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Section A Operations Research: Introduction to OR: Definition, Characteristics, Scope and Necessity of OR, OR Models: Principles and Types.

Decision making: Decision making environment, Decision making under certainty, Decision making under uncertainty, Decision making under risk, Decision Tree Analysis

Introduction to OR
Any problem that require a positive decision to be made can be classified as an operations research (OR) type problem. Although OR problems have existed since the creation of man, it was 1885 when Frederick Winslow Taylor emphasized the application of scientific analysis to methods of production; then the real start took place. The name (OR) probably came from a program under taken by Great Britain during World war II research inn military operations. It was during the early part of the war that Great Britain brought together a group of specialists from a number of areas to work on the military defense of their country. The work of the first OR group involved, among other things, studies to determine the best use of air power and the newly invented Radar. Because of the success of OR military operations, it quickly spread to all phases of industry and Government. By 1951, OR had taken its place as a distinct science in the United states. Hence it is said that OPERATION RESEARCH IS THE ART OF WINNING WAR WITHOUT ACTUALLY FIGHTING IT.

Definition
According to T.L Satty, Operation research is the art of giving bad answers to problems which otherwise have worse answers. According to H.M wagner, Operation research is a scientific approach to problem solving for executive management.

Characteristics
1.

2.

3.

System orientation: OR study the situation or problem as a whole. It identifies all possible alternatives and determine their impact on the organization as a whole. Inter-disciplinary team approach: Managerial problems have economic, physical, psychological, biological, sociological and engineering aspects. This requires a number of people which expertise in the areas on mathematics, statistics, engineering, economics, management, computer science and so on. Scientific approach: OR is a formalized process of reasoning. Under OR the problem is to be analyzed and defined clearly. Observations are made under different conditions to study the behavior of the system. On the basis of these observations, a hypothesis describing how the various factors involved are believed to interact and the best solution to the problem is formulated. To test the hypothesis experiment is designed and executed. Observations are made and measurements are recorded. Finally results of the experiments are studied and the hypothesis is accepted or rejected. So, OR is the use of scientific method to solve the problem under study.

Continued.
4. Decision making: OR increases the effectiveness of a management decisions as it involves a systematic process:
Diagnose the problem, and establish the criterion like maximization of profits, minimization of cost etc. STEP 1. Select the alternative course of action for consideration. Determine the model to be used and values of the parameters. Evaluation of best alternatives. Selecting the best and the optimum alternative

STEP 2.

STEP 3.

STEP 4.

STEP 5.

Continued.
5. Use of computer: Use of digital computer has become an integral part of the operations research approach to decision making. 6. Objectives: Operations research always attempts to find the best and optimal solution to the problem. For this purpose objectives of the organization are defined and analyzed. These objectives are then used as the basis to compare the alternative courses of action. 7. Quantitative Solution: Operation research provides the quantitative basis for solutions to various managerial problems.

Scope and Necessity of OR


3. Production Management:

1. Finance, Budgeting and Investments

2. Purchasing, Procurement and Exploration

Project Planning, Manufacturing and Facility planning

4. Marketing management

5. Personnel management

6. Research & Development

Continued.
1. FINANCE, BUDGETING AND INVESTMENTS: Cash flow analysis Long range capital requirements Investment portfolios Dividend policies

2. PURCHASING, PROCUREMENT AND EXPLORATION: Determine the quantity and timing of purchase of raw materials, machinery, etc. Rules for buying and supplying under varying prices. Bidding policies. Equipment replacement policies. Determination of quantities and timings of purchases. Strategies for exploration and exploitation of new material sources.

Continued.
3. PRODUCTION MANAGEMENT: i. Project Planning: Location and size of warehouses, distribution centers, retail outlets etc. Distribution policy. ii. Manufacturing and Facility Planning: Production scheduling and sequencing. Project scheduling and allocation of resources. Selection and location of factories, warehouses and their sizes. Determining the optimal production mix. Maintenance policies and preventive maintenance. Maintenance crew sizes. Scheduling arid sequencing the production run by proper allocation of machines.

Continued.
4. MARKETING MANAGEMENT: Product selection, timing, competitive actions. Advertising strategy and choice of different media of advertising. Number of salesman, frequency of calling of accounts, etc. Effectiveness of market research. Size of the stock to meet the future demand.

