Operations Research Notes for Business Students

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Operations Research Notes
BUSINESS INFORMATION TECHNOLOGY (Kenya Methodist University)
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CONTENTS
1. INTRODUCTION......................................................................................................2
Definition of Operations Research.............................................................................2
Characteristics of Operations Research.....................................................................2
2. ORIGIN OF OPERATIONS RESEARCH................................................................3
3. PHASES OF OPERATIONS RESEARCH...............................................................3
4. SCOPE OF OPERATIONS RESEARCH..................................................................4
Operations research and Management.......................................................................4
5. METHODOLOGY OF OPERATIONS RESEARCH...............................................6
Methods for Solving OR models................................................................................8
Applications of Operations Research.............................................................................9
6. TECHNIQUES OF OPERATIONS RESEARCH...................................................11
Advantages of Operations Research............................................................................14
Disadvantages of Operations Research (OR)...............................................................14
Key Concepts...............................................................................................................15
7. LINEAR PROGRAMMING MODELS..................................................................15
Definition of Linear Programming...........................................................................15
Advantages (utility) of L.P Approach......................................................................15
Limitations of L.P Approach....................................................................................16
Application areas of L.P...........................................................................................16
8. MATHEMATICAL MODELS FOR LINEAR PROGRAMMING.........................17
GRAPHICAL METHOD.........................................................................................17
SIMPLEX METHOD...............................................................................................19
9. MIXED CONSTRAINTS: PROBLEMS WITH ¿ OR ¿ CONSTRAINTS. .26
10. MINIMIZATION PROBLEM...............................................................................30
11. DUALITY THEORY.............................................................................................34
12. SENSITIVITY ANALYSIS...................................................................................37
13. TRANSPORTATION MODELS............................................................................42
LINEAR PROGRAMMING FORMULATION OF TRANSPORTATION
PROBLEM...............................................................................................................43
SOLUTION PROCEDURE FOR TRANSPORTATION PROBLEMS..................47
FINDING AN INITIAL FEASIBLE SOLUTION...................................................48
1. North-West corner method (NWCM)..........................................................48
2. Least Cost Method (LCM)...........................................................................50
3. Vogel’s Approximation Method (VAM).......................................................50
MODIFIED DISTRIBUTION (MODI) METHOD.................................................53
STEPPING STONE METHOD...............................................................................57
14. ASSIGNMENT MODELS.....................................................................................64
15. NETWORK ANALYSIS........................................................................................75
Objectives of network analysis................................................................................75
MANAGEMENT APPLICATIONS OF NETWORK ANALYSIS.........................75
Main concepts of network analysis:.........................................................................76
Rules for construction of network diagrams............................................................77
Common errors in Network Diagrams.....................................................................79
TIME ESTIMATES IN NETWORK ANALYSIS...................................................81
CRITICAL PATH METHOD (CPM).......................................................................81
PROJECT EVALUATION AND REVIEW TECHNIQUE (PERT)........................81
16. INVENTORY CONTROL.....................................................................................81

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INVENTORY CONTROL TERMINOLOGY.........................................................81

ECONOMIC ORDER QUANTITY........................................................................81
17. QUEUING THEORY.............................................................................................81
BENEFITS OF QUIEUING THEORY....................................................................81
SINGLE CHANNEL QUIEUING MODEL............................................................81
18. DECISION THEORY............................................................................................81

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1. INTRODUCTION
Meaning and Scope
Definition of Operations Research

Operations Research is a scientific methodology which is applied to the study of the
operations of organizations (mostly large and complex) or activities to assess the
overall implications of various alternative courses of action to provide an improved
basis for management decisions.
OR is the application of scientific methods, techniques, and tools to problems

involving the operations of systems to provide optimum solutions to these problems.
OR is the use of scientific methods to provide criteria for decisions regarding machine
systems involving repetitive operations.
Characteristics of Operations Research

1. It is inter-disciplinary. It borrows from different disciplines for developing new
methods and procedures.
2. It is a continuous process.
3. It is objective is to find the best or optimal solution to the problem under
consideration.
4. It increases the creative ability of a decision maker.
5. It is decision making science.
6. It uncovers new problems for study methods.
7. It examines fundamental relationships form a systems overview.
8. It uses scientific methodology.
9. It replaces management by personality.
10. It is for operations economy.
OR provides managers with quantitative basis for decision making. By employing a
systematic study of a problem involving gathering data, building a mathematical
model, experimenting with the model and predicting future operations; i.e. the
mathematical and logical means of Operations Research provides the management
with quantitative basis for decision making and enhances ability to make long-range

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plans and to solve everyday problems of running a business industry with greater
efficiency, competence and confidence.
2. ORIGIN OF OPERATIONS RESEARCH

The need for effective allocation of the very limited (scarce) military resources of
Britain during World War II led to the development of operations research. Many
scientists including physicists, biologists, statisticians, mathematicians and
psychologists applied a scientific approach to the many strategic and tactical problems
which helped to win the “Air battle of Britain”, “Battle of North Atlantic”, and the
Island Campaign in the Pacific. The success of this team of scientists in Britain
encouraged U.S, Canada and France to start with such teams.
The name OR came directly from the context in which it was used and developed,
viz., research on military operations. As the discipline of OR developed, many names
like “operational analysis”, “systems analysis”, “cost benefit analysis”, “management
analysis”, “decision science” etc. were assigned to it. The apparent success of the
military team in the war prompted the industry sector that was experiencing complex
decision problems, due to the increasing complexity and specialization in
organizations, to use the formal tools of operations research.
3. PHASES OF OPERATIONS RESEARCH

The scientific method in OR study generally involves the following three phases:
1. Judgment phase
This phase consists of:
i) Determination of the operation
ii) Establishment of the objectives and values related to the operation
iii) Determination of the suitable measures of effectiveness
iv) Formulation of the problems relative to the objectives
2. Research phase
This phase utilizes:
i) Operations and data collection for better understanding of the problems
ii) Formulation of hypothesis and model

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iii) Observation and experimentation to test the hypothesis on the basis of

additional data
iv) Analysis of the available information and verification of the hypothesis
using pre-established measures of effectiveness
v) Predictions of various results from the hypothesis
vi) Generalisation of the various results and consideration of alternative
methods
3. Action phase
It consists of making recommendations for the decision process by those who first
posed the problem for consideration or by anyone in a position to make a decision,
influencing the operation in which the problem occurred.
4. SCOPE OF OPERATIONS RESEARCH

An OR worker is required to
i) minimize the input value for a specific output and/or
ii) maximize the output value for a specific input and/or
iii) maximize some function of these values e.g. the profit function, return on
investment function (ratio of output and input values)
Operations research and Management

Some of the areas of management where tools of OR are applied include:
1. Finance, Budgeting and Investments

a) Cash flow analysis, long range capital requirements, investment portfolios,
dividend policies etc.
b) Credit policies, credit risks and delicate account procedures, claim and
complaint procedures.
2. Purchasing, procurement and Exploration

a) Determining the quantity and timing of purchase of raw materials, machinery,
etc.
b) Rules for buying and supplying under varying prices

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c) Bidding policies
d) Equipment replacement policies
e) Determination of quantities and timings of purchase
f) Strategies for exploration and exploitation of new material sources
3. Production Management
a) Physical distribution
i. Location and size of warehouses, distribution centres, retail outlets etc.
ii. Distribution policy
b) Manufacturing and Facility Planning
i. Production scheduling and sequencing
ii. Project scheduling and allocation of resources
iii. Number and location of factories, warehouses, hospitals and their sizes
iv. Determining the optimum production mix
c) Manufacturing
i. Maintenance polices and preventive maintenance
ii. Maintenance crew sizes
4. Marketing Management
a) Product selection, timing, competitive actions
b) Advertising strategy and choice of different media of advertising
c) Number of salesmen, frequency of calling of accounts etc
d) Effectiveness of market research
e) Size of the stock to meet the future demand
5. Personnel Management
a) Recruitment policies and assignment of jobs
b) Selection of suitable personnel on minimum salary
c) Mixes of age and skill
d) Establishing equitable bonus systems
6. Research and Development

a) Determination of areas of concentration of research and development
b) Reliability and evaluation of alternative projects

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c) Control of developed projects

d) Co-ordination of multiple research projects.
e) Control of developed projects
f) Co-ordination of multiple research projects
g) Determination of time and cost requirements
5. METHODOLOGY OF OPERATIONS RESEARCH
OR projects entail the following steps:
1. Problem Formulation
It involves:
i) thorough analysis of the organizational structure and function the
communication and control systems, the objectives and the policies of the
organization and so on.
ii) Formal formulation of the management problem and its transformation
into a research problem.
2. Construction of a Mathematical Model

Expression of the relevant features of the system under study in terms of a
mathematical model. The general form of a mathematical model is:
E=f ( x i y i )
where f represents a system of mathematical relationships between the measure of
effectiveness of the objectives sought (E) and the variables, both controllable (xi) and
uncontrollable (yi).
3. Derivation of solutions from the model

Determining the value of decision variables that optimize the given objective function
by use of various mathematical techniques.
4. Testing the Model
Assessing models credibility by testing the results against the real world experience
(reality)

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5. Establishing controls over the solution

Incorporation of controls into the models so that they are adaptable for a range of
problems, to take care of changes in values of parameters and changes in structural
relationships among variables.
A conscious control procedure is established for detecting significant changes in the

parameters and relationships and for specifying the action to be taken or adjustments
to be made in the solution when a significant change occurs.
6. Implementing the solution

a) Action on the proposal
b) Continuous review – updating and modification in light of a changing
environment.

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METHODOLOGY OF OPERATIONS RESEARCH
Problem formulation Model Solution & Testing

Model Building Establishing controls & solution Implementation
Qualitative model (Informal)

Isolation of Mgt. Problem Quantitative model (Informal) Conclusions & Implications
Testing
Model refinement
SYSTEM REAL WORLD Data collection
Methods for Solving OR models

Solving a model entails finding the values of controlled variables that optimize the
measure of performance, or estimating them approximately. OR models are generally
solved by the following three methods:
1. Analytical or deductive method

 Deductive manipulation of mathematical equations with symbols (without
actual values).
 Examples include graphical method, elementary differential calculus etc.
2. Numerical or iterative methods

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 Initial trial solutions and a set of rules for improving it

 Continuous improvement of the solution until the optimal solution is obtained
(no further improvement is possible)
3. Monte Carlo Method

 The knowledge of the important characteristics and rules of operation of a
system can help to visualize the typical behaviour of the system. This is done
by taking random samples from the mathematical model that represents the
real-life system. The random samples result in a probability distribution that
imitates the real-life system, and from which the value of the specified
stochastic variables is to be estimated.
 Procedure (main steps) of Monte Carlo Method:
i) Draw a flow diagram of the system under study
ii) Obtain probability distribution for each of the variables of interest
iii) Find out cumulative probability distribution corresponding to each of
the variable chosen for study in step (ii)
iv) Assign an appropriate set of random numbers to represent each value
of range of values, of the variable of interest chosen in step (ii)
v) Fit a suitable standard mathematical function to the values obtained in
step (iv)
Applications of Operations Research
1. Determination of optimal product mix – optimum allocation of resources to

competing products or activities, transportation schedules, rent allocation,
assignment of personnel and machine, media selection, investment portfolio
selection, blending of materials, energy, ecology (pollution) etc by linear
programming.
2. Inventory control model aids in minimizing the sum of

i) Acquisition costs
ii) Stock holding costs

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iii) Shortage costs for various stock items
3. PERT and CPM techniques are very useful in planning, analyzing, scheduling and
controlling the progress and completion of large and one time projects.
4. Application of dynamic planning in areas such as planning, advertising

expenditures, distributing sales efforts, and production scheduling.
5. Decision analysis has been applied to problems in controlling hurricanes, water

pollution, machine, law, nuclear safety, space exploration, new product decisions,
advertising expenditures, research and development.
6. Queuing theory has had application in solving problems concerned with traffic
congestion, servicing machines subject to breakdown, determining the level of a
service force, air traffic scheduling, design of dams, job shop scheduling, hospital
operations, receipts and withdrawal counters in a commercial bank.
7. Replacement theory is extensively applied in funding the optimal replacement

interval for:
i) Equipment that deteriorates with time
ii) Equipment (e.g. bulbs) that perish suddenly, and
iii) Staff replacement
8. The use of exponential smoothing for:

i) Preparation of monthly forecasts for stock-keeping items
ii) Determination of optimal product inventory and work-force levels in
production planning
9. Use of simulation in probabilistic marketing situations such as:
 to derive NPV/Internal rate of return distribution for the venture of

introduction of a new product

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6. TECHNIQUES OF OPERATIONS RESEARCH
1. PROBABILITY
 for prediction of the future of the business
 Probability concepts help to analyze the uncertainties and bring out necessary
data with reasonable accuracy for decision making.
2 types of probabilities:
a) Objective probability: for which there is a definite historical evidence and

common experience e.g. P(H) in tossing a coin is ½ assuming it is unbiased/fair
coin
b) Subjective probability: where historical evidence is not available and the
businessman has to guess the likelihood of various possible outcomes in a
situation e.g. decision on the number of umbrellas and raincoats to be ordered by a
salesman during the rainy season will depend on estimates or “educated guesses”.
2. DECISION THEORY
The basic elements in decision theory are:
 alternative courses of action
 various states of nature
 knowledge about the likelihood of occurrence of each state of nature
 net value (pay-off) to decision maker for each outcome
 decision maker’s objectives
The basic premise of decision theory is that the behaviour of the future is probabilistic
and not deterministic. Various probabilities are assigned to the state of nature on the
basis of available information or subjective judgment and the likely outcomes of the
alternative courses of action are evaluated accordingly before a particular alternative
is selected.
3. LINEAR PROGRAMMING
 Involves selection of an optimum combination of factors from a series of inter-
related alternatives, each subjective to limitation.

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 Involves development of linear equations to obtain the best solution for the
allocation of the problem.
 Linear programming consists of:
i) The simplex method – aims at maximizing or minimizing a given

function subject to constraints in respect of each variable.
ii) The transportation problem – deals with the problems of matching the
origins(stores, warehouses, factories) with the outlets (process, centre,
market etc) at minimum cost of distribution and transportation
iii) The assignment problem – assigning a given number of agents each
one to the same number of tasks so as to result in maximum efficiency
or minimum cost.
4. DYNAMIC PROGRAMMING
 Deals with problems related to multi-period analysis and decisions.
 No standard mathematical formulation like in the case of linear programming.
 A problem is broken down into a series of problems in such a way that
answers to the first sub problem can be used in deriving the solution to the
next sub-problem and so forth, finally giving solution to the whole problem.
5. SEQUENCING
 Determination of a sequence in which given jobs should be performed to
minimize total efforts – cost, time, mileage etc.
 Solves problem where effectiveness measures (in terms of cost, time, mileage
etc) depends upon the sequence of performing given jobs.
6. GAME THEORY
 A mathematical theory applicable to competitive business problems.
 Deals with situations where 2 or more (finite) individuals are making
decisions involving conflicting interest. The final decision depends upon the
decisions of the parties concerned.
 The basic assumptions made are that every competing party will adopt the
policy most unfavourable to us and therefore we are required to select the best
position among the worst positions.

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 In such situations, one’s favourable item is unfavourable to another.
7. INVENTORY CONTROL AND MANAGEMENT

 Inventory problems (models) are mainly concerned with inventory decisions
which basically include:
i) How much to order at one time
ii) When to order this quantity
8. QUEUING THEORY
9. NETWORK ANALYSIS (PERT/CPM)

 PERT – Programme Evaluation and Review Technique
 CPM – Critical Path Method
 PERT and CPM are management tools for planning and control of complex
jobs involving a large number of activities.
 The objective of PERT and CPM techniques is to establish the total duration
required for the completion of the project while incurring the optimum cost.
10. SIMULATION
 It is a manipulation of a model constructed from the formal statements of a
mathematical representation in respect of logical relations between the
elements in a structure or a system expressed in measurable terms.
 It is a process of designing an experiment which will duplicate or present as
nearly as possible the real situation and then watching what does happen.
 It is especially appropriate where it is difficult to build a model for the real life
situation mathematically or if at all it is modeled, it is difficult to solve the
model analytically.
11. REPLACEMENT THEORY

 Determination of the time when items of a plant should be replaced due to
depreciation.

