QTM

Unit 1: Linear Programming .

L.P. Problems
● It is a technique for choosing the best from a set of feasible alternatives

● Components
○ The objective of the Analysis
○ Activity/Action
○ Resources of the system which are in limited supply
○ Linear relations formed using objective and resource limitations to formulate
objective function and constraint equations
○ Several feasible courses of action available to the decision-maker

● Requirements
○ All components must be clearly identifiable and measurable in quantitative terms
○ Specification of the goal of the problem and constraints in algebraic terms
○ Every LPP spells out the type of objective (Maximisation/Minimisation)

● Essentials
○ Decision Variables
■ Activities regarding which the decision is to be made

○ Objective Function
■ Specifies the goal, it is either the maximisation type or the minimisation
type

○ Constraint Inequalities
■ Set of resources which are in limited supply and thus must be adhered to

○ Non-Negativity Condition
■ The decision variables may or may not fulfil this condition of assuming
positive integer values

● Constraints
○ Binding Constraint
■ LHS = RHS

○ Non-Binding Constraint
■ LHS != RHS
 ○ Redundant Constraint
■ Constraints that do not form the boundary of the feasible region when
solving graphically

Formulations
● Maximisation Case
Maximise
𝑛
𝑍 = ∑ 𝑐𝑗𝑥𝑗
𝑗=1

Subject to
𝑛
∑ 𝑎𝑖𝑗𝑥𝑗 ≤ 𝑏𝑖
𝑗=1
𝑥𝑗 ≥ 0
Where
- 𝑐𝑗: profit coefficient
- 𝑎𝑖𝑗: technological coefficient
- 𝑏𝑖: resource values
- 𝑥𝑗: decision variable

● Minimisation Case
Minimise
𝑛
𝑍 = ∑ 𝑐𝑗𝑥𝑗
𝑗=1

Subject to
𝑛
∑ 𝑎𝑖𝑗𝑥𝑗 ≥ 𝑏𝑖
𝑗=1
𝑥𝑗 ≥ 0
Graphical Solutions
● Normal
○ Maximisation Case
○ Minimisation Case

● Multiple optimal solutions

○ In case, the objective function has a slope which is the same as that of
constraint, then multiple optimal solutions might exist
○ Conditions
■ The objective function should be parallel to a constraint that forms an
edge or boundary on the feasible region
■ The constraint should form a boundary on the feasible region in the
direction of optimal movement of the objective function. In other words,
the constraint must be a binding constraint

○ Maximisation case
○ Minimisation Case

● Infeasibility
○ Sometimes it is possible that the constraints may be inconsistent so that there is
no feasible solution to the problem. Such a situation is called infeasibility
● Unbounded Solution
○ For a maximisation type of linear programming problem, unboundedness occurs
when there is no constraint on the solution so that one or more of the decision
variables can be increased indefinitely without violating any of the restrictions
(constraints)

● Degeneracy
○ When a basic variable assumes a value equal to zero
Simplex Method
● It is an iterative method
● It considers all or some of the convex points as determined using the graphical method
● It has the merit to indicate whether a given solution is optimal or not and improve the
solution if required

● Conditions
○ 𝑏𝑖 should be non-negative
○ Each of the decision variables of the problem should be non-negative

● Optimal Solution
○ If max
■ Zero or negative
○ Elif min
■ Zero or positive

Initial Table
Basis 𝑥1 𝑥2 𝑆1 𝑆2 𝑏𝑖 𝑏𝑖/𝑎𝑖𝑗

𝑆1 0 1 0

𝑆2 0 0 1

𝐶𝑗 0 0

𝑍𝑗 0 0

△𝑗 = 𝐶𝑗 − 𝑍𝑗 0 0

● New row element = old row element - (row element in the key column * corresponding
replacement row value)
○ Replacement row = Key row after dividing each element by key element

Special Cases
● Multiple Optimal Solution
○ Conditions
■ When two or more combinations of variable values yield the same
objective function value
■ In the optimal solution one or more of the non-basic variables have a △𝑗
value equal to zero
 ● Infeasibility
○ If in the final solution an artificial variable is in the basis with a positive value
there is no feasible solution

