Nigeria Notes

ECO 314
NATIONAL OPEN UNIVERSITY OF NIGERIA
SCHOOL OF ARTS AND SOCIAL SCIENCES
COURSE CODE: ECO 314
COURSE TITLE: OPERATIONS RESEARCH
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ECO 314 OPERATIONS RESEARCH
MAIN
COURSE
CONTENTS PAGE
Module 1 .................................................................................... 1
Unit 1 Mathematical Programming (Linear Programming).. 1

Unit 2 The Transportation Model…………………………. 16
Unit 3 Assignment Model..................................................... 49
Unit 4 Project Management................................................... 56
Module 2 .................................................................................... 72
Unit 1 Elements of Decision Analysis.................................. 72

Unit 2 Approaches to Decision Analysis.............................. 78
Unit 3 Types of Decision Situations ..................................... 91
Unit 4 Decision Trees ........................................................... 104
Module 3 .................................................................................... 114
Unit 1 Operations Research (OR).......................................... 114

Unit 2 Modelling in Operations Research............................. 124
Unit 3 Simulation.................................................................. 131
Unit 4 Systems Analysis........................................................ 137
Module 4 .................................................................................... 145
Unit 1 Sequencing................................................................. 145

Unit 2 Games Theory ............................................................ 162
Unit 3 Inventory Control...................................................... 177
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COURSE
GUIDE
ECO 314
OPERATIONS RESEARCH
Course Team Mr. S.J. Babatunde (Course Developer/Writer) -

NOUN
Dr. S.Q.O. Hassan (Course Editor)
NATIONAL OPEN UNIVERSITY OF NIGERIA
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ECO 314
National Open University of Nigeria

Headquarters
14/16 Ahmadu Bello Way
Victoria Island, Lagos
Abuja office
5 Dar es Salaam Street
Off Aminu Kano Crescent
Wuse II, Abuja
e-mail: [email protected]
URL: www.nou.edu.ng
Published by
National Open University of Nigeria
Printed 2015
ISBN: 978-058-040-4
All Rights Reserved
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CONTENTS PAGE
Introduction...................................................................................... iv
What you will Learn in this Course................................................. iv
Course Aims .................................................................................... v
Course Objectives............................................................................ v
Working through this Course........................................................... vi
Course Materials.............................................................................. vi
Study Units....................................................................................... vii
References/Further Reading ............................................................ vii
Assignment File................................................................................ vii
Presentation Schedule....................................................................... viii
Assessment....................................................................................... viii
Tutor-Marked Assignments (TMAs)............................................... viii
Final Examination and Grading....................................................... viii
Course Marking Scheme.................................................................. ix
Course Overview.............................................................................. ix
How to Get the Most from this Course............................................ x
Tutors and Tutorials......................................................................... xii
Conclusion........................................................................................ xii
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ECO 314
INTRODUCTION
ECO 314: Operations Research is a three-credit course for students

offering B.Sc. Economics in the School of Art & Social Sciences.
The course consists of five modules which is divided into 15 units. The
material has been developed to suit undergraduate students in
Economics at the National Open University of Nigeria (NOUN) by
using an approach that treats Operations Research.
After successfully completing the course you will surely be in a better

position to manage operations of organisations in both private and
public organisations.
The Course Guide tells you briefly what the course is about, what course
materials you will be using and how you can work your way through
these materials. It suggests some general guidelines for the amount of
time you are likely to spend on each unit of the course in order to
complete it successfully. It also gives you some guidance on your tutor-
marked assignments. Detailed information on tutor-marked assignment
is found in the separate assignment file which will be available in due
course.
WHAT YOU WILL LEARN IN THIS COURSE
The course is made up of 15 units, covering areas such as:
 Mathematical Programming (Linear Programming)

 The Transportation Model
 Assignment Model
 Project Management
 Elements of Decision Analysis
 Approaches to Decision Analysis
 Types of Decision Situations
 Decision Trees
 Operations Research (OR)
 Modelling In Operations Research
 Simulation
 Systems Analysis
 Sequencing
 Games Theory
 Inventory Control
 Case for OR Analysis
 Integer Programming
 Indefinite Integra
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In all, this course will introduce you to some fundamental aspects of

analysis for business decisions, elements of decision analysis, types of
decision situations, decision trees, operational research, approach to
decision analysis, system analysis, modelling, simulation, cases for OR
analysis, mathematical programming, transportation model, assignment
model, game theory, project management, inventory control, and
sequencing.
COURSE AIM
The aims of the course will be achieved by your ability to:
 identify and explain elements of decision analysis

 identify and use various criteria for solving problems in different
decision situations;
 discuss the decision tree and solve problems involving the
general decision tree and the secretary problem
 trace the history and evolution of operation research
 explain the different approaches to decision analysis
 discuss the concept of system analysis and identify the various
categories of systems
 describe model and analyse the different types of models
 defined simulation and highlight the various types of simulation
models
 solve different types of problems involving linear programming
 explain what transportation problem is all about and solve
transportation problems
 discuss the elements of assignment problem solve decision
problems using various assignment methods
 apply various techniques in solving gaming problems
 solving inventory problem using the Critical Path Methods
(CPM) and the Programme Evaluation and Review Techniques
(PERT)
 identify and solve problems using the sequencing techniques
 identify and solve integer programming and indefinite integra.
COURSE OBJECTIVES
At the end of this course, you should be able to:
 identify and explain elements of decision analysis

 identify and use various criteria for solving problems in different
decision situations
 discuss the decision tree and solve problems involving the
general decision tree and the secretary problem
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ECO 314
 trace the history and evolution of operation research

 explain the different approaches to decision analysis
 discuss the concept of system analysis and identify the various
categories of systems
 describe model and analyse the different types of models
 defined simulation and highlight the various types of simulation
models
 solve different types of problems involving linear programming
 explain what transportation problem is all about and solve
transportation problems
 discuss the elements of assignment problem solve decision
problems using various assignment methods
 apply various techniques in solving gaming problems
 solving inventory problem using the critical path methods (CPM)
and the programme evaluation and review techniques (pert)
 identify and solve problems using the sequencing techniques.
WORKING THROUGH THE COURSE
To successfully complete this course, you are required to read the study
units, reference books and other materials on the course.
Each unit contains self-assessment exercises in addition to tutor-marked
assignments (TMAs). At some points in the course, you will be required
to submit assignments for assessment purposes. At the end of the course
there is a final examination. This course should take about 20 weeks to
complete and some components of the course are outlined under the
course material subsection.
COURSE MATERIALS
The major components of the course are:
1. Course Guide
2. Study Units
3. Textbooks
4. Assignment File
5. Presentation Schedule.
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STUDY UNITS
There are four modules of 15 units in this course:
Module 1
Unit 1 Mathematical Programming (Linear Programming)

Unit 2 The Transportation Model
Unit 3 Assignment Model
Unit 4 Project Management
Module 2
Unit 1 Elements of Decision Analysis

Unit 2 Approaches to Decision Analysis
Unit 3 Types of Decision Situations
Unit 4 Decision Trees
Module 3
Unit 1 Operations Research (OR)

Unit 2 Modelling in Operations Research
Unit 3 Simulation
Unit 4 Systems Analysis
Module 4
Unit 1 Sequencing
Unit 2 Games Theory
Unit 3 Inventory Control
REFERENCES AND FURTHER READING
Every unit contains a list of references and further reading. Try to get as
many as possible of those textbooks and materials listed. The textbooks
and materials are meant to deepen your knowledge of the course.
ASSIGNMENT FILE
There are many assignments in this course and you are expected to do
all of them. You should follow the schedule prescribed for them in terms
of when to attempt the homework and submit same for grading by your
tutor.
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PRESENTATION SCHEDULE
The presentation schedule included in your course materials gives you

the important dates for the completion of tutor-marked assignments and
attending tutorials. Remember, you are required to submit all your
assignments by the due date. You should guard against falling behind in
your work.
ASSESSMENT
Your assessment will be based on tutor-marked assignments (TMAs)

and a final examination which you will write at the end of the course.
TUTOR-MARKED ASSIGNMENTS (TMAs)
Assignment questions for the 15 units in this course are contained in the
Assignment File. You will be able to complete your assignments from
the information and materials contained in your set books, reading and
study units. However, it is desirable that you demonstrate that you have
read and researched more widely than the required minimum. You
should use other references to have a broad viewpoint of the subject and
also to give you a deeper understanding of the subject.
When you have completed each assignment, send it, together with a
TMA form, to your tutor. Make sure that each assignment reaches your
tutor on or before the deadline given in the presentation file. If for any
reason, you cannot complete your work on time, contact your tutor
before the assignment is due to discuss the possibility of an extension.
Extensions will not be granted after the due date unless there are
exceptional circumstances. The TMAs usually constitute 30% of the
total score for the course.
FINAL EXAMINATION AND GRADING
The final examination will be of two hours' duration and have a value of
70% of the total course grade. The examination will consist of questions
which reflect the types of self-assessment practice exercises and tutor-
marked problems you have previously encountered. All areas of the
course will be assessed
You should use the time between finishing the last unit and sitting for
the examination to revise the entire course material. You might find it
useful to review your self-assessment exercises, tutor-marked
assignments and comments on them before the examination. The final
examination covers information from all parts of the course.
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COURSE MARKING SCHEME
The table below indicates the total marks (100%) allocation.
Assessment Marks
Assignment (best three assignments out of the 30%
four marked)
Final Examination 70%
Total 100%
COURSE OVERVIEW
The table below indicates the units, number of weeks and assignments to
be taken by you to successfully complete the course.
Units Title of Work Week’s Assessment

Activities (end of unit)
Course Guide
MODULE 1
1 Mathematical Programming Week 1 Assignment 1
(Linear Programming)
2 The Transportation Mode Week 2 Assignment 1
3 Assignment Model Week 3 Assignment 1
4 Project Management Week 4 Assignment 1
MODULE 2
1 Elements of Decision Analysis Week 5 Assignment 2
2 Approaches to Decision Week 6 Assignment 2
Analysis
3 Types of Decision Situations Week 7 Assignment 2
4 Decision Trees Week 8 Assignment 2
MODULE 3
1 Operations Research (OR) Week 9 Assignment 3
2 Modelling In Operations Week 10 Assignment 3
Research
3 Simulation Week 11 Assignment 3
4 Systems Analysis Week 12 Assignment 3
MODULE 4
1 Sequencing Week 13 Assignment 4
2 Games Theory Week 14 Assignment 4
3 Inventory Control Week 15 Assignment 4
Total 15 Weeks
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HOW TO GET THE MOST FROM THIS COURSE
In distance learning, the study units replace the university lecturer. This
is one of the great advantages of distance learning; you can read and
work through specially designed study materials at your own pace and at
a time and place that suit you best. Think of it as reading the lecture
instead of listening to a lecturer. In the same way that a lecturer might
set you some reading to do, the study units tell you when to read your
books or other material, and when to embark on discussion with your
colleagues. Just as a lecturer might give you an in-class exercise, your
study units provides exercises for you to do at appropriate points.
Each of the study units follows a common format. The first item is an
introduction to the subject matter of the unit and how a particular unit is
integrated with the other units and the course as a whole. Next is a set of
learning objectives. These objectives let you know what you should be
able to do by the time you have completed the unit. You should use
these objectives to guide your study. When you have finished the unit
you must go back and check whether you have achieved the objectives.
If you make a habit of doing this you will significantly improve your
chances of passing the course and getting the best grade.
The main body of the unit guides you through the required reading from
other sources. This will usually be either from your set books or from a
readings section. Self-assessments are interspersed throughout the units,
and answers are given at the ends of the units. Working through these
tests will help you to achieve the objectives of the unit and prepare you
for the assignments and the examination. You should do each self-
assessment exercises as you come to it in the study unit. Also, ensure to
master some major historical dates and events during the course of
studying the material.
The following is a practical strategy for working through the course. If

you run into any trouble, consult your tutor. Remember that your tutor's
job is to help you. When you need help, don't hesitate to call and ask
your tutor to provide the help.
1. Read this Course Guide thoroughly.

2. Organise a study schedule. Refer to the `Course overview' for
more details. Note the time you are expected to spend on each
unit and how the assignments relate to the units. Important
information, e.g. details of your tutorials, and the date of the first
day of the semester is available from study centre. You need to
gather together all this information in one place, such as your
dairy, a wall calendar, an iPad or a handset. Whatever method
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you choose to use, you should decide on and write in your own
dates for working each unit.
3. Once you have created your own study schedule, do everything
you can to stick to it. The major reason that students fail is that
they get behind with their course work. If you get into difficulties
with your schedule, please let your tutor know before it is too late
for help.
4. Turn to unit 1 and read the introduction and the objectives for the
unit.
5. Assemble the study materials. Information about what you need
for a unit is given in the `Overview' at the beginning of each unit.
You will also need both the study unit you are working on and
one of your set books on your desk at the same time.
6. Work through the unit. The content of the unit itself has been
arranged to provide a sequence for you to follow. As you work
through the unit you will be instructed to read sections from your
set books or other articles. Use the unit to guide your reading.
7. Up-to-date course information will be continuously delivered to
you at the study centre.
8. Work before the relevant due date (about 4 weeks before due
dates), get the Assignment File for the next required assignment.
Keep in mind that you will learn a lot by doing the assignments
carefully. They have been designed to help you meet the
objectives of the course and, therefore, will help you pass the
exam. Submit all assignments no later than the due date.
9. Review the objectives for each study unit to confirm that you
have achieved them. If you feel unsure about any of the
objectives, review the study material or consult your tutor.
10. When you are confident that you have achieved a unit's
objectives, you can then start on the next unit. Proceed unit by
unit through the course and try to space your study so that you
keep yourself on schedule.
11. When you have submitted an assignment to your tutor for
marking, do not wait for its return `before starting on the next
units. Keep to your schedule. When the assignment is returned,
pay particular attention to your tutor's comments, both on the
tutor-marked assignment form and also written on the
assignment. Consult your tutor as soon as possible if you have
any questions or problems.
12. After completing the last unit, review the course and prepare
yourself for the final examination. Check that you have achieved
the unit objectives (listed at the beginning of each unit) and the
course objectives (listed in this Course Guide).
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TUTORS AND TUTORIALS
There are some hours of tutorials (2-hour sessions) provided in support

of this course. You will be notified of the dates, times and location of
these tutorials, together with the name and phone number of your tutor,
as soon as you are allocated a tutorial group.
Your tutor will mark and comment on your assignments, keep a close
watch on your progress and on any difficulties you might encounter, and
provide assistance to you during the course. You must mail your tutor-
marked assignments to your tutor well before the due date (at least two
working days are required). They will be marked by your tutor and
returned to you as soon as possible.
Do not hesitate to contact your tutor by telephone, e-mail, or discussion

board if you need help. The following might be circumstances in which
you would find help necessary. Contact your tutor if:
• you do not understand any part of the study units or the assigned
readings
• you have difficulty with the self-assessment exercises
• you have a question or problem with an assignment, with your
tutor's comments on an assignment or with the grading of an
assignment.
You should try your best to attend the tutorials. This is the only chance
to have face to face contact with your tutor and to ask questions which
are answered instantly. You can raise any problem encountered in the
course of your study. To gain the maximum benefit from course
tutorials, prepare a question list before attending them. You will learn a
lot from participating in discussions actively.
CONCLUSION
On successful completion of the course, you would have developed

critical thinking and analytical skills (from the material) for efficient and
effective discussion of operational research. However, to gain a lot from
the course please try to apply everything you learn in the course to term
paper writing in other related courses. We wish you success with the
course and hope that you will find it interesting and useful.
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MODULE 1
Unit 1 Mathematical Programming (Linear Programming)

Unit 2 The Transportation Model
Unit 3 Assignment Model
Unit 4 Project Management
UNIT 1 MATHEMATICAL PROGRAMMING (LINEAR

PROGRAMMING)
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Requirements for Linear Programming Problems
3.2 Assumptions in Linear Programming
3.3 Application of Linear Programming
3.4 Areas of Application of Linear Programming
3.5 Formulation of Linear Programming Problems
3.6 Advantages Linear Programming Methods
3.7 Limitation of Linear programming Models
3.8 Graphical Methods of Linear Programming Solution
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment
7.0 References/Further Reading
1.0 INTRODUCTION
Linear programming deals with the optimisation (maximisation or

minimisation) of a function of variables known as objective function,
subject to a set of linear equations and/or inequalities known as
constraints. The objective function may be profit, cost, production
capacity or any other measure of effectiveness, which is to be obtained
in the best possible or optimal manner. The constraints may be imposed
by different resources such as market demand, production process and
equipment, storage capacity, raw material availability, etc. By linearity
is meant a mathematical expression in which the expressions among the
variables are linear e.g., the expression a1x1 + a2x2 + a3x3 + ... + aⁿxⁿ is
linear. Higher powers of the variables or their products do not appear in
the expressions for the objective function as well as the constraints (they
do not have expressions like x13, x23/2, x1x2, a1x1 + a2 log x2, etc.). The
variables obey the properties of proportionality (e.g., if a product
requires 3 hours of machining time, 5 units of it will require 15 hours)
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and additivity (e.g., amount of a resource required for a certain number

of products is equal to the sum of the resource required for each).
It was in 1947 that George Dantzig and his associates found out a
technique for solving military planning problems while they were
working on a project for U.S. Air Force. This technique consisted of
representing the various activities of an organisation as a linear
programming (L.P.) model and arriving at the optimal programme by
minimising a linear objective function. Afterwards, Dantzig suggested
this approach for solving business and industrial problems. He also
developed the most powerful mathematical tool known as “simplex
method” to solve linear programming problems.
2.0 OBJECTIVES
At the end of this unit, you should be able to:
 explain the requirements for linear programming

 highlight the assumptions of linear programming
 identify the areas of application of linear programming
 formulate a linear programming problem
 solve various problems using linear programming.
3.0 MAIN CONTENT
3.1 Requirements for a Linear Programming Problem
All organisations, big or small, have at their disposal, men, machines,

money and materials, the supply of which may be limited. If the supply
of these resources were unlimited, the need for management tools like
linear programming would not arise at all. Supply of resources being
limited, the management must find the best allocation of its resources in
order to maximise the profit or minimise the loss or utilise the
production capacity to the maximum extent. However this involves a
number of problems which can be overcome by quantitative methods,
particularly the linear programming.
Generally speaking, linear programming can be used for optimisation

problems if the following conditions are satisfied:
1. There must be a well-defined objective function (profit, cost or

quantities produced) which is to be either maximised or
minimised and which can be expressed as a linear function of
decision variables.
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2. There must be constraints on the amount or extent of attainment

