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# Management Science

Lecture Day 9
PERT/Cost
Specialized Linear Programming Models

Greedy Method

PERT / Cost

## PERT/Cost is used to aid in planning, scheduling,

and controlling the cost of a project.
Once the various work packages have been
identified in the WBS and their costs have
been estimated, the project manager must
predict the cash flow for the project. In
addition, the project manager must periodically
review expenditures to determine if actual
costs are exceeding budgeted costs so that he
or she can take the necessary corrective
action to reduce or eliminate cost overruns.

## Periodically, a project manager must review the

status of the various work packages to ascertain
the actual expenditure to date and the work
package's percentage completion. This
information, together with the original detailed
budget for the project, allows the project manager
to identify cost overruns and underruns.

## Steps in project cash flow analysis:

Step 1: For each work package, estimate the cost.
In most applications, the cost of a

## work package or individual task is

assumed to be linear (constant).

## Steps in project cash flow analysis:

Step 1: For each work package, estimate the cost.
Activity

A
B
C
D
E
F
G
H
I
J

Immediate
Estimated
Time
Total
Predecessor (months) Estimated Cost Monthly Cost
2
P 5,000
P 10,000
3
24,000
8,000
A
3
30,000
10,000
A
2
20,000
10,000
B
2
40,000
20,000
B
7
140,000
20,000
C
4
160,000
40,000
D, E
3
90,000
30,000
H
2
100,000
50,000
G, I
4
100,000
25,000
P714,000

## Steps in project cash flow analysis:

Step 2: Using PERT/CPM, find the critical path for
the project.
Activity Immediate
Estimated
Time
Total
Predecessor (months) Estimated Cost Monthly Cost
A
2
P 5,000
P 10,000
B
3
24,000
8,000
C
A
3
30,000
10,000
D
A
2
20,000
10,000
E
B
2
40,000
20,000
F
B
7
140,000
20,000
G
C
4
160,000
40,000
H
D, E
3
90,000
30,000
I
H
2
100,000
50,000
J
G, I
4
100,000
25,000
P714,000

G=4

H=3

I=2

J=4

ES = 5

EF = 9

G=4

ES = 5 EF = 8

H=3

ES = 10 EF = 14

I=2
ES = 8

EF = 10

J=4

LS = 6
ES = 5

G=

EF = 9
4 LF = 10

LS = 5 LF = 8
ES = 5 EF = 8

H=3

LS = 10 LF = 14
ES = 10 EF = 14

I=2
ES = 8
LS = 8

EF = 10
LF = 10

J=4

1
LS = 6
ES = 5

G=

EF = 9
4 LF = 10

0
0
LS = 5 LF = 8
ES = 5 EF = 8

H=3

1
0

LS = 10 LF = 14
ES = 10 EF = 14

I=2
ES = 8
LS = 8
0

J=4

EF = 10
LF = 10
0

## Steps in project cash flow analysis:

Step 3: Calculate monthly expenditures assuming
each activity starts at its earliest start time.
Activity Immediate
Estimated
Time
Total
Predecessor (months) Estimated Cost Monthly Cost
A
2
P 5,000
P 10,000
B
3
24,000
8,000
C
A
3
30,000
10,000
D
A
2
20,000
10,000
E
B
2
40,000
20,000
F
B
7
140,000
20,000
G
C
4
160,000
40,000
H
D, E
3
90,000
30,000
I
H
2
100,000
50,000
J
G, I
4
100,000
25,000
P714,000

## Steps in project cash flow analysis:

Step 4: Calculate monthly expenditures assuming
each activity starts at its latest start time.
Activity Immediate
Estimated
Time
Total
Predecessor (months) Estimated Cost Monthly Cost
A
2
P 5,000
P 10,000
B
3
24,000
8,000
C
A
3
30,000
10,000
D
A
2
20,000
10,000
E
B
2
40,000
20,000
F
B
7
140,000
20,000
G
C
4
160,000
40,000
H
D, E
3
90,000
30,000
I
H
2
100,000
50,000
J
G, I
4
100,000
25,000
P714,000

## Steps in project cash flow analysis:

Step 5: Calculate the range of monthly cash flows
using data calculated in steps 3 and 4 and
decide whether to begin the project
according to its earliest start time or latest
start time.

Specialized
Linear Programming
Models

## Specialized Linear Programming Models:

Transportation Model
Transshipment Model

Assignment Model
The three special LP models fall into the category of
network models that could be used in determining
least cost ways of distributing products from sources
to destinations.
The transportation and transshipment

## models are particularly useful in determining

the best distribution or allocation of a
product from origin to destination.

## Specialized Linear Programming Models:

Transportation Model
Transshipment Model

Assignment Model
The three special LP models fall into the category of
network models that could be used in determining
least cost ways of distributing products from sources
to destinations.
The assignment model is a special case of the

## transportation and transshipment models. It is

concerned with the one-to-one assignment of
one set of objects to another. It is useful in the
matching of workers to jobs, jobs to machines,
sales representatives to territories, etc.

