transportation schedule that minimizes the overall
transportation cost, while meeting the supply and demand requirements. But in reality, the

problems that we encounter involve unbalanced conditions where the supply and demand are not
Let us consider a problem where a company has three warehouses – warehouse 1, warehouse 2,
and warehouse 3. The company provides supplies to retailers Retailer A and Retailer B. The
supply and demand for the warehouses and retailers is shown below. The table shows the supply
from each warehouse, the demand of individual retailer and the distance between the individual
warehouses and the retailers. The cost of transportation can be taken proportionate to the
distance between the warehouse and retailer

Conditions for forming a loop

(i) The start and end points of a loop must be the same.
(ii) The lines connecting the cells must be horizontal and vertical.
(iii) The turns must be taken at occupied cells only.
(iv) Take a shortest path possible (for easy calculations).
Remarks on forming a loop

(i) Every loop has an even number of cells and at least four cells
(ii) Each row or column should have only one „+‟ and „–‟ sign.
(iii) Closed loop may or may not be square in shape. It can also be a rectangle or a stepped shape.
(iv) It doesn‟t matter whether the loop is traced in a clockwise or anticlockwise direction.
Take the most negative '– q' value, and shift the allocated cells accordingly by adding the value
in positive cells and subtracting it in the negative cells. This gives a new improved table. Then 5
test for optimality.
Assignment problem is a special type of linear programming problem which deals with the
allocation of the various resources to the various activities on one to one basis. It does it in such a
way that the cost or time involved in the process is minimum and profit or sale is maximum

The Hungarian Algorithm is used in assignment problems when we want to minimize cost. This
lesson will go over the steps of this algorithm and we will also see this algorithm in action by
applying it to a real-world example.

The Hungarian Algorithm
Suppose you own a business, and you have four employees to choose from to complete three
jobs you need done. The following table displays the cost of each job for each employee.
J1 J2 J3
E1 482 437 512
E2 421 399 432
E3 502 407 518
E4 414 402 411

This table is also called a matrix, which is an array of elements in rows and columns.
You want to assign the employees to jobs in such a way that the overall cost is minimized. This
is an example of an assignment problem that we can use the Hungarian Algorithm to solve.
The Hungarian Algorithm is used to find the minimum cost when assigning people to activities
based on cost, and each activity must be assigned to a different person.

Steps of the Hungarian Algorithm

To use the Hungarian Algorithm, we first arrange the activities and people in a matrix with rows
being people, columns being activity, and entries being the costs. Once we've done this, we make
sure the number of rows equal the number of columns by adding dummy columns or rows with
entries equal to the largest cost in the entire matrix.
After we've got our square matrix, the steps of the algorithm are as follows:

1. Subtract row minima - Subtract the smallest entry in each row from each entry in that
2. Subtract column minima - Subtract the smallest entry in each column from each entry in
that column.
3. Cover all zeros with the minimum number of lines - Using the smallest number of lines
possible, draw lines over rows and columns in order to cover all zeros in the matrix. If the
number of lines is equal to the number of rows in your square matrix, stop here.
Otherwise, go to step 4.
4. Create additional zeros - Find the smallest element, call it c, that is not covered by a line.
Subtract c from all uncovered elements in the matrix and add it to any element that is
covered twice. Go back to step 3.

Once you can stop the algorithm, choose a set of zeros such that each row and column only has
one zero selected. Now take out any dummy rows/columns that you added. The zeros in the final
matrix correspond to the ideal assignment in the original matrix.

Unbalanced assignment problem.

Unbalanced Assignment problem is an assignment problem where the number of facilities is

not equal to the number of jobs. To make unbalanced assignment problem, a balanced one, a
dummy facility(s) or a dummy job(s) (as the case may be) is introduced with zero cost or time.

If the cost matrix of an assignment problem is not a square matrix (number of sources is not
equal to the number of destinations),
The assignment problem is called an unbalanced assignment problem.
In such cases, fictitious rows and columns are added in the matrix so as to form a square matrix.
Then the usual assignment algorithm can be applied to this resulting balanced problem.


Game theory is "the study of mathematical models of conflict and cooperation between intelligent
rational decision-makers". Game theory is mainly used in economics, political science, and psychology,
as well as in logic and computer science.

Game Theory Definitions

Any time we have a situation with two or more players that involves known payouts or quantifiable
consequences, we can use game theory to help determine the most likely outcomes.

Let's start out by defining a few terms commonly used in the study of game theory:

Game: Any set of circumstances that has a result dependent on the actions of two of more decision-
makers (players)

Players: A strategic decision-maker within the context of the game

Strategy: A complete plan of action a player will take given the set of circumstances that might arise
within the game

Payoff: The payout a player receives from arriving at a particular outcome. The payout can be in any
quantifiable form, from dollars to utility.