● Unbounded
○ If in the final solution, there are non-negative replacement ratios or they are equal
to infinity

● Degeneracy
○ If at any point a basic variable assumes a value equal to zero

Big-M method
Initial Table
Basis 𝑥1 𝑥2 𝑆1 𝑆2 𝐴1 𝐴2 𝑏𝑖 𝑏𝑖/𝑎𝑖𝑗

𝐴1 M -1 0 1 0

𝐴2 M 0 -1 0 1

𝐶𝑗 0 0 M M

𝑍𝑗 -M -M M M

△𝑗 = 𝐶𝑗 − 𝑍𝑗 M M 0 0

Two-phase method
Initial Table
Basis 𝑥1 𝑥2 𝑆1 𝑆2 𝐴1 𝐴2 𝑏𝑖 𝑏𝑖/𝑎𝑖𝑗

𝐴1 1 -1 0 1 0

𝐴2 1 0 -1 0 1

𝐶𝑗 0 0 0 0 1 1

𝑍𝑗 -1 -1 1 1

△𝑗 = 𝐶𝑗 − 𝑍𝑗 1 1 0 0
Duality (emphasis on formulation & economic interpretation)
● Every LPP has a dual, the given LPP is a primal
● A M-variable N-constraint primal has an N-variable M-constraint dual
● Dual is obtained by transposing the three matrices involved in the primal problem

● First ensure
○ All variables are non-negative
○ All constraints are “<=” type for a max problem / “>=” type for a min problem
■ If opp, multiply by -1
■ Elif “=”, replace by identical LHS and RHS with (<= and >=)

● Primal-Dual Relationship
○ If a feasible solution exists for both primal and dual, the objective function values
of their optimal solutions are equal
○ The solution to the dual can be read from the ∆𝑗 values of the slack/surplus
variables in the optimal solution tableau of the primal
○ If primal has an unbounded solution, the Dual has no feasible solution

Sensitivity Analysis
● RHS Ranging
○ Shadow prices are valid only over certain ranges
○ The range for each resource is determined by bi and ail values in the optimal
solution tableau

● Changes in objective function coefficients

○ Within certain limits, such changes do not induce changes in the optimal mix
○ The limits are determined by ∆𝑗 and the appropriate ail values in the optimal
solution tableau

Formulation of Integer programming (Media Allocation

Problem)
● A special type of LPPs where some or all variables are non-negative integers
● Pure IPPs: where all variables are required to be integers
● Mixed IPPs: where some variables are required to be integers

Zero-one programming (Interface with Excel solver

application)
● An IPP where decision variables can take either of the two values: 0 or 1
Unit 2 .

Transportation Problem
● Study of efficient transport routes
● A special case of LPP

Formulation
● -

Solution
● NW Corner Rule
○ Also called the naive approach
○ Easiest

● Least Cost Method

○ Based on the cost in the individual cells

● Vogel’s Approximation Method (VAM)

○ Requires keen observation for calculation of penalty cost
○ The initial solution obtained by VAM has the lowest transport cost

● Modified Distribution Method

○ Uses the occupied cells to determine the opportunity cost

Special Cases
● Multiple Solutions
○ If in the optimal solution if any △𝑖𝑗 = 0, it indicates that the solution is not unique
○ The larger the number of △𝑖𝑗 = 0, the greater will be the number of optimal
solutions

● Maximisation Case
○ Choose the lowest value from the given profit matrix
○ Subtract all the profit value for each cell from the value chosen above

● Unbalanced Case
○ Aggregate Demand != Aggregate Supply
○ If Demand > Supply
■ Add a dummy row and assign the difference (D-S) in the qty column
■ The cost element of the dummy row will be 0
○ Elif Supply > Demand
■ Add a dummy column and assign the difference (S-D) in the qty column
● Prohibited Routes
○ A given transportation problem may restrict one or more routes, i.e., the transfer
of resources from a particular source to a destination may not be allowed
○ Replace the cost associated with the prohibited route with M
○ M represents a very high transportation cost