of the objective and these constraints must be capable of being
expressed as linear equations or inequalities in terms of variables.
3. There must be alternative courses of action. For example, a given
product may be processed by two different machines and problem
may be as to how much of the product to allocate to which
machine.
4. Another necessary requirement is that decision variables should
be interrelated and nonnegative. The non-negativity condition
shows that linear programming deals with real life situations for
which negative quantities are generally illogical.
3.2 Assumptions in Linear Programming Models
A linear programming model is based on the following assumptions:
1. Proportionality
A basic assumption of linear programming is that proportionality exists

in the objective function and the constraints. This assumption implies
that if a product yields a profit of #10, the profit earned from the sale of
12 such products will be # (10 x 12) = #120. This may not always be
true because of quantity discounts. Further, even if the sale price is
constant, the manufacturing cost may vary with the number of units
produced and so may vary the profit per unit. Likewise, it is assumed
that if one product requires processing time of 5 hours, then ten such
products will require processing time of 5 x 10 = 50 hours. This may
also not be true as the processing time per unit often decreases with
increase in number of units produced. The real world situations may not
be strictly linear. However, assumed linearity represents their close
approximations and provides very useful answers.
2. Additivity
It means that if we use t1 hours on machine A to make product 1 and t2

hours to make product 2, the total time required to make products 1 and
2 on machine A is t1 + t2 hours. This, however, is true only if the
change-over time from product 1 to product 2 is negligible. Some
processes may not behave in this way. For example, when several
liquids of different chemical compositions are mixed, the resulting
volume may not be equal to the sum of the volumes of the individual
liquids.
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3. Continuity
Another assumption underlying the linear programming model is that

the decision variables are continuous i.e., they are permitted to take any
non-negative values that satisfy the constraints. However, there are
problems wherein variables are restricted to have integral values only.
Though such problems, strictly speaking, are not linear programming
problems, they are frequently solved by linear programming techniques
and the values are then rounded off to nearest integers to satisfy the
constraints. This approximation, however, is valid only if the variables
have large optimal values. Further, it must be ascertained whether the
solution represented by the rounded values is a feasible solution and also
whether the solution is the best integer solution.
4. Certainty
Another assumption underlying a linear programming model is that the

various parameters, namely, the objective function coefficients, R.H.S.
coefficients of the constraints and resource values in the constraints are
certainly and precisely known and that their values do not change with
time. Thus, the profit or cost per unit of the product, labour and
materials required per unit, availability of labour and materials, market
demand of the product produced, etc. are assumed to be known with-
certainty. The linear programming problem is, therefore, assumed to be
deterministic in nature.
5. Finite choices
A linear programming model also assumes that a finite (limited) number

of choices (alternatives) are available to the decision-maker and that the
decision variables are interrelated and non-negative. The non-negativity
condition shows that linear programming deals with real-life situations
as it is not possible to produce/use negative quantities.
Mathematically these non-negativity conditions do not differ from other

constraints. However, since while solving the problems they are handled
differently from the other constraints, they are termed as non-negativity
restrictions and the term constraints is used to represent constraints other
than non-negativity restrictions and this terminology has been followed
throughout the book.
3.3 Applications of Linear Programming Method
Though, in the world we live, most of the events are non-linear, yet
there are many instances of linear events that occur in day-to-day life.
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Therefore, an understanding of linear programming and its application

in solving problems is utmost essential for today’s managers.
Linear programming techniques are widely used to solve a number of

business, industrial, military, economic, marketing, distribution and
advertising problems. Three primary reasons for its wide use are:
1. A large number of problems from different fields can be

represented or at least approximated to linear programming
problems.
2. Powerful and efficient techniques for solving L.P. problems are
available.
3. L.P. models can handle data variation (sensitivity analysis) easily.
However, solution procedures are generally iterative and even medium

size problems require manipulation of large amount of data. But with the
development of digital computers, this disadvantage has been
completely overcome as these computers can handle even large L.P.
problems in comparatively very little time at a low cost.
3.4 Areas of Application of Linear Programming
Linear programming is one of the most widely applied techniques of

operations research in business, industry and numerous other fields. A
few areas of its application are given below.
1. Industrial applications
(a) Product mix problems: An industrial concern has available a

certain production capacity (men, machines, money, materials,
market, etc.) on various manufacturing processes to manufacture
various products. Typically, different products will have different
selling prices, will require different amounts of production
capacity at the several processes and will, therefore, have
different unit profits; there may also be stipulations (conditions)
on maximum and/or minimum product levels. The problem is to
determine the product mix that will maximise the total profit.
(b) Blending problems: These problems are likely to arise when a
product can be made from a variety of available raw materials of
various compositions and prices. The manufacturing process
involves blending (mixing) some of these materials in varying
quantities to make a product of the desired specifications.
(c) Production scheduling problems: They involve the
determination of optimum production schedule to meet
fluctuating demand. The objective is to meet demand, keep
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inventory and employment at reasonable minimum levels, while

minimising the total cost Production and inventory.
(d) Trim loss problems: They are applicable to paper, sheet metal
and glass manufacturing industries where items of standard sizes
have to be cut to smaller sizes as per customer requirements with
the objective of minimising the waste produced.
(e) Assembly-line balancing: It relates to a category of problems
wherein the final product has a number of different components
assembled together. These components are to be assembled in a
specific sequence or set of sequences. Each assembly operator is
to be assigned the task / combination of tasks so that his task time
is less than or equal to the cycle time.
2. Management applications
(a) Media selection problems: They involve the selection of

advertising mix among different advertising media such as T.V.,
radio, magazines and newspapers that will maximise public
exposure to company’s product. The constraints may be on the
total advertising budget, maximum expenditure in each media,
maximum number of insertions in each media and the like.
(b) Portfolio selection problems: They are frequently encountered
by banks, financial companies, insurance companies, investment
services, etc. A given amount is to be allocated among several
investment alternatives such as bonds, saving certificates,
common stock, mutual fund, real estate, etc. to maximise the
expected return or minimise the expected risk.
(c) Profit planning problems: They involve planning profits on
fiscal year basis to maximise profit margin from investment in
plant facilities, machinery, inventory and cash on hand.
(d) Transportation problems: They involve transportation of
products from, say, n sources situated at different locations to,
say, m different destinations. Supply position at the sources,
demand at destinations, freight charges and storage costs, etc. are
known and the problem is to design the optimum transportation
plan that minimises the total transportation cost (or distance or
time).
(e) Assignment problems: They are concerned with allocation of
facilities (men or machines) to jobs. Time required by each
facility to perform each job is given and the problem is to find the
optimum allocation (one job to one facility) so that the total time
to perform the jobs is minimised.
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3.5 Formulation of Linear Programming Problems
First, the given problem must be presented in linear programming form.

This requires defining the variables of the problem, establishing inter-
relationships between them and formulating the objective function and
constraints. A model, which approximates as closely as possible to the
given problem, is then to be developed. If some constraints happen to be
nonlinear, they are approximated to appropriate linear functions to fit the
linear programming format. In case it is not possible, other techniques
may be used to formulate and then solve the model.
Example 1: (Production allocation problem)
A firm produces three products. These products are processed on three

different machines. The time required for manufacturing one unit of
each of the three products and the daily capacity of the three machines
are given in the table below.
Table 1
Machine Time per unit (minutes) Machine capacity
Product 1 Product 2 Product 3 (minutes/day)
M1 2 3 2 440
M2 4 - 3 470
M3 2 5 - 430
It is required to determine the daily number of units to be manufactured

for each product. The profit per unit for product 1, 2 and 3 is #4, #3 and
#6 respectively. It is assumed that all the amounts produced are
consumed in the market. Formulate the mathematical (L.P) model that
will maximise the daily profit.
Formulation of linear programming model
Step 1
From the study of the situation find the key-decision to be made. It this
connection, looking for variables helps considerably. In the given
situation key decision is to decide the extent of products 1, 2 and 3, as
the extents are permitted to vary.
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Step 2
Assume symbols for variable quantities noticed in step 1. Let the extents
(amounts) of products, 1, 2 and 3 manufactured daily be x1, x2 and x3
units respectively.
Step 3
Express the feasible alternatives mathematically in terms of variables.
Feasible alternatives are those which are physically, economically and
financially possible. In the given situation feasible alternatives are sets
of values of x1, x2 and x3,
where x1, x2, x= ≥ 0, since negative production has no meaning and is
not feasible.
Step 4
Mention the objective quantitatively and express it as a linear function
of variables. In the present situation, objective is to maximise the profit.
i.e., maximise Z = 4x1 + 3x2 + 6x3.
Step 5
Put into words the influencing factors or constraints. These occur
generally because of constraints on availability (resources) or
requirements (demands). Express these constraints also as linear
equations/inequalities in terms of variables.
Here, constraints are on the machine capacities and can be

mathematically expressed as
2x1 + 3x2 + 2x3 ≤ 440,

4x1 + 0x2 +3x3 ≤ 470,
2x1 + 5x2 + 0x3 ≤ 430.
Example 2: (Blending problem)
A firm produces an alloy having the following specifications:
(i) specific gravity ≤ 0.98,

(ii) chromium ≥ 8%,
(iii) melting point ≥ 450°C.
Raw materials A, B and C having the properties shown in the table can
be used to make the alloy.
167
Table 2
Property Properties of raw material
A B C
Specific gravity 0.92 0.97 1.04

Chromium 7% 13% 16%
Melting point 440OC 490OC 480OC
Costs of the various raw materials per ton are: #90 for A, #280 for B and
#40 for C. Formulate the L.P model to find the proportions in which A,
B and C be used to obtain an alloy of desired properties while the cost of
raw materials is minimum.
Let the percentage contents of raw materials A, B and C to be used for

making the alloy be x1, x2 and x3 respectively.
Objective is to minimise the cost

i.e., minimise Z = 90x1 + 280x2 + 40x3.
Constraints are imposed by the specifications required for the alloy.
They are
0.92x1 + 0.97x2 + 1.04x3 ≤ 0.98,

7x1 + 13x2+ 16x3 ≥ 8,
440x1 + 490x2 + 480x3 ≥ 450,
and x1 + x2 + x3 = 100,
as x1, x2 and x3 are the percentage contents of materials A, B and C in

making the alloy.
Also x1, x2, x3, each ≥ 0.
Let x1, x2, x3 and x4 denote the number of advertising units to be bought
on television, radio, magazine I and magazine II respectively.
The objective is to maximise the total number of potential customers
reached.
i.e., maximise Z = 10 (2x1 + 6x2 + 1.5x3 + x4).
Constraints are on the advertising budget:
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30,000x1+20,000x2+15,000x3+10,000x4 ≤ 450,000
or 30x1+20x2+15x3+10x4 ≤ 450,
on number of female customers reached by the advertising campaign:
150,000x1+400,000x2+70,000x3+50,000x4= ≥ 100,000
or 15x1+40x2+7x3+5x4 ≥ 100
on expenses on magazine advertising: 15,000x3+10,000x4 ≤ 150,000
or 15x3+10x4 ≤ 150
on no. of units on magazines: x3 ≥ 3,
x4 ≥ 2,
on no. of units on television: : 5 ≤ x1 ≤ 10 or x1 ≥ 5, x1 ≤ 10
on no. of units on radio: 5 ≤ x2 ≤ 10 or x2 ≥ 5, x2 ≤ 10
where x1, x2, x3, x4, each ≥ 0.
Example 3: (Inspection problem)
A company has two grades of inspectors, I and II to undertake quality

control inspection. At least 1,500 pieces must be inspected in an 8-hour
day. Grade I inspector can check 20 pieces in an hour with an accuracy
of 96%. Grade II inspector checks 14 pieces an hour with an accuracy of
92%.
Wages of grade I inspector are #5 per hour while those of grade II

inspector are #4 per hour. Any error made by inspector costs #3 to the
company. If there are, in all, 10 grade I inspectors and 15 grade II
inspectors in the company find the optimal assignment of inspectors that
minimises the daily inspection cost.
Formulation of L.P. model

Let x1 and x2 denote the number of grade I and grade II inspectors that
may be assigned the job of quality control inspection.
The objective is to minimise the daily cost of inspection. Now the
company has to incur two types of costs: wages paid to the inspectors
and the cost of their inspection errors. The cost of grade I inspector/hour
is;
# (5 + 3 x 0.04 x 20) = #7.40.

Similarly, cost of grade II inspector/hour is
# (4 + 3 x 0.08 x 14) = #7.36.
: The objective function is
minimise Z = 8(7.40x1 + 7.36x2) = 59.20x1 + 58.88x2.
Constraints are on the number of grade I inspectors: x1 ≤ 10,
on the number of grade II inspectors : x2 ≤ 15,
on the number of pieces to be inspected daily:
20 X 8x1 + 14 X 8x2 ≥ 1,500
or 160x1 + 112x2 ≥ 1,500
where x1,x2 ≥ 0.
169
Example 4: (Product mix problem)
Consider the following problem faced by a production planner in a soft

drink plant. He has two bottling machines A and B. A is designed for 8-
ounce bottles and B for 16-ounce bottles. However; each can be used on
both types of bottles with some lass of efficiency. The following data are
available:
Machine 8-ounce bottles 16-ounce bottles

A 100/minute 40/minute
B 60/minute 75/minute
The machines can be run 8-hour per day, 5 days a week. Profit on 8-
ounce bottle is 15 paise and on 16-ounce bottle is 25 paise. Weekly
production of the drink cannot exceed 300,000 ounces and the market
can absorb 25,000 eight-ounce bottles and 7,000 sixteen-ounce bottles
per week. The planner wishes to maximise his profit subject, of course,
to all the production and marketing constraints. Formulate this as L.P
problem.
Key decision is to determine the number of 8-ounce bottles and 16-

ounce bottles to be produced on either of machines A and B per week.
Let xA1, xB1 be the number of 8-ounce bottles and xA2, xB2 be the
number of 16-ounce bottles to be produced per week on machines A and
B respectively.
Objective is to maximise .the weekly profit.

i.e., maximise Z = #[0.15 (xA1 +xB1) + 0.25(xA2 +xB2)].
Constraints can be formulated as follows:
Since an 8-ounce bottle takes 1/100minute and a 16-ounce bottle takes

1/40 minute on machine A and the machine can be run for 8 hours a day
and 5 days a week, the time constraint on machine A can be written as:
xA1+ xA2≤ 5 X 8 X 60
100 40
≤ 2,400
Similarly, time constraint on machine B can be written as
xB1+ xB2≤ 2,400.

60 75
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Since the total weekly production cannot exceed 300,000 ounces,

8(xA1+XB1) + 16(xA2 + xB2) ≤ 300,000.
The constraints on market demand yield
xA1 + xB1 ≥ 25,000,

xA2 + xB2 ≥ 7,000,
where xA1, xB1, xA2, xB2, each ≥ 0.
3.6 Advantages of Linear Programming Methods
Following are the main advantages of linear programming methods:
1. It helps in attaining the optimum use of productive factors. Linear

programming indicates how a manager can utilise his productive
factors most effectively by a better selection and distribution of
these elements. For example, more efficient use of manpower and
machines can be obtained by the use of linear programming.
2. It improves the quality of decisions. The individual who makes
use of linear programming methods becomes more objective than
subjective. The individual having a clear picture of the
relationships within the basic equations, inequalities or
constraints can have a better idea about the problem and its
solution.
3. It also helps in providing better tools for adjustments to meet
changing conditions. It can go a long way in improving the
knowledge and skill of future executives.
4. Most business problems involve constraints like raw materials
availability, market demand, etc. which must be taken into
consideration. Just because we can produce so many units of
products does not mean that they can be sold. Linear
programming can handle such situations also since it allows
modification of its mathematical solutions.
3.7 Limitations of Linear Programming Model
This model, though having a wide field, has the following limitations:
1. For large problems having many limitations and constraints, the

computational difficulties are enormous, even when assistance of
large digital computers is available. The approximations required
to reduce such problems to meaningful sizes may yield the final
results far different from the exact ones.
2. Another limitation of linear programming is that it may yield
fractional valued answers for the decision variables, whereas it
may happen that only integer values of the variables are logical.
171
For instance, in finding how many lathes and milling machines to

be produced, only integer values of the decision variables, say x1
and x2 are meaningful. Except when the variables have large
values, rounding the solution values to the nearest integers will
not yield an optimal solution. Such situations justify the use of
special techniques like integer programming.
3. It is applicable to only static situations since it does not take into
account the effect of time. The O.R. team must define the
objective function and constraints which can change due to
internal as well as external factors.
3.8 Graphical Method of Solution
Once a problem is formulated as mathematical model, the next step is to

solve the problem to get the optimal solution. A linear programming
problem with only two variables presents a simple case, for which the
solution can be derived using a graphical or geometrical method.
Though, in actual practice such small problems are rarely encountered,
the graphical method provides a pictorial representation of the solution
process and a great deal of insight into the basic concepts used in
solving large L.P. problems. This method consists of the following
steps:
1. Represent the given problem in mathematical form i.e., formulate

the mathematical model for the given problem.
2. Draw the x1 and x2-axes. The non-negativity restrictions x1 ≥ 0
and x2 ≥ 0 imply that the values of the variables x1 and x2 can lie
only in the first quadrant. This eliminates a number of infeasible
alternatives that lie in 2nd, 3rd and 4th quadrants.
3. Plot each of the constraint on the graph. The constraints are
whether equations or inequalities are plotted as equations. For
each constraint, assign any arbitrary value to one variable and get
the value of the other variable. Similarly, assign another arbitrary
value to the other variable and find the value of the first variable.
Plot these two points and connect them by a straight line. Thus
each constraint is plotted as line in the first quadrant.
4. 1dentify the feasible region (or solution space) that satisfies all
the constraints simultaneously. For type constraint, the area on or
above the constraint line i.e., away from the origin and for type
constraint, the area on or below the constraint line i.e., towards
origin will be considered. The area common to all the constraints
is called feasible region and is shown shaded. Any point on or
within the shaded region represents a feasible solution to the
given problem. Though a number of infeasible points are
eliminated, the feasible region still contains a large number of
feasible points
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4.0 CONCLUSION
Linear programming involves optimisation (maximisation or

minimisation) of a function of variables known as objective function,
subject to a set of linear equations and/or inequalities known as
constraints. The objective function may be profit, cost, production
capacity or any other measure of effectiveness, which is to be obtained
in the best possible or optimal manner. The constraints may be imposed
by different resources such as market demand, production process and
equipment, storage capacity, raw material availability and so on.
5.0 SUMMARY
You have learnt in this unit that all organisations, big or small, have at
their disposal, men, machines, money and materials, the supply of which
may be limited. If the supply of these resources were unlimited, the need
for management tools like linear programming would not arise at all.
Supply of resources being limited, the management must find the best
allocation of its resources in order to maximise the profit or minimise
the loss or utilise the production capacity to the maximum extent.
However this involves a number of problems which can be overcome by
quantitative methods, particularly the linear programming. Generally
speaking, linear programming can be used for optimisation problems if
the following conditions are satisfied- there must be a well-defined
objective function; there must be constraints on the amount or extent of
attainment of the objective and these constraints must be capable of
being expressed as linear equations or inequalities in terms of variables;
there must be alternative courses of action; decision variables should be
interrelated and nonnegative; and the resources must be in limited
supply. Linear programming has the following assumptions-
proportionality, additivity, continuity, certainty, and finite choices. LP
solution methods can be applied in solving industrial problems,
management related problems, and a host of other problem areas.
6.0 TUTOR-MARKED ASSIGNMENT
1. Briefly discuss what linear programming involves.