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12. RELIABILITY THEORY

 Quantification of the frequency of failures and development of an indicator of
quality and dependability of a product.
13. MARKET ANALYSIS

 A method of analyzing the current movement of some variable in order to
predict the future movement of the same variable.
Advantages of Operations Research
1. Better control of operations of various systems in big complex organizations. This

spares management the cost and effort of continuous executive supervisions over
routine decisions.
2. Better co-ordination of operations of systems. Maintains law and order to avoid
chaos.
3. Better decisions – quantitative basis for decision making
4. Better systems – development of systems that are more effective and efficient.
Disadvantages of Operations Research (OR)
1. Magnitude of computation – OR seeks optimal solutions, taking all the factors

into account. These factors are numerous and expressing them in quantity and
establishing relationships among these requires huge calculations which require
costly electronic computers.
2. Absence of quantification of some intangible factors – OR requires quantification
of all elements. Some intangible factors such as human relations cannot be
quantified. Thus they are excluded, yet they may be significant.
3. Distance between managers and OR – operations research requires specialized
skills of mathematicians or statisticians who might not be aware of business
problems. Similarly, a manager fails to understand the complex working to OR.

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Key Concepts
1. Analog model – a model in which one physical property is used to represent

another physical property.
2. Decision theory models – a class of OR models designed to select an optimal
course of action from a set of alternative courses of action.
3. Decision variables – the unknowns that are to be determined by solving the
model.
4. Deterministic models – a model in which the functional relationships and
parameters are known with certainty.
5. Iconic model – a scaled physical representation of a real system.
6. Operations research – a scientific method of providing executive departments
with a quantitative basis for decisions regarding the operations under control.
7. LINEAR PROGRAMMING MODELS
Definition of Linear Programming

Linear programming is a mathematical technique for determining the optimal
allocation of resources among alternative uses of the resources to achieve a particular
objective. The objective includes profit maximization or cost minimization.
Advantages (utility) of L.P Approach
1. Insight and perspective into problem solutions

2. Consideration of all possible solutions to the problem
3. Better and more successful decisions.
4. Better tools for adjusting to meet changing conditions
5. Optimal use (allocation) of resources
6. Insight and perspective into problem situations

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Limitations of L.P Approach
1. Applicable only for linear expressions of objective functions and constraints.

2. Applicable only when coefficients in the objective function and the constraint are
known and constant over period of study.
3. It may generate fractional valued solutions which may not be applicable or
sensible.
4. It will fail to give a solution if management has conflicting multiple goals.
5. Large numbers of variables and complexity of their relationships.
Application areas of L.P
1. Industrial applications
i) Product mix problem
ii) Production Scheduling e.g. arrangement of 20 jobs to be done on 5
machines
iii) Blending Problems – where a product can be made from a variety of
available raw materials of various composition and prices
iv) Transportation problem
v) Production distribution problems
2. Management applications
i) Portfolio selection – selection of specific investments from among a
wide variety of alternatives, to maximize returns or minimize risks.
ii) Financial mix strategy – selection of means for financial company
projects, production operations etc. How much production is to be
supported by internally generated funds and by external funds?
iii) Profit planning – to maximize profit margin from net investment in
plant facilities and equipment, cash on hand and inventory.
iv) Media selection – in advertising field – effective media mix.
v) Traveling salesmen problem.

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vi) Determination of equitable salaries.

vii)Staffing problem
3. Miscellaneous applications
i) Farm planning – allocation of limited resources (e.g. acreage, labour,
water supply etc.) for revenue maximization.
ii) Airline routine – to determine the most economic pattern and timing
for flights for the most efficient use of aircraft, crews and money.
iii) Diet problems – to determine the most economical diet for patients,
feed ingredient combination to satisfy stated nutritional requirements at
a minimum cost level.
iv) Administrative applications
i. Optimal usage of resources like men, machine, materials i.e.
optimal allocation of resources.
ii. Departmental staff requirements over a period of time.
iii. Work distribution among staff members according to their
efficiency for optimum results.
8. MATHEMATICAL MODELS FOR LINEAR PROGRAMMING
2 main methods:
i) Graphical method
ii) Simplex method
GRAPHICAL METHOD
Steps:
i) Write the objective function and all necessary constraints.
ii) Graph the feasible region.
iii) Determine the coordinates of each of the corner points.
iv) Find the value of the objective function at each corner point.

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v) For a bounded region, the solution is given by the corner point producing the
optimum value of the objective function.
vi) For an unbounded region, check that a solution actually exists. If it does, it will
occur at a corner point.
Example 1
Maximize
Z =6 x+20 y
Subject to
x+ y≤16
x≤10
5 x+15 y≤180
x≥10; y≥0
x 10
25
20
15
10
5s
5s 10s 15s 20s 25s 30s 35s 5x 15 y 180

x  y 16
Corner points : (0,12) (0,0) (10,0) (10,6) (6,10)

Corresponding Z: 240 0 60 180 236
Optimal point (6,10)

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Therefore, x=6 , y=6 and Z =236
Example 2
Minimize:
Z =0 .18 x+0 .12 y
Subject to:
2x+6 y≥30
4 x+2 y≥20
y≥2
x≥10; y≥0
10
y 2
5s 10s 15s 20s 25s 30s 35s
4 x  2 y  20 2 x  6 y 30
SIMPLEX METHOD
Basic Concepts
1. Standard form – a linear program in which all of the constraints are written as
equalities.

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2. Slack variable – a variable added to the left hand side of less than or equal to
constraint to convert the constraint into an equality. Interpretation: the amount of
unused resources.
3. Surplus variable – a variable subtracted from the left hand side of a greater than or
equal to constraint to convert the constraint into an equality. Interpretation: the
amount over and above the required minimum level.
4. Iteration – sequence of steps performed in moving form one basic feasible
solution to another.
5. Simplex tableau – simplex table
6. Indicators – the numbers in the bottom row of the simplex table, which are from
the objective function except for the 0 at the far right corner.
7. Pivot column – the column of simplex table with the most negative indicator.
8. Pivot row – the row with the smallest non-negative quotient.
9. Pivot or key element – the element at the intersection of pivot row and pivot
column.
Solving Maximization Problems
Standard Maximum Form

A linear programming problem is in standard form if:
i) The objective function is to be maximized
ii) All variables are non-negative (xi = 0)
iii) All constraints involve ¿
iv) The constants in the constraints are all non-negative b≥0
Steps
1. Determine the objective function
2. Write all the necessary constraints
3. Convert each constraint into an equation by adding slack variables
4. Set up the initial simplex tableau
5. Locate the most negative indicator. Choose either if there are two.
6. Form the necessary quotients to find the pivot. Disregard any negative quotient or
quotients with a zero-denominator. The smallest non-negative quotient gives the

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location of the pivot. If all quotients must be disregarded, no maximum solution

exists. If two quotients are equally the smallest, let either determine the pivot.
7. Transform the tableau so that the pivot becomes 1 and all other numbers in that
column becomes 0.
8. If all the indicators are all positive or 0, this is the final tableau. If not, go back to
step 5 above and repeat the process until a tableau with no negative indicators is
obtained.
9. Read the solution from this final tableau. The maximum value of the objective
function is the number in the lower right corner of the final tableau.
Maximize
Z =9 X 1 +10 X 2
Subject to
X 1 +2 X 2≤8
5 X 1 +2 X 2 ≤16
Slack variables
X 1 + X 2 + X 3=8
5 X 1 +2 X 2 + X 4 =16
Initial simplex tableau:
[ ]
X1 X2 X3 X 4
1 2 1 0 8
5 2 0 1 16
−9 −10 0 0 0
Most negative indicator is -10, pivot column is X 2. 8/2 = 4. 16/2 = 8. 8 is least
quotient. Pivot row is 1st row, pivot element = 2.
X 1 X2 X3 X4
1 1 R1
1 0 4
2 2 2
5 2 0 1 16
−9 −10 0 0 0

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X1 X2 X3 X4
1 1
1 0 4
2 2
4 0 −1 1 8 R 2−2 R 1
−4 0 5 0 40 R 3+10 R 1
X1 X2 X3 X4
5 1
0 1 − 3
8 8
1 1 R2
1 0 − 2
4 4 4
−4 0 5 0 40
X1 X2 X3 X4
5 1
0 1 − 3
8 8
1 1
1 0 − 2
4 4
0 0 4 1 48 R 3+4 R 2
Maximum is 48 hours when X1=2, X2=3
Example 2
Maximize
Z =3 X 1 +2 X 2 + X 3
Subject to
2 X 1 +X 2 + X 3 ≤150
2 X 1 +2 X 2 + 8 X 3 ≤200
2 X 1 +3 X 2 + X 3 ≤320
X 1 ≥0 , X 2 ≥0 , X 3 ≥0

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Convert the equalities by adding slack variables
Max
Z =3 X 1 +2 X 2 + X 3
Sub to
2 X 1 + X 2 + X 3 +X 4 =150
2 X 1 +2 X 2 +8 X 3 + X 5 =200
2 X 1 +3 X 2 +X 3 + X 6 =320
X 1 ≥0 , X 2 ≥0 , X 3 ≥0 , X 4 ≥0 , X 5 ≥0 , X 6 ≥0
X1 X2 X3 X 4 X5 X6
2 1 1 1 0 0 150
2 2 8 0 1 0 200
2 3 1 0 0 1 320
−3 −2 −1 0 0 0 0
X1X2 X3 X 4 X5 X6
1 1 1 1
1 0 0 75 R1
2 2 2 2
2 2 8 0 1 0 200
2 3 1 0 0 1 320
−3 −2 −1 0 0 0 0
X1 X2 X3 X4 X5 X6
1 1 1
1 0 0 75 −2 R 1+R 2
2 2 2
0 1 7 −1 1 0 50 −2 R 1+R 3
0 2 0 −1 0 1 170 −2 R 1+R 3
1 1 3
0 − 0 0 225 3 R 1+R 4
2 2 2

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X1 X2 X3 X4 X5 X6
1 1
1 0 −3 1 − 0 50 − R 2+R 1
2 2
0 1 7 −1 1 0 50
0 0 14 2 −2 1 70 −2 R 2+R 3
1 1
0 0 4 1 0 250 R 2+R 4
2 2
Solutions
X 1 =50 , X 2 =50 , X 3 =0 ,
X 4 =0 , X 5 =0 , and
X 6 =70 .
Z =250
Practice Questions
1. Maximize
Z =8 X 1 +12 X 2
Subject to
X 1 +2 X 2≤14
6 X 1 +8 X 2 ≤72
X 1 ≥0 , X 2 ≥0
Solutions
X 1 =8, X 2 =3, Z=100
2. Maximize
Z =100 X 1 +60 X 2 +40 X 3
Subject to the constraints
X 1 + X 2 + X 3≤100
10 X 1 +4 X 2 +5 X 3 ≤600
2 X 1 +2 X 2 +6 X 3 ≤300
X 1 ≥0 , X 2 ≥0 , X 3 ≥0
100 200 22000

X 1= , X 2= , X 3 =0, Z=
Solutions 3 3 3

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3. The ABC manufacturing company can make 2 products, P 1 and P2. Each of the
products requires time on cutting machine and a finishing machine as shown
below.
Products
P1 P2
Cutting hrs (per unit) 2 1
Finishing hrs (per unit) 3 3
Profit (per unit) 6 4
Maximum sales (units per week) - 200
The number of cutting hours available per week is 390 and number of finishing hours
available per week is 810. How much should be produced of each product in order to
achieve maximum profit of the company.
Maximize (total profits)

Z =6 X 1 + 4 X 2
Subject to
2 X 1 + X 2≤290
3 X 1 +3 X 2≤810
X 2 ≤200
X 1 ≥0 , X 2 ≥0
Where, X 1 = No. of units of product P1 and X 2 = No. of units of product P2.
Solution:
X 1 =800 , X 2 =0, X 3 =400 , X 6 =5000 , X 4 =1, Z=20 ,000
Optimum mix leaves 5000 units of constraint no.3 and 2000 of constraints no. 1 used.

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9. MIXED CONSTRAINTS: PROBLEMS WITH ¿ OR ¿
CONSTRAINTS
Example 1
Maximize
Z =10 X 1 +8 X 2
Subject to
4 X 1+ 4 X 2 ≥ 60 2 X 1+ 5 X 2 ≤ 120 X 1 ≥0, X 2 ≥ 0
Add slack or surplus variables to the constraints as needed

4 X 1 +4 X 2 −X 3 =60
2 X 1 +5 X 2 + X 4 =120
−10 X 1 −8 X 2 +Z=0
Phase 1
First simplex tableau
X1 X2 X3 X4
4 4 −1 0 60
2 5 0 1 120
−10 −8 0 0 0
This tableau gives the solution:

X 1 = 0 X 2 = 0 X 3 = - 60 X 4 = 120
But this is not a feasible solution since

X3 is negative. All the variables in any
feasible solution must be non-negative.
When a negative value of a variable appears, use row operations to transform the
matrix until a solution is found in which all variables are non-negative. The difficulty
is caused by the – 1 in row one of the matrix. Correct this by using row
transformations to change a column that has non-zero entries (such as X 1 or X 2

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columns) to one in which the first row is 1 and the other entries are 0. The choice of a
column is arbitrary.
1
Let us choose the X 1 column. Multiply the entries in the first row by 4 to get 1
in the top row of the column. Then use row transformations to get 0’s in the other
rows of that column.
X1 X2 X3 X4
−1 1
1 1 0 15 R1
4 4
1
0 3 1 90 −2 R 1+ R 2
2
−5
0 2 0 150 10 R 1+ R 3
2
The solution X 1 =15 , X 2 =0 , X 3 =0 , X 4 =90 is feasible. The process of

applying row transformations to get a feasible solution is called phase 1.
Phase 2
The simplex method is applied as usual to get the optimal solution in phase 2. The
1
pivot is 2 .
[ ]
X1 X2 X3 X4
5 1
1 0 60
2 2
0 6 1 2 180
0 17 0 5 600
X 1 =60 , X 2 =0 and Z =600
Procedure/Steps:
1. Set up initial simplex tableau
2. Apply row transformations to get a feasible solution i.e. phase 1.
3. Use simplex method to get optimal solutions i.e. phase 2.

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Example 2
Maximize
Z =120 X 1 + 40 X 2 +60 X 3
Subject to
X 1 + X 2 + X 3≤100
400 X 1 +100 X 2 +280 X 3 ≤20000
X 1 + X 2 + X 3≥60
X 1 + X 2 + X 3 + X 4 =100
400 X 1 + 100 X 2 +280 X 3 + X 5 =20000
X 1 + X 2 + X 3− X 6 =60
−120 X 1 −40 X 3 −60 X 3 + Z=0
[ ]
X1 X2 X 3 X4 X5 X6
1 1 1 1 0 0 100
400 160 280 0 1 0 20 ,000
1 1 1 0 0 −1 60
−120 −40 −60 0 0 0 0
Solution
X 1 =0 , X 2 =0 , X 3 =0 , X 4 =400 , X 5 =20000 , X 6 =−60 . Not a
feasible solution because X6 is negative. Choose a column X2, 3rd row entry in
column X2 is already 1. Using row transformation to get 0’s in the rest of the column
gives:
Phase 1:
X1 X 2 X 3 X4 X5 X6
0 0 0 1 0 0 40 −1R 3+R 1
240 0 120 0 1 160 10400 −160 R 3+R 2
1 1 1 0 0 −1 60
−80 0 −20 0 0 0 2400 40R 3+R 4

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Phase 2:
X1 X2 X3 X4 X5 X6
0 0 0 1 0 1 40
1
1 0 0.5 0 0. 004 0 .667 R2 43 . 3
240
0 1 0.5 0 −0. 004 −1. 667 16 . 7 1 R 2+R 3
0 0 20 0 0 .32 13. 4 5864 80 R 2+R 4
Solutions,
X 1 =43 . 3 , X 2 =16 . 7 , X 3 =0 , X 4 =40 , X 5 =0 , X 6 =0
Exercise
1. Maximize
Z =8 X 1 +10 X 2
Subject to
3 X 1 + X 2≤50
4 X 1 +2 X 2 + X 3 ≥70
Step 1
3 1 1 0 50
4 2 0 −1 70
−8 −10 0 0 0
Step 2: Use 2nd column to complete phase 1 of the solution and give the feasible
solution of the results.
1
1 0 1 15
2
−1
2 1 0 35
2
12 0 0 −5 350

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Step 3: Use simplex method to solve.
2. An animal feed company must produce 200kg of a mixture consisting of
ingredient X 1 and X 2 daily. X 1 costs $ 3 per kg and X 2 $ 8 per kg. No
more than 80 kg of X1 can be used, and at least 60 kg of X2 must be used.