Continued.
5. PERSONNEL MANAGEMENT: Recruitment policies and assignment of jobs. Selection of suitable personnel with due consideration of age, skills etc. Establishing equitable bonus systems. 6. RESEARCH & DEVELOPMENT: Determination of areas of concentration of R&D. Reliability and evaluation of alternative designs. Control of development projects. Co-ordination of multiple research projects Determination of time and cost requirements

Types of OR Models.
A. PHYSICAL MODELS
Iconic models Analog models

B. MATHEMATICAL MODELS OR SYMBOLIC MODELS


Allocation model Routing model Queuing model Simulation Replacement model Sequencing model Competitive model Decision theory Goal programming Markov analysis

C. BY NATURE OF ENVIRONMENT
Deterministic models Probabilistic model

D. BY THE EXTENT OF GENERALITY General models Specific models

Types of OR Models.
A. PHYSICAL MODELS: These model include all forms of diagrams, drawing graphs and charts. By presenting significant factors and inter-relationships in pictorial term, physical models are able to indicate problem in a manner that facilitates analysis. These models are easy to observe, build and describe, but cannot be manipulated and used for predictions. It is of two types: i. Iconic models: An iconic model is based on a smaller scale than the original. Its use in engineering field is more as compared to management. E.g. Indian airlines as well as Air India use flight simulators to train their pilots and members of the crew. These flight simulators are Iconic models are different types of aircraft and the trainees really feels as if he is piloting the actual aircraft. Thus an iconic model has all the operating features of the real system.

Types of OR Models.
ii. Analog models: They are not replicas of problem situation like iconic models, rather they are small physical systems that have similar characteristics and work like an object or system it represents. e.g. childrens toys model of rail, roads etc. so that model is easy to understand by analogy.

Types of OR Models.
B. MATHEMATICAL MODELS OR SYMBOLIC MODELS: It employ a set of mathematical symbols to represent the decision variable of the system under study. These variables are related together by mathematical equations. E.g. simple demand curve in economics is a symbolic model predicting buyers behavior at different price levels.

Types of OR Models.
C. BY NATURE OF ENVIRONMENT: Deterministic models: In this model everything is defined and the results are certain. E.g EOQ models, one can easily determine economic lot size. Probabilistic model: In cases of risk and certainty, the input and output variables take the form of probability distribution. E.g In game theory where saddle points or equilibrium points of the player does not exist, we apply probabilistic model.

Types of OR Models.
D. BY THE EXTENT OF GENERALITY: General models: It is one which does not apply one situation only rather it has got general applications. E.g. linear programming model is known as a general model since it can be used for product mix, transportation and assignment problems etc. Specific models: It is applicable under specific condition only. E.g. sales response curve.

OR Models: The following principles must be kept in mind while formulating models:
1. Principle of simplicity 2. Understand the problem, only then apply the appropriate technique 3. A model can analyze the data but it can not be better than the information that goes into it. It means that data can be interpreted but cannot be generated. 4. Models are for the decision makers e.g. In LPP, x1 = 0, x2 = 9 and x1 = 6, x2 = 3. In both cases total profits is same. Its for the management to decide whether to discontinue or continue the product x1. 5. A model should never be taken too literally: In some cases, we can find still better solutions. 6. Flexible models: Model should be flexible enough to incorporate changes. 7. Use of Computers: OR techniques are usually complex and only computers can solve them.

Decision making environment


Decision in any aspect refers to the selection of the best or favorable act out of several alternatives available. Decision making is an integral part of management planning, organizing, controlling and motivation processes. The decision maker selects one strategy (course of action) over others depending on some criteria, like utility, sales, cost or rate of return is used whenever an organization or an individual faces a problem of decision making or dissatisfied with the existing decisions or when alternative selection is specified. The administration of an industry or any concern is to take decision about the development or expansion of the concern. Example: Publicity of goods, the seller may take the help of Internet, T.V., radio, newspapers or door to door promotion. The aim of the decision theory is to guide the decisionmaker in choosing the best course of action

Components of decision making problems


1. Acts (or course of action): Decision making problems deal with the selection of a single act from a set of alternative acts. Example: Publicity of goods, the seller may take the help of Internet, T.V., radio, newspapers or door to door promotion. 2. Events (or states of Nature) : If the outcome of some action is not known in advance, then that outcome is uncertain, but is vital for the choice of any act. Example: If a cosmetic product is marketed, it may be highly liked, it may not appeal or it may satisfy only a fraction, say 20%.

3.