2. Identify and discuss five assumptions of linear programming.
3. List and explain three areas where linear programming can be
applied.
173
7.0 REFERENCES/FURTHER READING
Dixon-Ogbechi, B.N. (2001). Decision Theory in Business. Lagos:

Philglad Nig. Ltd.
Denardo, E. V. (2002). The Science of Decision Making: A Problem-

Based Approach Using Excel. New York: John Wiley.
Gupta, P.K. & Hira, D.S. (2012). Operations Research. New-Delhi: S.

Chand & Company.
Lucey, T. (1988). Quantitative Techniques: An Instructional Manual.

London: DP Publications.
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UNIT 2 THE TRANSPORTATION MODEL
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Assumptions Made in the Use of the Transportation Model
3.2 Theoretical Consideration
3.3 General Procedure for Setting Up a Transportation Model
3.4 Developing an Initial Solution
3.4.1 The North West Corner Method
3.4.2 The Least Cost Method
3.4.3 Vogel’s Approximation Method (VAM)
3.5 The Unbalanced Case
3.6 Formulating Linear Programming Model for the
Transportation Problem
3.7 Improving the Initial Feasible Solution through
Optimisation
3.8 Determination of the Optimal Transportation Cost Using
the Stepping Stone Method
3.9 The Modified Distribution Method
3.10 Degeneracy
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
We now go on to another mathematical programming problem which is

a special case of linear programming model. Unlike the linear
programming method, treated in the last unit of this book, which focuses
on techniques of minimising cost of production or maximising profit,
this special linear programming model deals with techniques of evolving
the lowest cost plan for transporting product or services from multiple
origins which serve as suppliers to multiple destinations that demand for
the goods or services.
As an example, suppose cows are to be transported in a day from five

towns in the northern part of Nigeria to four towns in the south. Each of
the five northern towns has the maximum they can supply in a day,
while each of the town in the southern part also has the specified
quantities they demand for. If the unit transportation cost from a source
to each of the destinations is known it is possible to compute the
175
quantity of cows to be transported from each of the northern towns to

the southern towns in order to minimise the total transportation cost.
2.0 OBJECTIVES
 describe the nature of a transportation problem

 compute the initial feasible solution using the north west corner
method
 find the initial feasible solution using the least cost method
 compute the initial feasible solution using the Vogel’s
approximation method
 use the stepping stones and modified distribution methods to find
the optimum solution.
3.0 MAIN CONTENT
3.1 Assumptions Made in the Use of the Transportation

Model
The transportation model deals with a special class of linear

programming problem in which the objective is to transport a
homogeneous commodity from various origins or factories to
different destinations or markets at a total minimum cost (Murthy,
2007).
In using transportation model the following major assumptions are

made.
1. The homogeneity of materials to be transported. The materials or

items to be transported by road, sea, air or land must be the same
regardless of their specific source or specified locations.
2. Equality of transportation cost per unit. The transportation cost
per unit is the same irrespective of which of the materials is to be
transported.
3. Uniqueness of route or mode of transportation between each
source and destination.
In using the transportation model it is essential that the following

information is made available.
• The list of each source and its respective capacity for supplying
the materials
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• The list of each destination and its respective demand for that
period.
• The unit cost of each item from each source to each destination.
3.2 Theoretical Consideration
Suppose we have a transportation problem involving movement of items

from m sources (or origins) to n location (destination) at minimum cost.
Let cij be the unit cost of transporting an item from source i to location j;
a1 be the quantity of items available at source i and bj the quantity of
item demanded at location j. Also, let xij be the quantity transported
from ith source to jth location then total supply = ∑aij, while total demand
= ∑ bij. This problem can be put in tabular form as shown below:
1 2 3 …..n Supply
1 c11 c12 c13 …. n a1
2 c21 c22 c23 …. n a2
3 c31 c32 c33 …. n a3
: : : : : :
m cm1 cmn am
Demand b1 b2 b3 …. bm
The
linear
Programming model can be formulated as follows:

Subject to the constraints-
3.3 General Procedure for Setting up a Transportation

Model
Convert statement of the problem into tabular form showing the total
supply and total demand for each of the sources and destinations.
• Check that total number of supply equals the total number of

demand to know whether the transportation model is of the
balanced or unbalanced type.
177
• Allocate values into the necessary cells using the appropriation

techniques for the method of allocation of quantities that you
have selected. We expect the number of allocated cells to be
m+n-l where m is the number of rows and n is the number of
columns otherwise degenerating occurs.
. Compute the total cost of transportation.
Solution of transportation problem comes up in two phases namely:
 The initial feasible solution

 The optimum solution to the transportation problem
3.4 Developing an Initial Solution
When developing an initial basic feasible solution, there are different

methods that can be used. We shall discuss three methods used namely;
1. The North West Corner Method

2. he Least Cost Method
3. Vogel’s Approximation Method
It is assumed that the least cost method is an improvement on the North

West Corner method, while the Vogel’s approximation method is an
improvement of the least cost method.
3.4.1 The North West Corner Method
This is the simplest and most straight forward format of the method of
developing an initial basic feasible solution. The initial solution
resulting from this method usually operations research in decision
analysis and production management results in the largest total
transportation cost among the three methods to be discussed. To explain
how to use this method, we present an illustrative data of a
transportation problem in the example below:
Table 1: Supply and Demand of Cows
Sources Lagos Akure Awka Supply

Sokoto 90 85 70 600
Kano 175 110 95 1400

Maiduguri 205 190 130 1000
Demand 1600 1050 350
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Example 1
Suppose the table above gives us the supply of cows from three sources
in the north and the demands by three locations in the southern part of
Nigeria. The quantities inside the cell represent the unit costs (in naira)
of transporting one cow from one source to one location. Use the North
West Corner method to allocate the cows in such a way as to minimise
the cost of transportation and find the minimum cost.
Solution
We observe that the total demand = 1600 + 1050 + 350 =3U00 and total
supply = 600 + 1400 + 1000 = 3000. Since demand supply we have a
balanced transportation problem
To use the North West Corner method to allocate all the cows supplied
to the cells where they are demanded, we follow this procedure:
a. Starting from the North West Corner of the table allocate as many
cows as possible to cell (1, 1). In this case it is 600. This exhausts
the supply from Sokoto leaving a demand of 1000 cows for
Lagos.

Sokoto 90 85 70
600 - - 600
Kano 175 110 95 1400
Maiduguri 205 190 130 350
100
Demand 1600 1050 350
1000
b. Allocate 1000 cows to cell (2,1) to meet Lagos demand leaving a

supply of 400 cows in Kano. Cross out the 1000 in column 1
where the demand has been met

Sokoto 90 85 70
600 - - 600
Kano 175 110 95 1400
1000 - 400
Maiduguri 205 190 130 100
Demand 1600 1050 350
1000
179
c. Allocate 400 cows to cell (2, 2) to exhaust the supply from Kano
leaving a demand of 650 in Akure. Cross out the 1400 in row 2
which has been satisfied.

Sokoto 90 85 70
600 - - 600
Kano 175 110 95 400
1000 400 - 1400
Maiduguri 205 190 130 1000
- 650 350
Demand 1600 1050 350
1000 650
d. Allocate 650 cows to cell (3, 2) to satisfy the demand in Akure

Sokoto 90 85 70
600 - - 600
Kano 175 110 95 400
1000 400 - 1400
Maiduguri 205 190 130 350
- 650 350 1000
Demand 1600 1050 350
1000 650
e. Allocate 350 cows to cell (3, 3) to satisfy the demand in Awka

and exhaust the supply in Maiduguri. Cross out the 350.
Location
Sokoto 90 85 70
600 - - 600
Kano 175 110 95 400
1000 400 - 1400
Maiduguri 205 190 130 350
- 650 350 1000
Demand 1600 1050 350
1000 650
This completes the allocation. We observe that out of the 9 cells only 5
cells have been allocated. If m is the number of rows and n the number
of columns, the total number of allocated cells in this case is m + n — 1
i.e. 3+ 3-1 = 5.
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The transportation cost is found by multiplying unit cost for each cell by
its unit allocation and summing it up.
i.e. C =∑ (unit cost x cell allocation)

= (600 x 90) + (l000x 175) + (110 x 400) + (190 x 650) + (130 x 350)
= 54000 + 175000 x 44000 + 123500 + 45500
= N442000
This can be summarised in tabular form as follows:
Cell Quantity Unit Cost Cost

(1, 1) 600 90 54000
(2, 1) 1000 175 17500
(2, 2) 400 110 4400
(3, 2) 650 190 123500
(3, 3) 130 350 45500
442000
3.4.2 The Least Cost Method
This method is also known as the minimum cost method. Allocation

commences with the cell that has the least unit cost and other subsequent
method of allocation is similar to the North West Corner method.
Example 2
Solve example 2 using the least cost method.
Solution
We observe that the total demand = 1600 + 1050 + 350 = 3000 and total
supply = 600 + 1400 + 1000 3000. Since demand = supply we have a
balanced transportation problem.
We note that the least cost per unit in this problem is N70 in cell (1, 3).
We do the allocation as follows:
Step 1
Allocate 350 to cell (1, 3) to satisfy the demand at Awka and leaving a
supply of 250 cows at Sokoto. Cross out column 3 that has been
satisfied.
181
Table 2
Location
Sokoto 90 85 70 250
- 250 350 600
Kano 175 110 95 1400
-
Maiduguri 205 190 130
- - 1100
Demand 1600 1050 350
Step 2
Allocate 250 cows to cell (1, 2) that has the next smallest unit cost of
N85 to complete the supply from Sokoto leaving us with demands of
800 cows at Akure. Cross out exhausted row one.

Sokoto 90 85 70 250
- 250 350 600
Kano 175 110 95 600
- 1400
Maiduguri 205 190 130 1100
Demand 1600 1050 350

800
Step 3
Allocate 800 cows to cell (2, 2) with the next least cost leaving 110 to
satisfy demand at Akure, leaving us with supply of 600 ram at Kano
cross out satisfied column 2.
Location
Sokoto 90 85 70 250
- 250 350 600
Kano 175 110 95 600
600 800 - 1400
Maiduguri 205 190 130 1100
1000 - -
Demand 1600 1050 350
800
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Step 4
Allocate 600 cows to cell (2,1) which has the next least cost of 175
thereby exhausting supply from Kano, leaving 1000 cows demand in
Lagos. Cross out exhausted row 2.
Location
Sokoto 90 85 70 250
- 250 350 600
Kano 175 110 95 600
600 800 - 1400
- - 1100
Demand 1600 1050 350
1000 800
Step 5
Allocate the remaining 1000 cows to cell (3, 1) to exhaust the supply
from Maiduguri. This completes the allocation.
Location
Sokoto 90 85 70 250
- 250 350 600
Kano 175 110 95 600
600 800 - 1400
1000 - 1100
Demand 1600 1050 350
1000 800
The minimum cost of transportation is given by:

(85 x 250) + (70 x 350) + (175 x 360) + (110 x 800) + (205 x 1,000) =2
1,250 + 24,500 + 105,000 + 88,000 + 205,000 = 443,750
We can represent it in a tabular form as follow:
Cells Quantity Unit Cost Cost

(1, 2) 250 80 21250
(1, 3) 350 70 24500
(2, 1) 600 175 105000
(2, 2) 800 110 88000
(3, 1) 1000 205 205000
443750
183
Example 3
In the table below, items supplied from origins A, B, C and D and those
demanded in locations 1, 2, 3 and 4 are shown. If the figures in the
boxes are the unit cost of moving an item from an origin to a destination,
use the least cost method to allocate the material in order to minimise
cost of transportation.
Destination
Origin 1 2 3 4 Supply
A 29 41 25 46 1250
B 50 27 45 33 2000
C 43 54 49 40 500
D 60 38 48 31 2750
Demand 3250 250 1750 1250
Solution
We check the total demand and supply. In this case, both totals are equal
to 6500. It is balanced transportation problem. We set up the allocation
as follow:
Step 1
Look for the least cost. It is 25 in cell (1, 3) Allocate 1250 to cell (1, 3)
and thus exhaust the supply by A while leaving a demand of 500 in
column three. Cross out the 1250 in A and the other cells on row 1.
Step 2
Look for the least cost among the remaining empty cells. This is 27 in
cell (2, 2) Allocate all the demand of 250 to that cell. Cross out the 250
in column 2 and the 2000 supply in row 2 becomes 1750. Cross out the
empty cells in column 2.
Step 3
Once again identify the cell with the least cost out of the remaining
empty cells. This is 31 in cell (4, 4). Allocate all the 1250 in column 4 to
this cell to satisfy the demand by column 4. This leaves a supply of 1500
for row D. Cross out all the other cells in column 4.
Step 4
Identify the cell having the least cost among the remaining cell. This is
43 in cell (3, 1). Allocate all the 500 supply to this cell and cross out the
500 in satisfied row 3 as well as any empty cell in that row. Also cross
out the 3250 row and replace with 3250 — 500 = 2750.
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Step 5
Identify the cell with the least cost among the empty cells. This is 45 in
cell (2, 3). Since column 3 needs to exhaust 500 we allocate this to cell
(2, 3). Cross out the 500 and any empty cell in that column. Row 2
needs to exhaust 1250 quantity.
Step 6
Examine the remaining empty cells for the cell with the least cost. This
is cell (2, 1) with N50. Allocate all the 1250 into this cell. Cross out
2750 in column 1 and write the balance of 1500.
Step 7
The last cell remaining is (4, 1). Allocate the remaining 1500 to this cell
thus satisfying the remaining demands of row 4 and the remaining
supply of column 1.
Destination
A 29 41 25 46 1250
- - 1250 -
B 50 27 45 33 7501250
1250 250 500 2000
C 43 54 49 40 500
500 - - -
D 60 38 48 31 27501500
1500 - - 1250
Demand 3250 250 1750 1250
2750 500
We then calculate the cost as follow:

(2, 1) 1250 50 62500
(3, 1) 500 43 21500
(4, 1) 1500 60 90000
(2, 2) 250 27 6750
(1, 3) 1250 25 31250
(2, 3) 500 45 22500
(4, 4) 1250 31 38750
273,250
Note that total number of cell allocations m + n -1 where m = 4 and n =

number of columns = 4.
185
3.4.3 Vogel’s Approximation Method (VAM)
This technique of finding an initial solution of the transportation is an

improvement on both the least cost and North West corner methods. It
involves minimisation of the penalty or opportunity cost. This penalty
cost is the cost due to failure to select the best alternatives. This
technique can thus be regarded as the penalty or regret method.
The steps for using the VAM method can be presented as follow:
 Check the row and column totals to ensure they are equal.
 Compute the row and column parallels for the unit costs. This is
done by finding the difference between the smallest cell cost and
the next smallest cell cost for each row and column.
 Identify the row or column with the highest penalty cost.
 Allocate to the cell with the least cost in the identified cell in step
3 the highest possible allocation it can take.
 Cross out the entire redundant cell.
 Recompute the penalty cost and proceed to allocate as done in the
previous steps until all the cells have been allocated.
 Check for the m + n — 1 requirement.
 Compute the total cost.
Example 4
Solve example 4 using the Vogel’s Approximation Method.
Solution
(i) The first step is to check the row and column totals and since
both totals equal 6500, it is a balanced transportation problem.
(ii) Next we compute the row and column penalty costs denoted by
d1! and d1 respectively and obtain the following table:
1 2 3 4 Supply d1!
A 29 41 25 46 1250 4
B 50 27 45 33 2000 6
C 43 54 49 40 500 3
D 60 38 48 31 2750 7
Demand 3250 2500 1750 1250 6500
d1 14 11 20 2
(iii) The highest penalty cost is 20; we allocate to the least unit cost in
that column the highest it can take. The least is 25 and is
allocated 1250 as shown below.
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(iv) The next step is to re-compute the penalty costs, d2! and d2 for the
unbalanced cells in both rows and column. The results obtained
are as follows.
1 2 3 4 Supply d1! d2!

A 29 41 25 46 1250 4 -
1250 -
B 50 27 45 33 2000 6 6
250 1750
C 43 54 49 40 500 3 3
-
D 60 38 48 31 2750 7 7
-
Demand 3250 250 1750 1250 6500
500
d1 14 11 20 2
d2 7 11 3 2
Since all cells in the row 1 have all been allocated d2 0 for that row.
(v) The highest penalty cost is 11. We allocate the maximum

allocation for cell (2,1) which has the least cost of 27 which is
250. Row 2 has a balance of 1750 to be exhausted while column
2 is satisfied.
(vi) Next we compute penalty costs d3! and d3 for the unallocated
cells and obtain the following.
1 2 3 4 Supply d1! d2! d3!

A 29 41 25 46 1250 4 - -
1250 -
B 50 27 45 33 2000 6 6 12
250 1750
C 43 54 49 40 500 3 3 3
-
D 60 38 48 31 2750 7 7 17
- 1250 1500
Demand 3250 250 1750 1250 6500
500
d1 14 11 20 2
d2 7 11 3 2
d3 7 - 3 2
The highest penalty cost is 17 and the unit cost is 31. We give the cell
with unit cost of 31 its maximum allocation of 1250 thereby exhausting
the demand in column 3 and leaving a balance of 1500 in row 4.
187
(vii) We re-compute the penalty cost d4! and d4 and then fill up all the
other cells
1 2 3 4 Supply d1! d2! d3! d4!