Find how much of each ingredient should be used if the company wants to
minimize cost.
Minimize (total cost)

Z =3 X 1 +8 X 2
Subject to constraints
X 1 + X 2 =200
X 1 ≤80 , X 2 ≥60
X 1 ≥0 , X 2 ≥0
where X1 = no. of kgs of ingredient X1 and X2 = no. kgs of ingredient

X2
X 1 + X 2 + X 3=200 , X 1 + X 4 =80 , X 2 −X 5 =60
Solutions:
X 1 =80 , X 2 =120 , S=0
10. MINIMIZATION PROBLEM

Standard minimum form:
A linear programming problem is in standard minimum form if:
i) The objective function is to be minimized

ii) All the variables are non-negative

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iii) All the constraints involve ¿

iv) The constants in the constraints are all non-negative. Standard minimum problems
can be solved with the method of surplus variables presented above. To solve a
minimization problem, first observe that the minimum of an objective function is
the same number as the maximum of the negative of the function.
Procedure: Solving nonstandard problems
i) If necessary, convert the problem to a maximum problem

ii) Add slack variables and subtract surplus variables as needed.
iii) Write the initial simplex tableau.
iv) If the solution from this tableau is not feasible, use row transformations to get a
feasible solution (phase 1).
v) After a feasible solution is reached, solve by the simplex method (phase 2)
Example
Minimize
W=3 y 1 +2 y 2
Subject to
y 1 +3 y 2 ≥6
2 y1 + y 2 ≥3
and
y 1 ≥0 , y 2≥0
Step 1: Change this to a maximization problem by letting Z equal the negative of the
objective function. Z = -10. Then find the maximum value of Z.
Z =−W=−3 y 1 −2 y 2 The problem can now be stated as follows:
Maximize
Z =−3 y 1−2 y 2
Subject to

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y 1 +3 y 2 ≥6
2 y1 + y 2 ≥3
and
y 1 ≥0 , y 2≥0
Step 2: For phase 1 of the solution, subtract surplus variables and set up the first
tableau.
Maximize Z +3 y 1 +2 y 2 =0
y 1 +3 y 2 − y 3 =6
Subject to
2 y1 + y 2 − y 4 =3
Step 3: Initial simplex tableau
[ ]
y1 y2 y3 y 4
1 3 −1 0 6
2 1 0 −1 3
3 2 0 0 0
Step 4: Row transformations
The solutions y 1 =0 , y 2 =0 , y 3 =−6 and y 4 =−3 contains negative

numbers. Row transformations must be used to get a tableau with a feasible solution.
Let us use the y 1 column since it already has a 1 in the first row. Begin by getting a
0 in the second row, and then a 0 in the third row.
y1 y2 y3 y4
1 3 −1 0 6
0 −5 2 −1 −9 −2 R1+R 2
0 −7 3 0 −18 −3 R 1+R 3
Step 5: Solution by simplex method (phase 2)

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The above tableau has a feasible solution. In phase 2, complete the solution as usual
by the simplex method. The pivot is -5
y1 y2 y3 y4
1 3 3
1 0 −3 R 2+ R 1
5 5 5
−2 1 9 1
0 1 − R2
5 5 5 5
1 7 27
0 0 7 R 2+ R 3
5 5 5
3 9
y1= y2= y 3 =0 y 4 =0 . This solution is
The solution is 5 , 5 , and
−27
Z=
feasible, and the tableau has no negative indicators. Since 5 and Z = -W,
27 3
W= y1=
then 5 is the minimum value, which is obtained when 5 and
9
y2=
5 .
Exercise
1. Minimize
W=2 y 1 +3 y 2
Subject to
y 1 + y 2 ≥10
2 y1 + y 2 ≥16
and
y 1 ≥0 , y 2≥0
Solution
y 1 =10 , y 2 =0 , y 3 =0 and y 4 =4 , W=20
2. A chemical manufacturer processes two chemicals, Arkon and Zenon, in varying

proportions to produce three products A, B, and C. He wishes to produce at least
150 units of A, 200 units of B and 60 units of C. Each ton of Arkon yields 3 of A,
5 of B and 3 of C. Each ton of Zenon yields 5 of A, 5 of B and 1 of C. If Arkon

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costs $ 40 per ton and Zenon $ 50 per ton, advise the manufacture how to
minimize his cost.
Solution
Minimize
40 X 1 +50 X 2
Subject to
3 X 1 +5 X 2≥150
5 X 1 +5 X 2≥200
X 1 ≥0 , X 2 ≥0
where X 1 = no. of tons of Arkon and X 2 = no. of tons of Zenon

Ans: Purchase 25 tons of Arkon
Purchase 15 tons of Zenon.
Total cost (25×$ 40)+(15×$ 50)=1750
3. Sam, who is dieting requires tow food supplements I, and II. He can get these
supplements from two different products, A and B as shown in the table.
Supplement
(Grams per serving)
I II
A 3 2
B 2 4
Sam’s physician has recommended that he include at least 15 grams of supplement I

but no more than 12 grams of supplement II in his daily diet. If product A costs $ 25
per serving and product B costs $ 40 per serving, how can he satisfy his requirements
most economically?
11. DUALITY THEORY

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Duality is related to a connection that exists between standard maximum and standard
minimum problem. Any solution of a standard maximum problem produces the
solution of an associated standard minimum problem, and vice-versa. Each of these
associated problems is called the dual of the other.
Theorem of Duality
The objective function W of a minimizing linear programming problem takes on a
minimum value if and only if the objective function Z of the corresponding dual
maximizing problem takes on a maximum value. The maximum value of Z equals the
minimum value of W.
Solving minimum problems with Duals
1. Find the dual standard maximum problem

2. Solve the maximum problem using the simplex method
3. The minimum value of the objective function W is the maximum value of the
objective function Z.
4. The optimum solution is given by the entries in the bottom row of the columns
corresponding to the slack variables.
Example
Minimize
W=3 y 1 +2 y 2
Subject to
y 1 +3 y 2 ≥6
2 y1 + y 2 ≥3
y 1 ≥0 , y 2≥0
Step 1: Get the dual maximizing problem; use the given information to write the
matrix
[ ]
1 3 6
2 1 3
3 2 0
Transpose to get the following matrix for the dual problem

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[ ]
1 2 3
3 1 2
6 3 0
Write the dual problem from this matrix as follows:
Maximize
Z =6 x1 +3 x 2
Subject to
x 1 +2 x 2 ≤3
3 x1 + x 2≤2
x 1≥0 , x 2 ≥0
Step 2: Solve this standard maximizing problem using simplex method.
Slack variables
x1 +2 x 2 +x 3 =3
3 x 1 + x2 +x 4 =2
−6 x 1−3 x 2 + Z=0
x1 ≥0 , x 2 ≥0 , x 3 ≥0 , x 4 ≥0
x1 x2 x3 x4
1 2 1 0 3
3 1 0 1 2
−6 −3 0 0 0
Simplex method gives the following final tableau:
[ ]
x1 x2 x3 x4
3 −1 7
0 1
5 5 5
−1 2 1
1 0
5 5 5
3 9 27
0 0
5 5 5
The last row of this final tableau shows that the solution of the given standard
minimum problem is as follows:

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27 3 9
y 1= y 2=
The minimum value of W is 5 . 5 and 5 . Minimum value of
27
W, 5 is the same as maximum value of Z.
Interpretation of primal-dual optimum solution

1. Slack/surplus variables in the dual problem correspond to the primal basic
variables in the optimum solution.
2. The values of the elements in the index row corresponding to the columns of the
slack/surplus variables with changed sign directly gives the optimum values of the
basic primal variables.
3. Values for the slack variables of the primal are given by the index row under the
non-basic variables of the dual solution with changed sign.
4. The value of the objective function is same for primal and dual problem.
Exercise
Minimize
W=10 y 1 +8 y 2
Subject to
y 1 +2 y 2 ≥2
y 1 + y 2 ≥5
y 1 ≥0 , y 2≥0
y 1 =0
Solution:
y 2 =5 for a minimum of 40
12. SENSITIVITY ANALYSIS
Also referred to as post-optimality analysis. It is usually undertaken to explore the

effect of changes in the LP parameters on the optimum solution. Sensitivity analysis is
concerned with the extent of sensitivity of the optimum solution to an LP for change
in one or more of:

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i) The profit or cost co-efficients of the objective function

ii) The LHS coefficients of the variables in the constraints
iii) The RHS quantities of the constraints
Sensitivity analysis is the process of investigating to what extent the numerical

parameters of a LP model can be changed before the optimum solution for a given set
of parameters of a LP model can be changed, before the optimum solution for a given
set of parameters is disturbed. Such post optimality analysis can be of the following
types.
Type I
To determine the range within which each of profit (or cost) co-efficients can be
varied without altering the basic variables through the optimum profit (or cost) would
actually vary.
Type II
To indicate the extent of increase of RHS quantities without altering the existing basic
variables.
Type III
To investigate the effect of adding or deleting constraints and/or variables on the
optimum product mix.
Type IV
To determine the sequence of basic situations that become optimum as the changes in
LP parameters are extended further and further.
The dual is useful not only in solving minimum problems but also in seeing how
small changes in one variable will affect the value of the objective function. For
example:
Suppose an animal breeder needs at least 6 units per day of nutrient A and at least 3
units of nutrient B and that the breeder can choose between 2 different feeds, feed 1

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and feed 2. Find the minimum cost for the breeder if each bag of feed 1 costs $ 3 and
provides1 unit of nutrient A and 2 units of B, while each bag of feed @ costs $ 2 and
provides 3 units of nutrient A and 1 of B. If y 1 represents the number of bags of feed 1
and y2 represents the number of bags of feed 2, then:
Minimize
W=3 y 1 +2 y 2
Subject to
y 1 +3 y 2 ≥6
2 y1 + y 2 ≥3
y 1 ≥0 , y 2≥0
Final tableau as solved in pg (35)
[ ]
x1 x2 x3 x4
3 −1 7
0 1
5 5 5
−1 2 1
1 0
5 5 5
3 9 27
0 0
5 5 5
3 9
The breeder will obtain minimum feed costs by using 5 bag of feed 1 and 5
27
bag of feed 2 per day, for a daily cost of 5 = 5.40 dollars. The top two numbers
in the right-most column give the imputed costs in terms of the necessary nutrients.
1 7
x 1= x 2=
From the final tableau 5 and 5 which means that a unit of nutrient
1 7
A costs 5 = 0.20 dollars, while a unit of nutrient B costs 5 = 1.40 dollars.
The minimum daily cost $ 5.40 is obtained as follows

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($ 0.20 per unit of A )×(6 units of A )=$1 .20

($ 1.40 per unit of B )×(3 units of B)=$ 4 .20
Total=$ 5.40
These 2 numbers from the dual $ 0.20 and $ 1.40 also allow the breeder to estimate
feed costs for “small” changes in nutrient requirements. For example, an increase of
one unit in the requirement for each nutrient would produce a total cost of
$ 5.40 (6 units of A , 3 of B )
$ 0.20 ( an extra unit of A )
$ 1.40 ( an extra unit of B)
$ 7. 40 total per day
These numbers 0.20 and 1.40 are called the shadow values of nutrients.
Exercise
1. An office manager needs to purchase new filing cabinets. Ace cabinets cost $ 40
each, require 6 square feet of floor space, and 8 cubic feet of files. On the other
hand, each Excello Cabinet costs $ 80, requires 8 square feet of floor space, and
holds 12 cubic feet. His budget permits him to spend no more than $ 560 on files,
while the office has room for no more than 72 square feet of cabinets. The
manager desires the greatest storage capacity within the limitations imposed by
funds and space.
i) How many of each type of cabinet should he buy?
Let x1 be no. of Ace Cabinets
Let x2 be no. of Excello Cabinets.
Maximize
Z =8 x1 +12 x 2
Subject to
40 x 1 +80 x 2 ≤560
6 x 1 +8 x 2≤72
x 1≥0 , x 2 ≥0
Final tableau

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x1 x2 x3 x4
3 −1
0 1 3
80 4
−1 1
1 0 8
20 2
1
0 0 1 100
20
ii) What are the imputed amounts of storage for each unit cost and floor space?
iii) What are the shadow values of the cost and the floor space?
The final tableau of the dual problem is given as:

x1 x2 x3 x4
1 −1
0 1 1
2 4
−1 1 1
1 0
20 80 20
0 0 8 3 100
Solution:
ii) Cost: 28 sq. feet
Floor space: 72 square feet
1
iii) 20 , 1
2. A small toy manufacturing firm has 200 square of felt, 500 ounces of stuffing
and 90 feet of trim available to make two types of toys, a small bear and a
monkey. The bear requires 1 square of felt and 4 ounces of staffing. The
monkey requires 2 squares of felt, 3 ounces of stuffing, and 1 foot of trim. The
firm makes $1 profit on each bear and $1.50 profit on each monkey. The linear
program to maximize profit is
Max x 1 +1. 5 x 2=Z
Subject to
x 1 +2 x 2 ≤200
4 x 1 +3 x 2 ≤600
x 2≤90

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The final tableau is:

0 1 0.8 −0.2 0 40
1 0 −0.6 0.4 0 120
0 0 −0.8 0.2 1 50
0 0 0.6 0.1 0 180
i) What is the corresponding dual problem?

ii) What is the optimal solution to the dual problem?
iii) Use the shadow values to estimate the profit the firm will make if their supply
of felt increases to 210 squares.
iv) How much profit will the firm make if their supply of stuffing is cut to 590
ounces and their supply of trim is cut to 80 feet?
13. TRANSPORTATION MODELS
Transportation models deal with the transportation of a product manufactured at

different plants or factories (supply origins) to a number of different warehouses
(demand destinations). The objective is to satisfy the destination requirements within
the plants capacity constraints at the minimum transportation cost.
Transportation models typically arise in situations involving physical movement of

goods from plants to warehouses, warehouses to wholesalers, wholesalers to retailers,
and retailers to customers.
Solution of the transportation models requires the determination of how many units
should be transported from each supply origin to each demands destination in order to
satisfy all the destination demands while minimizing the total associated cost of
transportation.
Illustration:
Assume that a manufacturer has three plants, P1, P2 and P3 producing the same
product, which is transported from them to three warehouses W1, W2 and W3. Each
plant has a limited supply (capacity), and each warehouse has specific demand. Each
plant can transport to each warehouse but the transportation costs vary for different

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combinations. The problem is to determine the quantity each plant should transport to
each warehouse in order to minimize total transportation costs.
Supply Demand
P1 W1 D1
S1
P2 W2 D2
S2
S3 P3 W3 D3
LINEAR PROGRAMMING FORMULATION OF TRANSPORTATION

PROBLEM
Let
x ij= quantity transported from plant P i to warehouse W j
c ij= per unit transportation cos t from plant Pi to warehouse W j
Objective function is to minimize total transportation costs.
The LP objective function:

Minimize
Z =c 11 x 11 +c12 x12 +c 13 x 13 +c 21 x 21 +c 22 x 22+c 23 x 23+c 31 x 31+c32 x32 +c 33 x 33
Subject to:
Supply constraints
x 11 + x 12+x 13 =s1
x 21+ x 22+ x23 =s 2
x 31+ x 32+ x33 =s 3
Demand constraints