Outcome: There is an outcome (or consequence) of the combination of each act with each possible state of nature. This outcome is called conditional value.
E1 A1 A2 A3 E2 E1 E2 E2 O12 O11

E1
START

O21 O22

O31
O32

EVENTS

S1

S2

..

Sj

Sn

ACTS
A1 A2 : : Ai : Am Om1 Om2 Omj . Omn O11 O21 . . Oi1 . O12 O22 . . Oi2 . . . . . . . O1j O2j ... ... Oij ... O1n O2n Oin

1. PAY OFF : The result of combinations of an act with each of the states of nature is the outcome and monetary gain or loss of each outcome is the pay-off. 2. REGRET (Opportunity loss) : The difference between the highest possible profit for a state of nature and the actual profit obtained for the particular action taken is known as opportunity loss.

Example1. In case of supply of goods and demand in a market, the outcome may be unsold goods (+), short of goods (-), or no stock (0). In the following matrix form, outcomes of supply and demand are shown.
EVENTS ACTS (50) a1 (51) a2 (52) a3 (53) a4 (50) S1 0 +1 +2 +3 (51) S2 -1 0 +1 +2 (52) S3 -2 -1 0 +1 (53) S4 -3 -2 -1 0

Example2. A shopkeeper purchases a food at a total average cost of Rs. 4 per plate and sells it at a price of Rs 6. The food is prepared in the morning and is sold during the same day. Unsold food during the same day are spoiled and is to be thrown away. According to the past sale, number of plates is not less than 20 or greater than 23. You are to formulate the (i) action space (ii) state of nature space, (iii) pay off table, (iv) loss table. D = Quantity demanded S = Quantity produced For D > or = S, Marginal profit (MP) = Rs 6 Rs 4 = Rs2 For S>D, Marginal loss (ML) = Rs 4, due to unsold stock.

Decision making under certainty


Example: Following are three payoff measures for travelling by three different routes.
ROUTES TIME SAVING (hours) FUEL SAVING (liter) ENJOYMENT (subjective rating)

A
B C

4
3 0

3
7 0

1
3 10

If a person values time he will go by route A and if he values saving fuel he will go by route B and if he wants more enjoyment he might take to route C.

Decision making under uncertainty


The probabilities are unknown and decision maker cannot calculate the expected pay-off for the course of action. The decision maker faces problem, when he desires to introduce new plant of production. A number of decision criteria makes an assumption about the extent to which a decision maker is an optimist or pessimist. Decision criterion under uncertainty depends on the attitude of the decision maker. The decision maker can choose any one of the following: (i) Maximin (ii) Maximax (iii) Minimax regret (iv) Hurwitz criterion (v) Criterion of rationality

(1) Maximin
The course of action that maximizes the minimum possible pay-off is selected. The decision maker lists down the minimum outcome within each course of action (or act) and then selects the strategy with the maximum number. This is also known as a pessimistic decision criterion as it locates the strategy having least loss. Suppose, the row minimums of the different course of action are: a1 : 40 By this criteria the choice will be a1 which has a2 : 36 the maximum payoff amongst all the minimums a3 : 32 of four acts. a4 : 28

(2) Maximax
In this case the course of action that maximizes the maximum pay-off taken. The decision maker lists down the maximum pay-off associated with each course of action then selects that alternative having maximum number. This may be called an optimistic decision criterion as the decision maker selects the alternative of highest possible gain. Suppose, the maximum pay-off of each course of action are: a1 : 40 a2 : 42 a3 : 44 a4 : 46 Since the course of action a4 has the maximum pay-off, so the decision maker will select this alternative.

(3) Minimax regret


The regrets (opportunity loss) for each course of action are to be calculated with reference to the list pay-off of various alternative acts. Now obtain the maximum regret and hence select course of action with the minimum of the maximum regret values.
EVENTS ACTS (20) a1 (21) a2 (20) S1 0 4 (21) S2 2 0 (22) S3 4 2 (23) S4 6 4 6 4 Maximum Regrets

(22) a3
(23) a4

8
12

4
8

0
4

2
0

8
12

Thus the minimum amongst the maximum regret is a2.

(4) Hurwitz criterion

(5) Criterion of rationality

Decision making under risk

Decision Tree Analysis

Section B
Linear Programming : Problem Formulation, Graphical Method, Simplex Method, Duality Project Management: PERT, CPM, Phases of a Project, Network Arrow Diagrams; Slack; Critical Path, Float, Crashing the Network.

