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Business Decisions

R17MBA14

AY 2017-18

MRCET MBA

UNIT-1

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.

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

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.

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.

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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.

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.

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(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.

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.

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.

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.

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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

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.

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.

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.

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

research.

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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.

(I ) Iconic 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.

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

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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

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

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UNIT-II

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

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

the common applications of LP are

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

conditions.

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(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.

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 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.

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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:

Make sure that each variable in the objective function appears at least once in the

constraints.

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.

including:

distribution networks

truck routing

Linear programming models consist of an objective function and the constraints on that function.

A linear programming model takes the following form:

Objective function:

Constraints:

.

.

.

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

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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.

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

requirements.

2. Portfolio Optimization Minimize the risk in your investment portfolio subject to achieving a

certain return. Can also be accessed from the NEOS

• 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

deadheading.

• 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.

Traveling Salesman Problem Given a set of cities, find the shortest route that visits each city

exactly once and returns to the home city.

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Railroads

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.

Agriculture

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.

Warfare

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

worldwide.

Telecommunications

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.

Microchips

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

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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.

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.

1. Problem identification

o Diagnosis of the problem from its symptoms if not obvious (i.e. what is the

problem?)

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

bugs)

the computer program correctly represents the model we are attempting to

validate

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:

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variables

constraints

objective

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'

ISO- PROFIT (OR ISO-COST)

Method of Solving Linear Programming Problems

Suppose the LPP is to

Optimize Z = ax + by subject to the constraints

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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.

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:

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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.

Dual:

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,…..bm 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.

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UNIT-3

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

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.

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

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

2) Stepping Stone 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.

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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.

1) Unbalanced problem

2) Degeneracy problem

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

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problems that we encounter involve unbalanced conditions where the supply and demand are not

equal.

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

(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.

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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.

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

row.

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.

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Unbalanced assignment problem.

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.

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UNIT-4

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.

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)

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

reached.

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.

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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.

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

participants.

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.

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

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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

applied.

1. ODDS METHOD

(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.

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

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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.

Decision alternatives

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State of nature

Payoff

1. Identify problem.

2. Decision making under risk

3. Decision making under uncertainty

1. Optimizing criteria

2. Pessimism criteria

3. Equal probability / Laplace method

4. Co efficient of optimism / Hurwitz method

5. Regret (savage criteria)

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UNIT-5

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

project.

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

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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.

RULES FOR DRAWING NETWORKS:

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

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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

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

crashed.

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