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x 11 + x 21+ x 31=d 1
x 12+ x 22+ x32=d 2
x 13+ x 23 + x 33=d 3
And
X i j ≥0 for i=1,2,3 j=1,2,3 . Assumed that total supply available at the plants
will exactly satisfy the demand required at the destinations, i.e.
s 1 + s2 +s 3 =d 1 + d2 +d 3
In general a transportation problem with m factories (capacity centres or source of

supply) and n warehouses (requirement centres) can be expressed in tabular form as
follows:
Factory Supply
Warehouse destinations
(Origins) (Availability)
W1 W2 Wj Wn
F1 S1
F2 S2
Fi Si
Sm
Demand/
m n
Requiremen d1 d2 dj dn ∑ si =∑ d j
i =1 j=1
t
The problem of the company is to distribute the available product to different

warehouses in such a way so as to minimize the total transportation cost for all
possible factory-warehouse shipping patterns.
i=index for origins (factory ); i=1,2,. .. . , m
j=index for destinations ( warehouse); j=1,2,. .. . ,n

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x i j=number of units shipped from origin i to destination j

c i j=cost per unit of shipping from origin i to destination j
s i = supply or capacity in units at origin i
d j = demand in units at destination j
i) The objective is to determine xij that would minimize the total transportation cost:
Z =x11 c11 + x12 c 12+. .. x 1n c1 n
+x 21 c 21 +x 22 c 22+. . .+ x2 n c 2 n
+x m1 c m1 +x m2 c m 2 +. .. x mn c mn
Subject to the linear constraints:

ii) Total supply form the ith origin to all the destinations is equal to total quantity
produced at the ith origin, i.e.
x ij +x i2 +. ..+x in =s i ;i=1,2, .. . , m
iii) Total quantity transported at the jth destination from various origin should be equal
to the quantity required at the jth destination, i.e.
x ij +x 2 j +.. .+x mj=d j ; j=1,2,. .. , n
x ij≥0, for all i and j
iv) The general mathematical model may be given as follows:
m n
Minimize Z=∑ ∑ cij x i j
i=1 j=1
Subject to the constraints
∑ x i j =si ;i=1,2,...,m (capacity constra int )

j=1 .
m
∑ x i j =d j ; j=1,2,. .. , n (requirement constra int )

i=1

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x ij≥0, for all i and j
For a feasible solution to exist, it is necessary that total capacity equals total
requirement, i.e.
m n
∑ si =∑ d j
i=1 j=1
Feasible solution
A set of non-negative values xij, i = 1,2,…,m; j = 1,2,…,n that satisfies (ii), (iii) and
(iv) is called a feasible solution to the transportation problem.
Basic feasible solution

It is an initial feasible solution with an allocation (m+n-1) number of variables,
xij = 1,2,…,m; ; j = 1,2,…,n
Optimum solution
It is a feasible solution (not necessarily basic) that minimizes the total transportation
cost.
Illustration
Minimize Z=(21 x 11 +16 x 12+25. x 13+13 x 14 )

+(17 x 21+ 18 x 22 +14 x 23+ 23 x 24 )
+(32 x 31+27 x 32+ 18 x 33 +41 x 34 )
Subject to
i) Capacity constraints
x 11 + x 12+ x 13 + x14 =11

x 21 + x 22+ x23 + x 24 =13
x 31 + x 32+ x33 + x 34 =19

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ii) Requirement constraints
x 11 + x 21 + x 31=6
x 12+ x 22 + x32=10
x 13+ x 23 + x 33=12
x 14+ x24 + x 34 =15
and
x ij≥0 , for all i=1,2,3,4 ; j=1,2,3 where x ij represents the number of unites
of the product shipped from the ith production centre (i=1,2,3,4) to the jth selling centre
(j=1,2,3). The value of each

x ij will be positive for a cell, this means that no
quantity is shipped between the production centre and selling centre in question.
Capacity
From/To W1 W2 W3 W4
(supply)
21 16 25 13
F1 11
x 12 x 13 x 14
x 13 17 18 14 23
F2 13
x 22 x 23 x 24
x 21
32 27 18 41
F3 x 32 19
x 33 x 34
x 34
Requiremen
t 6 10 12 15 43
(demand)
The above LP problem involves 3×3=9 decision variables and 3 + 4 =7

constraints.
SOLUTION PROCEDURE FOR TRANSPORTATION PROBLEMS

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Transportation method: procedure

1. Define the objective function to be minimized with the constraints imposed on the
problem.
2. Set up the transportation table with m rows representing the sources (plants,
factories etc.) and n columns representing the destinations (warehouses, stores,
markets etc).
3. Develop an initial feasible solution to the problem
4. Examine whether the initial solution is feasible or not. The solution is said to be
feasible if the solution has allocations in (m+n-1) cells with independent positions.
The positions are said to be independent if it is not possible to alter any individual
allocation without either changing the positions of allocations or violating the
supply and demand constraints. The cells having allocations are known as
occupied cells and the remaining cells are known as empty (or unoccupied) cells.
5. Test whether the solution obtained in step 4 is optimum or not. This is done by
computing opportunity costs associated with the empty cells. Opportunity cost of
an empty cell mean what will be the cost reduction, if this particular cell is
included in the solution.
6. If the solution is non-optimum, modify the shipping schedule by including that
empty cell whose inclusion in the programme results in the largest savings.
7. Repeat steps 5 and 6 until an optimum solution is obtained.
Applications
1. To minimize shipping costs from factories to warehouses or from warehouses to
retail outlets.
2. To determine lowest cost location for new factory, warehouse or sales office.
3. To determine minimum cost production schedule that satisfies the firm’s demand
and production limitations (called ‘production smoothing’).
FINDING AN INITIAL FEASIBLE SOLUTION

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An initial basic feasible solution can be constructed by selection the (m+n-1) basic
variable (allocations)
x ij one at a time after which a value is assigned to that
variable so as to satisfy a linear constraint.
3 methods:
i) The north-west corner rule
ii) Lowest cost entry method
iii) Vogel’s approximation method
1. North-West corner method (NWCM)
i) Select the north west (upper left hand) corner cell of the transportation table and
allocate as many units as possible equal to the minimum between available supply
and demand requirement i.e. min (s1, d1)
ii) Adjust the supply and demand numbers in the respective rows and columns
allocations.
iii) If:
a. The supply for the first row is exhausted, then move down to the first cell
in the second row and first column and go to step 2.
b. If the demand for the first column is satisfied then move horizontally to the
next cell in the second column and first row and go to step 2.
iv) If for any cell, supply equals demand, then the next allocation can be made in cell
either in the next row or column.
v) Continue the procedure until the total available quantity is fully allocated to the
cells as required.

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854 6
515
Capacity
From/To W1 W2 W3 W4
(supply)
21 16 25 13
F1 11
17 18 14 23
F2 13
32 27 18 41
F3 19
Requirement
6 10 12 15 43
(demand)
Solution consists of six cells
x 11=6 , x 12=5 , x 13=0 , x 14 =0

x 21=0 , x 22=0 , x 23=5 , x 24=8
x 31=0 , x 32=0 , x33 =4 , x 34=15
Total cos ts=∑ x ij c ij

¿ 6(21 )+5 (16)+5( 18 )+8(14 )+ 4(18 )+ 15( 41 )=1095

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2. Least Cost Method (LCM)

i)
a. Select the cell with the lowest transportation cost among all the rows or
columns of the transportation table.
b. If the minimum cost is not unique, then select arbitrarily any cell with this
minimum cost
ii) Allocate as many units as possible to the cell determined in step (i) and eliminate
that row (column) in which either supply is exhausted or demand is satisfied.
iii) Repeat steps (i) and (ii) for the reduced table until the entire supply at different
factories is exhausted to satisfy the demand at different warehouses.
Capacity
From/To W1 W2 W3 W4 4 15
(supply) 10
11
12
21 16 25 13
F1 11
17 18 14 23
F2 13
32 27 18 41
F3 19
Requirement
6 10 12 15 43
(demand)
Total cos ts=11(13 )+1(17)+12(14 )+5(32 )+10 (27)+4( 41)=922
3. Vogel’s Approximation Method (VAM)
More preferred to the other two methods because the initial basic feasible solution
obtained is either optimum or very close to the optimum solution.
i) Compute a penalty for each row and column in the transportation table. The
penalty for a given row and column is merely the difference between the smallest
cost and the next smallest cost in that particular row or column.

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ii) Identify the row or column with the largest penalty. In this identified row or
column, choose the cell which has the smallest cost and allocate the maximum
possible quantity to the lowest cost cell in that row or column so as to exhaust
either the supply at a particular source or satisfy demand at a warehouse.
If a tie occurs in the penalties, select that row/column which has the minimum
cost. If there is a tie in the penalties, select that row/column which has minimum
cost. If there is a tie in the minimum cost also, select that row/column which will
have maximum possible assignments.
iii) Reduce the row supply or column demand by the amount assigned to the cell.
iv) If the row supply is now zero, eliminate the row, if the column demand is now
zero, eliminate the column. If both the row supply and the column demand are
zero, eliminate both the row and column.
v) Recompute the row and column difference for the reduced transportation table,
omitting rows or columns crossed out in the preceding step
vi) Repeat the above procedure until the entire supply at factories are exhausted to
satisfy demand at different warehouses.
Capacity Column
From/To W1 W2 W3 W4
(supply) penalty
2 16 25 13
F1 11 3
1
17 18 14 23
F2 13 3
32 27 18 41
F3 19 9
Requirement
6 10 12 15 43
(demand)
Row Penalty 4 2 4 10

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From/To W1 W2 W3 W4 Capacity Column

Capacity
From/To W1 W2 W3 W4
(supply) penalty
(supply)
F2 21 17 18
16 14 25 23 1313 3
F1 F3 32 27 18 41 19 11 9
Requirement 176 10 18 12 14 4 2332
F2 13
(demand)
Row Penalty 3215 9 27 4 18 18 41
F3 19
Requirement
6 10 12 15 43
From/To
(demand) W1 W2 W3 Capacity Column
(supply) penalty
F2 17 18 14 9 3
F3 32 27 18 19 9
Requirement (demand) 6 10 12 28
Row Penalty 15 9 4
Arbitrarily select column for W2 or row for F3 since both equal maximum difference.
Select row for F3.
Capacity Column
From/To W2 W3
(supply) penalty
F2 18 14 3 3
F3 27 18 19 9
Requirement (demand) 10 12 22
Row Penalty 9 4
The next step brings in the cell (2,2) assignment x22 = 3 followed by the entry x32 = 7
unites which certainly satisfies the demand of warehouse W2. The initial feasible
solution thus obtained is:
x 11=0 , x 12=0 , x 13 =0 , x14 =11
x 21 =6 , x 22 =3 , x23 =0 , x 24=4
x 31 =0 , x 32 =7 , x33 =12, x34 =0
costs=11(13)+6 (17)+3 (18 )+4 (23 )+7(27 )+12(18 )=796
73412 6
11

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Note: TC is considerably less than the cost associated with the initial solutions
obtained by the other 2 methods.
FINDING THE OPTIMUM SOLUTION

(Testing the initial solution for optimality)
2 Methods:
i) Stepping stone method
ii) Modified distribution method (MODI)
Checks solution obtained to see if it represents the minimum cost possible by

calculating “shadow costs” i.e. an imputed cost of not using a particular route and
comparing with the real cost of transport to see whether a change of allocation is
desirable.
MODIFIED DISTRIBUTION (MODI) METHOD
1. Determine an initial basic feasible solution consisting of m+n-1 allocations in

independent positions.
2. Calculate a nominal “dispatch” and “reception” cost for each occupied cell by
assuming that the transport cost per unit is capable of being split between dispatch
and reception cost thus:
 by convention the first depot is assigned the value zero which is then
substituted in the first equation and thus obtain all other values.
3. Calculate the shadow costs of the unoccupied cells.

4. Compute the opportunity costs (improvement index) by using the relationship:
Opportunity cost = actual cost – shadow cost for each of the unoccupied cells.

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In other words, for every unoccupied cell, implied cost can be determined by
adding the corresponding row number and column number and then other
opportunity costs obtained by subtracting the actual cost of this cell from its
implied cost.
Implied cost (for a given solution) for an unoccupied cell is an upper limit on the
actual shipping cost of this beyond which the inclusion of this cell will not
decrease the transportation cost.
5. Check the sign of each opportunity cost. If the opportunity costs of all the
unoccupied cells are either positive or zero, the given solution is the optimum
solution. If one or more unoccupied cells have negative opportunity cost, the
given solution is not an optimum solution and further savings in transportation
cost are possible.
6. Select the unoccupied cell with the largest negative opportunity cost as the cell to
be included in the next solution.
7. Draw a closed path or loop for the unoccupied cell selected in step 6 above. It may
be noted that right angel turns in this path are permitted only at occupied cells and
at the original unoccupied cell. It may be noted that every closed loop must have
even number of turns and is formed with horizontal and vertical lines only.
8. Assign alternate plus and minus signs at the unoccupied cells on the corner points
of the closed path with a plus sign at the cell being evaluated.
9. Determine the maximum number of units that should be shipped to this
unoccupied cell. The smallest stone with a negative position on the closed path
indicates the number of units that can be shipped to the entering cell. This quantity
is added to all the cells on the path marked with a plus sign and subtracted from
those cells marked with minus signs. This makes the unoccupied cell under
consideration an occupied cell making one of the occupied cells to become
unoccupied.
10. Repeat the whole procedure until an optimum solution is attained i.e. we are able
to show that for a given solution the opportunity cost of all the unoccupied cells
are either positive or zero.
11. Obtain the total transportation cost for the new solution.

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Condition to be satisfied by initial solution

i) Every row and every column must have at least one assignment.
ii) All the assignments must be made in independent cells (the cells which make a
closed loop are called dependent cells and other cells are independent cells) and
must be m+n-1 in number.
Illustration
Check the solution obtained to see if it represents the minimum cost possible. This is
done by calculating “shadow costs” (i.e. an imputed cost of not using a particular
route) and comparing these with the real transport costs to see whether a change of
allocation is desirable. This is done as follows:
Step 1
Calculate a nominal “dispatch” and “reception” cost for each occupied cell by making
the assumption that the transport cost per unit is capable of being split between
dispatch and reception costs thus:
Capacity Dispatch
From/To W1 W2 W3 W4
(supply) No.
21 16 25 13
F1 11 DF1
11
17 18 14 23
F2 13 DF2
6 3 4
32 27 18 41
F3 19 DF3
7 12
Requirement
6 10 12 15 43
(demand)
Reception No. RW1 RW2 RW3 RW4

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Di=Value for the ith row of factory i

R j =Value for the jth column of warehouse j
For the occupied cells, the following relationship exists
Cij =Di +R j
The unit transportation cost for the six occupied cells can be described as:
C14 =DF 1 + RW 4 =13 C 221 =DF 2 + RW 1 =17
C22=DF 2 + RW 2 =18 C 24=DF 2 + RW 4 =23
C32=DF 3 + RW 2 =27 C 33=DF 3 + RW 3 =18
where DF1, DF2, DF3, represent dispatch cost from F1, F2, and F3. RW1, RW2,
RW3, and RW4 represent reception costs at warehouses W1, W2, W3 & W4.
In order to obtain a solution to determine the row and column numbers, one of the
variables must be chosen and given an arbitrary value of zero. By convention the first
depot is assigned the value zero i.e. DF1 = 0. With DF1 = 0, we can obtain values of
the remaining variables.
DF 1 + RW 4 =13⇒ RW 4=13−0=13
DF 2 +RW 4 =23 ⇒ DF 2=23−13=10
DF 2 +RW 1 =17⇒ RW 1=17−10=7
DF 2 +RW 2 =18 ⇒ RW 2=18−10=8
DF 3 +RW 2 =27 ⇒ DF 3=27−8=19
DF 3 +RW 3 =18 ⇒ RW 3=18−19=−1
Evaluate the cost change for all the unoccupied cells by using the following cost
change formula:
Cost Change=C ij −( Di + R j )
As in the stepping stone method, if an unoccupied cell has a negative cost change, it
indicates that an improved solution is possible. When all cost changes have zero or
positive values, the optimum solution is reached. The net cost change or opportunity
cost for each of the unoccupied cell is evaluated as follows:

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Unoccupied Cell Cij −( Di +R j ) Net Cost Change

(F1,W1) 21-(0+7) +14
(F1,W2) 16-(0+8) +8
(F1,W3) 25-(0+-1) +26
(F2,W3) 14-(10+-1) +5
(F3,W1) 32-(19+7) +6
(F3,W4) 41-(19+13)
Capacity Dispatch
From/To W1 W2 W3 W4
(supply) No.
21 16 25 13
F1 11 D1 = 0
11
17 18 14 23
F2 6 3 4 13 D2 = 10
32 27 18 41
F3 12 19 D3 = 19
7
Requirement
6 7 10 12 12 15 43
(demand)
Reception
7 8 -1 13
No.
The net cost change derived corresponds with those obtained in the stepping stone
method of which none is negative and thus this is the optimum solution.
STEPPING STONE METHOD
 Involves calculation of the net cost change that can be obtained by introduction of
any of the unoccupied cells into the solution.
 Important rule: every increase (or decrease) in supply at one occupied cell must be
associated by a decrease (or increase) in supply at another.