Example:
The Cordoba Company is now faced with the problem of how to
distribute its electrical components from plants to regional warehouses.
The company has plants located in Cavite, Laguna, and Batangas while
regional warehouses are located in Baguio, Cebu, Davao, and Iloilo.
This month, the company has available 50 units in Cavite, 80 units in
Laguna, and 120 units in Batangas. To meet predicted demand,
Cordoba Company must ship 90 units to Baguio, 70 to Cebu,
40 to Davao, and 50 to Iloilo. Relevant per unit transportation costs for
each component as well as demand and supply data are as follows:
Shipping Costs:
To Warehouse
From Plant Baguio
Cebu Davao Iloilo Supply
Cavite
P 8
P 9
P 11
P 16
50
Laguna
12
7
5
8
80
Batangas
14
10
6
7
120
Demand
90
70
40
50
The Cordoba Company wants to determine the shipping pattern
that meets all demand at minimum transportation cost.

## The Cordoba Company distribution problem is actually a

linear programming problem, that can be formulated as
follows:
Let xij = amount to be shipped from plant i to warehouse j
Where: i = 1, 2, 3 and j = 1, 2, 3, 4
Minimize:

## Z = 8x11 + 9x12 + 11x13 + 16x14

+ 12x21 + 7x22 + 5x23 + 8x24
+ 14x31 + 10x32 + 6x33 + 7x34

Subject to:

## x11 + x12 + x13 + x14 = 50

x21 + x22 + x23 + x24 = 80
x31 + x32 + x33 + x34 = 120
x11 + x21 + x31 = 90
x12 + x22 + x32 = 70
x13 + x23 + x33 = 40
x14 + x24 + x34 = 50
xij > 0; i = 1, 2, 3; j = 1, 2, 3, 4

## General Transportation Model

We may interpret any situation in which a
homogeneous product is available in the amounts of
a1, a2, . . . , am at m sources 1,2, . . . , m, respectively,
wherein demands b1, b2, . . . , bn are present at n
destinations 1,2, . . . , n, respectively.
The transportation cost per unit from the ith source
to the jth destination is a known constant, cij,
which is directly proportional to the amount shipped.

## General Transportation Model

Letting xij represent the amount shipped from source i
to destination j, we obtain the general transportation
model:
m n

Minimize:

Z = S S cij xij
i=1 j=1

Subject to:

S xij = ai, i = 1, 2, . . . , m
j=1
m

S xij = bj, j = 1, 2, . . . , n

i=1

## xij > 0 for i = 1, 2, . . . , m;

j = 1, 2, . . . , n

From

To

Warehouse
A

Warehouse
B

Warehouse
C

Plant
Capacity

Plant W
Plant X
Plant Y
Project
Requirements

Total

From

To

Warehouse
A

Warehouse
B

Warehouse
C

Plant
Capacity

Plant W
A

Plant X
Plant Y
Project
Requirements

Total

From

To

Warehouse
A

Warehouse
B

Warehouse
C

Plant
Capacity

Plant W
A

Plant X

Plant Y
Project
Requirements

Total

From

To

Warehouse
A

Plant
Capacity

Warehouse
B

Warehouse
C

Plant W
A

Plant X

Plant Y
Project
Requirements

Total

From

To

## The Transportation Tableau

Warehouse
A

Plant
Capacity

Warehouse
B

Warehouse
C

Plant W
A

Plant X

Plant Y
Project
Requirements

Section D. Requirements/demand
of each destination.

Total

From

To

Warehouse
A

Plant
Capacity

Warehouse
B

Warehouse
C

Plant W
A

Plant X

Plant Y
Project
Requirements

## Section E. Cells representing the alternative

source-to-destination assignments

Total

From

To

Warehouse
A

Plant
Capacity

Warehouse
B

Warehouse
C

Plant W
A

Plant X

Plant Y
Project
Requirements

## Section F. Transportation cost from a source

to a destination.

Total

Example:
The Cordoba Company is now faced with the problem of how to
distribute its electrical components from plants to regional warehouses.
The company has plants located in Cavite, Laguna, and Batangas while
regional warehouses are located in Baguio, Cebu, Davao, and Iloilo.
This month, the company has available 50 units in Cavite, 80 units in
Laguna, and 120 units in Batangas. To meet predicted demand,
Cordoba Company must ship 90 units to Baguio, 70 to Cebu,
40 to Davao, and 50 to Iloilo. Relevant per unit transportation costs for
each component as well as demand and supply data are as follows:
Shipping Costs:
To Warehouse
From Plant Baguio
Cebu Davao Iloilo Supply
Cavite
P 8
P 9
P 11
P 16
50
Laguna
12
7
5
8
80
Batangas
14
10
6
7
120
Demand
90
70
40
50
The Cordoba Company wants to determine the shipping pattern
that meets all demand at minimum transportation cost.

Warehouse

To
From

Baguio

Cavite

Laguna

Batangas
Demand

90

Cebu

Supply

Davao

Iloilo

11

16

12

14

10

70

40

50

50

80

120
250

## Solving Transportation Problems Heuristically

A heuristic is a rule-of-thumb procedure that
determines a good, but not necessarily optimal,
solution to a problem.
The simplex method is not a heuristic since it is an
optimization technique that guarantees an optimal
solution, provided that one exists.
Heuristic solutions are usually obtained much faster
and thus at lower cost. However, heuristics cannot
be considered as accurate as optimization
techniques since an optimal solution is not
guaranteed.
A good heuristic is generally within 10% of
optimality, but the great disadvantage of using a
heuristic is that the amount of error is not known.

