BA 9226 Applied Operations Research For Management

BA 9226 Applied Operations Research for Management
1

INTRODUCTION TO OR
OR term was coined by Mcclosky and Trefthen in 1940 in the U.K.
The Second World War was the perfect background for the development of this science which drew its
strength from applied mathematics and formal science and used advanced techniques such as mathematical
modeling, statistical analysis and mathematical optimization.
OR was originally used in defense application. British scientists set up the first field installation of
radars during the war and observed the air operations. During World War II, the military management in
England called on a team of scientists to study the strategic and tactical problems of air and land defense. This
team wad lead by a professor and a formal naval officer - Prof. P. M. S. Blackett of University of Manchester.
The group was called as Blacketts Circus which included three physiologists, two mathematical physicists,
one astrophysicist, one army officer, one surveyor, one general physicist and two mathematicians.
The objective was to find out the most effective allocation of limited military resources to the various
military operations and to the activities within each operation. Research was extended to anti submarine warfare
and to all phases of military, naval and air operations.
This group of scientists formed the First OR team. Their analysis of operations of military led to
suggestions that greatly improved and increased the effectiveness of British fighters and contributed to the
success of British defense.
The encouraging results led to the formation of more such teams in British armed services and the use
of such scientific teams spread to Western Allies. Immediately after the war, the success of military teams
attracted the attention of Industrial Managers who were seeking solutions to their problems.
Today , almost every large Organization or Corporation in affluent nations has staff applying OR in
Govt, the use of operations research has spread from military to widely varied departments at all levels.
In 1952, in the USA, the National Research Council formed a committee on operations research. First
Book on the subject was published on the same year. In 1952, the Operations Research Society of America
(ORSA) came into existence.
India was one of the first few countries who started using OR. In 1949, the first unit was established in
Regional Research Laboratory at Hyderabad. In 1953, an OR unit was established with the aim of using OR
method in national planning and survey. The OR society of India was formed in 1955.

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The International Federation of Operations Research Societies, which was found in 1959, now
comprises member societies from many countries of the world.
A wide range of problem-solving techniques and methods applied in the pursuit of improved decision-
making efficiency is encompassed by OR. Some of the OR techniques used are statistics theory, probability
theory, queuing theory, game theory, decision analysis, mathematical modeling and simulation.
Due to computational nature of these techniques, OR also has strong tied with computer science.
Operations researchers faced with a new problem must determine which of these techniques is most
appropriate, given the nature of the system, the goal for improvement and the constraints on time and
computing power.


3

DEFINITION OR
Operations Research is a scientific method of providing executive departments with a quantitative
basis for decisions regarding the operations under their control
- Morse and Kimball First OR Book Authors
Operations research is an experimental and applied science devoted to observing, understanding and
predicting the behavior of purposeful man-machine systems; and operations research workers are actively
engaged in applying their knowledge to practical problems in business, government and society.
- ORSA
CHARACTERISTICS OF OR
o System Oriented
o Use of interdisciplinary teams
Mathematics, statistics, physicists, psychologists, economics and engineering
o Application of scientific method
o Uncovering of new problems
o Improvement in the quality of decisions
o Use of computer
o Quantitative solutions
o Human factors (study of human factors)
NECESSITY OF OR
The need of OR has been equally felt by the industry due to the following reasons
a. Complexity in decision making in a big industry as number of factors influencing a decision have
increased
b. Scattered responsibility and authority Mathematical quantification helps for easy decision-
making as responsibility and authority of decision making is scattered throughout the organization.
c. Uncertainty: Uncertainty in economic and general environment. OR is essential from reliability
point of view
d. Knowledge explosion- OR team collects the latest information for analysis purpose which is quite
useful for the industries especially for decision making and implementation

4

SCOPE OF OR
In Industry
To optimize profits by considering various alternative methods of producing the goods and the return in
each case. OR is applied in the fields of production, blending, product mix, inventory control, demand forecast,
sale and purchase, transportation, repair and maintenance, scheduling and sequencing, planning, scheduling
and controlling of projects and scores of other associated areas.
In Defence
In operations, intelligence, administration, training and the like. Coordination of various activities
involved in order to arrive at optimum strategy and to achieve consistent goals.