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 A negative net cost change indicates that a cost reduction can be made by making
the change, and a positive one indicates a cost increase.
Procedure
1. Determine an initial basic feasible solution using any of the three methods.
2. Ensure that the number of occupied cells exactly equal to m+n-1 where m is
number of rows and n is number of columns.
3. Evaluate the cost effectiveness of shipping goods via transportation routes not
currently in the solution. Testing of each unoccupied cell involves the following
steps:
i) Selection of an unoccupied cell, where a shipment should be made
ii) Beginning at this cell, trace a closed path using the most direct route through at
least three occupied cells used in the solution and then back to the original
occupied cell and moving with only the turning points on the closed path and
hence others are likely to be skipped over. The cells at the turning points are
called ‘stepping stones’ on the path
iii) Assign (+) and (-) signs alternatively on each corner cell of the closed path just
traced, starting with a plus sign at the unoccupied cell to be evaluated.
iv) Compute the ‘net change in the cost’ along the closed path by adding together
the unit cost figures found in each cell contain a plus sign and then subtracting
the unit costs in each square containing the minus sign.
v) Repeat sub-step (i) through sub-step (ii) until ‘net change in cost’ has been
calculated for all unoccupied cells of the transportation table.
4. Check the sign of each of the net changes. If all net changes computed are grater
than or equal to zero, an optimum solution has been reached. Otherwise it is
possible to improve the current solution and decrease total shipping costs.
5. Select the unoccupied cells having the highest negative net cost change and
determine the maximum number of units that can be assigned to a cell marked
with a minus sign on the closed path corresponding to this cell. Add this number
to the unoccupied cell and to all other cells on the path marked with a plus sign.
Subtract this number from cells on the closed path marked with a minus sign.
6. Go to step 2 and repeat the procedure until we get an optimum solution.

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Illustration
Consider the initial solution given by least cost method as shown.
Capacity
11
4 12 15
From/To
10 W1 W2 W3 W4
(supply)
21 16 25 13
F1 11
17 18 14 23
F2 13
32 27 18 41
F3 19
Requirement
6 10 12 15 43
(demand)
Step 1
1. Initial solution has 4+3-1=6 occupied cells and involves transportation cost Rs.
922.
2. Let us evaluate the unoccupied cell (F1W1). Shipment of one unit to this cell will
incur an additional cost of Rs. 21. This requires in turn that one unit be decreased
from cell (F1W4) which decreases cost by Rs. 13. But to keep the balance between
capacity and requirement we have to add one unit to the cell (F 3W4) which
increases cost by Rs. 41 and finally one unit is decreased from cell (F 3W1) which
decreases cost by Rs. 32. Determine the net cost as follows:
Cell Change in Allocation Cost Change

(F1W1) +1 +21
(F1W4) -1 -13
(F3W4) +1 +41
(F3W1) -1 -32
Net Cost Change +17

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W1 W4
F 2 1
1 3 Capacity
From/To W1 W2 W3 W4
(supply)
+ 21 16 - 11 25 13
F 3 4
F1 11
2 1
+ 17 18 - 14 23
F2 13
- 5 + 4
- 32 27 + 18 41
If F3 19
Requirement
6 10 12 15 43
(demand)
the unoccupied cell (F1W1) is made occupied then the total transportation cost will be
increased by Rs. 17 per unit supplied. This transfer of shipment of one unit is shown
in the RHS table by making a closed path. Similarly, other unoccupied cells can also
be evaluated proceeding in the same manner.
Unoccupied cell Closed path Net Cost Change (Rs.) Remarks

(F1,W2)--(F1,W4)-- 16-13+41-27=+17 Cost increase
(F1,W2)
(F3,W4)-- (F3,W2)
(F1,W3)-- (F1,W4)-- 25-13+41-32+17- Cost increase
(F1,W3) (F3,W4)-- (F3,W1)-- 14=+24
(F2,W1)-- (F2,W3)
(F2,W2)-- (F3,W2)-- 18-27+32-17=6 Cost increase
(F2,W2)
(F3,W1)-- (F2,W1)
(F2,W4)-- (F3,W4)-- 23-41+32-17=-3 Cost decrease
(F2,W4)
(F3,W1)-- (F2,W1)
(F3,W3)-- (F3,W1)-- 18-32+17-14=-11 Cost decrease
(F3,W3)
(F2,W1)-- (F2,W3)
11
4 12 15
10
Step 2

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Only the unoccupied cell (F3,W3) for which the largest reduction in cost change being
-11 will decrease the total transportation cost by Rs. 11 per unit and hence will be
considered for further reduction. The maximum quantity that can be shipped to cell
(F3,W3) is exactly the minimum quantity of those cells with the minus sign in the
closed path as shown above. In this case, cell (F3,W1) has 5 and cell (F2,W3) has 12 as
the quantity to be shipped. Therefore the minimum of 5 & 12 is 5 which has to be the
maximum quantity to be shipped to cell (F3,W3). If we ship more than 5 units to the
cell (F3,W3), we have to assign some negative value to the cell (F3,W1) in order to
meet supply and demand requirements which is not possible. The new solution
obtained is shown below:
11
4 7 6
10
5
Capacity
From/To W1 W2 W3 W4
(supply)
21 16 25 13
F1 11
17 18 14 23
F2 13
32 27 18 41
F3 19
Requirement
6 10 12 15 43
(demand) Downloaded by RJ prince (rjweby@gmail.com)
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The total transportation cost of the improved solution is:

Total cos ts=11(13 )+6(17 )+7(14 )+5(32)+10 (27)+5(18 )+4 (41 )=867
Unoccupied cell Closed path Net Cost Change (Rs.) Capacity

Remarks
(F1,WFrom/To
1) (F1,W1W1
)--(F1,W4)--W2 21-13+41-18+14-
W3 W4 Cost increase
(supply)
213,W3)—
(F3,W4)-- (F 16
17=+28 25 13
F1 11
(F2,W3)—( F2,W1)
(F1,W2) 7 6 171,W4)--
(F1,W2)-- (F 18 14
16-13+41-27=+17 23 Cost increase
11
4 5F2 13
(F3,W4)-- (F3,W2)
(F1,W3) F3 32 ,W )--
(F1,W3)-- (F 27 18
25-13+41-18=+35 41 Cost
1 4 19 increase
(F3,W4)-- (F3,W3)
Requirement
(F2,W2) (F2,W2)--
6 (F2,W3)--10 18-14+18-27=-5
12 15 Cost
43 decrease
(demand)
(F3,W3)-- (F3,W2)
(F2,W4)—(F3,W4)— 23-41+18-14=-14
(F2,W4) Cost decrease
(F3,W3)—(F2,W3)
(F3,W1)-- (F3,W3)— 32-18+14-17=+11
(F3,W1) Cost increase
(F2,W3)-- (F2,W1)
Thus every unit shipped from factory F2 to warehouse W4 results in a saving of Rs 14.
We now make the amount of the shift as large as possible without violating any
normal conditions. This is done by shipping the minimum quantity of those cells with
the 10 Capacity
From/To W1 W2 W3 W4
(supply)
21 16 25 13
F1 11
17 18 - 14 + 23
F2 13
32 27 + 18 - 41
F3 19
Requirement
6 10 12 15 43
(demand)
minus sign in the closed path as shown above. Cell (F3,W4) has 4 and cell (F2,W3) has
7 as the quantity to be shipped. Therefore, the maximum quantity to be shipped to cell
(F2,W4) is 4. The second feasible shipment plan is shown in the table below.
11
410 total transportation
The 39 6 cost associated with the improved solution is:

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Total cos ts=11(13 )+6(17 )+3(14 )+4 (23)+10 (27)+9 (18)=811
Step 3
Repeat step 2 and examine if the transportation costs can be reduced further by
replacing any of the unoccupied cells with the one actually used in the second
solution. The net changes in costs together with their associated loops for each of the
unoccupied cells are as follows:
Transported to Quantity Unit Cost Total Cost
Factory
Warehouse
F1 W4 11 13 143
F2 W1 6 17 102
F2 W2 3 18 54
F2 W4 4 23 92
F3 W2 7 27 189
F3 W3 12 18 216
Total transportation cost 796

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14. ASSIGNMENT MODELS

Assignment problem deals in allocation of various resources (items) to various
activities (receivers) on one to one basis in such a way that the resultant effectiveness
is optimized. Possible applications include assignment of available sales-force to
different regions; vehicles to routes; products to factories; contracts to bidders;
machines to jobs; development engineers to several construction sites and etc.
With information about the number of assignment i, (i=1,2,3,…,n) performing the

same number of jobs j (j=1,2,3…,n) and the pay off measure Cij available for each
assignment, the objective is to determine the strategy that minimizes the total cost or
maximizes the total utility.
n resources are to be assigned to n activities such that each resource is allocated to

each activity and each activity is performed by one resource only. The allocation is to
be done in such a way so as to maximize the resultant effectiveness.
The assignment problem can be represented in the form of n×n matrix

[C ij ]n×n
known as cost or effectiveness; where

x ij represents assignment of the jth person to
the ith job and

Cij is the cost associated with assigning the i th facility(person) to the
jth job.
It is assumed that:
x ij =1, if ith person is assigned to the jth job and
x ij =0, otherwise.
Mathematical formulation of the assignment problem is given as

n n
Minimize TC=Z=∑ ∑ c ij x ij
i=1 j=1
subject to the constraints:

i) Each person should be assigned to one and only one job, i.e.

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x i1 + x i2 +…+ x in ; i=1,2,…, n
ii) Each job must be assigned to one and only one person, i.e.
x 1 j + x 2 j +…+x nj ; j=1,2,…, n
iii)
Persons/Jobs J1 J2 Jn Supply
c11 c12 c1n

P1 1
x11 x12 x1n
c21 c22 c1n
P2 1
x21 x22 x2n
cn1 cn2 cnn

P3 1
xn1 xn2 xnn
Requirement 1 1 1
x ij=0 or 1 for all i, j
Hungarian Method of Assignment Problem (Minimization Case)
This method is based on the following important properties:

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i) In assignment problem, if a constant quantity is added or subtracted from every

element of any row or column in the given cost matrix, an assignment that
minimizes the total cost in one matrix also minimizes the total cost in the other.
ii) In assignment problem, a solution having zero total cost is an optimum solution.
Procedure for Hungarian Method
1. In a given matrix, subtract the smallest element in each row from every element of
that row.
2. In the reduced matrix obtained from step 1, subtract the smallest element in each
column from every element of that column.
3. Make the assignment for the reduced matrix obtained from steps 1 and 2 in the
following ways:
i) Examine the rows successively until a row with exactly one unmarked zero
is found. Enclose this zero in a box ( ) as an assignment will be made
there and cross (X) all other zeros appearing in the corresponding column
as they will not be considered for future assignment. Proceed in this way
until all the rows have been examined.
ii) Examine the columns successively until a column with exactly one
unmarked zero found. Make an assignment to this single zero by putting a
square ( ) around it and cross out (X) all other zeros appearing in the
corresponding row as they will not be used to make any other assignment
in that row. Proceed in this manner until all columns have been examined.
iii) Repeat the operations (i) and (ii) successively until one of the following
situations arises:
a. All the zeros in rows/columns are either marked ( ) or crossed (X)
and there is exactly one assignment in each row and in each

column. In such a case optimum assignment policy for the given
problem is obtained.
iv) There may be some row (or column) without assignment, i.e. the total
number of marked zeros is less than the order of the matrix. In such a case,
proceed to step 4.

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4. Draw the minimum number of vertical and horizontal lines necessary to cover all
the zeros in the reduced matrix obtained from step 3 by adopting the following
procedure:
i) Mark ( ) all rows that do not have assignments.
ii) Mark ( ) all columns (not already marked) which have zeros in the
marked rows [step 4(ii)]

iii) Mark ( ) all rows (not already marked) that have assignments in marked
columns [step 4(iii)].

iv) Repeat steps 4 (ii) and (iii) until no more rows or columns can be marked.
v) Draw straight lines through all unmarked rows and marked columns.
5. If the number of lines drawn [step 4 (iii)] are equal to the number of rows or
columns, then it is an optimum solution, otherwise go to step 6.
6. Select the smallest element among all the uncovered elements. Subtract this
smallest element from all uncovered elements and add it to the element which lies
at the intersection of two lines. Thus we obtain another reduced matrix for fresh
assignments.
7. Go to step 3 and repeat the procedure until the number of assignments become
equal to the number of rows and columns. In such a case, we shall observe that
row/column has an assignment. Thus the current solution is an optimum solution.
Steps in Assignment Problem

1. Set up cost table for the problem
2. Find the opportunity cost
i) Subtract smallest number in each row from every number in that row, then
ii) Subtract smallest number in each column from every number in that
column.
3. Test opportunity cost table to see if optimum assignments are possible by drawing
the minimum possible lines on columns and/or rows such that all zeroes are
covered.
If optimum: No. of lines = no. of rows or columns

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Optimum solutions at zero locations systematically make final assignments.

i) Check each row and column for a unique zero, and make the first
assignment at the intersection.
ii) Eliminate that row and column and search for another unique zero. Make
that assignment and proceed in a like manner.
If not optimum: No. of Lines < No. of Rows or Columns

4. Revise opportunity cost table in 2 steps:
i) Subtract the smallest number not covered by a line from itself and every
other uncovered number.
ii) Add this number at every intersection of any two lines.
Example 1
A computer centre has got 4 expert programmers. The centre needs 4 application
programmes to be developed. The head of the computer centre, after studying
carefully the programmes to be developed, estimates the computer time in minutes
required by the respective experts to develop the application programmes as follows.
Programmes
Programmers A B C D
1 120 100 80 90
2 80 90 110 70
3 100 140 120 110
4 90 90 80 90
Step 1: Subtract the smallest element of each row from every element of the
corresponding row,
Programmes
Programmers A B C D
1 40 20 0 10
2 10 20 40 0
3 0 40 20 10
4 10 10 0 10
Step 2: Subtract the smallest element of each column from every element in that
column.

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Programmes
Programmers A B C D
1 40 10 0 10
2 10 10 40 0
3 0 30 20 10
4 10 0 0 10
Step 3: Draw the minimum possible number of horizontal and vertical lines so as to
cover all the zeros. Since the number of lines (= 4) is equal to the order of the given
matrix, an optimum assignment has been attained. Make the zero assignment as
follows:
i) Starting with row 1 of the matrix above, examine rows one by one until a row
containing exactly a single zero element is found. Make an assignment
indicated by ( ) to that cell. Then cross all other zeros in the column in which
the assignment was made. This eliminates the possibility of making further
assignments in that column. Do likewise for the rows.
ii) Starting with column 1, examine columns until a column containing exactly
one remaining zero is found. Make an assignment in that position and cross
other zeros in the row in which the assignment was made.
Programmes
Programmers A B C D
1 40 10 0 10
2 10 10 40 0
3 0 30 20 10
4 10 0 0 10
iii) Continue with these successive operations on rows and columns until all zeros
have been either assigned or crossed out. Absence of any more unmarked zeros
indicates an optimum assignment schedule – as the table above. Then compute
the minimum computer – time (in minutes) as follows:
Example 2
A company is producing a single product and is selling it through fire agencies
situated in different cities. All of a sudden there is a demand for the product in another
five cities not having any agency of the company. The Company is faced with the
problem of deciding on how to assign the existing agencies to dispatch the product to
needy cities in such a way that the traveling distances is minimized. The distance (in

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kms) between the surplus and deficit cities are given in the following distance –
matrix.
Surplus
cities/Deficit Programmes
cities
Programmer
I II III IV V
s
A 160 130 175 190 200
B 135 120 130 160 175
C 140 110 155 170 185
D 50 50 80 80 110
E 55 35 70 80 105
Determine the optimum assignment schedule.