A 29 25 41 46 1250 4 - -
- -
1250 -
B 50 27 45 33 2000 6 6 12 5
1750 250 1750
C 43 54 49 40 500 3 3 3 6
500 -
D 60 38 48 31 2750 7 7 17 12
1000 - 500 1250 1500
Demand 3250 250 1750 1250 2750
500
d1 14 11 20 2
d2 7 11 3 2
d3 7 - 3 2
d4 7 - 3 -
The highest penalty costs is 12, we allocate cell (4, 3) having the least
unit cost of 48 maximally with 500 to exhaust row 3. All the remaining
cells in column 3 are given 0 allocations since column 3 has now been
exhausted.
(viii) We then allocate the remaining empty cells as follows: cell (2, 1)
is given the balance of 1750 to exhaust the supply of row 2. Cell
(3, 1) is given supply of 500 to exhaust the supply of row 3 while
cell (4, 1) is allocated to the balance of 1000.
(ix) A total of 7 cells have been allocated satisfying m + n — 1
criterion. We then compute the minimum cost of allocation in the
transportation model and obtain the following:

(1, 3) 25 1250 62500
(2, 1) 50 1750 21500
(2, 2) 27 250 90000
(3, 1) 43 500 6750
(4, 1) 60 1000 31250
(4, 3) 48 500 22500
(4, 4) 31 1250 38750
Total 269750
We observed that this value is an improvement on the value of N273,

250 obtained by the Least Cost Method.
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3.5 The Unbalanced Case
Suppose the total number of items supplied is not equal to the total
number of items demanded. When this happens then we have an
unbalanced transportation problem. To solve this type of problem we
adjust the transportation table by creating a dummy cell for source or
demand column or row to balance the number. The dummy cells created
are allocated zero transportation unit cost and the problem is solved
using appropriate method as before. We have two cases, namely (1) the
case when supply is greater than demand (SS>DD) (2) the case when the
demand is greater than the supply (DD >SS). The next two examples
will show us how the dummy is created and how the problem is solved.
Example 5
The table below shows us how some items are transported from five
locations A,B,C,D to four location P,Q,R,S with the unit cost of
transportation in them being shown in the box. Determine the initial
feasible solution by finding minimum cost of transportation using the
North West Corner method.
P Q R S Supply
A 150 120 135 105 2000
B 90 140 130 140 8000
C 120 100 120 150 7000
D 180 140 200 162 3000
E 110 130 100 160 2500
Demand 1000 4000 8500 4500
The total from the supply is 2000 + 8000 + 7000 + 3000 + 2500 =
22500.
The total quantity demanded is 1000 + 4000 + 8500 + 4500 = 18,000.

Since the supply is more than the demand. We then create out a new
dummy variable, with column T to take care of the demand with value
of 22500 - 18000 = 4500. We now have a table with five rows and time
columns.
P Q R S T Supply
A 150 120 135 105 0 2000
B 90 140 130 140 0 8000
C 120 100 120 150 0 7000
D 180 140 200 162 0 3000
E 110 130 100 160 0 2500
Demand 1000 4000 8500 4500 4500
189
We then carry out the allocation using the usual method to get the table
below. So the table becomes.
P Q R S T Supply
A 150 120 135 105 0 1000
1000 1000 2000
B 90 140 130 140 0 5000
3000 5000 8000
C 120 100 120 150 0 3500
3500 3500 7000
D 180 140 200 162 0 2000
1000 2000 3000
E 110 130 100 160 0 2500
2500
Demand 1000 4000 8500 4500 4500
3000 3500 1000 2000
The allocations are shown above. The cost can be computed as follow:

(1, 1) 1000 180 180000
(1, 2) 1000 120 120000
(2, 2) 3000 140 420000
(2, 3) 5000 130 650000
(3, 3) 3500 120 420000
(3, 4) 3500 150 525000
(4, 4) 1000 162 162000
(4, 5) 2000 0 0
(5, 5) 2500 0 0
Total 2477000
Example 6
Find the minimum cost of this transportation problem using the North
West Corner method.
1 2 3 Supply
A 10 8 12 150
B 16 14 17 200
C 19 20 13 300
D 0 0 0 250
Demand 300 200 400 900
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Solution
Total for demand = 300 + 200 + 400 = 900 Total for supply is 150 + 200
+ 300 = 650
Here, Demand is greater than Supply. According to Lee (1983) one way
of resolving this is to create a dummy variable to make up for the 900 —
600 = 250 difference in the supply and to assign a value of 0 to this
imaginary dummy variable. We then end up with 4 x 3 table as shown
below:
The cells are now allocated using the principles of North West Corner
method.
1 2 3 Supply
A 10 8 12 150
150 - -
B 16 14 17 200
150 50 - 150
C 19 20 13 300
- - 150 - 150
D 0 0 0 250
- - 250
Demand 300 200 400 900
150 150 150
The cost can be computed as follows

(1, 1) 150 10 1500
(2, 1) 150 16 2400
(2, 2) 50 14 700
(3, 2) 150 20 3000
(3, 3) 150 13 1950
(4, 3) 250 0 0
Total 9550
3.6 Formulating Linear Programming Model for the

Transportation Problem
The linear programming model can also be used for solving the
transportation problem. The method involves formulating a linear
programming model for the problem using the unit costs and the
quantities of items to be transported. In case the decision variables are
the quantities to be transported, we may represent the decision variable
191
for cell 1 column 1 as x11, cell 2 column 2 as x22 and so on. Constraints
are created for both rows (supply) and column (demand). There is no
need of constraints for the total. For the balanced case we use equality
for the supply and demand constants. For the unbalanced case we use
equality for the lesser quantity between supply and demand while the
greater of the two will use the symbol “less than or equal to (≤)”.
Dummy variables will be created to balance the requirements for
demand and supply.
Example 7
Formulate a linear programming model for the transportation problem.
Ofada Ewokoro Abeokuta Supply

Ikeja 5 8 2 250
Yaba 4 3 7 100
Agege 9 6 5 450
Lagos 3 4 6 300
Demand 600 200 300
Solution
Total demand is 600 + 200 + 300 = 1100. While

Total supply is 250 + 100 + 450 + 300 = 1100. This is a balanced
transportation problem.
We therefore use equality signs for the supply and demand constraints.
Let X11, X12, X13 be the quantities for row 1. The other quantities for the
remaining rows are similarly defined.
The objective function consists of all the cell costs as follow.
Minimise 5X11 + 8X12 + 2X13 + 4X21 + 3X22 + 7X23 + 9X31 + 6X32 +

5X33 + 3X41 + 4X42 + 6X43
The constraints are:
Supply (Row) X11 + X12 + X13 = 250

X21+X22+X23 = 100
X31 +X32+X33 = 450
X41 +X42+X43 = 300
Demands (column) X11 + X11 + X11 = 600

X21+X22+X23=200
X31 + X32 + X33 = 300.
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3.7 Improving the Initial Feasible Solution through

Optimisation
After the feasible solutions have been found using the North West
Corner Method, the Least Cost Method and the Vogel’s Approximation
Method (VAM) we move on to the next and final stage of finding the
minimum transportation cost using optimisation technique on the obtain
feasible solution. Various methods have been proffered for finding this
optimum solution among which are the following:
1) The Stepping Stone Method

2) The Modified Distribution Method (MOD) which is an
improvement on the stepping stone method and is more widely
accepted.
3.8 Determination of the Optimal Transportation Cost Using

the Stepping Stone Method
The optimal solution is found due to need to improve the result obtained
by the North West Corner Method, the Least Cost Method and the
Vogel’s Approximation Method.
The stepping stone method is used to improve the empty or unallocated

cells by carefully stepping on the other allocated cells. The method was
pioneered by Charnes. A and Cooper W. W, and is based on the idea of
the Japanese garden which has at the center stepping stones carefully
laid across the path which enables one to cross the path by stepping
carefully on the stones.
The criterion of m + n-1 number of occupied cells must be satisfied to

avoid degeneracy. The stepping stone method is similar to the simplex
method in the sense that occupied cells are the basic variables of the
simplex method while the empty cells are the non-basic variables. To
find the optimum solution we assess a stepping stone path by stepping
on allocated cells in order to evaluate an empty cell. The set of allocated
cells that must be stepped on in order to evaluate an unallocated cell is
known as the stepping stone path. It is identical to the positive or
negative variables on a non-basic column of the simplex tableau. The
critical thing to do is to find the stepping stone path in order to find out
the net change in transportation by re-allocation of cells. In re-allocating
cells it is very important that the total supply and total demand is kept
constant.
The following steps are essential in using the stepping stone method:
193
• Identify the stepping stone path for all the unallocated cells.
• Trace the stepping stone paths to identify if transportation of one
unit will incur a difference in total transportation cost. One may
need to skip an empty cell or even an occupied cell when tracing
the path. We usually represent increase with a positive sign and a
decrease with negative sign.
• Using the traced stepping stone paths analyse the unit
transportation cost in each cell. Compute the Cost Improvement
Index (CII) for each empty cell.
• Select the cell with the largest negative CII for allocation, bearing
in mind the need to ensure that the demand and supply are both
kept constant and calculate the cost of transportation. Re-compute
the CII for the new table. If all the CIIs are positive then we have
reached the optimum allocation otherwise the procedure is
iterated until we get positive values for all the CIIs in the
transportation table.
The following points should be noted when using the stepping stone
method:
• It will be observed that if iteration is necessary the transportation

cost in cacti of the subsequent table will reduce until we obtain
the optimum solution.
• Only sources transport goods to destinations. Re-allocation is
done using horizontal movements for rows and vertical
movement columns.
• Every empty cell has a unique stepping stone path.
• The stepping stone path consists of allocated cells.
Example 8
You are given the following transportation table. Find (a) the initial
basic feasible solution using the Least Cost Method (b) the optimum
solution using the Stepping Stone.
Method
Abuja Bauchi Calabar Supply
Ibadan 6 7 9 70000
Jos 5 8 7 10000
Kano 7 9 6 150000
Demand 130000 90000 110000
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Solution
This is a case of unbalanced transportation problem since the total

demand is 330,000 while the total supply is 230,000. We therefore
create a dummy row of 100,000 to balance up. The result obtained by
the Least Cost Method is shown in the table below:

Ibadan 6 7 9
70000 70000
Jos 5 8 7
10000 10000
Kano 7 9 6
50000 100000 150000
Dummy 0 0 0
90000 10000 100000
Demand 130000 90000 110000 330000
Minimum cost is given as follow:
Cell Quantity Unit cost Cost

(1,1) 70000 6 420000
(2,1) 10000 5 50000
(3,1) 50000 7 350000
(3,3) 100000 6 600000
(4,2) 90000 0 0
(4,3) 10000 0 0
1420000
(b) We now find the optimum solution using the result obtained by
the Least Cost Method. We first identify the empty cells in the
table of initial feasible solution. The cells are Cell (1, 2), Cell (1,
3), Cell (2,2), Cell (2,3) and Cell (4,1).
Next, we evaluate empty cells to obtain the stepping stone path as well
as the Cost Improvement indices (CII) as follows:
Cell (1, 2): The Stepping Stone Path for this cell is:
+ (1, 2) - (4,2) + (4,3) - (1,1)+(3,l) - (3,3)
195

Ibadan (-) 6 (+) 7 9
70000 70000
Jos 5 8 7
10000 10000
Kano (+) 7 9 (-) 6
120000 30000 150000

Dummy 0 (-) 0 (+) 0
20000 80000
100000
Demand 130000 90000 110000
330000
The CII for cell (1,2) is +7 – 0 + 0 – 6 + 7 = +2

Cell (1, 3) The Stepping Stone Path for this cell is +(1,3) — (1,1) + (3,1)
— (3.3). The allocation matrix for this cell is shown below:

Ibadan (-) 6 7 (+)9
70000 70000 70000
Jos 5 8 7
10000 10000
Kano (+) 7 9 (-)6
120000 30000 150000
Dummy 0 0 0
90000 10000
100000
Demand 130000 90000 110000
330000
CII is given as +9 – 6 + 7 – 6 = +4
Cell (2,2) the stepping stone path for the cell is +(2,2) – (4,2) + (4,3)
(3,3) + (3,1) – (2,1) the obtained matrix is as follow:
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Ibadan 6 7 9
70000 70000
Jos (-5)5 (+)8 7
10000
Kano (+) 7 9 (-)6
60000 90000 150000
120000 30000 150000

Dummy 0 (-) 0 (+) 0
8000 20000
100000
Demand 130000 90000 110000
330000
The cell CII for cell (2, 2) is given as +8 – 0 + 0 – 6 + 7 – 5 = +4 Cell (2,

3) the stepping stone path is + (2, 3) – (3, 3) + (3,1) – (2,1)
The allocation matrix for the cell is as follow:

Ibadan 6 7 9
70000 70000
Jos (-)5 8 (+)7
10000 10000
Kano (+) 7 9 (-) 6
60000 90000 150000
Dummy 0 (-)0 0
20000 10000 100000
Demand 130000 90000 110000 330000
The CII for cell (2, 3) is given by +7 - 6 + 7 – 5 = +3
Cell (3, 2) the stepping stone Path is: +(3,2) – (4,2) + (4,3) – (3,3).
The matrix of the allocation is shown below:

Ibadan 6 7 9
70000 70000
Jos 5 8 7
10000 10000
Kano (+) 7 (+)9 (-) 6
50000 10000 90000 150000
197
Dummy 0 (-)0 0
80000 20000 100000
Demand 130000 90000 110000 330000
The CII for cell (3, 2) is given by +9–0 + 0 – 6 = +3
Cell (4, 1) the stepping stone Path is: +(4,1) – (3,1) + (3,3) – (4,3).
The allocation matrix is given below:

Ibadan 6 7 9
70000 70000
Jos 5 8 7
10000 10000
Kano (-) 7 (+)9 (-) 6
40000 110000 150000
Dummy (+)0 0 (-)0
10000 90000 100000
Demand 130000 90000 110000 330000
The CII for cell (4,1) is given as +0-7+6-0=-1
Since cell (4,1) has negative CII the optimum solution has not been
reached. We need to compute the CII for the un allocated cells in the
table for cell (4, 1) shown above.
The empty cells are Cell (1,2), Cell (1,3), Cell (2,2), Cell (2,3), Cell
(3,2) and Cell (4,3)
For Cell (1,2) The Stepping Stone Path is +(1,2) - (4,1) + (4,2) - (1,1).
The CII =+7 – 0 + 0 – 6 =+1
For Cell(1,3)The Stepping Stone Path is +(1,3)-(1,1)+(3,1) - (3,3)
The CII =+9 – 6 + 7 - 6 =+4
For CeII (2, 2) The Stepping Stone Path is + (2,2) - (4,2) + (4,1) - ( 2,1)
The CII =+8 – 0 + 0 - 7= +3
For Cell (2,3) The Stepping Stone Path is +(2,3) - (3,3) + (3,1) - (2,1)
The CII = +7 – 6 +7 – 5 = +3
For Cell (3,2) The Stepping Stone Path is +(3,2) — (4,2) + (4,1) — (3,1)
The CII
For Cell (4, 3) The Stepping Stone Path is + (4,3)— (3,3) + (3,1) —
(4,1)
The CII =+0—6+7-0=1
Since the CIIs are all positive an optimal solution has been found in the
last table.
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Ibadan 6 7 9
70000 70000
Jos 5 8 7
10000 10000
Kano 7 9 6
40000 110000 150000
Dummy 0 0 0
10000 90000 100000
Demand 10000 90000 110000 330000
Ibadan to Abuja 70,000 @ N6 = 70,000 x 6 = 420,000

From Jos to Abuja 1,000 @ N5 = 10,000 x 5 = 50,000
From Kano to Abuja 40,000 @ N7 = 40,000 x 7 = 280,000
From Kano to Calabar 110,000 @ N6 = 110,000 x 6= 660,000
Dummy to Abuja 10,000 @ NO = 10,000 x 0 = 0
Dummy to Bauchi 90,000 @ NO = 90,000 x 0= 0
1,410,000
We observe that the minimum cost of 1, 420, 000 obtained by the Least
Cost Method has been reduced by the stepping stone method to give s
the optimum transportation cost of 1,410, 000.
3.9 The Modified Distribution Method
This method is usually applied to the initial feasible solution obtained by

the North West Corner method and the Least Cost method since the
initial feasible solution obtained by the Vogel’s Approximation Method,
is deemed to be more accurate than these two. To use this method we
take the following steps:
Step 1
Using the obtained feasible solution, compute the row dispatch unit cost
r1 and the column reception unit cost c ij at location j for every cell with
allocation using
Cij = ri+cj
Conventionally, ri = 0
Note that ri is the shadow cost of dispatching a unit item from source to
cell kij while cj is the shadow cost of receiving a unit of the item from
location j to cell kij and cij is the cost of transporting a unit of the item
from source i to location j in the corresponding cell kij.
If we have a 3 x 3 cell we obtain r1, r2, r3, c1,c2, and c3 respectively.
Step 2
Compute the unit shadow costs for each of the empty unallocated cells
using the various obtained ci and ri
199
Step 3
Obtain the differences in unit costs for the unallocated cells using:
C1ij =cij- (ri+cj)
If these differences are all positive for the empty cells the minimum
optimum solution has been obtained. If we have one or more records of
any negative difference then it implies that an improved solution can
still be obtained and so we proceed to step 4.
Step 4
We select the cell with the highest negative value of C ij. If more than
one of them have the same negative C ij (i.e. the unit shadow cost is
greater than the actual cost), that is a tie occurs we select any one of
them arbitrarily for transfer of units.
Step 5
Transfer to the empty cells the minimum value possible from an
allocated cell, taking care that the values of the demand and supply are
unaffected by the transfer and that no other empty cell is given
allocation.
Step 6
Develop a new solution and test if it is the optimum solution.
Step 7
If it is not, repeat the procedures by starting from step 1 until the
optimum solution is obtained.
Example 9
In the transportation table given below:
(a) Find the initial feasible solution using (i) the least cost method
(ii) the Vogel’s approximation method.
Use the modified Distribution method to find the optimum solution

using the initial feasible solution obtained by the Least Cost Method.
1 2 3 Supply
X 9 11 15 400
Y 15 7 17 500
Z 11 5 7 600
Demand 500 450 550
Solution
We use the least cost method to obtain this table.
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1 2 3 Supply
X 9 11 15
400 - - 400
Y 15 7 17
100 - 400 500
Z 11 5 7
- 450 150 600
Demand 500 450 550
The Least Cost value is (400 x 9) + (100 x 15) + (450 x 5) + (400 x 17)
+ (550 x 7)
= 3600+1500+2250+6800+1050= 15200
Minimum cost by least cost = 15200
ii. Using the Vogel approximation method:
X Y Z Supply d1 d2 d3
A 9 11 15
400 - - 400 2 6 6*
B 15 7 17
50 450 - 500 8* 2 2
C 11 5 7
50 - 550 600 2 4 -
Demand 150 100 130
d11 2 2 8
d21 2 - 8*
d31 6 - 2
The cost by the Vogel Approximation method is (400 x 9) + (50 x 15) +