● Degeneracy
○ Due to degeneracy remaining 𝑈𝑖 𝑎𝑛𝑑 𝑉𝑗 values cannot be calculated
○ Place an ε in the unoccupied cell which will help to compute the remaining
𝑈𝑖 𝑎𝑛𝑑 𝑉𝑗 values
○ ε is a variable used to denote a very infinitesimally small value, that is very close
to 0
○ Any constant multiplied by ε yields a value equal to 0
○ The unoccupied cell is decided on the basis of the problem at hand
Assignment Problem
● Minimisation type only
● Number of rows = Number of cols

Hungarian Method
● Based on the concept of opportunity cost
● The underlying principle is that if a constant is added or subtracted from every element
of a cost table, the original cost table remains the same

Special Cases
● Multiple Solutions
○ A situation where multiple zeroes are observed in unassigned rows/cols

● Maximisation Case
○ Select the minimum value from the given grid
○ Subtract all the values from the minimum value selected

● Unbalanced Case
○ A situation where the assignment table does not have an equal number of rows
and columns
○ Rewrite the problem by adding the reqd
○ All elements will be 0

● Restriction on Assignment
○ situation where one or more of the assignments may be prohibited due to
peculiar circumstance
○ Rewrite the problem by replacing the value under the constrained assignment
with the value “M”
Unit 3 .

Basic Concept
● It is a graphic depiction of activities and events
● It helps in the planning, execution, and control of a large scale project

● Essentials
○ A project consists of a well-defined collection of activities or tasks
○ Each activity can be started and terminated independently
○ The activities must be ordered in a technological sequence
○ The precedence relation of each activity is pre-defined

● Components
○ Identifiable set of activities
○ Each activity is depicted using an arrow and defined using an alphabet
○ Each activity starts at a node, described using a number
○ Every activity has a definite start and end node
○ Every activity has a definite duration expressed in terms of a unit of time
○ Each activity in a network consumes time and resources to complete

Construction of the Network Diagram

● Rules
○ A network can have only one initial and terminal node
○ Each activity is represented in the network using an arrow diagram
○ Before undertaking an activity all activities preceding it must be completed
○ Arrows depict only the logical precedence, the length of the arrow has no
significance
○ The arrow represents progression in time, thus all arrows should point from left to
right
○ Events marking the start of an activity are known as tail events and events
marking the completion of an activity are known as head events
○ When a number of activities terminate at a single node, it indicates that no
activity starting from that node will start unless all activities terminating there have
been completed
○ An activity can be described by its name or using the tail and head nodes
○ When 2 or more activities are jointly complete at a node, it is known as the merge
event
○ When 2 or more activities jointly start from a node, it is known as a burst event
○ While numbering the nodes, every activity must start from a node with a lower
number and end at a node with a higher number
○ No two activities can have identical tail and head events
○ In case the above situation arises, dummy activities can used to construct the
network
 ○ An arrow with a broken line is used to depict the dummy activity
○ The purpose of the dummy activity is to correctly portray the given precedence
relation. It does not consume any time or resources

Critical Path Analysis

● Specifically developed to control the maintenance of chemical plants
● Used in projects in which activity durations are known with certainty
● To obtain the trade-off between project duration and cost

● Critical Path
○ The longest path of the network in terms of duration
○ Activities along this path are called critical activities
○ All other activities are known as non-critical activities
○ The total slack of the critical activities is 0

● Utility of Critical Path

○ The duration of critical path is the duration of the project
○ Critical activities cannot be delayed
○ If critical activities are delayed, the project duration is extended
○ Timely completion of the critical activities is essential to complete the project
within the expected time

Float and Slack Analysis

● It is the flexibility in scheduling an activity
● This delay in the activity does not change or delay the project

● Total Float
○ Total duration for which an activity can be delayed without extending the project
duration = LS - ES or LF - EF

● Free Float
○ Part of total float which can be used without affecting the float of succeeding
activities = total float - head event slack
○ ES of succeeding - EF