Step 1
Solution: Subtracting the smallest element of each row from every element of the
corresponding row, we get the adjoining reduced matrix.
Table 1
Surplus
cities
Programmer
I II III IV V
s
A 30 0 45 60 70
B 15 0 10 40 55
C 30 0 45 60 75
D 0 0 30 30 60
E 20 0 35 45 70
Step 2
Subtracting the smallest demand of each column from every element of the
corresponding column to get the following reduced matrix:

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Table 2
Surplus
cities
Programmer
I II III IV V
s
A 30 0 35 30 15
B 15 0 0 10 0
C 30 0 35 30 20
D 0 0 20 0 5
E 20 0 25 15 15
Step 3
Row 1 has a single zero in column 2. Make assignment by putting square around it
and delete the other zeros in column 2 by marking X.

Table 3
Surplus
cities
Programmer
I II III IV V
s
A 30 0 35 30 15
B 15 0 0 10 0
C 30 0 35 30 20
D 0 0 20 0 5
E 20 0 25 15 15
- Make an assignment by putting square (squaring 0) in column 1 which has a
single demand in row 4 and cross the other zero which is not yet crossed.
- Column 3 has a single zero in row 2 thus, make an assignment and delete the
other zero which is uncrossed.
Note: There are no remaining zeros, and row 3, row 5, column 4, and column 5 each
has no assignment. Thus, the optimum solution is not reached at this stage. Proceed to
the following important steps.
Step 4

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Draw the minimum number of horizontal and vertical lines necessary to cover all
zeros at least once. The following systematic procedure may help to draw the
minimum set of lines:

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i) For simplicity, first make table 4 again
Surplus
cities
Programmer
I II III IV V
s
A 30 0 35 30 15
4
B 15 0 0 10 0 L2
C 30 0 35 30 20 1
D 0 0 20 0 5 L3
E 20 0 25 15 15
2
L1
ii) Secondly, mark ( ) row 3 and row 5 in which there is no assignment.
iii) Then mark ( ) column 2 which have zeros in marked row 3 and 5.
iv) Next, mark ( ) row 1 because this row contains assignment in marked column 2.
No further rows or columns will be required to mark during this procedure.

v) Draw through the required lines as follows:
a. Draw line (L1) through marked column 2.
b. Next, draw lines (L2 and L3) through unmarked rows (2 and 4) both having
largest number (2) of uncovered zeros. Since no zero is left uncovered, the
required lines will be L1, L2, and L3.
Step 5
i) Select the smallest element (15) from all the elements of the matrix not covered by
lines and add to every element that lies at the intersection of the lines L 1, L2, and
L3 and leaving the remaining elements unchanged. Matrix table 5 is obtained.
Table 5
Surplus
cities
Programmer
I II III IV V
s
A 15 0 20 15 0

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B 15 15 0 10 0
C 15 0 20 15 5
D 0 15 20 0 5
E 5 0 10 0 0
Step 6
Again repeat step 3 to reach the final matrix (table 6)
Table 6
Surplus
cities
Programmer
I II III IV V
s
A 15 0 20 15 0
B 15 15 0 10 0
C 15 0 20 15 5
D 0 15 20 0 5
E 5 0 10 0 0
Note
In table 6, there are no remaining zeros and every row and column has an assignment.
Since no two assignments are in the same column (they cannot be if the procedure has
correctly been followed) the zero assignment is the required optimum solution. From
the original matrix, the optimum assignment schedule is therefore:
Route Distance
(Kilometres)
A–V 200
B – III 130
C – II 110
D–I 50
E – IV 80
Minimum distance 570 Kilometres
travelled
Exercise
1. A project work consists of four major jobs for which four contractors have
submitted tenders. The tender amounts quoted in thousands of Ksh. are given in
the matrix as:
Jobs

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J1 J2 J3 J4
C1 15 29 35 20
C2 21 27 33 17
Contractors C3 17 25 37 15
C4 14 31 39 21
Find the assignment which minimizes total cost of the project. Each contractor has to
be assigned one job.
Answers: C1 – J2; C2 – J3; C3 – J4; C4 – J4

Minimum cost = 91
2. A company employs service engineers based at various locations throughout the
country to service and repair their equipment installed in customers’ premises.
Four requests for service have been received and the company finds that four
engineers are available. The distance each of the engineers is from the various
customers is given in the following table and the company wishes to assign
engineers to customers to minimize the total distance to be traveled.
Customers
W X Y Z
Alf 25 18 23 14
Bill 38 15 53 23
Engineers Charlie 15 17 41 30
Dave 26 28 36 29
Solution:
Total mileage of the final assignment:
Mileage
A to Z 14
B to X 15
C to W 15
D to Y 36
80 miles
15. NETWORK ANALYSIS

It refers to a family of related techniques that help management to plan and control
projects. These techniques show interrelationships of various chores/tasks which
make up the overall projects and clearly identify the critical paths of the project. They
are most useful in complex large organizations or big projects with restrictions or
constraints.

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Objectives of network analysis
1. Planning, scheduling and control

2. Simplified framework of the interconnectivity of various activities constituting
a project or a programme. Done to show the technology interdependence of
various activities.
3. Minimization of the total cost, total time, and other resources.
4. Maximization of efficiency/effectiveness, returns, etc.
MANAGEMENT APPLICATIONS OF NETWORK ANALYSIS

Network analysis is the organized application of systematic reasoning for planning,
scheduling, monitoring and controlling practical situations where many separate tasks
(which make up a whole project) can happen simultaneously or consecutively.
Applications include:
1. Building and construction – construction of buildings, bridges, factories,
highways, stadiums.
2. Budgeting and auditing procedures.
3. Assembly line scheduling
4. Missile development
5. Installation of complex equipment e.g. computers, large machines.
6. Planning.
7. Advertising programmes for development and launching of new products.
8. Finding the best traffic flow pattern in a city.
9. Research and development.
Main concepts of network analysis:
1. Activity – a task or job which takes time and resources. Denoted by an arrow (
).
2. Predecessor activity – an activity that must be completed immediately prior to
the start of another activity.

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3. Successor activity – activity that succeeds other activities.

4. Concurrent activities – activities that can be accomplished together.
5. Critical activity – an activity whose delay causes delay in the entire project.
6. Dummy activity – an activity that does not consume time or resources. It is used
to show logical dependencies between activities. Denoted by a broken arrow (
).
7. Event – a point in time that indicates the start or finish of an activity. It is denoted
by a circle (O), or a node.
Activity
Start Event Finish event
There are 3 types of events:

i) Merge event – formed when more than one activity come and join together
in an event.
ii) Burst event - formed when more than one activity leaves an event.
iii) Merge and burst event – a combination of the two. When more than one
activity come and join together and more than one activity leaves an event.
8. Network – a combination of activities and events in a logical sequence according

to the rules of drawing networks.
Rules for construction of network diagrams
1. Each activity is represented by one and only one arrow in the network.
2. No two activities can be identified by the same beginning and end event. In such
cases a dummy activity is used.
3. An activity can only be undertaken if all activities preceding it are completed.
4. The flow of the network diagram should be from left to right.

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5. Arrows should be straight, not curved or bent, and should not cross each other
unless it is inevitable.
6. The length of arrows is of no significance.
7. Angles between the arrows should be as large as possible.
8. Each activity must have a unique tail and head event.
Activity
Tail event Head event

9. A complete network should have only one point of entry (i.e. start event) and only
one point of exit (finish event).
10. Generally no even can be numbered until all preceding events have been
numbered. The number at the head of the arrow is always greater than the number
at its tail.
Identification of activities
There are three main methods of identification:
1. a short description of the task/activity
2. alphabetical or numerical code
3. tail and head event numbers
Illustrations
1. Activity B cannot start until A is completed. (B depends on A or B is preceded by
A or B succeeds A).
A B
2. Activities B and C cannot start until activity A is completed i.e. B and C depends
on A.
B
A

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3. Activity C cannot start until both A and B are completed
A
C
4. Both A and B must be finished before either C or D can start.
A C
B D
5. Activity A and B must be completed before activity C can start. Only activity B
must be completed before activity D can start.
A C
B D

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6. Activity Preceding activity

A: Buying orbit -
B: Removing the wrapper A
C: Putting the orbit in the mouth B
D: Chewing the orbit C
A B C D

A -
C A
B -
D A, B
A C
B D
Common errors in Network Diagrams

1. Dangling – disconnection of an activity before completion of all activities in the
project network diagramming.

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2. Looping or cycling error – this is having a series of activities which lead back to
the same event.
3. Redundancy – providing unnecessary dummy activity in a network diagram.
Draw the following network diagrams

A -
B -
C A
D C
E B&C
A D
B
E

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A -
B -
C A
D A
E B
F B
G C&E
H C,E, & F
A D
C
G
B H
E
10. Preceding activities are in brackets:
A(-)
B(-) C E
C(A)
D(B) A
E(A&C)
F(B)
I
G(C&D)
B D
H(G&F)
I(E)
G
J(H&I) F
H J K
K(J)

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TIME ESTIMATES IN NETWORK ANALYSIS
Time analysis of the network is useful for planning the various activities of a project.
Time analysis requires an estimation of time to complete an activity. An activity time
is the forecast of time expected of each activity from the starting time to its
completion under normal conditions. The basic objective of time analysis is to get a
planned schedule of the project. The plan should include the following:
i) Total completion time for the project

ii) Earliest time when each activity can begin
iii) The latest time when each activity can be started without delaying the total
project.
iv) Float for each activity – that is the amount of time by which the
completion of an activity can be delayed without delaying the total project
completion
v) Identification of critical activities and critical path
The analysis of the projects time can be achieved by using:
i) Single time estimates of each activity

ii) Multiple time estimates of each activity
CRITICAL PATH METHOD (CPM)
If the times of all activities of a particular project are given, the time taken for each of
the possible paths through the network can be evaluated.
Role of CPM in project planning and coordination (importance)
i) The network indicates the specific activities required to complete a

project.

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ii) The network indicates the interdependence and sequence of specific

activities.
iii) Indicates start and finish time of each activity of the project.
iv) It indicates the critical path and its duration of time.
Assumptions of CPM
i) A project can be subdivided into a set of predictable independent activities.
ii) The precedence relationship of project activities can be completely represented
by a non-cyclical network graph in which each activity connects directly with
the immediate successors.
iii) Activity times may be estimated as single point estimates or as 3 point
estimates (that is, optimistic, pessimistic, and most likely) and are independent
of each other.
Key concepts
i) Earliest start time (EST) – this is the earliest time at which an activity can begin.
It is the earliest time at which a succeeding activity can start.
ii) Latest start time (LST) – refers to the earliest expected time – the latest time
which an activity can begin without affecting the normal project duration. The
latest possible time at which a preceding activity can finish without delaying
project duration.
iii) Earliest finish time (EFT) – earliest time at which an activity can be completed.
iv) Latest finish time (LFT) – the latest time at which an activity can be finished
without affecting the normal time duration.
v) Slack – the amount of time by which the start of an activity may be delayed
without affecting the overall duration of a project. Free or spare time in the
network.
vi) Critical path – the path in the network with the longest time.
2 features to note:
i) There can be no more than one critical path in a network.
ii) To reduce the duration of a project requires shortening the time of an activity that
is on the critical path.

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COMPUTATION OF TIME ESTIMATES

There are three main categories:
i) Forward pass (associated with EST)
ii) Backward pass (LST)
iii) Critical path
Illustration
Activity Pre-requisite Time

A - 1
B A 2
C A 3
D B 4
E C 1
F D&E 2
E F
C
D
A B
A B C D E F
EST 0 1 1 3 4 7
LST 0 1 1 3 6 7
A B C D E F
EFT 1 3 4 7 7 9
LFT 1 3 6 7 7 9
Identification of critical path

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A critical path comprises of critical activities. An activity is critical when:
i) EST = LST of tail event

ii) EST = LST of head event
iii) EST of head event – EST of tail event = time duration of the activity
Critical path: A – B – C – F
To denote the critical path use || or a double-arrow.
Project duration
Project duration is the sum of the time taken by the critical activities on the critical.
Project duration = 1 + 2 + 4 + 2 = 9 days
Exercise 1
Precedence table for a project is given as follows:
Activity Predecessor Time duration
A - 3
B - 2
C - 2
D A 4
E B 4
F B 7
G C 4
H A, D 2
I B, E 5
J B, C, F, G 6
K A, B, D, E, I, H 3
a) Draw the network diagram

b) Determine EST, LST, EFT & LFT of each activity
c) Find the critical path
d) Find project duration

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Solution-
D K
I
A
B E
C F J
A B C D E F G H I J K
EST 0 0 0 3 2 2 2 7 6 9 11
LST 0 0 0 6 2 2 5 10 7 9 12
EFT 3 2 2 7 6 9 9 11 11 15 15
LFT 6 2 5 10 7 9 9 12 12 15 15

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Exercise 2
A project consists of the following activities with duration n weeks of each activity
given in brackets.
A(12), B(8), and C(14), can be executed concurrently. A and B precede D(4). B
precedes E(2), F(10), and H(16). F and C precede G(6). E and H precede I(4) and
J(8). C, F, and J precede K(4). K precedes L(8). D, I, G, and L are the terminating
activities in the project.
i) Construct the precedence table, and hence draw the network for the project.
ii) Determine the critical path and the project duration using the forward pass and
backward pass method.
iii) Construct a table of the EST, LST, EFT, LFT, and total float for each activity.
FLOAT CALCULATIONS
If an activity is not on the critical path then it is not possible to increase its duration
without increasing the total project duration. The extra time is known as float. There
are three types of float:
i) Total float
ii) Free float
iii) Independent float
i) Total float
It is the amount of spare time a path of activities could be delayed without affecting
the overall project duration.
Total float = Latest head time – Earliest tail time – Activity duration
TF = LFT – EST - tij
Activity Aij is that activity with the tail end I and the head end j. Total float on critical
activity is always zero.
Interpretation of total float

a) Negative total float – implies inadequate resources; activity may not finish on
time

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b) Zero total float – resources are just enough to complete the activity; activities
are not delayed
c) Positive total float – excess resources; thus they can be reallocated to other
activities or delay activities by amount of the total float.
2. Free Float
Amount of time an activity could be delayed when all preceding activities are
completed as late as possible and all succeeding activities completed as early as
possible.
FF = EHT – ETT - tij

= EFT – EST - tij
3. Independent float
Amount of time an activity could be delayed when all preceding activities are
completed as late as possible and all succeeding activities completed as early as
possible.
IF = EHT – ETT – tij

= EFT – EST - tij
Note:
 EHT = EFT
 LTT = LST
Slacks: free or spare time in a network. Slack refers to events while float focuses on
activity.
Event Slack (ES)

ES = Latest event time – Earliest event time
2 types of slack:
 Head slack (HS) = Lj – Ej
 Tail slack (TS) = Li – Ei
In terms of slack events:

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TF = Lj – Ei – tij
FF = TF – HS
IF = FF – TS
[Get EST, LST, EFT, LFT, TF, FF, IF, HS, and TS for exercise 1]
PROJECT EVALUATION AND REVIEW TECHNIQUE (PERT)

Methodology:
1. Project planning – drawing the network diagram
2. Time estimation
3. Scheduling – computation of the latest and earliest allowable start and finish time.
Hence we determine the critical path, the float and the slacks.
4. Time cost trade-offs – to determine the cost of reducing the completion time of the
project. The cost of reducing the project-completion-time as well as time-cost
trade-offs of activity performance times are put into account for activities on the
critical path.
5. Resource allocation – the feasibility of each schedule must be checked with
respect to man-power and equipment requirement.
6. Project control – the project is controlled by checking the progress against the
schedule, assigning and scheduling man-power and equipment, and analyzing the
effects of delays.
PERT system of 3 estimates
1. Optimistic time (O, a, or t0)
2. Most likely time (M, tm or ML)
3. Pessimistic time (P, b, or tp)
1. Optimistic time – It is the estimate of the shortest minimum possible time an

activity can take to be completed. This is usually under ideal conditions.
2. Pessimistic time – It is the longest possible time that an activity can take.
3. Most likely time – the time which the activity will take most frequently if
performed a number of times.