Information set: The information available at a given point in the game. The term information set is most
usually applied when the game has a sequential component.

Equilibrium: The point in a game where both players have made their decisions and an outcome is

Assumptions Used in Game Theory

As with any concept in economics, there is the assumption of rationality. There is also an assumption of
maximization. It is assumed that players within the game are rational and will strive to maximize their
payoffs in the game.
When examining games that are already set up, it is assumed on your behalf that the payouts listed
include the sum of all payoffs associated with that outcome. This will exclude any "what if" questions
that may arise.

The number of players in a game can theoretically be infinite, but most games will be put into the context
of two players. One of the simplest games is a sequential game involving two players.

Two persons Zero sum Game

Zero-sum is a situation in game theory in which one person's gain is equivalent to another's loss, so the
net change in wealth or benefit is zero. A zero-sum gamemay have as few as two players, or millions of

Pure strategies
In particular, it determines the move a player will make for any situation he or she could face. A player's
strategy set is the set of pure strategies available to that player. A mixed strategy is an assignment of a
probability to each pure strategy. This allows for a player to randomly select a pure strategy.
Saddle points
All saddle points in a game have the same payoff value. Choosing the row and column through anysaddle
point gives optimal strategies for both players. The value of a strictly determined game is the value of
the saddle point entry. A fair game has value of zero, otherwise it is unfair or biased.
Mixed strategies 0

A player's strategy set is the set of pure strategies available to that player. A mixed strategy is an
assignment of a probability to each pure strategy. This allows for a player to randomly select a
pure strategy. Since probabilities are continuous, there are infinitely many mixed strategies available to
a player.

Dominance Rule

Generally, we use the 'Dominance Rule' to reduce the order of a pay-off matrix possibly up to 2x2 in the
case of a game without saddle point. ... are generally used for the solution of two-player zero-
sum games.

Dominant Strategy Rules (Dominance Principle)

If all the elements of a column (say ith column) are greater than or equal to the corresponding elements of
any other column (say jth column), then the ith column is dominated by the jth column and can be
deleted from the matrix.

If all the elements of a row (say i th row) are less than or equal to the corresponding elements of any other
row (say jth row), then the ith row is dominated by the jth row and can be deleted from the matrix.

Game problems, where saddle point does not exist are taken as mixed strategy problems.
Where row minima is not equal to column maxima, then different methods are used to solve

Game problems, where saddle point does not exist are taken as mixed strategy problems.
Where row is not equal to column maxima, then different methods are used to solve the
different types of problems. Both players will use different strategies with certain probabilities to
optimize. For the solution of games with mixed strategies, any of the following methods can be
(2x2 game without saddle point)
2. Dominance Method.
3. Sub Games Method. – For (mx2) or (2xn) Matrices
4. Equal Gains Method.
5. Linear Programming Method-Graphic solution
6. Algebraic method.
7. Linear programming - Simplex method
8. Iterative method
These methods are explained one by one with examples, in detail.

ODDS Method - For 2 x 2 Games

Use of odds method is possible only in case of games with 2 x 2 matrix. Here it should be
ensured that the sum of column odds and row odds is equal.


Step1. Find out the difference in the value of in cell (1, 1) and the value in the cell
(1,2) of the first row and place it in front of second row.

Step2. Find out the difference in the value of cell (2, 1) and (2, 2) of the second row
and place it in front of first row.

Step3. Find out the differences in the value of cell (1, 1) and (2, 1) of the first column
and place it below the second column.

Step4. Similarly find the difference between the value of the cell (1, 2) and the value in
cell (2, 2) of the second column and place it below the first column

The above odds or differences are taken as positive (ignoring the negative sign)

Decision theory, in statistics, a set of quantitative methods for reaching optimal decisions. A
solvable decision problem must be capable of being tightly formulated in terms of initial
conditions and choices or courses of action, with their consequences. In general, such
consequences are not known with certainty but are expressed as a set of probabilistic
outcomes. Each outcome is assigned a “utility” value based on the preferences of the
decision maker. An optimal decision, following the logic of the theory, is one that maximizes
the expected utility. Thus, the ideal of decision theory is to make choices rational by reducing
them to a kind of routine calculation.