5

In Planning
Planning should be oriented towards growth of per capita income, achieving national goals besides
restrictions imposed by the country. There is a great scope for economists, statisticians, administrators,
technicians, politicians and agriculture experts working together to solve this problem with an OR approach
In Agriculture
Optimal distribution of land, water, to crops and study of impact of climatic conditions on agriculture.
In Public Utilities
Queuing theory in big hospitals
Monte Carlo methods in tariff planning
Job scheduling, assignment of job to persons, etc.
SCOPE OF RESEARCH IN MANAGEMENT
Operations research is a problem, - solving and decision making science. Some of the areas of
management where OR techniques have been successfully applied are:
1. Allocation and Distribution
2. Production and Facility Planning
3. Procurement
4. Marketing
5. Finance
6. Personnel
7. Research and Development
SCOPE OF OR IN FINANCIAL MANAGEMENT
Cash management
Inventory control
Simulation Technique
Capital Budgeting
Dividend policy making
Investment & portfolio analysis

6

PHASES OF OR or METHODOLOGY OF OR
1. Formulating the problem
- Observe the problem environment
- Analyse and define the problem

2. Constructing a model to represent the system under study
- A model is representation of some real or abstract situation.
- In OR, it is usually a mathematical model. A mathematical model consists of a set of equations
which describe the system or problem. these equations represent objective function and constraints
- Objective function is a mathematical expression of cost or profit of the operation
- Constraint are the mathematical expression if limitation on the fulfillment of the objectives
- There are 2 types of variables : Controllable and uncontrollable
- Inter - relationship among variables is found in this step and a model is constructed to solve the
problem under study

3. Select an appropriate data input
- The phase involves collection and analysis o9f right and of internal and external data and facts.
The purpose of this step is to have a sufficient input to operate and test the model.

4. Deriving a solution from the model
- This depends upon the nature and complexity of the system under study. General methods for
solving OR model.
o Analytic Procedure
Solving models by classical mathematical techniques like calculus or matrix algebra or
finite differences
o Numeric Procedure
These procedures vary from trial and error to complex iteration. Starts with a trial
solution and a set of rules for improving it by repeating the procedure until further improvement
is not possible i.e., optimality is reached
o Montecarlo methods (simulation methods)

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Taking sample observations, computing probability distribution for the variable using random numbers
and constructing some functions to determine values of the decision variables

5. Testing the model and the solution derived from it
First the solution is used to test the model and to find the limitations, if any. If a model is
formulated and correctly manipulated, it may be useful in predicting the effect of changes in control
variables on the overall system effectiveness. The usefulness of a model is tested by determining how
well it predicts the effect of these changes. Such an analysis is usually called sensitivity analysis.

6. Implement the solution
Obtained solution should be translated into operating procedure which can be easily
understood and applied by those who control the operations. Changes required in existing procedure
and resources must be clearly indicated and should be implemented.
After implementation, OR group must study the response of the system to the changes made.
The workability of the solution should be there and solution must provide enough opportunity to be
reviewed, modified and updated in the light of changing environment. It should not be static. It should
be dynamic.
MODELS OF OR
.

1. By degree of abstraction
Mathematical
Models
Language
Models
2. By Function
Descriptive Predictive
Normative or
Prescriptive

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LIST OF MATHEMATICAL MODELS
Mathematical techniques
Statistical techniques
Inventory Models
Allocation Models
Sequencing Models
Project scheduling by PERT & CPM
Routing models
Competitive models
Queuing models
Simulation Techniques
Decision theory
Replacement Models
Reliability theory
Markov analysis
Advanced OR models
1. Non linear Programming
2. Dynamic Programming
3. Integer Programming
4. Goal Programming
5. Heuristic Programming
6. Quadratic Programming
7. Sensitivity analysis
8. Parametric Programming
9. Stochastic Programming

3. By Structure
Iconic or
Physical Models
Analogue or
Schematic Models
4. By Nature of the Environment
Deterministic Probabilistic
5. By the Time of Horizon
Static
Models
Dynamic
Models