● Independent Float
○ Part of total float which can be used without affecting the float of preceding and
succeeding activities = ES for succeeding activity - LF for preceding Activity -
Activity Duration
○ Max (0, ES-LF-T)
PERT
● Project Evaluation and Review Technique
● Led to substantial cost and time savings
● Useful in cases where the duration of activities and thus the projects is not certain
● Incorporates the variation in activity times when planning, scheduling, and executing
activities

● Involves a probabilistic analysis for estimating the time of completion

● Use 3 probable estimates
● The purpose of the technique is to predict the time of completion with an associated
probability estimate
● Application of the concept of feed-forward and concurrent control rather than feedback
control
● Used in projects where completion time is of utmost importance but the tasks associated
are not repetitive

● 3 estimates
○ Optimistic Time (a)
■ Shortest time for completion
■ Probability of more than 1/100
■ Best time estimate

○ Most Likely Time (m)

■ Frequently consumed time to complete
■ Modal Time Estimate

○ Pessimistic Time (b)

■ The longest time taken for completion
■ Worst Time Estimate

● Expected Time
𝑎+4𝑚+𝑏
𝑡𝑒𝑖 = 6

● Variance

2
2 (𝑏−𝑎)
σ𝑖 = 2
6

PERT CPM

Probabilistic in nature Deterministic in Nature

Useful for new non-repetitive projects Useful for repetitive, standardised projects

Focuses on accurate time estimates Focuses on time-cost trade-off

Variation in project time is an inherent part of Additional resources can be used to reduce
PERT time

Event oriented analysis (start-finish nodes) Activity Oriented Analysis

Time-Cost Optimization
● Duration of some critical activities can be reduced to shorten the project completion time
● It involves the employment of additional resources/working overtime
● The result is observed in the form of increased cost

● Types of Costs
○ Direct Costs
■ Cost of Material
■ Cost of Labour
■ Equipment Cost

■ To reduce the project duration, the direct costs are likely to increase
■ The faster pace of work means higher direct cost

○ Indirect Costs
■ Overhead Costs
■ Late completion penalties
■ Reward for early completion

■ Reduction of the project duration decreases the indirect costs

■ The faster pace of work means lower indirect cost

● Crashing

Path Normal Duration Crash Duration Cost

Path Normal I II III IV V

Crashing Available Activities Crashed Activities Cost

II

Duration Direct Cost Overhead Penalty Crash Cost Total Cost

Cost
Unit 4 .

Decision-Making Environment

Construction of Pay-Off Table

Opportunity Loss Table

Decision Under Uncertainty

● Laplace Principle: Assumes equal likelihood of various states of nature
● Maximin Principle (minimax in regret): Pessimists’ criterion - considers best of the worst
● Maximax Principle (minimin in regret): Optimists’s criterion- considers the best of the
best
● Hurwicz Principle: Uses decision maker’s degree of optimism
● Savage Principle: Uses a minimum of the maximum regret values of various acts

Decision under Risk

● Maximum Likelihood Principle: For the event with the highest probability, choose the act
with the best pay-off
● Expectation principle: choose the act with the best-expected pay-off (highest in case of
gains and lowest in case of costs)
● Expected Regret Principle: Choose the act with the lowest expected regret value, a
decision identical to one under the expectation principle

EMV

EOL

Expected Value of Perfect Information (EVPI)

● EVPI = EPPU - Expected Payoff
● It is the maximum worth that a decision maker will be ready to pay for perfect information
● EVPI = Expected Regret of Optimal Action

● The expected payoff for each action plus the corresponding regret value will always be
equal to EPPI
● EVPI = Expected Cost under Optimal Action - Expected Cost under Perfect Information

Expected Payoff under Perfect Information (EPPI)

● A hypothesis that the decision maker has complete information about the state of nature
● The resultant payoff will thus be maximum, alternatively, the regret is minimum
Markov Chains
● Stochastic Process
● It may be discrete or continuous
● Markovian analysis is descriptive in nature
● Markov chain is homogeneous when transition probabilities remain stable over time
● For example, brand switching by customers

● Assumptions
○ Finite states
○ First order process
○ Stationarity
○ Uniform time period