## Northwest Corner Rule

Greedy Method
Row-Minimum Method
Vogels Approximation Method

## Northwest Corner Rule

The northwest corner rule requires that we start in the
upper left-hand cell (or northwest corner) of the
transportation tableau and allocate units to routes
as follows:
1. Exhaust the supply of each row before moving down
to the next row.
2. Exhaust the demand/requirements of each column
before moving to the next column on the right.

Warehouse

To
From
Cavite

Laguna

Batangas
Demand

Baguio

Cebu

50

40

14

Iloilo

11

12

40

Davao

Supply
16

X
5

10

X
6

50

80

40

30

40

50

120
90

90

70

40

50

250

40

30

## Compute the total

transportation cost

50

Greedy Method
With the greedy method, we begin by identifying
the square with the lowest possible cost per unit,
and we assign as many units to it as we can.
With this methods focus on least cost, it would
generally provide a lower initial overall shipping/
transportation cost than the northwest corner rule.

## The major shortcoming of the greedy method

is that it is myopic; it is unable to look beyond
a single target.

Warehouse

To
From
Cavite

Laguna

Batangas
Demand

Baguio

Cebu

50

40
14

Iloilo

11

12

Davao

Supply
16

X
5

40

10

X
6

40

30

50

90

70

40

50

40

30

## Compute the total

transportation cost

50

80

120
250

40

70

40

## Row Minimum Method

Like the greedy method, the row minimum method
gives particular focus on the cost component
of the transportation problem.
This heuristic proceeds by trying to assign
shipments to the minimum-cost cell in each row,
as follows:

## 1. Find the minimum-cost cell in row 1 and

allocate as much supply as possible to this.
2. Proceed to the next row and find the
minimum-cost cell. Again, make an allocation
and delete the appropriate row or column.
3. Repeat Step 2 until all supply is exhausted
and all demand is satisfied.

Warehouse

To
From
Cavite

Laguna

Batangas
Demand

Baguio

Cebu

50

40
14

Iloilo

11

12

Davao

Supply
16

X
5

40

10

X
6

50

80

40

40

30

50

120
70

90

70

40

50

250

40

30

## Compute the total

transportation cost

40

## Vogels Approximation Method (VAM)

VAM is based upon the concept of minimizing
opportunity costs, defined as the difference between
the lowest-cost and the second-lowest-cost alternative.
In other words, if we fail for some reason to achieve
the lowest cost, by how much will costs increase
if we take the second-best alternative?
VAM looks at the opportunity cost of not assigning
to the minimum-cost cell in a row or column
of the transportation tableau.
Assignment is made to the minimum-cost cell
in the row or column that has the highest potential
opportunity loss. If we view the opportunity loss
as a possible penalty, the idea is to avoid a high
penalty.

Steps Involved:
1. For each row and column, calculate the potential
opportunity loss as the difference between the
minimum-cost cell and the next lowest-cost cell.

## 2. Find the highest potential opportunity loss

from among all rows and columns then find
the minimum-cost cell associated with that row
or column.
If a tie exists in opportunity losses among

## 3. Allocate the maximum possible amount of supply

to the minimum-cost cell in Step 2; this will delete
a row or column. Reduce the supplies and
demands accordingly.

Steps Involved:
4. If a row has been deleted, recalculate the column
opportunity losses. If a column has been deleted,
recalculate the row opportunity losses.
5. If all allocations have been exhausted, stop.
Otherwise, begin another iteration by returning to
Step 2.

Warehouse

To
From
Cavite

Baguio
8

50

Laguna

Batangas
Demand

Cebu

90

Davao

Supply
Iloilo

11

16

12

14

10

70

40

50

40

50

80

120

250

Warehouse

To
From
Cavite

Baguio
8

50

Laguna

Batangas
Demand

Cebu

90

Davao

Supply
Iloilo

11

16

12

14

10

70

40

50

40

50

80

120

250

Warehouse

To
From
Cavite

Baguio
8

50

Davao

Iloilo

11

12

Laguna

16

X
5

70
14

Batangas
Demand

Cebu

Supply

10

X
90

70

40

50

40

50

80

10

120
250

2
1

Warehouse

To
From
Cavite

Baguio
8

50

Davao

Iloilo

11

12

Laguna

16

X
5

70
14

Batangas
Demand

Cebu

Supply

10

X
90

70

40

50

40

50

80

10

120
250

3
1

Warehouse

To
From
Cavite

Laguna

Batangas
Demand

Baguio

Cebu

50

70
14

Iloilo

11

12

Davao

Supply
16

X
5

10

10

X
6

40

30

50

90

70

40

50

40

30

50

80

10

120
250

90

3
1

40

## VAM can be used when the decision maker

is satisfied with obtaining a good heuristic
solution that is not necessarily optimal.