Components of Decision analysis

 Decision alternatives

 State of nature
 Payoff

Steps in decision making process

1. Identify problem.

2. Define all coerces of actions.

3. Determine pay off each combination.

4. Choose the best course.

Types of Decision Making situations:

1. Decision making under certainty

2. Decision making under risk
3. Decision making under uncertainty

Decision making under uncertainty having 5 criteria’s for decision making

1. Optimizing criteria
2. Pessimism criteria
3. Equal probability / Laplace method
4. Co efficient of optimism / Hurwitz method
5. Regret (savage criteria)

Network analysis Introduction
Network analysis is the general name given to certain specific techniques which can be used for
the planning, management and control of projects. One definition of a project A project is a
temporary end eavour undertaken to create a "unique" product or service
This definition serves to highlight some essential features of a project
it is temporary - it has a beginning and an end
it is "unique" in some way
With regard to the use of the word unique I personally prefer to use the idea of "non-repetitive"
or "non-routine", e.g. building the very first Boeing Jumbo jet was a project - building them now
is a repetitive/routine manufacturing process, not a project.
We can think of many projects in real-life, e.g. building the Channel tunnel, building the London
Eye, developing a new drug, etc
Typically all projects can be broken down into:
separate activities (tasks/jobs) - where each activity has an associated duration or completion
time (i.e. the time from the start of the activity to its finish)
precedence relationships - which govern the order in which we may perform the activities, e.g.
in a project concerned with building a house the activity "erect all four walls" must be finished
before the activity "put roof on" can start
and the problem is to bring all these activities together in a coherent fashion to complete the
Two different techniques for network analysis were developed independently in the late 1950's -
these were:
PERT (for Program Evaluation and Review Technique); and
CPM (for Critical Path Management).
PERT was developed to aid the US Navy in the planning and control of its . This was a project
to build a strategic weapons system, namely the first submarine launched intercontinental
ballistic missile, at the time of the Cold War between the USA and Russia. Military doctrine at

that time emphasized 'MAD - mutually assured destruction', namely if the other side struck first
then sufficient nuclear weapons would remain to obliterate their homeland. That way peace was
preserved. By the late 1950s the USA believed (or more importantly believed that the Russians
believed) that American land based missiles and nuclear bombers were vulnerable to a first
strike. Hence there was a strategic emphasis on completing the Polaris project as quickly as
possible, cost was not an issue. However no one had ever build a submarine launched
intercontinental ballistic missile before, so dealing with uncertainty was a key issue. PERT has
the ability to cope with uncertain activity completion times (e.g. for a particular activity the most
likely completion time is 4 weeks but it could be any time between 3 weeks and 8 weeks).
CPM was developed in the 1950's as a result of a joint effort by the DuPont Company and
Remington Rand Univac. As these were commercial companies cost was an issue, unlike the
Polaris project mentioned above. In CPM the emphasis is on the trade-off between the cost of the
project and its overall completion time (e.g. for certain activities it may be possible to decrease
their completion times by spending more money - how does this affect the overall completion
time of the project?)
Modern commercial software packages tend to blur the distinction between PERT and CPM and
include options for uncertain activity completion times and project completion time/project cost
trade-off analysis. Note here that many such packages exist for doing network analysis.
There is no clear terminology in the literature and you will see this area referred to by the
phrases: network analysis, PERT, CPM, PERT/CPM, critical path analysis and project planning.
Network analysis is a vital technique in PROJECT MANAGEMENT. It enables us to take
a systematic quantitative structured approach to the problem of managing a project through to
successful completion. Moreover, as will become clear below, it has a graphical representation
which means it can be understood and used by those with a less technical background.
The following rules are all logically based and should be thoroughly learned before attempting to
draw networks.
1) A complete network should have only one point of entry – a START event and only one
point of exist – a FINISH event.
2) Each activity is represented by one and only one arrow in the network. Every activity must
have one preceding or „tail‟ event and one succeeding or „head‟ event. Note that many activities
may use the same tail event and many may use the same head event
However no two activities can be identified by the same head and tail events. When two or more
parallel activities in a project have the same head and tail events, DUMMY ACTIVITIES are
needed in constructing the network.
A dummy activity , which is used when two or more activities have same tail and head events is
known as an IDENTITY DUMMY.
Dummy activities are also useful in establishing logic relationships in the arrow diagram that
cannot otherwise be represented correctly. Such dummy activities are known as LOGIC

DUMMIES. E.g. Suppose that in a certain project, jobs A and B must proceed C while job E is
preceded by job B only.
(3) No activity can start until its tail event is reached.
(4) An event is not complete until all activities leading into it are complete.
This is an important rule an invariably has to be applied in examination questions.
(5) „Loops‟ i.e. a series of activities which lead back to the same event are not allowed
because the essence of networks is a progression of activities always moving onwards in time.
Crashing is a schedule compression technique used to reduce or shorten the project schedule
The PM can various measures to accomplish this goal. Some of the common methods used are
Adding additional resources to the critical path tasks This option has various constraints such as
the securing of the budget to add the resources, and the availability of the resources.
Reduce the project requirements or scope
This can be done only if the sponsor and major stakeholders agree to reduce the scope
After applying the crashing, the critical path might have changed and result in creating a
different critical path. Always revisit the project schedule to ensure the schedule has been