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DIFFICULTIES IN OR
1. Formulation of problem is perhaps the most important and toughest part of OR study. It is necessary
that the right problem be selected and it must be completely and accurately defined.
2. Data collection may consume a very large portion of time and money spent on OR study
3. The whole study is based on the laws that operated in the past. There is no evidence that these laws
will continue to operate in future also.
4. The researcher, while making observation, may affect the system he is studying. The behavior of an
organization depends upon the activities of the person in it and the very fact that they being observed
is bound to affect their behavior.
5. Time factor is the greatest difficulty. Managers must make fairly good solution to the problem at the
right time. Furthermore, cost is also an important factor.
6. It is the responsibility of the OR scientist to translate his highly specialized and technical thoughts,
ideas and concepts into simple operational procedure capable of being easily understood by the
management and workers alike.
7. Lastly what may appear to be a pitfall is the fact that OR study may raise more questions than it
answers.
LIMITATIONS OF OR
Magnitude of computation: Factors influencing a problem are numerous and requires huge calculations. It
cannot be handled manually and requires a computer which is costly.
Non quantifiable factors: OR provides solutions only when all elements related to a problem can be quantified.
Certain factors cannot be quantified. OR does not take into account qualitative factors or emotional factors
which may be quite important.

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Distance between a non or person and OR scientist is more as the solutions are technical at first and they
have to be interpreted and simplified by the OR scientist
Money and time cost
Implementation of decision is delicate task. Human factor to be considered seriously during the implementation

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Assignment Problem
Hungarian Method
This is a particular case of Transportation problem in which the objective function is to assign a no. of
tasks (jobs or origins or sources) to an equal no. of facilities ( machine / persons / destinations) at a
minimum cost ( or maximum profit)
Suppose that we have n jobs to be performed on m machines (one job to one machine) and our
objective is to assign the jobs to the machine at the minimum cost or maximum profit under the assumption that
each machine can perform each job with varying degree efficiency. The assignment problem can be started
from the n x n matrix Cij called cost matrix where Cij is the cost of assigning i
th
machine to the j
th
job
COMPARISON WITH TRANSPORTATION PROBLEM (TP) MODEL
The AP may be considered as a special case of TP with n sources and n destinations. In this problem,
the sources represent machines and destinations represents jobs. An AP is always a degenerate form of TP.
TP AP
Supply at any source may be any positive quantity a
i

Supply at any source (machine) will be equal to 1 (a
i
=
1)
Demand at any destination may be any positive
quantity b
i

Demand at any destination (job) will be equal to 1 (b
i
=
1)
One or more source to any no.of destination One machine to one job only

Algorithm
Whether the no.of rows = no.of columns in the given assignment problem. If it is so then the AP is said to be a
balanced problem. Then proceed to step no.1. If it is not, then it should be balanced before applying the
algorithm
Step 1:
Subtract the smallest cost element of each row from all the elements in the row of the given cost
matrix. See that each row contains at least one row.
Step 2:

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Subtract the smallest cost element of each column from all the elements in the column of resulting cost
matrix obtained in the step 1
Step 3:
a. Examine the row successively until a row with exactly on unmarked zero is found. Make an assignment
to this single unmarked zero by encircling it. Cross all the other zero in the column of this encircled
zero, as these will not be considered for any future assignment. Continue in this way al l the rows have
been examined.
b. Examine the columns excessively until a column with exactly one unmarked zero is found. Make an
assignment to this single unmarked zero by encircling it and cross out all other zero in its row.
Continue this procedure until all the columns have been examined.