(50 x 11) + (550 x7)
=3600+750÷550+ 3150+3850=11900.
(b) Using the Modified Distribution Method on the Least Cost Risk.
(c) We now use the Modified Distribution method on the initial
solution obtained by the Least Cost Method We follow the steps
allowed as shown below:
Step 1
Reproduce the obtained feasible solution by least cost method.
1 2 3 Supply
X 9 11 15
400 - - 400
Y 15 7 17
100 - 400 500
Z 11 5 7
201
- 450 150 600

Demand 500 450 550
Minimum cost by least cost = 15200
We then compute the unit shown costs for each of the allocated cells as
follow:
By convention r1 =0
In cell (1,1) r1+c1=9 ….. c1=9
In cell (2,1) r2+c1=15 :.r2 = 15 – 9 =6
In cell (2,3) r2+c3= 17 :.c3 = 17 – 6 =11
In cell (3,3) r3+c3 =7 :.r3 = 7 – 11 =-4
In cell (3,2) r3 + c2 = 5 :.c2 = 5 - (-4) = 9
Let us summarise as follow:

r1 = 0 c1=9
r2 = 6 c2=9
r 3 = -4 c3=11
Steps 2 and 3
We compute the difference in unit cost for the unoccupied cells as
follow:
For cell (1,2) c12 = 11 - (r1 + c2) = 11 - 9 = 2
For cell (1,3) c13 = 15 - (r1+c3) = 15 - 11= 4
For cell (2,2) c22 = 7 - (r2+c) = 7 – 15 = -8*
For cell (3,1) c31 = 11 - (r3+c1) = 11 – 5 = 6
Step 4
The negative value in asterisk implies we have to do some transfer to
cell (2,2) while ensuring that the supply and demand quantities are kept
constant and no other empty cell expect (2,2) is given allocation. We
must also ensure that the m + n — 1 criterion is maintained to avoid
degeneracy. We obtain the table below.
1 2 3 Supply
X 9 11 15
400 - - 400
Y 15 7 17
100 - 400 500
Z 11 5 7
- 450 150 600
Demand 500 450 550
Cost = (400x9)+(100x15)+(400x7)+(50x5)+(550x7)
= 3600 + 1500 + 2800 + 250 + 3850 = 12000
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This is less than 15200. However, we need to check if this is an

optimum value.
Step 5
This is done by computing the c iij and ciij or the new table. If none of the
cij is negative,
then it is the optimum value.
As before we get
For allocated cells

r1=0, 1+c1=9 :.c1=9
r2+c1=15 :.r2=15 – 9 = 6
r2+c2=7 :,c2=7-6 =1
r3+c2=5 :.r3=5-1=4
r3+c3=7 :.c3=7-4=3
We summarise and get the following:

r1=0 c1=9
r2=6 c2=1
r3=4 c3=3
For unallocated cells we have the following:

For cell (1,2) we have c12 = 11 - (r1 + c2) = 11 - 1 = l0 for cell (1,3) we
have c13 = 15 - r1÷c3)=15 - 13=2
For cell (1,3) we have ci13 = 15 - (r1 + c3) = 15 - 13 = 2
For cell (2,3) we have ci23 = 17 - (r2 + c3) = 17 - (6+3) = 17 - 9 = 8
For cell (3,1) we have ci31 = 11 - (r3 + c1)= 11(4 + 9) = 11 - 13 = -2*
Since (3, 1)has negative ci31 value of -2 we do some transfer to (3,1) in
the usual member together.
1 2 3 Supply
X 9 11 15 400
400 - -
Y 15 7 17 500
50 450
Z 11 5 7 600
50 550
Demand 500 450 550
Cost= (400x9)+(50x15)+(50x11)+(450x7)+(550x7)
=3600+70+550+3150+3850= 11,900
We check if this is the optimum solution by computing the differences

in the unit costs an unit shadow costs cij in the usual way.
For allocated cells
203
r1=0, 1+c1 = 9 .: c1 = 9
r2 + c1 = 15 .: r2 = 15 – 9 = 6
r 2 + c2 = 7 .: c2 = 7 – 6 = 1
r3+c1= l1 .: r3 = 11 – 9 = 2
r3+c3 = 7 .: c3 = 7 – r3 = 7 – 2 = 5
We summarise and get

r1 = 0 c1=9
r2=6 c2=1
r3=2 c3=5
For unallocated cells

(1,2) we have c12 = 11 - (0+1) = 10 for(1,3)we have c13 =15 - (0+5)=10
for (2,3) we have c23=17 - (6+5)=6 for cell (3,2) we have c32 = 5 - (2 +
1) = 2
Since all these values are positive then the last table is the optimum
assignment.
The optimum assignment is thus
1 2 3 Supply
X 400 - - 400
Y 50 450 - 500
Z 50 - 550 600
Demand 500 450 550
The optimum cost is N11, 900.

We observe that the value obtained is the same as that of Vogel’s
Approximation method so Vogel is the best of all the methods.
3.10 Degeneracy
This condition arises when the number of allocated cell does not satisfy
the m + n — 1 criterion Degeneracy prevents us from utilising the
optimisation technique to get the minimisation cost of the transportation
model.
Examp1e 10
Find the initial feasible solution of the transportation problem below

using the Vogel s Approximation Method. Comment on your result.
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1 2 3 Supply
X 8 7 6 40
Y 16 10 9 120
Z 19 18 12 90
Demand 130 15 25
Solution
1 2 3 Supply d1 d2 d3
X 8 7 6
40 - - 400 1 - -
Y 16 10 9 25
- 95 25 120 1 1 1
Z 19 18 12
90 - - 90 6 6 7
Demand 130 15 25
d1 8* 3 3
d2 3 8* 3
d3 3 - 3
Correct: Only four cells are allocated. So degeneracy occurs.

The feasible solution can be obtained as follow:
40 x 8 = 320
95 x 10 = 950
90 x 19 = 1710
25 x 9 = 225
N3, 205
Let us compute the shadow costs

By convention r1 = 0
r1+c1 = 8 .: r1 = 8
r2+c2 = l0
r2+c3 = 9
r3+c1=19 .: r3=19 – 8 =11
Due to degeneracy we cannot get enough information to enable us

calculate r+, c+ and c3. This implies that we cannot determine the
needed row and column values for the unallocated cells.
The way out is to create a dummy allocated cell which is assigned a

value of 0. Others advocate adding a small value to an empty cell and
then proceeding with using MODI to obtain the optimum solution in the
usual way.
205
4.0 CONCLUSION
The transportation problem is only a special topic of the linear

programming problems. It would be a rare instance when a linear
programming problem would actually be solved by hand. There are too
many computers around and too many LP software programs to justify
spending time for manual solution. (There are also programs that assist
in the construction of the LP or TP model itself. Probably the best
known is GAMS—General Algebraic Modelling System (GAMS-
General, San Francisco, CA). This provides a high-level language for
easy representation of complex problems).
5.0 SUMMARY
The transportation model deals with a special class of linear

programming problem in which the objective is to transport a
homogeneous commodity from various origins or factories to
different destinations or markets at a total minimum cost. In this unit,
we discussed the following issues- assumptions of the transportation
model which include the Homogeneity of materials to be transported,
equality of transportation cost per unit, uniqueness of route or mode of
transportation between each source and destination. It also discussed
extensively, various methods of solving the transportation problem like:
the North West corner method, the least cost method, Vogel’s
approximation method (VAM), the unbalanced case, formulating linear
programming model for the transportation problem, and determination
of the optimal transportation cost using the stepping stone method.
6.0 TUTOR- MARKED ASSIGNMENT

1. Give four assumptions of the transportation model.
2. Present a theoretical consideration of the transportation model.
3. List three methods used in developing a transportation solution.
4. In the table below, items supplied from origins A, B, C and D and
those demanded in locations 1, 2, 3 and 4 are shown. If the
figures in the boxes are the unit cost of moving an item from an
origin to a destination, use the least cost method to allocate the
material in order to minimise cost of transportation.
Destination
A 29 41 25 46 1250
B 50 27 45 33 2000
C 43 54 49 40 500
D 60 38 48 31 2750
Demand 3250 250 1750 1250
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Murthy, R.P. (2007). Operations Research. (2nd ed.). New Delhi: New
Age International Publishers.

Philglad Nigeria Ltd.
Denardo, E.V. (2002). The Science of Decision Making: A Problem-

Gupta, P.K. & Hira, D.S. (2012). Operations Research. New Delhi: S.
Chand & Company.

207
UNIT 3 ASSIGNMENT MODEL
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Problem
3.2 Comparison between Transportation Problem and
Assignment Problem
3.3 Approach to Solution
4.0 Conclusion
5.0 Summary
6.0 Tutor- Marked Assignment
1.0 INTRODUCTION
The assignment problem is a special type of linear programming

problem. We know that linear programming is an allocation technique to
optimise a given objective. In linear programming we decide how to
allocate limited resources over different activities so that, we maximise
the profits or minimised the cost.
Similarly in assignment problem, assignees are being assigned to

perform different task. For example, the assignees can be employees
who need to be given work assignments, is a common application of
assignment problem. However assignees need not be people. They could
be machines, vehicle, plants, time slots etc. to be assigned different task.
2.0 OBJECTIVES
 identify the types of assignment problems

 draw a comparison between an assignment and a transportation
problem
 use the different solution techniques to solve assignment
problems.
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3.0 MAIN CONTENT
3.1 The Problem
There are various types in assignment problem. They are:
(i) Assigning the jobs to machines when the problem has square
matrix to minimise the time required to complete the jobs. Here
the number of rows i.e. jobs are equals to the number of machines
i.e. columns. The procedure of solving will be discussed in detail
in this section.
(ii) The second type is maximisation type of assignment problem.
Here we have to assign certain jobs to certain facilities to
maximise the returns or maximise the effectiveness.
(iii) Assignment problem having non-square matrix. Here by adding a
dummy row or dummy columns as the case may be, we can
convert a non-square matrix into a square matrix and proceed
further to solve the problem. This is done in problem number.5.9.
(iv) Assignment problem with restrictions. Here restrictions such as a
job cannot be done on a certain machine or a job cannot be
allocated to a certain facility may be specified. In such cases, we
should neglect such cell or give a high penalty to that cell to
avoid that cell to enter into the programme.
(v) Travelling sales man problem (cyclic type). Here a salesman
must tour certain cities starting from his hometown and come
back to his hometown after visiting all cities. This type of
problem can be solved by Assignment technique and is solved in
problem 5.14. Let us take that there are 4 jobs, W, X, Y and Z
which are to be assigned to four machines, A, B, C and D. Here
all the jobs have got capacities to machine all the jobs. Say for
example that the job W is to drill a half an inch hole in a Wooden
plank, Job X is to drill one inch hole in an Aluminium plate and
Job Y is to drill half an inch hole in a Steel plate and job Z is to
drill half an inch hole in a Brass plate.
The machine A is a Pillar type of drilling machine, the machine B is

Bench type of drilling machine, Machine C is radial drilling machine
and machine D is an automatic drilling machine. This gives an
understanding that all machines can do all the jobs or all jobs can be
done on any machine. The cost or time of doing the job on a particular
machine will differ from that of another machine, because of overhead
expenses and machining and tooling charges. The objective is to
minimise the time or cost of manufacturing all the jobs by allocating one
job to one machine. Because of this character, i.e. one to one allocation,
the assignment matrix is always a square matrix. If it is not a square
matrix, then the problem is unbalanced. Balance the problem, by
209
opening a dummy row or dummy column with its cost or time

coefficients as zero. Once the matrix is square, we can use assignment
algorithm or Flood's technique or Hungarian method to solve the
problem
Mathematical model:
Jobs Machine Time (hours) Availability
A B C D
W C11 C12 C13 C14 1
X C21 C22 C23 C24 1
Y C31 C32 C33 C34 1
Z C41 C42 C43 C44 1
REQUIREMENT 1 1 1 1
Mathematical model:
Subject to: Xij = (Xij)2i and j = 1 to n
For i and j = 1 to n
(Each machine to one job only) (Each job to one
machine only)
And
Xij = 0 for all values of j and i. Non-negativity constraint.
3.2 Comparison between Transportation Problem and

Assignment Problem
Now let us see what are the similarities and differences between
Transportation problem and Assignment Problem.
Similarities
1. Both are special types of linear programming problems.

2. Both have objective function, structural constraints, and non-
negativity constraints. And the relationship between variables and
constraints are linear.
3. The coefficients of variables in the solution will be either 1 or
zero in both cases.
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4. Both are basically minimisation problems. For converting them

into maximisation problem same procedure is used.
Table 1: Differences between Transportation and Assignment

Models
Transportation Problem Assignment Problem

1. The problem may have 1. The matrix of the problem
rectangular matrix or must be a square matrix.
square matrix. 2. The rows and columns must
2. The rows and columns may have one to one allocation.
have any number of Because of this property,
allocations depending on the matrix must be a square
the rim conditions. matrix.
3. The basic feasible solution 3. The basic feasible solution
is obtained by northwest is obtained by Hungarian
corner method or matrix method or Flood's
minimum method or VAM technique or by Assignment
4. The optimality test is given algorithm.
by stepping stone method 4. Optimality test is given by
or by MODI method. drawing minimum number
5. The basic feasible solution of horizontal and vertical
must have m + n – 1 lines to cover all the zeros
allocations. in the matrix.
6. The rim requirement may 5. Every column and row
have any numbers (positive must have at least one zero.
numbers). And one machine is
7. In transportation problem, assigned to one job and vice
the problem deals with one versa.
commodity being moved 6. The rim requirements are
from various origins to always 1 each for every row
various destinations and one each for every
column.
7. Here row represents jobs or
machines and columns
represents machines or
jobs.
Source: Murthy, Rama P. (2007) Operations Research 2nded. New
Delhi: New Age International Publishers
211
3.3 Approaches to Solution
Let us consider a simple example and try to understand the approach to

solution and then discuss complicated problems.
1. Solution by visual method
In this method, first allocation is made to the cell having lowest element.
(In case of maximisation method, first allocation is made to the cell
having highest element). If there is more than one cell having smallest
element, tie exists and allocation may be made to any one of them first
and then second one is selected. In such cases, there is a possibility of
getting alternate solution to the problem. This method is suitable for a
matrix of sise 3 × 4 or 4 × 4. More than that, we may face difficulty in
allocating.
Problem 5.1
There are 3 jobs A, B, and C and three machines X, Y, and Z. All the jobs
can be processed on all machines. The time required for processing job
on a machine is given below in the form of matrix. Make allocation to
minimise the total processing machines (time in hours).
Jobs X Y Z
A 11 16 21
B 20 13 17
C 13 15 12
Allocation: A to X, B to Y and C to Z and the total time = 11 + 13 +12 =

36 hour (Since 11 is least, Allocate A to X, 12 is the next least, Allocate
C to Z)
2. Solving the assignment problem by enumeration
Let us take the same problem and workout the solution.
Machines (time in hours)
Jobs X Y Z
A 11 16 21
B 20 13 17
C 13 15 12
S/N Assignment Total Cost in N

1 AX BY CZ 11 + 13 + 12 = 36
2 AX BZ CY 11 + 17 + 15 = 43
3 AY BX CZ 16 + 20 + 12 = 48
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4 AY BZ CX 16 + 17 + 13 = 46
5 AZ BY CX 21 + 13 + 13 = 47
6 AZ BX CY 21 + 20 + 15 = 56
Like this we have to write all allocations and calculate the cost and
select the lowest one. If more than one assignment has same lowest cost
then the problem has alternate solutions.
3. Solution by transportation method
Let us take the same example and get the solution and see the difference
between transportation problem and assignment problem. The rim
requirements are 1 each because of one to one allocation
Machines (Time in hours)
Jobs X Y Z Available
A 11 16 21 1
B 20 13 17 1
C 13 15 12 1
Req. 1 1 1 3
By using northwest corner method the assignments are:
Machines (Time in hours)
Jobs X Y Z Available
A 1 E 1
B 1 ∈ 1
C 1 1
Req. 1 3
As the basic feasible solution must have m + n – 1 allocation, we have to

add 2 epsilons. Next we have to apply optimality test by MODI to get
the optimal answer.
4.0 CONCLUSION
For solving the assignment problem we use assignment technique or

Hungarian method or Flood's technique. All are the same. Above all, it
is mentioned that one origin is to be assigned to one destination. This
feature implies the existence of two specific characteristics in linear
programming problems, which when present, give rise to an assignment
problem. The first one being the pay of matrix for a given problem is a
square matrix and the second is the optimum solution (or any solution
213
with given constraints) for the problem is such that there can be one and
only one assignment in a given row or column of the given payoff
matrix.
5.0 SUMMARY
Assignment problems involve matching the elements of two or more

sets in such a way that some objective function is optimised. Hungarian
Method algorithm for its solution, the classic AP, which involves
matching the elements of two sets on a one-to-one basis so as to
minimise the sum of their associated weights, has spawned a wide
variety of derivatives, including problems with different or multiple
objectives, problems that involve one-to-many or many-to-one
matching, and problems that involve matching the elements of three or
more sets
1. List and explain five types of assignment problems.

2. Give three similarities between an assignment problem and a
3. Highlight the differences between an assignment problem and a

Chand & Company.

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UNIT 4 PROJECT MANAGEMENT
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 What is Project Management?
3.2 International Standards and Guidelines
3.3 Project Management Processes
3.4 Project vs. Product Life Cycles
3.5 What is the Value of Project Management?
3.6 How Project Management Relates to Other Disciplines
3.7 The Project Management Profession
3.8 Project Planning
3.9 Programme Evaluation and Review Technique and
Critical Path Method (PERT and CPM)
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
This unit is designed to introduce you to the basic concepts and

definitions associated with project management. You will learn about
the triple constraints of scope, time and cost; the nine functional
knowledge areas associated with project management and the four major
phases of a project. You will also learn about the skills and tools used to
integrate all of the knowledge areas throughout a project’s lifecycle.
You will also learn how to use the CPM and PERT techniques in
solving project related problems.
2.0 OBJECTIVES
 define project management

 identify the “body of knowledge areas” in project management
 list and explain the processes involved in project management
 describe the project vs. product cycle.
215
3.0 MAIN CONTENT
3.1 What is Project Management?