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The three time estimates O, M and P are combined statistically to develop the
expected time (te) for an activity.
2 main assumptions:
1. The three time estimates O, M and P form the end-points and the mode of beta
distribution. Both optimistic and pessimist time are equally likely to occur
whereas the probability of occurrence of most likely time is 4 times that of O and
P.
O M te P
2. The probability of O:M:P = 1:4:1
O 4M P
Expected time duration= + +
6 6 6
O+4 M+ P
t e=
6
OR
a+4 m+b
t e=
6
Deviation/Variance
( )
2
P−O
6 =standard deviation squared
Standard deviation
√( )
2
P−O
σ=
6

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The standard deviation of the project = √ sum of variances of critical activities

Procedure for calculating time estimates using PERT
1. Prepare a table of expected duration, the variance for each of the activities of the
project.
2. Draw the project network diagram of activities based on the expected duration of
activities.
3. Find or determine the critical path.
4. Find the total expected duration of the project based on the network also referred
to as the average duration of the project.
5. Standard deviation of the entire project
6. Find the probability of completing the project within a particular time period.
Example
A project has the following activities and characteristics.
Optimisti Most Pessimisti Expected

Activit
c likely c time Variances
y
time time time duration (te)
1-2 2 5 8 5 1
1-3 4 10 16 10 4
1-4 1 7 13 7 4
2-5 5 8 11 8 1
3-5 2 8 14 8 4
4-6 6 9 12 9 1
5-6 4 7 10 7 1

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8
5
10 8
7 7
Critical path: 1-3-5-6

Total duration time = 10 + 8 + 7 =25 days
Standard deviation of the project
σ =√ sum of variances of critical activities=√(4 +4 +1)= √ 9=3
COST ANALYSIS - Costs and Networks
Concerned with the cost of activities and of the project as a whole. The main objective
is to calculate the cost of various activity durations and find the cheapest way of
reducing the overall project duration.
Concepts associated with PERT costs

1. Normal cost – cost associated with the normal time estimate for an activity.
2. Crash cost – cost associated with the minimum possible time for an activity.
3. Crash time – minimum possible time for an activity.
4. Cost slope – average cost of shortening an activity by 1 time unit.
Crash cost−Normal cost

Cost slope=
Normal time−Crash time
Example

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The normal time of an activity is 12 days at a cost of ₤ 480 and a crash time of 8 days
at ₤ 640.
640−480
Cost slope=
12−8 = ₤ 40 per day
5. Least cost scheduling or crashing – the process of finding the least cost method of
reducing the overall project duration from time period to time-period.
Note: only critical activities affect the project duration and thus they are the only
ones whose time can be reduced (or crashed).
Example
A project has the following characteristics:
Activit Pre-
Time Cost Cost
y requisite
Slop
Norma Cras Norma Cras
e
l h l h
A - 5 3 500 620 60
B - 4 2 300 390 45
C A 7 6 650 680 30
D A 3 2 400 450 50
E B, C 5 3 850 1000 75
Network Diagram

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3
A
E
5
B 5
Critical path: ACE

Total normal cost = ₤ 2700
Time duration 17 days
Time scheduling
Begin by reducing by 1 day activities on the critical path with the lowest cost slope
i.e. reduce activity C by 1 day at an extra cost of ₤ 30.
Total normal cost is ₤ 2700 with 17 days

16 day duration (C) at a total cost of 2730
15 day duration (A) at a total cost of 2790
14 day duration (A) at a total cost of 2850
13 day duration (E) at a total cost of 2925
12 day duration (E) at a total cost of 3000
The project can be completed in 12 days at a cost of ₤ 3000.
Exercise
Activity Pre-requisite O M P Time Cost

Normal Crash Normal Crash Cost Slope
A - 3 4 5 4 3 400 600 200
B - 6 8 10 8 7 500 700 200
C F, D 2 3 4 3 2 900 1000 100
D B 4 5 12 6 5 600 700 100
E - 5 7 9 7 6 800 900 100
F A 9 16 17 15 14 950 1250 300
G B 8 12 16 12 10 670 870 100
H G 8 10 12 10 8 890 990 50
J L 4 5 6 5 3 1000 1200 100

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K E 7 8 15 9 7 400 600 100

L G, K 8 11 14 11 9 1200 1400 100
Required:
1. Expected time duration for each activity using PERT formula (te).
2. Network diagram.
3. Critical path and total time for the project.
4. Standard deviation of the project.
5. Least cost schedule – the total time and cost for the project.

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16. INVENTORY CONTROL
Inventory refers to stock of goods, commodities, or other economic resources that are
stored or reserved at any given period for future production or for meeting future
demand.
What is inventory management?

It is the function of directing the movement of goods through the entire manufacturing
cycle from the requisition of raw materials to the inventory/stock of finished goods in
such a manner as to meet the objectives of maximum customer service with minimum
investment and efficiency.
Types of inventories
1. Direct inventories – these include items which play a direct role in the
manufacturing process and become an integral part of the finished goods, e.g. raw
materials, work in progress inventories, finished goods inventories, spare parts.
2. Indirect inventories – include those items necessary for manufacturing but do not
become an integral component of the finished product e.g.
a. Lubricants
b. Machinery/equipment
c. Labour
Objectives of inventory control

1. To minimize financial investments in inventories.
2. To ensure availability of the supply of stock at all time.
3. To allow flexibility in production scheduling.
4. To ensure that the value of the material consumed is minimum.
5. Reduce surplus stock.
Inventory decisions
1. How much of an item to order?
2. When to replenish the inventory of the item?

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INVENTORY CONTROL TERMINOLOGY
1. Inventory or stock cost

There are several:
i) Purchase/Production cost – cost of purchasing a unit of item
ii) Ordering/Acquisition/Set-up cost – costs related to acquisition of purchased items
i.e. those of getting an item to a firm’s store e.g. transport, loading and off-loading,
inspection.
iii) Inventory carrying/ holding costs – costs associated with holding a given level of
inventory e.g. warehousing, spoilage, security, pilferage, administrative, insurance,
depreciation.
iv) Stock-out cost/ shortage costs – incurred due to a delay in meeting demand or
inability to meet demand at all because of shortage of stock loss of future sales,
cost associated with future replenishment.
2. Order cycle – the time period between placement of 2 successive orders.

3. Lead time – time between placing an order and actual replenishment of item. Also
referred to as procurement time.
4. Time horizon – this is the period over which the inventory level will be
controlled.
5. Maximum stock – the level beyond which stocks should not be allowed to rise.
6. Minimum stock level/buffer stock/safety stock – level below which stock
should not be allowed to fall. It is the additional stock needed to allow for delay in
delivery or for any higher than expected demand that may arise due to lead time.
7. Reorder level – point at which purchased order must be sent to supplier for the
supply of more stock. The level of stock at which further replenishment order
should be placed.
8. Reorder quantity – the quantity of the replacement order.
9. Average stock level
Minimum stock level+ Maximum stock level
Average stock level=
2
10. Physical stock – no. of items physically in stock at any given time.
11. Stock replenishment – rate at which items are added to the inventory.

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12. Free stock – the physical stock plus the outstanding replenishment orders minus
the unfulfilled requirements.
13. Economic order quantity (EOQ) – the quantity at which the cost of having
stocks is minimum.
14. Economic batch quantity – quantity of stock within the enterprise. Company
orders form within its own warehouses unlike in EOQ where it is ordered from
elsewhere.
A simple stock situation
Stock Level
800
Average
Maximum
500
Re-order quantity
200 Safety stock Lead Time

(5 weeks)
2 8 9 14
Time period (in days, weeks, months, etc.)
Maximum stock = 800 units

Safety stock = 200 units
Average stock = 500 units
Reorder quantity = 600 units
Lead time = 5 weeks
3 Types of inventory control systems

1. Reorder level system
2. Periodic review system
3. Economic order quantity (EOQ)

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ECONOMIC ORDER QUANTITY

This is the ordering quantity which minimizes the balance of cost between inventory
holding cost and ordering costs. It is based on the following assumptions:
1. A known constant stock holding cost.
2. A known constant ordering cost.
3. The rate of demand is known (is deterministic).
4. A known constant price per unit.
5. Inventory replenishment is done instantaneously.
6. No stock-out is allowed.
7. Quantity discounts are not allowed – purchase price is constant.
8. Lead time is known and fixed.
Deriving EOQ can be done using three methods:

1. Graphical method.
2. Tabular method.
3. Algebraic method.
ALGEBRAIC METHOD
Variables used:
Q = number of units per order
Q* = economic order quantity or optimal no. of units per order to minimize total cost
D = annual demand requirement (units per year)
C = cost of 1 unit of item
C0 = ordering (preparation or set-up) cost of each order
Ch = Cc = holding or carrying cost per unit per period of time
T = length of time between two successive orders
N = no. of orders or manufacturing runs per year
TC = Total Inventory cost
The optimal order quantity (EOQ) is at a point where the ordering cost = holding cost

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1. Annual ordering cost

Annual ordering cost=(no . of orders placed per year )×(ordering cost per order )
= (Annual Demand
no. of units in each order )
×( order cost per order )
D
= ×C o
Q
2. Annual holing ( or carrying) cost
Annual ordering cost=( Average inventory level )×(carrying cos t per order )
Q
= ×C h
2
3. Equating (1) and (2) above

Since the minimum TC occurs at the point where the ordering cost and the inventory
carrying costs are equal, we equate the 2 equations above.
D Q
×C o = ×C h
Q 2
Solve for Q
2 DC o =Q 2 Ch
2 DC o
Q2 =
Ch
Q=
¿
√ 2 DC o
Ch
EOQ=
Note:
√ 2 DC o
Ch
1. Inventory holding or carrying costs are often expressed as annual percentage(s) of

the unit cost or price.
Co or Ch as % of unit cost or price
I = annual inventory carrying charge (cost) as 1% of price
Ch = IC where C is the unit price of inventory item
EOQ = Q* = √ 2 DC o
Ch

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2. Total cost is sum of annual Cc and annual ordering cost.

D Q
TC= . C o + . C h
Q 2
Example 1:
A manufacturer has to supply his customers with 1200 units of his product per annum.
The inventory carrying cost amounts to ₤ 1.2 per unit. The set-up cost per run is ₤
160. Find:
i) EOQ
ii) Minimum average yearly cost
iii) Optimum no of orders per year
iv) The optimum time between orders (optimum period of supply per optimum order)
Solutions
i) Economic order quantity
EOQ=
√ 2 DC o
Ch
¿
√
2(1200 )( 160)
1.2
¿ 565. 69 or 566 units
ii) Minimum average yearly cost
Total cost = ordering cost + holding cost

D Q
TC= . C o+ . C h
Q 2
¿
¿ DC o Q C h
TC( Q )= ¿ +
Q 2
1200( 160) 566 ( 1. 2)
¿ +
566 2
¿ 339. 22+339 . 6
¿ £ 678 . 82 or £ 679

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iii) Optimum no. of orders per year (N*)

¿ Demand
N=
EOQ
1200
¿
566
¿ 2. 1 orders ⇒3 orders
iv) Optimum time between orders

no . of working days in a year
T¿=
N¿
365
¿
3
¿ 122
Example 2:
The annual demand per item is 6400 units. The unit cost is ₤ 12 and the inventory
carrying charges 25% per annum. If the cost of procurement is ₤ 300 determine:
i) EOQ
ii) No. of orders per year
iii) Time between 2 consecutive orders
iv) Optimal cost
Solution
i) EOQ
EOQ=
C h=IC
√ 2 DC o
Ch
EOQ=
√ IC
2 DC o
¿
√ 2( 6400)( 300 )
( 0 .25 )( 12)
¿ 1131 units

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ii) N*
Demand
¿
N=
EOQ
6400
¿
1131
¿ 5 .65 orders⇒ 6 orders
iii) Time between 2 consecutive orders
¿ no . of working days in a year
T= ¿
N
365
¿
5 .65
¿ 64 . 60
OR
¿EOQ
T= ×12 months
Demand
1131
¿ ×12 months
6400
¿ 2 months 4 days
iv) Optimal cost
optimal cost= (unit cos t×demand ) + √ 2 DC o C h

¿ ( 12×6400 ) + √ 2(6400 )(300)(0 . 25×12 )
¿ 80194 . 11

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17. QUEUING THEORY
A queue refers to items awaiting service. Queues may include people, cars, telephone
calls, and aircrafts queuing for landing. Queuing theory is a construction of
mathematical models of various types of queuing systems so that predictions may be
made about the system. Queues form when the rate of arrival of items requiring
service is greater than the rate of service.
Concepts
1. Arrival – the element concerned with how items arrive in the system.
2. Queue – what happens between the arrival of the item and the time when the
service is carried out. It is known as queue discipline, which is generally assumed
to be first-come-first-serve.
3. Service – time taken to serve a customer.
4. Outlet – exit from the system.
5. Queuing – the whole situation considered from arrival to exit. The time in the
system is generally taken to be the queuing time plus the service time.
6. Customer – items awaiting service: people, machines.
7. Service station – the point where service is provided.
8. Waiting time – the time a customer spends in the queue before being served.
9. Time spent by customer in the system – waiting time + service time.
10. No. of customers in the system – no. of customers in the queue + no. of
customers being served.
11. Queue length – no. of customers waiting in the queue.
12. Queuing system – consists of the arrival of customers waiting in the queue being
picked for the service, customers being served and the departure of customers.
Types of Queuing Systems

1. Single queue – single serving point e.g. hospitals
2. multiple queues – multiple serving points e.g. banks, supermarkets
3. single queue – multiple service point e.g. banks
4. multiple queues – single serving point e.g. telephone calls

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Assumptions/Characteristics of a single channel queuing model

1. A single queue and a single service point.
2. First come – first served queuing discipline.
3. The queue has infinite capacity (i.e. waiting space available for customers)
4. The arrivals are random and follow a Poisson distribution.
5. No simultaneous arrival in a small time interval
6. Service times are random and follow a negative exponential distribution.
7. Traffic intensity is less than 1.
BENEFITS OF QUIEUING THEORY
1. Scheduling of aircraft at landing and take-off from busy airports.

2. Scheduling of mechanical transport fleets.
3. Scheduling of work and jobs in production control.
4. Minimization of congestion due to traffic delay.
5. Scheduling of parts and components to assembly lines.
6. Inventory analysis and inventory control.
SINGLE CHANNEL QUIEUING MODEL
Arrival and service rates

There are 2 major factors in the queuing problems – the arrival and the service rates.
1. Arrival rate
This is the average rate of arrivals per unit of time. It is denoted by λ e.g. 20
students on average visit the library each hour – 20 items per unit of each hour
λ=20 per hour
On average a plane arrives at the airport every 5 minutes.
λ=no . of arrivals per unit time
no . of arrivals
=
time taken
1
= ×60
5
=12 planes per hour

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2. Service rate( μ )
The average no. of services completed in a unit of time.
units of services
μ=
units of time
e.g. a cashier at a supermarket serves on average 480 customers per 8 hour shifts
480
μ= =60 customers per hour
8
3. Traffic intensity ( ρ )
The ratio of average arrival rate to the average service rate.
average arrival rate λ
ρ= =
average service rate μ
Alternatively ewe can get traffic intensity by dividing average service time by
average time between arrivals
average service time
ρ=
average time between arrivals
In a single queue people on average arrive at the rate of 15 per hour whereas 20 of
them are served per hour. Find the traffic intensity.
λ=15 μ=20
15
ρ= =0 . 75
20
Alternative method:
Average service time  1 60 3 min

20
1
Average arrival time= ×60=4 min
15
3
ρ=
4
Assumption – the mean arrival rate is less than the mean service rate.
λ<μ=20 . Under single queuing this queue will come to an end.
Interpretation of traffic intensity ( ρ )

1. If traffic intensity is zero then there is no queue.
2. If traffic intensity = 1 or more the queue will theoretically be of infinite length, it
will be continuous.
3. Traffic intensity is the probability that the service point is busy.