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Step 4: Apply optimality test:
a. If each row and each column contains exactly one encircled zero than the current assignment is
optimal
b. If atleast one row/column is without an assignment i.e., if there is atleast one row/column is without
one encircled zero then the current assignment is not optimal. Then goto step 5
Step 5:
Cover all the zero by drawing a minimum number of straight lines as follows:
a. Mark () the rows that do not have any assignment
b. Mark () the columns ( not already marked) that have zeros
c. Mark () the rows (not already marked) that have assignment in the marked columns
d. Repeat b & c until no more marking is required
e. Draw lines through all unmarked rows and marked columns. If the no.of these lines is equal to the
order of the matrix then it is an optimum solution otherwise not.
Step 6:
Determine the smallest cost element not covered by the straight line. Subtract the smallest cost
element from all the uncovered elements and add these to all those which are lying in the intersection of these
straight lines and do not change the remaining elements which are lie on the straight line
Step 7:
Repeat step 1 to 6 until an optimum assignment is obtained
Notes:
1. In case some rows/ columns contain more than one zero, encircle any unmarked zero arbitrarily
and cross out all the other zeros in its column/rows. Proceed in this way until no zero is left un
marked or encircled
2. The above assignment algorithm is applicable for minimization problem.
3. If the given assignment is of maximization type then convert it into a minimization AP by
Max z = - (Min (-z))
or by multiplying all by -1 in the crossed matrix and solve by AP algorithm

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4. Some time a final cost matrix contains more than required no.of zeroes at independent positions.
This implies that more than one optimal solution with same optimum assignment cost can be
obtained
MAXIMIZATION IN AP
In an AP, we may have to assign person to job in such a way that total optimal cost is maximized. This
maximization problem can be converted into minimization problem & then solve by usual Hungarian method in
other word AP.
Subtract all the cost elements C
ij
of the cost matrix from the highest cost element in that cost matrix.
We should make the max case into minimization


15

RESTRICTION IN ASSIGNMENT
The assignment techniques assume that the problem is free from practical restriction and any task to
be assigned to any facility. But in some cases, it may not be possible to assign a particular task to a particular
facility due to space, size of the cost amount, process capability, technical difficulties, etc. This can be
overcome by assigning a very high processing time or high cost element. It can be infinity () to the
corresponding cell. In the AP this cell will be automatically excluded because of the unused high time cost.
Then solve the problem by Hungarian method.
TRAVELLING SALESMAN PROBLEM
The salesman must normally visit a no. of cities starting from his head quarters. The distance / time /
cost between every pair of cities are assumed to be known. The problem of finding the shortest distance /
minimum time / minimum cost, if the salesman starts from his head quarters and passing through each city
under his jurisdiction exactly once and return to his head quarters is called Travelling Salesman Problem
(TSP).
A TSP is very to AP with the following additional constraints
a. The salesman should go that every city exactly once except the starting city
b. The salesman starts from one city and comes back to the same city in the end
c. Going from any city to the same city directly is not allowed
d. No assignment should be made along the diagonal line.
Note 1: Conditions a & b are route conditions
Note 2: A salesman has to visit n cities then he will have a total of factorial (n-1) possible round trips.
Steps for solving TSP
1. Assigning an infinity in each of the squares along the diagonal line in the cost matrix
2. Solving the problem as a routine assignment problem (AP)
3. Scrutinizing the solution obtained under step 2 and see the route conditions are satisfied.
4. If not make adjustments in the assignments to satisfy the condition with minimum increase in the total cost.
In other words satisfy the route condition with next best solution.


16

GAME THEORY
A Competitive situation is called a Game. The term game represents a conflict between 2 or more
parties. A situation is termed as Game, if it possesses the following properties.
1. The no. of competitors is finite
2. Each of the participants has a finites no of possible course of action
3. The outcome of the game is affected by the choice made by the players.
Zero Sum Game:
If in a game the gains of one player are exactly equal to the losses of another player, then the sum of
the gains and losses equals zero.
Gain of one player (A) + loss of another player (-A) = 0
This game is said to be a zero-sum game. Otherwise it is said to be non-zero sum game..
Two person Zero Sum Game:
A game with only two persons is said to be two person zero sum game if the gain of one player is
equal to the loss of the other.
Strategy:
It is defined as a set of plans of actions specifying precisely , what the player will do under every
possible future contingency that might occur during the play of the game, i.e., the strategy of the player is
decision rule that he uses for making a choice from his list of course of action.
There are 2 types of strategies
1. Pure strategy
2. Mixed strategy
Pure strategy:
It is a decision rule which is always used by the player to select the particular course of action. Thus,
each player knows in advance of all the strategies out of which he always selects only one particular strategy