Project management has been called an accidental profession. In many
organisations in the past, project managers typically stumbled or fell into
project management responsibilities. The world has since changed and
project management is now recognised globally as a formal discipline,
with international standards and guidelines and a growing knowledge
base of best practices. Project management is the application of skills
and knowledge and the use of tools and techniques applied to activities
in a project to complete the project as defined in the scope. Project
management is not only the use of a scheduling tool such as Microsoft
Project, Scheduler Plus, etc. Many organisations still do not understand
that the ability to use a scheduling tool is not enough to successfully
manage a project. The use of a tool is only one part of the equation.
Project management requires a high level of skill in both the people and
technical side of the discipline for successful projects to result.
3.2 International Standards and Guidelines

Project management is a formal discipline with international standards
and guidelines developed by the Project Management Institute (PMI). A
significant body of knowledge has been accumulated specifically over
the past 5 years relating to effective project management practices, tools,
techniques and processes across industries. PMI is recognised as the
international body providing guidance and direction for the discipline.
PMI has developed the “Project Management Body of Knowledge” or
“PMBOK” the essential knowledge areas and processes required to
effectively manage projects. There are nine “body” of knowledge areas
within the standards and guidelines.
• Integration management: processes to ensure that the
elements of the project are effectively coordinated. Integration
management involves making decisions throughout the project in
terms of objectives and alternative approaches to meet or exceed
stakeholder expectations.
• Scope management: processes to ensure that all the work
required to complete the project is defined. Defining what is or is
not in scope.
• Time management: all processes required to ensure that the
project completes on time (defined schedule).
• Quality management: processes to ensure that the project
delivers the need for which it was undertaken. Includes all quality
processes such as quality policy, objectives, and responsibility
and implements these through quality planning, quality
assurance, quality control and quality improvement.
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• Procurement management: processes to acquire goods and

services for the project outside of the organisation.
3.3 Project Management Processes
Project Management processes define, organise and complete the work

defined for the project. There are five project management process areas
that apply to most projects and are defined in the PMBOK:
• Initiating processes: authorising the project or phase.

• Planning processes: defining the project objectives and selecting
the most appropriate approach for the project to attain the
objectives.
• Executing processes: managing the resources required to carry
out the project as defined in the plan.
• Controlling processes: ensuring that project objectives are met
as defined by monitoring, measuring progress against plan,
identifying variance from plan and taking corrective action.
The following diagram is a sample of a standard four phase
project life cycle.
Table 1: The Project Cycle
TIME
INITIATION PLANNING IMPLEMENTATION CLOSE OUT
INITIAL CHARTER PLAN DELIVERABLE P. I. R
3.4 Project vs. Product Life Cycles
217
Those of you involved in information technology fields have likely

heard of the systems development life cycle (SDLC) – a framework for
describing the phases involved in developing and maintaining IT
systems. This is an example of a product life cycle. The project life
cycle applies to all projects (regardless of product produced) whereas a
product life cycle varies depending on the nature of the product. Many
products (such as large IT systems) are actually developed through a
series of several different projects. Large projects are seldom given full
funding and approval from the beginning. Usually a project has to
successfully pass through each of the project phases before continuing to
the next. The practice of ‘progressive resource commitment’ also means
you only get the money for the next phase after the prior phase has been
completed and there is an opportunity for management review to
evaluate progress, probability of success and continued alignment with
organisational strategy. These management points are often called phase
exits, kill points or stage gates.
3.5 What is the Value of Project Management?
Project Management increases the probability of project success. Project

Management is change facilitation, and used effectively with appropriate
processes, tools, techniques and skills will:
• Support the business

• Get the product or service to market effectively, efficiently and to
quality standards
• Provide common approach to project management
• Improve service
Project management is the application of knowledge, skills, tools, and

techniques to project activities in order to meet or exceed stakeholder
needs and expectations from a project.
3.6 How Project Management relates to other Disciplines
Project management overlaps with general management knowledge and

practice, as well as with the project's application areas, knowledge, and
practice. Project managers focus on integrating all the pieces required
for project completion. General managers or operational managers tend
to focus on a particular discipline or functional area. In this respect,
project management tends to be a cross-functional role, often involving
people from various business areas and divisions. While project
management requires some fundamental understanding of the
knowledge area of the project itself, the project manager does not have
to be an expert in that field.
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3.7 The Project Management Profession
The Project Management Institute (PMI) provides certification as a

Project Management Professional (PMP). The requirements include
verification of from 4500 to 7500 hours of project management
experience (depending on education level), adherence to a Code of
Ethics, and obtaining a score of 70% or higher on a 200-question
multiple choice certification exam.
3.8 Project Planning
We are going to take a quick look at the elements of project planning,

starting with the project life cycle and then examine the importance of
detailed planning to the overall success of the project. Without a clear
definition of the project, it's impossible to discern what should be
delivered as a result. If requirements are not clear, your project will be
impossible to control, and it will become unmanageable. We will review
the fundamentals of planning and then move on to the importance of
developing a comprehensive work breakdown structure.
Today’s organisations are running at a fast pace. More so than ever,

organisations are faced with increasing global competition and as such,
want products and services delivered yesterday! Organisations are
struggling with multiple projects, tight deadlines and fewer skilled
resources available to manage these projects. Project managers are
struggling with the concepts of best practices and the reality of life in a
corporation.
Often, insufficient time is provided for planning the project

appropriately and as a result projects consistently fail to produce the
expected results, have cost or time overruns, or just plain fail. In such
cases, the project manager can usually look back on his or her
experiences and see what went wrong, vowing never to make the same
mistake again. Sometimes, however, the cycle continues. Whether you
manage a small, medium or large size project, effective planning of the
project is the single most critical step to success. Too many project
managers either neglect or spend too little time and effort planning. The
tendency is to rush to implementation before a clear picture is
developed.
The following diagram illustrates the “Project Life Cycle” and the
cyclical nature of planning activities.
219
Fig. 1: The Project Cycle
3.9 Programme Evaluation and Review Technique and

Critical Path Method (PERT and CPM)
Programme Evaluation and Review Technique (PERT) and Critical Path

Method (CPM) are two techniques that are widely used in planning and
scheduling the large projects. A project is a combination of various
activities. For example, Construction of a house can be considered as a
project. Similarly, conducting a public meeting may also be considered
as a project. In the above examples, construction of a house includes
various activities such as searching for a suitable site, arranging the
finance, purchase of materials, digging the foundation, construction of
superstructure etc. Conducting a meeting includes printing of invitation
cards, distribution of cards, arrangement of platform, chairs for audience
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etc. In planning and scheduling the activities of large sized projects, the
two network techniques — PERT and CPM — are used conveniently to
estimate and evaluate the project completion time and control there
sources to see that the project is completed within the stipulated time
and at minimum possible cost. Many managers, who use the PERT and
CPM techniques, have claimed that these techniques drastically reduce
the project completion time. But it is wrong to think that network
analysis is a solution to all bad management problems. In the present
chapter, let us discuss how PERT and CPM are used to schedule the
projects. Initially, projects were represented by milestone chart and bar
chart. But they had little use in controlling the project activities. Bar
chart simply represents each activity by bars of length equal to the time
taken on a common time scale as shown in figure 2a. This chart does not
show interrelationship between activities. It is very difficult to show the
progress of work in these charts. An improvement in bar charts is
milestone chart. In milestone chart, key events of activities are
identified and each activity is connected to its preceding and succeeding
activities to show the logical relationship between activities. Here each
key event is represented by a node (a circle) and arrows instead of bars
represent activities, as shown in figure the figures below. The extension
of milestone chart is PERT and CPM network methods.
1 2
3
A
4 5
B
6 7
C
Fig. 2a: Bar Chart Fig. 2b: Milestone Chart
In PERT and CPM the milestones are represented as events. Event or

node is either starting of an activity or ending of an activity. Activity is
represented by means of an arrow, which is resource consuming.
Activity consumes resources like time, money and materials. Event will
not consume any resource, but it simply represents either starting or
ending of an activity. Event can also be represented by rectangles or
triangles. When all activities and events in a project are connected
logically and sequentially, they form a network, which is the basic
221
document in network-based management. The basic steps for writing a

network are:
(a) List out all the activities involved in a project. Say, for example,
in building construction, the activities are:
(i) Site selection
(ii) Arrangement of finance
(iii) Preparation of building plan
(iv) Approval of plan by municipal authorities
(v) Purchase of materials.
(b) Once the activities are listed, they are arranged in sequential
manner and in logical order. For example, foundation digging
should come before foundation filling and so on. Programme
Evaluation and Review Technique and Critical Path Method
(PERT and CPM).
(c) After arranging the activities in a logical sequence, their time is
estimated and written against each activity. For example:
Foundation digging: 10 days, or 1½ weeks.
(d) Some of the activities do not have any logical relationship, in
such cases; we can start those activities simultaneously. For
example, foundation digging and purchase of materials do not
have any logical relationship. Hence both of them can be started
simultaneously. Suppose foundation digging takes 10 days and
purchase of materials takes 7 days, both of them can be finished
in 10 days. And the successive activity, say foundation filling,
which has logical relationship with both of the above, can be
started after 10 days. Otherwise, foundation digging and purchase
of materials are done one after the other; filling of foundation
should be started after 17 days.
(e) Activities are added to the network, depending upon the logical
relationship to complete the project network.
Some of the points to be remembered while drawing the network are
(a) There must be only one beginning and one end for the network,
as shown in figures below.
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ECO 314
(b)
A
1 2 A
1 2
6
6
7 B
1 B
3
3 7
I I
4 3 3
J 6
4 6
6 J
6
5
RIGHT WRONG
5 6
Fig. 3: Writing the Network
(c) Event number should be written inside the circle or node (or
triangle/square/rectangle, etc). Activity name should be capital
alphabetical letters and would be written above the arrow. The
time required for the activity should be written below the arrow
as in the figure below.
A
i j
7
Fig. 4: Numbering and Naming the Activities
(d) While writing network, see that activities should not cross each
other. And arcs or loops as in figures above should not join.
activities.
1
3
WRONG
2 4
Fig . 5: Crossing of Activities not Allowed
223
(d) While writing network, looping should be avoided. This is to say

that the network arrows should move in one direction, i.e. starting
from the beginning should move towards the end, as in figure 6.
1 4
WRONG
Fig. 6: Looping is not Allowed
(e) When two activities start at the same event and end at the same
event, they should be shown by means of a dummy activity as in
figure 7.
Dummy activity is an activity, which simply shows the logical

relationship and does not consume any resource. It should be
represented by a dotted line as shown. In the figure, activities C and D
start at the event 3 and end at event 4. C and D are shown in full lines,
whereas the dummy activity is shown in dotted line.
C C
3 4
3 4
Dummy 5
3 D D
Wrong Right
5
Fig. 7: Use of Dummy Activity
(f) When the event is written at the tail end of an arrow, it is known
as tail event. If event is written on the head side of the arrow it is
known as head event. A tail event may have any number of
arrows (activities) emerging from it. This is to say that an event
may be a tail event to any number of activities. Similarly, a head
event may be a head event for any number of activities. This is to
say that many activities may conclude at one event. This is shown
in figure 8.
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ECO 314
W W
h h
Head Event e Tail
e Event
n n
Fig. 8: Tail Event and th Head Event th
e e
e e
v
The academic differences between PERT vnetwork and CPM network
e e
are: nt nt
is is
(i) PERT is eventw oriented and CPM iswactivity oriented. This is to
say that while ri discussing about PERT ri network, we say that
tt tt
Activity 1-2, Activity
e
2-3 and so on. Or event 2 occurs after event
e
1 and event 5n occurs after event 3 and so on. While discussing
n
CPM network, at we say that Activity at A follows activity B and
th
activity C follows activity B and so on. th Referring to the network
shown in figure e 9, we can discuss ase under. PERT way: Event 1
ta ta 2 is the successor to event
is the predecessor
il to event 2 or event
il
1. Events 3 and e 4 are successors toe event 2 or event 2 is the
predecessor ton events 3 and 4. CPM n way: Activity 1-2 is the
predecessor tod activities 2-3 and 2-4 dor Activities 2-3 and 2-4 are
o o
the successorsf to activity 1-2.
f
a a
(ii) PERT activities n are probabilistic in nnature. The time required to
complete thear PERT activity cannot ar be specified correctly.
r
Because of uncertainties
o in carryingr out the activity, the time
cannot be specified
w correctly. Say, owfor example, if you ask a
contractor how, much time it takes to, construct the house, he may
answer you that it it may take 5 to 6 months.
it This is because of his
is is
expectation of k
uncertainty in carrying out each one of the
activities in the k
n construction of the house.
n
o o
w w
B na n 3
a 3
A
s s WD
1
t 2 Ct h
ai W ai e
1 l n
W h l
e e e th
h 4
v n v e
e 4
e th e e
n 4
Fig. 9: Logical n e in PERT andnCPM4v
th Relationship
t. e t. e
e 4
If v If nt
e 4
e e e is
v 4
v nt v w
e e 4
is e ri
nt 4
nt w nt tt 225
is W
is ri is e
w w h
tt w n
ri e
ri e ri at
tt n
tt n tt th
e th
X
t0tLtP
Fig. 10: Three Time Estimates
There are three time estimates in PERT, they are:
(a) Optimistic time: Optimistic time is represented by t0. Here the

estimator thinks that everything goes on well and he will not
come across any sort of uncertainties and estimates lowest time
as far as possible. He is optimistic in his thinking.
(b) Pessimistic time: This is represented by tP. Here estimator thinks

that everything goes wrong and expects all sorts of uncertainties
and estimates highest possible time. He is pessimistic in his
thinking.
(c) Likely time: This is represented by tL. This time is in between

optimistic and pessimistic times. Here the estimator expects he
may come across some sort of uncertainties and many a time the
things will go right. So while estimating the time for a PERT
activity, the estimator will give the three time estimates. When
these three estimates are plotted on a graph, the probability
distribution that we get is closely associated with beta
distribution curve. For a Beta distribution curve as shown in
figure 10, the characteristics are:
Standard deviation = (tP – tO)/6 = , tP– tO is known as range.
Variance = {(tP– tO)/6}2 = 2
Expected Time or Average Time = tE = (tO + 4tL+ tP) / 6
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These equations are very important in the calculation of PERT times.

Hence the student has to remember these formulae. Now let us see how
to deal with the PERT problems.
(d) Numbering of events: Once the network is drawn the events are
to be numbered. In PERT network, as the activities are given in
terms of events, we may not experience difficulty. Best in case of
CPM network, as the activities are specified by their name, is we
have to number the events. For numbering of events, we use D.R.
Fulkerson’s rule.
Example 1
A project consists of 9 activities and the three time estimates are given
below. Find the project completion time (TE).
1. Write the network for the given project and find the project
completion time?
Activities
Activities Days
I j T0 TL TP
10 20 5 12 17
10 30 8 10 13
10 40 9 11 12
20 30 5 8 9
20 50 9 11 13
40 60 14 18 22
30 70 21 25 30
60 70 8 13 17
60 80 14 17 21
70 80 6 9 12
Solution
In PERT network, it is easy to write network diagram, because the

successor and predecessor or event relationships can easily be identified.
While calculating the project completion time, we have to calculate te
i.e. expected completion time for each activity from the given three-time
estimates. In case we calculate project completion time by using to or tl
or tp separately, we will have three completion times. Hence it is
advisable to calculate te expected completion time for each activity and
227
then the project completion time. Now let us work out expected project
completion time.
Successo Time in days TE= Range S.D Varianc

Predecess r (tO + 4tL (tp-to) ( ) e
or 2
Event
+ tP)/6
event tp-to
10 20 5 12 17 9.66(10) 12 2 4
10 30 8 10 13 10.17(10) 5 0.83 0.69
10 40 9 11 12 10.83(11) 3 0.5 0.25
20 30 5 8 9 7.67(8) 4 0.66 0.44
20 50 9 11 13 11.00(11) 4 0.66 0.44
40 60 14 18 22 18.00(18) 8 1.33 1.78
30 70 21 25 30 25.18(25) 9 1.5 2.25
60 70 8 13 17 12.83(13) 9 1.5 2.25
50 80 14 17 21 17.17(17) 7 1.16 1.36
70 80 6 9 12 6 1.0 1.0
For the purpose of convenience the tE got by calculation may be rounded

off to nearest whole number (the same should be clearly mentioned in
the table). The round off time is shown in brackets. In this book, in the
problems, the decimal, will be rounded off to nearest whole number. To
write the network program, start from the beginning i.e. we have 10 –
20, 10 – 30 and 10 – 40. Therefore from the node 10, three arrows
emerge. They are 10 – 20, 10 – 30 and 10 – 40. Next from the node 20,
two arrows emerge and they are 20 – 30 and 20 – 50. Likewise the
network is constructed. The following convention is used in writing
network in this book.
 21
10 50
60 T
20
11 38 7 80
DAYS 10 8 51 9
10 TL
20
10 25 70
TL = 0 30 21 18
11 11 33
11 12 33
40 60
Fig. 11: Network for Problem
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ECO 314
Let us start the event 10 at 0th time i.e. expected time TE = 0. Here TE
represents the occurrence time of the event, whereas tE is the duration
taken by the activities. TE belongs to event, and tE belongs to activity.
TE10 = 0
TE20 = TE10 + tE10– 20 = 0 + 10 = 10 days
TE30 = TE10 + tE10 – 30 = 0 + 10 = 10 days
TE30 = TE20 + tE20– 30 = 10 + 8 = 18 days
The event 30 will occur only after completion of activities 20–30 and
10–30. There are two routes to event 30. In the forward pass i.e. when
we start calculation from 1st event and proceed through last event, we
have to work out the times for all routes and select the highest one and
the reverse is the case of the backward pass i.e. we start from the last
event and work back to the first event to find out the occurrence time.
TE40 = TE10 + tE10 – 40 = 0 + 11 = 11 days

TE50 = TE20 + tE20 – 50 = 10 + 11 = 21 days
TE60 = TE40+ tE40 – 60 = 11 + 18 = 29 days
TE70 = TE30 + tE30 – 70 = 18 + 25 = 43 days
TE70 = TE60 + tE60 – 70 = 29 + 13 = 42 days
TE80 = TE70 + tE70 – 80 = 43 + 9 = 52 days
TE80 = TE50 + tE50 – 80 = 21 + 17 = 38 days
TE80 = 52 days. Hence the project completion time is 52 days. The path
that gives us 52 days is known as Critical path. Hence 10–20–30–70–
80 is the critical path. Critical path is represented by a hatched line (
). All other parts i.e. 10–40–60–70–80, 10–20–50–80 and 10–30–70–80
are known as non-critical paths. All activities on critical path are
critical activities.
4.0 CONCLUSION
In this unit, we have discussed the definition of project management,

project management processes, PERT and CPM.
5.0 SUMMARY
This unit is a foundation unit in our study of project management. It tries

to provide a starting point for our discussions on the key aspects of our
study of project management.
229
1. Define project management.