Markov Process

Transition Probability Matrix

Predicting Future Market Shares

Equilibrium conditions

Limiting probabilities

Chapman Kolmogorov Equation

Decision Under Conflict

Game Theory
● 2 or more rational players
● Players have a predetermined set of strategies
● Players compete and have conflicting interests
● Players are aware of the pay-off resulting from various combinations of strategies by
different players
● Helps determine rules of rational behaviour in game situations

Two-person zero-sum game

● There are 2 players
● Each player has a finite number of strategies
 ● Conditional pay-offs resulting from various combinations of strategies are known
● A gain for one player is exactly equal to the loss for the other
● The resulting payoff is known as the value of the game
● The solution may be pure (single strategy) or mixed strategy
● The solution determines the optimal strategy for each player

Maximin Minimax Principle

● Find the minimum pay-off in each row
● Select the largest of the minimum pay-offs
● This is the Maximin strategy of the maximising player

● Find the maximum payoff in each column

● Select the smallest of these pay-offs
● This is the Minimax strategy of minimising player

● If the maximin and minimax strategies have equal pay-offs, the game has a saddle point
● If so, the maximin and minimax strategies involved are optimal strategies for the players
and are called pure strategies

Games without Saddle

Mixed Strategy

Dominance Rule
● If one strategy is inferior to another, it is said to be dominated
● A dominated strategy can be deleted
● If each value in a row (say R1) is greater than, or equal to, the corresponding value in
another row (say R2), then R1 dominates R2
● If each value in a column (say C1) is smaller than, or equal to the corresponding value in
another column (say C2), then C1 dominates C2
● A linear combination of 2 strategies may also dominate a strategy

Reduction of m x n Game
● Attempt to reduce the order of the problem by applying the dominance rule
● If it can be reduced to a 2x2 game, solve it using the formula
● Else solve it using the graphical method

2x2
● Analytical Method
𝑎22−𝑎21
○ 𝑥= (𝑎11+𝑎22)−(𝑎21+𝑎12)
 𝑎22−𝑎12
○ 𝑦= (𝑎11+𝑎22)−(𝑎21+𝑎12)
(𝑎11𝑥 𝑎22)−(𝑎21𝑥 𝑎12)
○ 𝑣= (𝑎11+𝑎22)−(𝑎21+𝑎12)

Graphical Method
● To be used only where either of the players has only 2 strategies available
● The aim is to reduce a game to the order of 2x2
● The optimal strategy and value of the game can be read off the graph
● However, the analytical method may be used to verify the solution of the 2x2 game

2xs
● The highest point of the lower envelope is the point of equilibrium

Rx2
● The lowest point of the upper envelope is the point of equilibrium

Limitations
● Both players have complete and equal knowledge about their strategies and resultant
payoffs, however, in real parlance, it may not be tenable
● Business managers do not always adopt conservative strategies as they prefer to take
risks
● Two person zero-sum game is a simplistic model that explains the concept well but does
not exist in the real-world scenario
● Assuming that strategies available to the players are finite is quite restrictive

Simulation
● A descriptive method
● To simulate is to replicate a system

● Phases of process
○ Definition of the problem and statement of objectives
○ Construction of an appropriate model
○ Experimentation with the model constructed
○ Evaluation of the results of the simulation

Concept

Monte Carlo Simulation

● Uses random numbers to generate data
● Process
○ Determination of random number intervals
○ Obtaining random numbers and finding the input values corresponding to them
○ Carrying out needed simulation

● It is used extensively in areas like Capital Budgeting, Inventory control, queuing analysis,
and project management

Probability Cumulative Random

Probability Number Interval

.12 .12 0-11

.10 .22 12-21

Paper Pattern
2022
● Simplex + Dual (P+T) 15
● Transportation (P) 10
● Transition Probability (P) 5
● Assignment (P) 8
● Game Theory (P) 7
● Network (P) 15
● Theory
○ IPP
○ Monte Carlo Simulation
○ Types of Floats
○ Infeasible, multiple, n unbounded using LPP