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irrespective of the strategy others may choose and the objective of the players is to maximize gains or minimize
losses.
Mixed Strategy:
When both players are guessing as to which course of action is to be selected on a particular occasion
with some fixed probability, it is a mixed strategic game. Thus, there is a probabilistic situation and objective of
the players is to maximize expected gains or to minimize expected losses by making a solution among pure
strategies with fixed probabilities.
The optimal strategy mixture for each player may be determined by assigning to each strategy it
probability of being chosen. These strategies so determined is called mixed strategy.
Pay Off Matrix:
The pay offs in terms of gains or losses, when players selected their particular strategies, can be
represented in the form of a matrix, called the pay off matrix.


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Value of the game (v):
The expected outcome per play when players follow their optimal strategy is called the value of the
game.
Max-Min and Min-Max
Consider 2 players A & B. A is the player who maximize his gain while the player B minimizes his loss.
Since A would like to maximize his minimum gain, we obtain for A, the value called Max-Min value ( v ). The
corresponding strategy is called Max-Min strategy.
On other hand, the player B wishes to minimize his maximum loss, a value called Min-Max value (v)
and strategy is Min-Max strategy when these 2 are equal.
Saddle point:
A saddle point of a pay off matrix is that position in the pay off matrix where maximum of row minima
coincides with the minimum of the column maxima. The saddle point need not be unique
(v) = ( v ) = 0, then the game is fair game. If v 0, then the game is strictly determinable.
Games with Saddle point:
Procedure to determine the saddle point:
1. Select the minimum element in each row.
2. Select the maximum element in each row.
3. Find the maximum element among the minimum elements found in step 1
4. Find the minimum element among the maximum elements found in step 2
5. Check whether both the elements found in step 4 & 5 are equal. Such element is the value of the
game and the position is the saddle point.
Games without the saddle point
Consider 2 x 2 game without saddle point
B1 B2
A1 a
11
a
12

A2 a
21
a
22


19

The optimum mixed strategies

S
A
= S
B
=

( ) ( )

p
2
= 1-p
1

( ) ( )

q
2
=1-q
1

Replacement Models

The replacement are concerned with the situations that arise when some items such as men, machines, electric
light bulbs etc. need replacement due to their decreased efficiency, failure or breakdown. Such decreased
efficiency or complete breakdown may either be gradual or all of a sudden

The replacement problem arises because of the following factors;
1. The old item has become worse or requires expensive maintenance
2. The old item has failed due to accident
3. A more efficient design of equipment has become available in market

Thus the problem of replacement is to decide the best policy to determine the age of at which replacement is
ost economical instead of continuing at increased cost due to factor like maintenance. The objective is to find
the optimum period of replacement. We shall discuss the following main type of replacement situations;
i. Replacement of items that deteriorate with time
ii. Replacement of items which do not deteriorate but fail after certain amount of use
A
1
A
2

p
1
p
2

B
1
B
2

q
1
q
2


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Types of maintenance
1. Preventive maintenance
2. Breakdown maintenance

Failure mechanism of items
1. Gradual failure
2. Sudden failure

Replacement policy for items that deteriorate with time and value of money is not considered

If the running cost 9operating cost and maintenance cost0 for the next year is more than the average
annual cost of present year, then replace at the end of the present year.
If running cost of present year is less than the previous years average annual cost, then do not replace

Replacement policy for items that deteriorate with time and value of money is considered

The machine should be replaced if the next periods cost is greater than the weighted average of
previous cost
The machine should not be replaced if the next periods cost is less that weighted average of previous
cost

Replacement of items that fail suddenly
There are two types of replacement policies

Individual replacement policy
Under this policy, an item is replaced immediately after its failure .

Group replacement policy
Under this policy, we take decisions as to when all items must be replaced, irrespective of the fact that items
have failed or have not failed, with provision that, if any item fails before the replacement time it may be
individually replaced.

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Group replacement should be made at the end of t
th
year if the cost of individual replacement for the t
th
period is more than the average cost per unot time through the end of t periods.
Group replacement should not be made at the end of t
th
period if the cost of individual replacement for
the t
th
period is less than the average cost per unit time through the end of t periods

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