2. Discuss the interrelationship between project management and
other disciplines.
3. Identify and explain the five project management process areas
that apply to most projects.
4. Differentiate between PERT and CPM.

Chand & Company.

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MODULE 2
Unit 1 Elements of Decision Analysis

Unit 2 Approaches to Decision Analysis
Unit 3 Types of Decision Situations
Unit 4 Decision Trees
UNIT 1 ELEMENTS OF DECISION ANALYSIS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 What is a Decision?
3.2 Who is a Decision Maker?
3.3 Decision Analysis
3.4 Components of Decision Making
3.4.1 Decision Alternatives
3.4.2 States of Nature
3.4.3 The Decision
3.4.4 Decision Screening Criteria
3.5 Phases of Decision Analysis
3.6 Errors that can Occur in Decision Making
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Business Decision Analysis is the discipline comprising the philosophy,

theory, methodology, and professional practice necessary to address
important decisions in a formal manner. Decision analysis includes
many procedures, methods, and tools for identifying, clearly
representing, and formally assessing important aspects of a decision, for
prescribing a recommended course of action by applying the maximum
expected utility action axiom to a well-formed representation of the
decision, and for translating the formal representation of a decision and
its corresponding recommendation into insight for the decision maker
and other stakeholders.
231
2.0 OBJECTIVES
 define a decision
 define a decision maker
 describe the components of decision making
 outline the structure of a decision problem.
3.0 MAIN CONTENT
3.1 What is a Decision?
A decision can be defined as an action to be selected according to some

pre-specified rule or strategy, out of several available alternatives, to
facilitate a future course of action. This definition suggests that there are
several alternative courses of action available, which cannot be pursued
at the same time. Therefore, it is imperative to choose the best
alternative base on some specified rule or strategy.
3.2 Who is a Decision Maker?
A decision maker is one who takes decision. It could be an individual or

a group of individuals. It is expected that a good decision maker should
be skilled in art of making decisions.
3.3 Decision Analysis
Decision making is a very important and necessary aspect of every

human endeavour. In life, we are faced with decision problems in
everything we do. Individuals make decisions daily on what to do, what
to wear, what to eat etc. Every human being is assumed to be a rational
decision maker who takes decisions to improve his/her wellbeing. In
business, management have to make decision on daily bases on ways to
improve business performance. But unlike individual decision making,
organisational or business decision making is a very complex process
considering the various factors involved. It is easy to take decision for
simple situation but when it gets complex, it is better not to rely on
intuition. Decision theory proves useful when it comes to issues of risk
and uncertainty (Adebayo, et al. 2010).
3.4 Components of Decision Making
Earlier, we stated that complex decision problem involve risk and an

uncertainty and as such, certain logic, rules, procedures should be
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applied when analysing such situation. The major components that

constitute risk and uncertainty in decision making are:
 Decision alternatives
 States of nature
 The decision itself
 Decision screening criteria.
We now briefly discourse each of these components.
3.4.1 Decision Alternatives
These are alternative courses of action available to the decision maker.

The alternatives should be feasible, and evaluating them will depend on
the availability of a well-defined objective. Alternative courses of action
may also be seen as strategies or options from which the decision maker
must choose from. It is due to the existence of several alternatives that
the decision problem arises. If there were only one course of action, then
there will be no decision problem.
Alternatives present themselves as:
(a) Choices of products to manufacture

(b) Transportation routes to be taken
(c) Choice of customer to serve
(d) Financing option for a new project
(e) How to order job into machines, etc.
3.4.2 States of Nature
A state of nature is a future occurrence for which the decision maker has
no control over. All the time a decision is made, the decision maker is
not certain which states of nature will occur in future, and he has no
influence over them (Taylor III, 2007). For instance, if a company has a
contract to construct a 30km road, it may complete the construction of
the full stretch of road in six months in line with a laid down plan. But
this plan will be hinged on the possibility that it does not rain in the next
six months. However, if there is consistent heavy rain for the first three
months, it may delay the progress of work significantly and as a result,
prolong the completion date of the project. But if actually there is no
occurrence of heavy rainfall, the company is likely to complete the road
as scheduled.
233
3.4.3 The Decision
The decision itself is a choice which is arrived at after considering all

alternatives available given an assumed future state of nature. In the
view of Dixon-Ogbechi (2001), “A good decision is one that is based on
logic, considers all available data, and possible alternative and employs
quantitative technique” she further noted that, occasionally, a good
decision may yield a bad result, but if made properly, may result in
successful outcome in the long run.
3.4.4 Decision Screening Criteria
In the section above, we mentioned that the decision itself is a choice

which is arrived at after considering all other alternatives. Consideration
of alternative courses of action is not done arbitrarily; it is done using
some standardise logic or methodology, or criterion. These criteria form
the basis upon which alternatives are compared. The strategy or
alternative which is finally selected is the one associated with the most
attractive outcome. The degree of attractiveness will depend on the
objective of the decision maker and the criterion used for analysis
(Ihemeje, 2002).
SELF-ASSESSMENT EXERCISE
i. Define a decision.
ii. Who is a decision maker?
iii. What do you understand by states of nature?
iv. What is decision analysis?
v. List the two most prominent business objectives.
3.5 Phases of Decision Analysis
The process of analysing decision can be grouped into four phases.

These four phases from what is known as the decision analysis cycle.
They are presented as follows:
 Deterministic analysis phase: This phase accounts for certainties

rather than uncertainties. Here, graphical and diagrammatic models
like influence diagrams and flow charts can be translated into
mathematical models.
Necessary tools are used for predicting consequences of
alternatives and for evaluating decision alternatives.
 Probabilistic analysis: Probabilistic analyses cater for
uncertainties in the decision making process. We can use the
decision tree as a tool for probabilistic analysis.
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 Evaluation phase: At the phase, the alternative strategies are

evaluated to enable one identify the decision outcomes that
correspond to sequence of decisions and events.
3.6 Errors that can Occur in Decision Making
The following are possible errors to guide against when making

decisions.
 Inability to identify and specify key objectives: Identifying

specific objectives gives the decision maker a clear sense of
direction.
 Focusing on the wrong problem: This could create distraction and
will lead the decision maker to an inappropriate solution.
 Not giving adequate thoughts to trade-offs which may be highly
essential to the decision making process.
4.0 CONCLUSION
Decision can be made either as single individuals or as group of
individuals or as organisations. Those decisions are made in order to
meet laid down goals and objectives which in most cases are aim to
bring about improvement in fortunes.
5.0 SUMMARY
In this unit, the elements of decision analysis were discussed. It began
with defining a decision, and who a decision maker is. Further, it
considers the components of decision making, structure of a decision
problem and finally errors that can occur in decision making. This unit
provides us with concepts that will help us in understanding the
subsequent units and modules.

1. Who is a decision maker?
2. Define decision analysis.
3. List and explain the components of decision.
Ackoff, R. & Sisieni, M. (1991). Fundamentals of Operations Research.

New York: John Wiley and Sons Inc.
Adebayo, O.A., Ojo, O. & Obamire, J.K. (2006). Operations Research
in Decision Analysis. Lagos: Pumark Nigeria Limited.
235
Churchman, C.W. et al. (1957). Introduction to Operations Research.

Howard, A. (2004). “Speaking of Decisions: Precise Decision

Language”. Decision Analysis, Vol. 1 No. 2, June.
Ihemeje, J.C. (2002). Fundamentals of Business Decision Analysis.

Ibadan: Sibon Books Limited.
Shamrma, J.K. (2009). Operations Research Theory & Application.
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UNIT 2 APPROACHES TO DECISION ANALYSIS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Main Approaches to Decision Analysis
3.1.1 Qualitative Approach to Decision Making
3.1.2 Quantitative Approach
3.2 Objective of Decision Making
3.3 Steps in Decision Theory Approach
3.4 Decision Making Criteria
3.4.1 Maximax Criterion (Criterion of Optimism)
3.4.2 Maximin Criterion (Criterion of Pessimism)
3.4.3 Minimax Regret Criterion (Savage Criterion)
3.4.4 Equally Likely of Laplace Criterion (Bayes’ or
Criterion of Rationality
3.4.5 Hurwicz Criterion (Criterion of Realism)
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
We discussed what the subject decision analysis is all about we defined

a decision, decision maker, business decision analysis and threw light on
various components involved in Business Decision Analysis. In this
unit, we shall proceed to explaining the different approaches used in
analysing a decision problem. Two key approaches present themselves –
Qualitative Approach, and the Quantitative Approach. These two broad
approaches from the core of business decision analysis. They will be
broken down into several specific methods that will be discussed
throughout in this course of study.
2.0 OBJECTIVES
 identify the qualitative and quantitative approaches to decision

analysis
 identify the qualitative and quantitative tools of analysis
 use the expected monetary value (EMV) and expected
opportunity (EOL) techniques in solving decision problems
 solve decision problems using the different criteria available.
237
3.0 MAIN CONTENT
3.1 Main Approaches to Decision Analysis
As identified earlier, the two main approaches to decision analysis are

the qualitative and quantitative approaches.
3.1.1 Qualitative Approach to Decision Making
Qualitative approaches to decision analysis are techniques that use

human judgement and experience to turn qualitative information into
quantitative estimates (Lucey, 1988) as quoted by Dixon – Ogbechi
(2001). He identified the following qualitative decision techniques
(1) Delphi method

(2) Market research
(3) Historical analogy
According to Akingbade (1995), qualitative models are often all that are
feasible to use in circumstances, and such models can provide a great
deal of insight and enhance the quality of decisions that can be made.
Quantitative models inform the decision maker about relationships
among kinds of things. Knowledge of such relationships can inform the
decision maker about areas to concentrate upon so as to yield desired
results.
Akingbade (1995) presented the following examples of qualitative

models:
(1) Influence diagrams

(2) Cognitive maps
(3) Black box models
(4) Venn diagrams
(5) Decision trees.
(6) Flow charts, etc.
(Dixon – Ogbechi 2001).
Let us now consider the different qualitative approaches to decision

making.
Delphi method: The Delphi method is technique that is designed to

obtain expert consensus for a particular forecast without the problem of
submitting to pressure to conform to a majority view. It is used for long
term forecasting. Under this method, a panel is made to independently
answer a sequence of questionnaire which is used to produce the next
questionnaire. As a result, any information available to a group of
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experts is passed on to all, so that subsequent judgements are refined as

more information and experience become available (Lucey, 1988).
Market research: These are widely used procedures involving opinion

surveys; analysis of market data, questionnaires designed to gage the
reaction of the market to a particular product, design, price, etc. It is
often very accurate for a relatively short term.
Historical analogy: Historical Analogy is used where past data on a

particular item are not available. In such cases, data on similar subjects
are analysed to establish the life cycle and expected sales of the new
product. This technique is useful in forming a board impression in the
medium to long term. (Lucey, (1988) as quoted by Dixon-Ogbechi,
(2001)).
3.1.2 Quantitative Approach
This technique or approach lends itself to the careful measurement of

operational requirements and returns. This makes the task of comparing
one alternative with another very much more objective. Quantitative
technique as argued by Dixon-Ogbechi (2001), embraces all the
operational techniques that lend themselves to quantitative
measurement. Harper (1975) presents the following quantitative
techniques.
(a) Mathematics: Skemp (1971) defined mathematics as “a system

of abstraction, classification and logical reasoning. Generally,
Mathematics can be subdivided into two
i. Pure mathematics
ii. Applied mathematics.
Pure Mathematics is absolutely abstract in not concerning itself

with anything concrete but purely with structures and logical
applications, implications and consequences of such structures.
Applied Mathematics is the application of proved abstract

generalisation (from pure Mathematics) to the physical world
(Akingbade, 1996) both pure and applied Mathematics can be
broken into the following subdivisions.
(1) Arithmetic
(2) Geometry
(3) Calculus
(4) Algebra
(5) Trigonometry
239
(6) Statistics.
(b) Probability: Probability is widely used in analysing business

decisions. Akingbade, (1996) defined probability as a theory
concerned with the study of processes involving uncertainty.
Lucey, (1988) defined probability as “the quantification of
uncertainty.” Uncertainty may be expressed as likelihood, chance
or risk.
(c) Mathematical models: According to Dixon-Ogbechi (2001), A
Mathematical model is a simplified representation of a real life
situation in Mathematical terms. A Mathematical model is
Mathematical idealisation in the form of a system proposition,
formula or equation of a physical, biological or social
phenomenon (Encarta Premium, 2009).
(d) Statistics: Statistics has been described as a branch of
Mathematics that deals with the collection, organisation, and
analysis of numerical data and with such problems as experiment
design and decision making (Microsoft Encarta Premium, 2009).
3.2 Objective of Decision Making

Before a decision maker embarks on the process of decision making
he/she must set clear objectives as to what is expected to be achieved at
the end of the process. In Business decision analysis; there are two broad
objectives that decision makers can possible set to achieve. These are:
 maximisation of profit
 minimisation of loss.
Most decisions in business fall under these two broad categories of

objectives. The decision criterion to adopt will depend on the objective
one is trying to achieve.
In order to achieve profit maximisation, the Expected Monetary Value

(EMV) approach is most appropriate. As will be seen later, the Expected
Value of the decision alternative is the sum of highlighted pay offs for
the decision alternative, with the weight representing the probability of
occurrence of the states of nature. This approach is possible when there
are probabilities attached to each state of nature or event. The EMV
approach to decision making is assumed to be used by the optimistic
decision maker who expects to maximise profit from his investment.
The technique most suitable for minimisation of loss is the Expected
opportunity loss (EOL) approach. It is used in the situation where the
decision maker expects to make a loss from an investment and tries to
keep the loss as minimum as possible. This type of problem is known as
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minimisation problem and the decision maker here is known to be

pessimistic. The problem under the EMV approach is known as a
maximisation problem as the decision maker seeks to make the most
profit from the investment. These two approaches will be illustrated in
details in the next section.
3.3 Steps in Decision Theory Approach
Decision theory approach generally involves four steps. Gupta and Hira,
(2012) present the following four steps.
Step 1: List all the viable alternatives

The first action the decision maker must take is to list all viable
alternatives that can be considered in the decision. Let us assume that
the decision maker has three alternative courses of action available to
him a, b, c.
Step 2: Identify the expected future event

The second step is for the decision maker to identify and list all future
occurrences. Often, it is possible for the decision maker to identify the
future states of nature; the difficulty is to identify which one will occur.
Recall, that these future states of nature or occurrences are not under the
control of the decision maker. Let us assume that the decision maker has
identified four of these states of nature: i, ii, iii, iv.
Step 3: Construct a payoff table

After the alternatives and the states of nature have been identified, the
next task is for the decision maker to construct a payoff table for each
possible combination of alternative courses of action and states of
nature. The payoff table can also be called contingency table.
Step 4: Select optimum decision criterion

Finally, the decision maker will choose a criterion which will result in
the largest payoff or which will maximise his wellbeing or meet his
objective. An example of pay off table is presented below.
241
Table 2.1: An Example of the Payoff Table

Contingency table 1
Alternative States of nature

i ii iii iv
a ai aii aiii aiv
b bi bii biii biv
c ci cii ciii civ
As we can see from the payoff table above, a,b,c are the alternative
strategies, i, ii, iii, iv are the states of nature. Therefore the decision
maker has identified four states of nature and three alternative strategies.
Apart from the alternative strategy column and the raw representing the
states of nature, other cells in the table are known as condition
outcomes. They are the outcomes resulting from combining a particular
strategy with a state of nature. Therefore we can say that the
contingency table shows the different outcomes when the states of
nature are combined with the alternatives.
3.4 Decision Making Criteria
There are five criteria with which a decision maker can choose among
alternatives given different states of nature. Gupta and Hira (2012) are
of the view that choice of a criterion is determined by the company’s
policy and attitude of the decision maker. They are:
(1) Maximax Criterion or Criterion of Optimism

(2) Maximin Criterion or Criterion of Pessimism (Wald Criterion)
(3) Minimax Regret Criterion (Savage Criterion)
(4) Laplace Criterion or Equally likely criterion or criterion of
Rationality (Bayes’ Criterion)
(5) Hurwicz Criterion or Criterion of Realism
Now let us see how we can solve problems using the above criteria.
Example 2.1: Consider the contingency matrix given below
Table 2.2: Pay-off Table
Contingency table 2
Alternative Market Demand

Products High (N) Moderate Low
(N) (N)
Body Cream 500 250 -75
Hair Cream 700 300 -60
Hand Lotion 400 200 -50
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The matrix above shows the payoffs of an investor who has the choice
either investing in the production of Body Cream, or Hair cream, or
hand lotion. Whichever of the three products he decides to produce; he
will encounter three types of market demand. It may turn out that the
market demand for any of the product is high, or moderate of low. In
other words, the production of body cream, or hair cream, or hand lotion
represent the alternative courses of action or strategies available to the
investor, while the occurrence of either high demand, or moderate
demand, or low demand represent the states of nature for which the
investor has no control over. Now, how would the investor arrive at the
choice of product to manufacture? We are going to analyse the decision
problem using the five criteria earlier listed below.
3.4.1 Maximax Criterion (Criterion of Optimism)
The maximax criterion is an optimistic criterion. Here, the decision

maker aims to maximise profit or his outcome. It involves an optimistic
view of future outcomes. This is done by selecting the largest among
maximum payoffs. However, the disadvantage of this criterion is that it
does not make use of all available information in getting the quantitative
values. This is not often the case on real life situations. The criterion has
also been criticises for being too optimistic and assumes that the future
will always be rosy. (Adebayo et al, 2006).
Table 2.3: Pay-off Table
Contingency table 3
Alternative Market Demand Max Maxi

Products High (N) Low Column max
(N) Moderate (N) (N) (N)
Body 500 250 -75 500
Cream
Hair Cream 700 300 -60 700 700
Hand 400 200 -50 400
Lotion
Let us now try to solve the decision problem in the matrix above using
the maximax criterion.
Step 1: Create and additional column to the right hand side of the
matrix and call it max column as shown below.
Step 2: Identify the maximum pay-off in each alternative course
of action (i.e. either the role for body cream, or hair
cream, or hand lotion) and place it in the corresponding
cell on the maximum column.
243
Step 3: Identify and select the pay-off with the highest value on
the maximum column. This value becomes your optimal
value using the maximax criterion.
Step 4: Make recommendations.
As we can see from Contingency table 3 above, the maximax value is

N700.
Recommendation: Using the maximax decision criterion, the decision

maker should manufacture hair cream to maximise worth N700.
3.4.2 Maximin Criterion (Criterion of Pessimism)
Under the maximin criterion, the decision maker is assumed to be

pessimistic. The objective here is to maximise the minimum possible
outcome. It is a decision situation where the decision maker tries to
make the most of bad situations and avoids taking risks and incurring
huge losses. According to Adebayor, et al. (2006), the weakness of this
criterion is that the result may not always be unique. It has also been
criticised for being an unduly careful. However, it has the advantage of
helping one to be in the best possible condition in case the worst
happens.
In analysing a decision situation using this criterion, we use the

following steps.
Step 1: Create an additional column to the rights hand side of your

pay-off matrix minimum column.
Step 2: Select the minimum pay-off from each alternative and
place on the corresponding call in the minimum column.
Step 3: Identify and select the maximum pay-off in the minimum
column.
Step 4: Make recommendation.
Using data in contingency matrix 2
Minimum Maximin
Col (N) (N)
- 75
- 60
- 50 - 50
Fig. 2.4: Payoff Table- Minimum and Maximum Columns
Recommendation: Using the maximum decision criterion, the decision

maker should manufacture hand lotion with a pay-off of - N50.
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3.4.3 Minimax Regret Criterion (Savage Criterion)

This decision criterion was developed by L.J. Savage. He pointed out
that the decision maker might experience regret after the decision has
been made and the states of nature i.e. events have occurred. Thus the
decision maker should attempt to minimise regret before actually
selecting a particular alternative (strategy) (Gupta and Hira, 2011). The
criterion is aimed at minimising opportunity loss.
The following steps are used to solve problems using this criterion.
Step 1: For each column, identify the highest payoff.