LINEAR PROGRAMMING PROBLEMS: INTRODUCTION

Definition: Linear programming is a mathematical technique applied for choosing the best alternative from a set of feasible alternatives. In LPP objective functions as well as restrictions or constraints can be expressed as linear mathematical functions. George b. Dantzig is generally considered as the pioneer of linear programming. Dantzigs work was primarily in the search for mathematical techniques to solve military logistics problems when he was employed by the U.S air force during world war II.

Importance: LPP is used to help mangers in planning, decision making and to allocate the resources. The management always tries to make the most effective use of an organization resources. Resources include machinery, labor, money, time, warehouse, space and raw materials. These resources may be used to produce products e.g. machinery, furniture, food or clothing etc. Similarly resources may be used to produce services such as schedules for shipping, advertising policies and investment decisions etc. LP has been applied extensively in the past to military, industrial, financial, marketing, accounting and agriculture problems.

Linear Programming : Problem Formulation


(I) General form of LPP: Let the decision variables be x1, x2, x3.. xn and m is the set of constraints. Both decision variables and constraints are linear functions of the variable. The standard form of a general LPP may be written in the following form: (Max or Min) Z = c1x1 + c2x2 + ..cnxn (Objective function) Where Z is the objective function to maximize or minimize. Ci are the coefficients and xi are the variables. Subject to constraints a11x1 + a12x2 + .+ a1nxn ( , = ,) b1 a11x1 + a12x2 + .+ a1nxn ( , = ,) b1 a11x1 + a12x2 + .+ a1nxn ( , = ,) b1 where, (i) x1, x2, .xn are decision variables. (ii) c1, c2, .cn are called constant and it represent cost or profit coefficients i.e. per unit contribution to the objective function i.e. profit or cost. (iii) aij (i = 1, 2, m ;) j = 1, 2, ..n ) are called structural coefficients. (iv) b1, b2, ..bm represents requirements an availability of m constraints and expressions ( , = ,) means that each constraint may take only one of the three possible forms. The restrictions xj 0, (j = 1,2,.n) simply implies that Zjs must be non- negative.

The solutions procedure of linear programming problems is iterative. For this first a mathematical model is developed. The mathematical model serve as basis for initial solution and is improved step by step, till an optimal solution is obtained. In case there are two variables, the constraints and the objective function both can be plotted on a graph. To determine its solution after plotting the objective function iso-profit/iso-cost lines are drawn and the farthest point of the feasible region which optimizes (maximizes or minimizes) the effectiveness in the given situation is identified. Three stages of the solution are: (a) Feasible Solution: Any set of variables, X1, X2,..,Xn, satisfying the system of constraints is called a solution equations. Any solution which also satisfies the non-negativity restrictions, is called a feasible solution. (b) Basic Feasible Solution: Any feasible solution for which the vectors a1i, a2i,..ami, associated with non-zero variables, and Xi are linearly independent is called a basic feasible solution. (c) Optimal Solution: For any linear programming problem at least one basic feasible solution must be optimal, provided the optimal solution exists. The optimal solution is obtained through a procedure of step by step improvement in the initial feasible solution which is a basic also.

Maximization case: The objective function is to maximize profit, sale, output etc.
Example 1. A firm is engaged in producing two products P1 and P2. Each unit of products P1 requires 2 kg of raw material and 4 labor hours for processing, where as each unit of product P2 requires 5 kg of raw material and 3 labor hours of the same type. Every week the firm has the availability of 50 kg of raw material unit of product P2 sold gives Rs 30 as profit. Formulate this problem as linear programming problem to determine as to how many units of each of the products should be produced per week so that the many units of each of the products should be produced per week so that the firm can earn maximum profit, assume all unit produced can be sold in the market.

1.

The objective function: The goal is to maximization of profit which could be obtained by producing and selling products P1 and P2 respectively. Let x1 and x2 represents the number of units of product P1 and p2 respectively. The total profit Z, would be equal to 20x1 + 30 x2 because the unit profit of the two products is Rs 20 and Rs 30 respectively. Now Z = 20x1 + 30 x2 is then the objective function, relating the profit and sale level of each of the two products. X1 and x2 are the decision variables about which the optimum values is to be findout. The objective function is linear function. 2. The Constraints: Each unit of product P1 requires 2 kg of raw material every week. We can express this constraint as 2x1 + 5x2 50 as material constraint. Similarly it is given that a unit of product P2 requires 4 labor hours for its production and one unit of product P2 requires 3 hours. With availability of 60 labor hours, the labor constraint will be 4x1 + 3x2 60. 3. Non-negativity:

Game Theory
The managerial situation, problem or conflict is present in game format. The decision makers (managers) are viewed as players. Game theory aims at prescribing optimal playing strategies for the players. Characteristics of Game theory: 1. The game has a competitive situation. 2. There are a finite number of players or competitors. 3. A finite number of strategies is available to each player. 4. To play the game, both competitors initiate based on the strategies chosen by them. 5. Every game has a n outcome. 6. Every outcome involves stakes i.e. payments made and received.

