Decision Theory and Analysis

• Descision theory is body of knowledge and set

of analytical tools that help managers make
optimal decision.

• Descision Under Certainty

• Descision under uncertainty
• Descision under Risk
 Operation Research
• As its name implies, operations research
involves “research on operations.” Thus, operations
research is applied to problems that concern how to
conduct and coordinate the operations (i.e., the
activities) within an organization .
• The nature of the organization is essentially
immaterial, in fact, OR has been applied extensively
in such diverse areas as manufacturing,
transportation, construction, telecommunications,
financial planning, health care, the military, and
public services, to name just a few .
1.1 Operations Research Models
Imagine that you have a 5-week business commitment between
Fayetteville(FYV) and Denver (DEN). You fly out of Fayetteville on Monday
and retun on Wednesday. A Regular round trip ticket costs $400, but a
20% discount is granted if the dates of the ticket span a weekend. A one
way ticket in either direction costs 75% of the regular price. How should
you buy the ticket for the 5 week period?

We can Look at the situation as a decision-making problem whose

solution requires answering three question:

1.What are the decision alternatives?

2.Under What restriction is the descision made?
3.What is an appropriate Objective criterion for evaluating the
alternatives?
Three Alternatives are considered:

1.Buy five regular FYV-DEN-FYV for departure on Monday and return on

Wednesday of the same Week.

2.Buy one FYV-DEN, Four DEN-FYV-DEN that span weekends, and one DEN-
FYV.
3.Buy one FYV-DEN-FYV to cover Monday of the first week and Wednesday of
the last week and four DEN-FYV-DEN to cover the remaining legs.

All tickets in this alternative span at least on weekend.

The restriction on these options is that you should be able to leave FYV on
Monday and return on Wednesday of the same week.
An Obvious objective criterion for evalating the proposed alternative is the
price of the tickets. The alternative that yields tha smallest cost is the best.
Specifically, we have
Alternative 1 Cost = 5 x 400 =$2000
Alternative 2 Cost = 0.75 x 400 + 4 x (0,8 X 400 ) + 0.75 x 400 =$1800

Alternative 3 Cost = 5 x (0.8 X 400 ) =$1600

Thus you should choose alternative 3.

1.2 Solving the OR Model:
In OR, we do not have a single generl technique to solve all mathematical
models that can arise in practice. Instead, the type and complexity of the
mathematical model dictate the nature of the solution method.

The most prominent OR Technique is linear Programming. It is designed

for models with linear objective and constraint functions. Other
techniques include
Interger programming (in which variables assume integer values),
Dynamic programming ( in which the original model can be decomposed
into more manageable subproblems)
Network programming (in which the problem can be modeled as network)
and Non linear programming( in which functions of the model are
nonlinear) etc...
1.3 Queuing and Simulation Models
Queing and Simulation model deal with the study of waiting lines.
They are not optimization techniques, rather they measures of
performance of the waiting lines, such as average waiting time in
que, average waiting time for service and utilization of service
facilities.
Queuing model utilize probability and stochastic models to analyze
waiting lines, and simulation estimates the measures of performance
by imitating the behaviour of the real system.

The main difference between Queing and simulation model.

Queing models are purely mathematical, and hence are subject to

specific assumption that limit their scope of application.
And Simulation model is flexible and can be used to analyze
practically any queing situation.
The Process of Simulation models is costly in both time and
resources. Moreover, the execuation of simulation models, even on
the faster computer is usually slow.
1.4 Art of the Modeling

The assumed real world from the real situation by

concentrating on the dominant variables that control the
behavior of the real system.
 Definition
• Operations Research (OR)
It is a scientific approach to determine
the optimum (best) solution to a decision
problem under the restriction of limited
resources, using the mathematical
techniques to model, analyze, and solve the
problem
• Phases of OR

1. Definition of the problem

2. Model Construction
3. Solution of the model
4. Model validity
5. Implementation of the solution
 Basic components of the model
1. Decision Variables
2. Objective Function
3. Constraints
 Graphical Solution
• Construction of the LP model
• Example 1: The Reddy Mikks Company
Reddy Mikks produces both interior and exterior paints
from two raw materials, M1&M2. The following table
provides the basic data of the problem.
• A market survey indicates that the daily
demand for interior paint cannot exceed that of
exterior paint by more than 1 ton. Also, the
maximum daily demand of interior paint is 2
ton.
• Reddy Mikks wants to determine the optimum
(best) product mix of interior and exterior
paints that maximizes the total daily profit
 Problem Formulation
• Decision variables
X1= Tons produced daily of exterior paint.
X2= Tons produced daily of interior paint.
• Objective Function
Maximize Z= 5 X1 + 4 X2
• Constraints
6 X1+4 X2 24
X1+2 X2 6
- X1+ X2 1
 X 2
 2
graphcal solution ‫ال‬
X1, X2 0
• Any solution that satisfies all the constraints of the
model is a feasible solution. For example, X1=3 tons
and X2=1 ton is a feasible solution. We have an
infinite number of feasible solutions, but we are
interested in the optimum feasible solution that yields
the maximum total profit.
 Graphical Solution
• The graphical solution is valid only for two-
variable problem .
• The graphical solution includes two basic
steps:
1. The determination of the solution space that
defines the feasible solutions that satisfy all the
constraints.
2. The determination of the optimum solution from
among all the points in the feasible solution space.
• ABCDEF consists of an infinite number of points; we
need a systematic procedure that identifies the
optimum solutions. The optimum solution is
associated with a corner point of the solution space.
• To determine the direction in which the profit
function increases we assign arbitrary increasing
values of 10 and 15
5 X1 + 4 X2=10
And 5 X1 + 4 X2=15
• The optimum solution is mixture of 3 tons of exterior
and 1.5 tons of interior paints will yield a daily profit
of 21000$.