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QUEUING FORMULAE
1. No. of customers
i) The average no. of customers /items in the queue when there is a queue
λ2
N q=
μ ( μ−λ )
ii) Average no. of customers or items in the system:
Items in the queue plus the customers being served
N s =N q +items being served
λ
N s=
μ−λ
2. Time taken by customers/items

i) Average time in the queue (Tq)
λ
T q=
μ ( μ− λ )
ii) Average time taken in the system (Ts)
1
T s=
μ−λ
3. Probabilities
i) The probability of queuing on arrival i.e. the probability that the service point
is busy = traffic intensity.
λ
ρ=
μ
ii) The probability of there being no queue on arrival
λ
ρ|=1− ρ=1−
μ
iii) The probability of there being one or more items in the system
n
ρ

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Example 1
At a currency exchange bureau, on average a customer arrives every 5 minutes and
takes 4 minutes to be served. Considering the assumptions of a single channel queuing
model, determine the following:
a) Average no. of arrivals per minute ( λ )
b) Service rate ( μ )
c) The traffic intensity
d) Fraction of the time the service point/cashier is busy
e) The probability the cashier is busy
f) Expected no. of customers in the system
g) The average length of the queue (no. of customers waiting in the queue)
h) The mean time a customer spends in the system
i) The mean time a customer spends in the queue
Solution
a) Arrivals per minute
no. of arrivals 1
λ= = or 0. 2 arrivals per min
time taken 5
b) Service rate
units of services 1
μ= = or 0. 25 customers per min
units of time 4
c) Traffic intensity
λ 0 .2
ρ= = =0. 8
μ 0 .25
d) Fraction of time cashier is busy
80% of the time
e) Probability that cashier is busy = 0.8
f) Expected no. of customers in the system
λ
N s=
μ−λ
0.2
N s= =4 customers
0 . 25−0. 2

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g) Average length of the queue
λ2
N q=
μ ( μ− λ )
2
(0. 2) 0 . 04
N q= = =3 . 2 customers
0 . 25 ( 0. 25−0.2 ) 0 . 0125
h) The mean time a customer spends in the system
1
T s=
μ−λ
1
T s= =20 min
0 .25−0 .2
i) The mean time a customer spends in the queue
λ
T q=
μ ( μ−λ )
0 .2
T q= =16 min
0 .25 ( 0 . 25−0 . 2 )
Exercise
A mini supermarket has a cashier who serves 48 customers per hour on average
during the rush hour. The customers arrive at the rate of 40 customers per hour.
Assuming a single channel queuing model, determine:
a) The probability the cashier is idle

b) The average no. of customers in the queuing system
c) The average time a customer spends in the system
d) The average no. of customers in the queue
e) The average time a customer spends in the queue waiting for the service
Solution
λ=40 customers per hour
μ=48 customers per hour
a) Probability cashier is idle
λ 40 1
ρ=1− =1− = or 0 .17
μ 48 6

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b) Average no. of customers in the queuing system

λ
N s=
μ−λ
40
N s= =5 customers
48−40
c) Average time customers spend in the system
1
T s=
μ−λ
1 1
T s= = or 0. 125 min
48−40 8
d) Average no. of customers in the queue
λ2
N q=
μ ( μ− λ )
( 40 )2 1600
N q= = =4 . 17 customers
48 ( 48−40 ) 384
e) Average time a customer spends in the queue waiting to be served
λ
T q=
μ ( μ−λ )
40
T q= =0 . 1042 hours or 6 . 25 min
48 ( 48−40 )

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18. DECISION THEORY

All managerial activities involve the decision making process which entails the best
course of action amongst alternatives.
There are 5 main stages in the decision making process:
1. Perceiving the need and opportunity for decision making in any particular
problem.
2. Determination of objectives sought by the solution of the problem.
3. Collection of relevant information related to the problem at hand.
4. Developing and evaluation alternative courses of action.
5. Choice of one of the alternatives.
CONCEPTS IN DECISION MAKING
1. Decision maker – individual or group of individuals responsible for making

choice of an appropriate course of action.
2. Courses of action – alternative strategies available to the decision maker.
3. States of nature/outcomes – these are events whose occurrences determine the
level of success of a course of action but are beyond the control of a decision
maker.
4. Pay-off – the net benefit to the decision maker that accrues from a given
combination of decision alternatives and events.
5. Pay-off table – table comprising of the states of nature and a set of given courses
of action or strategies.
Illustration of pay-off table

Assume that we have:
m no. of events under states of nature S1, S2, …Sn
n alternative courses of action (strategies) a1,a2, …,an
Pay off for activity Aij under the state of nature Si is denoted by:
Pij (i=1, 2, …,m, j=1, 2, …n)

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m×n pay-off table

Courses of Action (Strategies)
States of nature
A1 A2 ……………… An
S1 P11 P12 …………….. P1n
S2 P21 P22 ……………... P2n
Sm Pm1 Pm2 ……………… Pmn
Weighted profit is the product of the pay-off of a state of action and the probability of
occurrence of the given state of nature.
weighted profit =P ij P (S i )
6. Regret or opportunity loss table – it is the difference between the highest
possible profit for a stat of nature and the actual profit obtained for the particular
action or strategy taken i.e. the loss incurred for not choosing the best possible
course of action or strategy.
Assume m is the best strategy or optimum value.
Courses of Action (Strategies)

States of nature Conditioned opportunity loss
A1 A2 ……………… An
S1 M1 – P11 M1 – P12 …………….. M1 –P1n
S2 M2 – P21 M2 –P22 ……………... M2 –P2n
Sm Mm – Pm1 Mm –Pm2 ………………. Mm –Pmn
Example
Assume we have a dealer of electronic equipment who buys and sells electric
irons in the range of 0 to 4 units (0, 1, 2, 3, 4). The demand could be between 0
and 4 units.
Buying price is @ ₤ 40
Selling price is @ ₤ 45
Develop a conditional pay-off table

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Courses of Action
State of nature
Conditioned pay-offs/ Possible
(Probable
supply
demand)
0 1 2 3 4
0 0 -40 -80 -120 -160
1 0 5 -35 -75 -115
2 0 5 10 -30 -70
3 0 5 10 15 -25
4 0 5 10 15 20
The regret (opportunity loss) table
Courses of Action
State of nature
Conditional opportunity
(Probable
loss
demand)
0 1 2 3 4
0 0 40 8 120 160
1 5 0 40 80 120
2 10 5 0 40 80
3 15 10 5 0 40
4 20 15 10 5 0
Types of Decision making criteria

The main aim of decision theory is to help the decision maker in selecting the best
course of action from amongst available strategies. The decision models can be
classified into 4 types:
i) Decision making under certainty
ii) Decision making under risk
iii) Decision making under uncertainty
iv) Decision making under conflict
I) DECISION MAKING UNDER CERTAINTY (DETERMINISTIC MODEL)

The decision maker knows with certainty the consequences of selecting each
course of action. The data is well defined and the decision maker is very sure on
what to base the decision on. The techniques used in this case include break-even
analysis, inventory models under certainty, linear programming, transportation,
and assignment models.

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II) DECISION MAKING UNDER RISK (PROBABILISTIC MODEL)

In this case the payoffs associated with each decision alternative are described by
probability decisions. The decision making is based on expected value criterion in
which the alternatives are compared based on maximization of expected gain or
minimization of expected loss.
Expected value (EV)

The expected value (EV) of an event is the product of its probability of occurrence
of the event and the outcome, or the value of the event (or a series or trial).
Example: a course of action has 0.3 chance of occurrence resulting in a gain of

shs.1200. What is the expected value.
EV = probability×outcome
=0. 3×1200
=360
Expected monetary value (EMV)

It is the sum of the product of each possible outcome of a course of action with its
probability of occurrence.
Suppose on the basis of prior knowledge due to either, past experience or on a

subject basis, that the state of nature Si has the probability of occurrence P(Sj)
[j=1, 2, …, k] then the expected monetary value corresponding to the courses of
action of the decision maker is given by:
EMV ( Ai )= pi1 P( S1 )+ pi2 P( S 2 )+ pi 3 P(S 3 )+.. .+p ij P(Sj)

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Steps for calculating EMV
1. Construction of a pay-off table listing the various courses of action (A i) and states
of nature (Si).
2. List the pay-off associated with each possible combination of course of action and
the states of nature along with the corresponding probability of each state of
nature.
3. Calculate EMV for each course of action by multiplying weighted conditional
profits/losses (pay-offs) by the associated probabilities and sum this weighted
value for each course of action.
4. Determine the course of action which corresponds to the EMV on the basis of a
specified decision.
Computation of expected monetary value
State Conditional pay-off Expected pay-offs

of Probability Course of action Course of action
natur P(Sj) A1 A2 A3 A4 A5 A1 A2 A3 A4 A5
e (0) (1) (2) (3) (4) (0) (1) (2) (3) (4)
S1(0) 0.04 0 -40 -80 -120 -160 0 -1.6 -3.2 -4.8 -6.4
S2(1) 0.06 0 5 -35 -75 -115 0 0.3 -2.1 -4.5 -6.9
S3(2) 0.20 0 5 10 -30 -70 0 1 2 -6 14
S4(3) 0.30 0 5 10 15 -25 0 1.5 3 4.5 -7.5
S5(4) 0.40 0 5 10 15 20 0 2 4 6 8
EMV 0 3.2 3.7 -4.8 -26.8
The maximum value of EMV corresponds to the course of action A3. Hence on the
basis of EMV criterion the dealer can opt for strategy A3 i.e. by 2 electric irons which
yields the maximum EMV, ₤ 3.7.

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Example 2
A small industry fins that from the past data the cost of making an item is ₤ 25.
Selling price of an item is ₤ 30, if it is sold within a week and could be disposed off at
₤ 20 per item at the end of the week.
Weekly sales ¿3 4 5 6 7 ¿8
No. of weeks 0 10 20 40 30 0
Find the optimum no. of items per week the industry should produce.
Cost of production = ₤ 25
Selling price = ₤ 30
At the end of the week = ₤ 20
Favourable chances
P(S j )=
Sum of possible outcomes
Profit = ₤ 5 per item (30-25)
Loss = ₤ 5 per item (20-25)
State
of Probability conditional pay-off expected pay-off
Nature P(Sj) (production per week) (production per week)
(Sj)
4 5 6 7 4 5 6 7
S1(0) 0.1 20 15 10 5 2 1.5 1 0.5
S2(1) 0.2 20 25 20 15 4 5 4 3
S3(2) 0.4 20 25 30 25 8 10 12 10
S4(3) 0.3 20 25 30 35 6 7.5 9 10.5
EMV 20 24 26 24
The best course of action is to produce 6 items because of the high EMV (₤ 26).
Exercise

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The management of a company is faced with a problem of choosing any of the 3

products for manufacturing. The potential demand for each product would turn out to
be good, moderate or poor. The probability of each of the states of nature was
estimated as follows.
Produc Goo Moderat Poo

t d e r
X 0.70 0.20 0.10
Y 0.50 0.30 0.20
Z 0.40 0.50 0.10
The estimated profit or loss under the 3 states is:
Produc Moderat
Good Poor
t e
30,00
X 20,000 10,000
0
60,00
Y 30,000 20,000
0
40,00 -
Z 10,000
0 15,000
Required: prepare the EV table and advise the management about the choice of the
product.
III) DECISION MAKING UNDER UNCERTAINTY

This involves alterative courses of action whose pay-offs depend on the
random state of nature whose probability of occurrence is either unknown or
cannot be determined.
We have several criteria under this:

1. Maxi-min (Wald decision-making criteria)
2. Maxi-max criterion
3. Mini-max criterion
4. Hurwic criterion
5. Laplace or Baye’s criterion

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1. Maxi-min (Wald decision-making criteria)

You choose the best of the worst. It is a decision rule based on maximizing the
minimum returns that occur.
courses of action
State of nature
A1 A2 A3 A4 A5
Sj
0 1 2 3 4
- - - -
0 0
40 80 120 160
-
1 0 5 -75 -115
35
2 0 5 10 -30 -75
3 0 5 10 15 -25
4 0 5 10 15 20
Minimum in - - - -
0
columns 40 80 120 160
Procedure:
 select the minimum outcomes of every course of action
 select the strategy with the maximum number among the minimum
2. Maxi-max criterion (optimism)
A decision rule based on maximizing the maximum returns that can be gained
(best of the best)
A1 A2 A3 A4 A5
maximum 0 5 10 15 20
payoffs
Maximum is A5 i.e. 20
Procedure:
 list down the maximum or best payoffs for each course of action
 choose the maximum of the maximum values
3. Mini-max/regret criterion (pessimism)

It is a decision rule that seeks to minimize the maximum regret that could be from
choosing a particular strategy.
regret payoff =maximum payoff − payoff
=M ij −Pij

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Procedure:
 obtain the maximum regret of each course of action
 select the course of action with the minimum of the maximum regret values
A1 A2 A3 A4 A5
maximum 20 40 80 12 16
regret 0 0
4. Hurwic criterion
It is the weighted average of the best and worst payoffs of each action. It is a
compromise between the optimistic and pessimistic decision criterion.
- select the coefficient of optimism

α ( 0≤α≤1 ) when α is close to 1 the decision maker is optimistic about
the future, and when near 0 is pessimistic.
H=α(max imum payoff in column )−( 1−α ) min imum payoff in the column
5. Laplace or Baye’s criterion (criterion of rationality)
 Calculate the average outcome for every course of action

 Select the maximum.
Decision rule is based on the maximum average for every course of action. This is a
compromise between optimistic and pessimistic decision criterion.
A1 A2 A3 A4 A5
Average 0 -4 - - -
17 39 71
Choose A1 because it is the best of the averages.

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Operations Research Notes

BUSINESS INFORMATION TECHNOLOGY (Kenya Methodist University)

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INVENTORY CONTROL TERMINOLOGY.........................................................81

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Meaning and Scope

Definition of Operations Research

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

Characteristics of Operations Research

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2. ORIGIN OF OPERATIONS RESEARCH

3. PHASES OF OPERATIONS RESEARCH

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iii) Observation and experimentation to test the hypothesis on the basis of

4. SCOPE OF OPERATIONS RESEARCH

Operations research and Management

1. Finance, Budgeting and Investments

2. Purchasing, procurement and Exploration

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6. Research and Development

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c) Control of developed projects

5. METHODOLOGY OF OPERATIONS RESEARCH

OR projects entail the following steps:

2. Construction of a Mathematical Model

3. Derivation of solutions from the model

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5. Establishing controls over the solution

A conscious control procedure is established for detecting significant changes in the

6. Implementing the solution

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METHODOLOGY OF OPERATIONS RESEARCH

Problem formulation Model Solution & Testing

Qualitative model (Informal)

SYSTEM REAL WORLD Data collection

Methods for Solving OR models

1. Analytical or deductive method

2. Numerical or iterative methods

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 Initial trial solutions and a set of rules for improving it

3. Monte Carlo Method

Applications of Operations Research

1. Determination of optimal product mix – optimum allocation of resources to

2. Inventory control model aids in minimizing the sum of

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iii) Shortage costs for various stock items

4. Application of dynamic planning in areas such as planning, advertising

5. Decision analysis has been applied to problems in controlling hurricanes, water

7. Replacement theory is extensively applied in funding the optimal replacement

8. The use of exponential smoothing for:

9. Use of simulation in probabilistic marketing situations such as:

 to derive NPV/Internal rate of return distribution for the venture of

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6. TECHNIQUES OF OPERATIONS RESEARCH

a) Objective probability: for which there is a definite historical evidence and

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i) The simplex method – aims at maximizing or minimizing a given

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 In such situations, one’s favourable item is unfavourable to another.

7. INVENTORY CONTROL AND MANAGEMENT

9. NETWORK ANALYSIS (PERT/CPM)