Terminology used in Game theory


1.Number of players: A game involving only two players is called a two person game. If the number of players exceeds two, then the game is called n person game where n denotes the number of players. 2. Sum of gains and losses: If in a game the gains of one player are exactly the same as the losses to another player, such that the sum of gains and losses equals zero, then the game is said to be a zero sum game. Otherwise it is said to be non-zero sum game. 3. Strategy: It is a plan of action conceived and carefully executed by each party to the game. It involves a list of all possible actions that a player will take for every outcome (payoff) that might arise. 4. Optimal strategy: A particular strategy by which a player optimizes his gain or losses without knowing the competitors strategies is called optimal strategy. 5. Pure strategy: This is a predetermined plan of action based on which the games are played and which does not change during the game. 6. Mixed strategy: It is a plan of action which is changed while the game is in progress.

7. Payoff: The outcome of the game is known as payoff. 8. Payoff matrix: A table showing the outcome of the game (in terms of gains or losses). 9. Fair game: A game is said to be fair when the value of the game is zero. 10. Value of the game: The maximum guaranteed expected outcome per play when players follow their optimal strategy is called the value of the game. 11. Maximin: The maximum value of the minimum payoffs in each row. 12. Minimax: The minimum value of the maximim payoffs in each column. 13. Saddle point: The game value is called the saddle point in which each player has a pure strategy. The saddle point is the lowest numerical value in a row (maximin) and the largest numerical value in a column (minmax), which are equal to each other.

Pure strategy method


Player Bs strategy

Q1.
A1
Player As Strategy

B1 4

B2 4

B3 10

A2
A3

2
6

3
5

1
7

Step1. Determine maximin of rows denoted by Step 2. Determine minimax of columns denoted by Step3. Determine value of the game (V) which is given by V = Maximin = Minimax. Step4. Determine optimum strategy for the players.

Formulation of LPP
1. XYZ company produces two models of TV sets. The profits realized is Rs 300 from set A and Rs 200 from set B. The limitations on production of TV sets are: (i) Availability of 50 hours of labor each day in the production department. (Labor constraint). (ii) Availability of only 40 hours of machine time per day (machine constraint). (iii) Inability to sell more than 10 sets of model A and 5 sets of model B each day (marketing constraint). Determine how many sets of each model of TV to be produced each day so that the total profit will be as high as possible. (a) Formulate a mathematical model of LPP. (b) Give solution to the problem.

Objective function: Maximize Z = 300x1 + 200x2 subject to 2x1 + x2 50 x1 + 3x2 40 x1 10, x2 5 x1 , x2 0


(labor constraint) (machine constraint)

(marketing constraint)
(non-negativity constraint)

Linear Programming : Graphical Method


1. Infeasibility (No solution) (i) 2x1 + 4x2 12, (ii) 4x1 + 2x2 16, (iii) x1 8 2. Unboundedness (no finite solution) (i) x1 5, (ii) x2 10, (iii) 2x1 + 4x2 20 3. Redundancy (i) 2x1 + 2x2 40, (ii) 2x1 + x2 30, (iii) x1 25 4. Feasibility (optimal solution) (i) 3x1 + 2x2 12, (ii) x1 3

Q1.

Linear Programming : Simplex Method

Linear Programming : Duality

Section C
Transportation Models: Transshipment Problem, Assignment Models, Replacement Models. Competitive Strategies: Theory of Games, Duopoly Two Person Zero Sum Game, Pure and Mixed Strategies, Criteria of choosing strategies and simple numerical problems based on these.

Section D
Inventory Management: Definition of Inventory, Costs associated with Inventory Elementary, Models of Inventory. Waiting Lines: Applications of waiting lines, queue disciplines, derivations of Average length, number of units in the queue, Average waiting time for single service station. Replacement Theory: Replacement Problems.