Step 2: Subtract the value from itself every other pay-off in the
column to obtain the regret matrix.
Step 3: Create an additional column to the right of your regret
matrix and call it maximum column.
Step 4: Identify and select the maximum value from each
alternative strategy.
Step 5: Find the minimum value in the maximum column created.
Step 6: Make recommendations.
Example 2.2
Contingency Table 4
Alternative Market Demand

Products High Moderate Low (N)
(N) (N)
Body Cream 500 250 -75
Hair Cream 700 300 -60
Hand Lotion 400 200 -50
Fig.2.5: Payoff Table
Regret matrix 1
Alternative Market Demand Max Mini

Products High Moderate Low Column max
(N) (N) (N)
Body Cream 200 50 25 200
Hair Cream 0 0 10 10 10
Hand Lotion 300 100 0 300
Fig.2.6: Regret Matrix
245
Recommendation: Using the minimax regrets criterion, the decision

maker should manufacture hair cream to minimise loss worth N10.
3.4.4 Equally Likely of Laplace Criterion (Bayes’ or Criterion

of Rationality)
This criterion is based upon what is known as the principle of
insufficient reasons. Since the probabilities associated with the
occurrence of various events are unknown, there is not enough
information to conclude that these probabilities will be different. This
criterion assigns equal probabilities to all the events of each alternative
decision and selects the alternative associated with the maximum
expected payoff. Symbolically, if “n” denotes the number of events and
“s” denotes the pay-offs, then expected value for strategy, say si is:
1/N[P1 + P2 + …. + Pn]
or simply put
P1 + P2 + ….. + Pn
n
The steps to follow are:
Step 1: Compute the average for each alternative using the above
formula.
Step 2: Select the maximum outcome from the calculation in step
1 above
Step 3: Make recommendations
Example 2.3
Contingency Table 5
Alternative Market Demand Max

Products High Moderate Low Average Column Col.
(N) (N) (N)
Body 500 250 -75 500 +250 + 75 = 675
Cream 3 3
= 225
Hair Cream 700 300 -60 700 + 300 – 60 =940 313.3
3 3
=313.3
Hand 400 200 -50 400 + 200 – 5 = 550
Lotion 30 3
=183.3
Fig. 2.7: Payoff Table
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Recommendation: Using the equally likely criterion, the decision

should manufacture Hair Cream worth N313.3.
3.4.5 Hurwicz Criterion (Criterion of Realism)
This criterion is also called weighted average criterion. It is a

compromise between the maximax (optimistic) and maximin
(Pessimistic) decision criteria. This concept allows the decision maker to
take into account both maximum and minimum for each alternative and
assign them weights according to his degree of optimism or pessimism.
The alternative which maximises the sum of these weighted pay-offs is
then selected. (Gupta and Hira, 2012)
The Hurwicz Criterion comprises the following steps:
Step 1: Choose an appropriate degree of optimism  ( lies

between zero and one (0 <<1)), so that (1-) represents
the degree of pessimism. is called coefficient or index of
optimism.
Step 2: Determine the maximum as well as minimum value of
each alternative course of action.
Step 3: Determine the criterion of realism using the following
formula
CRi =  (Max in Rowi) + (1 - ) (Min in Rowi)
Step 4: Select the maximum outcome in step 3 above

Step 5: Make Recommendation
Example 2.4
Example: Using the contingency Table 3 above
Maximum Min in Row

500 -75
700 -60
400 -50
Fig. 2.8: Max. And Min. Rows
For alternative Body Cream (b)
(Rb =  (Maxim Rowb) + (1 - ) (min in Rowb)

Let us assume  = 0.5
CRbc = 0.5 (500) + (1 – 0.5) (-75)
247
= 0.5 (500) + 0.5 (-75)

= 250 – 37.5 = 212.5
For alternative Hair Cream
CRhc = 0.5 (700) + (0.5) (-60)

= 350 + (- 30)
= 350 – 30 = 320
For alternative Hand Lotion
CRhl = 0.5 (400) + (0.5) (-50)

= 200 – 25 = 177
Therefore
CRbc=N212.5
CRhc = N320
CRhl = N175
Recommendation: Using the Hurwicz Criterion, the decision maker

should manufacture Hair Cream worth N320.
We have seen how interesting and simple it is to use the five criteria in
analysing decision problems. However, the above analysis can only be
used under a situation of uncertainty where the decision maker neither
knows the future states of nature nor have the probability of occurrence
of the states of nature. This will be discussed in greater detail in the next
unit.
4.0 CONCLUSION
An individual or a small group of people faced with simple decision

may apply common sense in solving their problems. However, this is
not the case with big corporate organisations which are faced with very
complex decision problems. An application of common sense in such
complex situations will not be appropriate as it will lead mostly to
wrong decisions. Complex decision problems demand the use of
specialised tools and techniques for analysis of problem and eventual
arrival at the best alternative.
5.0 SUMMARY
This unit outlines briefly some approaches to decision analysis. It

identifies two basic approaches to decision analysis: Qualitative and
Quantitative approaches. The Qualitative approach includes: Delphi
Method, Market Research and Historical Analogy. The Quantitative
technique includes the use of Mathematics, Probability, Mathematical
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models and statistics to analyse decision problems. Finally, we discuss

the five criteria for solving problems under the condition of uncertainty:
maximax, maximin, Laplace’s, minimax regret, and Hurwicz criterion.
1. Differentiate between qualitative and quantitative techniques.

2. List and explain four qualitative techniques of decision analysis.
3. What do your understanding by a state of Nature?
4. Differentiate between the Expected monetary value (EMV) and
the Expected opportunity Loss (EOL) techniques.
5. Consider the payoff matrix below and analyse the decision
problem completely.
Contingency Table 6
State of nature
Alternatives S1 S2 S3
d1 15,000 35,000 200
d2 75,000 15,000 -100
d3 20,000 45,000 -1,000
Hint: Whenever you are asked to analyse a problem completely, it

means you should use the five criteria early discussed for analyse the
decision problem.
Adebayo, O.A. et al. (2006). Operations Research in Decision and

Production Management.
Akingbade, F. (1995). Practical Operational Research for Developing

Countries: A Process Framework Approach. Lagos: Panaf
Publishing Inc.
Philglad Nig. Ltd.
Gupta, P.K & Hira, D.S. (2012). Operations Research. New-Delhi: S.

Chand & Company.
Harper, W.M. (1975). Operational Research. London: Macdonald &

Evans Ltd.

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UNIT 3 TYPES OF DECISION SITUATIONS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Elements of Decision Situation
3.2 Types of Decision Situations
3.2.1 Decision Making Under Condition of Certainty
3.2.2 Decision Making Under Conditions of Uncertainty
3.2.3 Decision Making Under Conditions of Risk
3.2.4 Decision Under Conflict
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Recall that in the previous unit we presented five decision criteria –

Maximax, Maximin, Laplace’s, Minimax Regret, and Hurwicz criterion.
We also stated that the criteria are used for analysing decision situations
under uncertainty. In this unit, we shall delve fully into considering
these situations and learn how we can use different techniques in
analysing problems in certain decision situations i.e: Certainty,
Uncertainty, Risk, and Conflict situations.
2.0 OBJECTIVES
 identify the four conditions under which decisions can be made

 describe each decision situation
 identify the techniques for making decision under each decision
situation
 solve problems under each of the decision situation.
3.0 MAIN CONTENT
3.1 Elements of Decision Situation
Dixon–Ogbechi (2001) presents the following elements of decision

situation:
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1 The decision maker: The person or group of persons making the

decision.
2 Value system: This is the particular preference structure of the
decision maker.
3 Environmental factors: These are also called states of nature.
They can be:
i. Political v Cultural factors

ii. Legal vi. Technological factors
iii. Economic factors viii Natural disasters
iv. Social factors
4 Alternative: There are various decision options available to the

decision maker.
5 Choice: The decision made.
6 Evaluation criteria: These are the techniques used to evaluate the
situation at hand.
3.2 Types of Decision Situations
According to Gupta and Hira (2012), there are four types of

environments under which decisions can be made. These differ
according to degree of certainty. The degree of certainty may vary from
complete certainty to complete uncertainty.
3.2.1 Decision Making Under Condition of Certainty
In this environment, only one state of nature exits for each alternative.
Under this decision situation, the decision maker has complete and
accurate information about future outcomes. In other words, the decision
maker knows with certainty the consequence of every alternative course
of action.
3.2.2 Decision Making Under Conditions of Uncertainty
Here, more than one state of nature exists, but the decision maker lacks
sufficient knowledge to allow him assign probabilities to the various
state of nature. However, the decision maker knows the states of nature
that may possibly occur but does not have information which will enable
him to determine which of these states will actually occur. Techniques
that can be used to analyse problem under this condition include the
Maximax criterion, equally likely or Laplace’s criterion, and Hurwicz
criterion or Criterion of Realism. These techniques have earlier been
discussed. We shall consider a more difficult problem for further
illustration.
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Example 3.1- Word Problem
A farmer is considering his activity in the next farming season. He has a

choice of three crops to select from for the next planting season –
Groundnuts, Maize, and Wheat. Whatever is his choice of crop; there
are four weather conditions that could prevail: heaving rain, moderate
rain, light rain, and no rain. In the event that the farmer plants Ground
nuts and there is heavy rain, he expects to earn a proceed of N650,000 at
the end of the farming season, if there is moderate rain N1,000,000, high
rain – N450,000 and if there is no rain – (-N1,000)If the farmer plants
Maize, the following will be his proceeds after the harvest considering
the weather condition: heavy rain – N1,200,000, moderate rain –
N1,500,000, Light rain – N600,000 and no rain N2000. And if the
farmer decides to plant wheat, he expects to make the following: heavy
rain – N1,150,000, moderate rain – N1,300,000, Light rain- N800,000
and No rain – N200 -000.
The farmer has contact you, an expert in OR to help him decide on what
to do.
Question: Construct a payoff matrix for the above situation, analyse

completely and advise the farmer on the course of action to adopt.
Assume  = 0.6.
Solution
First, construct a contingency matrix from the above problem.
Contingency Matrix 1a
Alterative Weather conditions

Crops Heavy Rain Moderate Light Rain No Rain
(S1) Rain (S2) (S3) (S4)
N N N N
Groundnut 750,000 1,000.000 450,000 -1,000
(d1)
Maize (d2) 1,200,000 1,500,000 600,000 2000
Wheat (d3) 1,150,000 1,300,000 800,000 -200,000
Fig. 3.1a: Pay-off Table
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Contingency Matrix 1b
Alterativ Weather conditions

e S1 S2 S3 S4 Max Min
Crops (N’000) col Col
(N’000) (N’000) (N’000)
d1 750 1,000 450 -1 1,000 -1

d2 1,200 1,500 600 2 1,500 2
d3 1,150 1,300 800 -200 1,300 -200
Fig. 3.1b: Pay-off table
Regret Matrix 1
Alterativ Weather conditions

e S1 S2 S3 (S4) Max Min
Crops (N’000) (N’000) (N’000) (N’000) col Col
d1 1200 – 1500- 800-450 2-(1) 500

750 1000 350 3
450 500
d2 1200 – 1500- 800-600 2-2 200 200
1200 1500 200 0
0 0
d3 1200-1150 1500- 800-800 2-(-200) 202
50 1300 0 202
200
Col max 1200 1500 800 2
Fig. 3.2: Regret Matrix 1
1. Maximax Criterion
Alt. Max
Col.
d1 1,000
d2 1,500
d3 1,300
Recommendation: Using the maximax criterion, the farmer should

select alternative d2 and plant maize worth N1, 500,000.
253
2. Maximin Criterion
Alt. Min. Col.

d1 -1
d2 2
d3 -200
Recommendation: Using the maximum criterion, the farmer should

select alternative d2 and plant maize worth N2, 000.
3. Minimax Regret Criterion
Choice of Weather conditions

crops S1 S2 S3 (S4) Max Min
Col Col
d1 450 500 350 3 500
d2 0 0 200 0 200 200
d3 50 200 0 202 202
Fig. 3.3: Pay- off Table
Recommendation: Using the Mini Max Regret Criterion, the decision

maker should select alternative d2 and plant maize to minimise loss
worth N200,000.
4. Laplace Criterion
d1 = 750 + 1000 + 450 – 1 = 549.75

4
d2 = 1200 + 1500 + 600 + 2 =825.50
4
d3 = 1150 + 1300 + 800 – 200 = 762.50
4
Recommendation: Using the Equally Likely or Savage Criterion, the

farmer should select alternative d2 to plant maize worth N825, 500.
(5) Hurwicz Criterion

 = 0.6, 1 -  = 0.4
CRi = (max in row) + (1-) (min in row)
CR1 = 0.6 (1000) + (0.4) (-1) = 600 + (-0.4) = 599.6
CR2 = 0.6 (1500) + (0.4) (2) = 900 + 0.8 = 900.8
CR3 = 0.6 (1300) + (0.4) (-200) = 780 + (-80) = 700
Recommendation: Using the Hurwicz criterion the farmer should select

alternative d2 and cultivate maize worth N900, 800.00.
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3.2.3 Decision Making under Conditions of Risk
Under the risk situation, the decision maker has sufficient information to
allow him assign probabilities to the various states of nature. In other
words, although the decision maker does not know with certainty the
exact state of nature that will occur, he knows the probability of
occurrence of each state of nature. Here also, more than one state of
nature exists. Most Business decisions are made under conditions of
risk. The probabilities assigned to each state of nature are obtained from
past records or simply from the subjective judgement of the decision
maker. A number of decision criteria are available to the decision maker.
These include.
(i) Expected monetary value criterion (EMV)

(ii) Expected Opportunity Loss Criterion (EOL)
(iii) Expected Value of Perfect Information (EVPI)
(Gupta and Hira, 2012)
We shall consider only the first two (EMV and EOL) criteria in details
in this course.
I. Expected monetary value (EMV) criterion
To apply the concept of expected value as a decision making criterion,

the decision maker must first estimate the probability of occurrence of
each state of nature. Once the estimations have been made, the expected
value of each decision alternative can be computed. The expected
monetary value is computed by multiplying each outcome (of a
decision) by the corresponding probability of its occurrence and then
summing the products. The expected value of a random variable is
written symbolically as E(x), is computed as follows:
(Taylor III, 2007)
Example 3.2
A businessman has constructed the payoff matrix below. Using the

EMV criterion, analyse the situation and advise the businessman on the
kind of property to invest on.
255
Contingency Matrix 2
Decision to invest State of Nature

Good Poor Turbulent
Economic Economic Economic
Conditions Condition Condition
(N) (N) (N)
Apartment building 50,000 30,000 15,000
(d1)
Office building (d2) 100,000 40,000 10,000
Warehouse (d3) 30,000 10,000 -20,000
Probabilities 0.5 0.3 0.2
Fig. 3.4: Pay- off Table (Adapted from Taylor, B.W. III (2007)
Introduction to Management Science. New Jersey:Pearson Education
Inc.)
Solution
EVd1 = 50,000 (0.5) + 30,000 (0.3) + 15,000 (0.2)
= 25,000 + 9,000 + 3,000
= N37,000
EVd2 = 100,000 (0.5) + 40,000 (0.3) + 10,000 (0.2)

=N50, 000 +12,000 + 2000
=N64,000
EVd3 = 30,000 (0.5) + 10,000 (0.3) + (-20,000(0.2)

= 15,000 + 3000 - 4000
= N14,000
Recommendation: Using the EMV criterion, the businessman should

select alternative d2 and invest in office building worth N64, 000.
Under this method, the best decision is the one with the greatest
expected value. From the above EXAMPLE, the alternative with the
greatest expected value is EVd1 which has a monetary value of N37,
000. This does not mean that N37,000 will result if the investor
purchases apartment buildings, rather, it is assumed that one of the
payoffs values will result in N25,000 or N9,000 or N 3,000. The
expected value therefore implies that if this decision situation occurs a
large number of times, an average payoff of N37,000 would result,
Alternatively, if the payoffs were in terms of costs, the best decision
would be the one with the lowest expected value.
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ii. Expected Opportunity Loss (EOL)
The expected opportunity Loss criterion is a regret criterion. It is used

mostly in minimisation problems. The minimisation problem involves
the decision maker either trying to minimise loss or minimise costs. It is
similar the Minimax Regret Criterion earlier discussed. The difference
however, is that is has probabilities attached to each state of nature or
occurrence.
The difference in computation between the EMV and EOL methods is

that, unlike the EMV methods, a regret matrix has to be constructed
from the original matrix before the EOL can be determined.
Example3.3
We shall determine the best alternative EOL using contingency matrix 2

above
First, we construct a regret matrix from contingency matrix 2 above.
Remember how the Regret matrix table is constructed? Ok. Let us do
that again here.
Quick reminder
To construct a regret matrix, determine the highest value in each state of

nature and subtract every payoff in the same state of nature from it.
Your will observe that most of the payoff will become negative values
and zero.
Regret Matrix 2
Decision to invest State of Nature

(N) (N) (N)
Apartment building (d1) (100,000 - (40,000 - (15,000 –
50,000) 30,000) 15,000)
50,000 10,000 0
Office building (d2) (100,000 - (40,000 – (15,000 -
100,000) 40,000) 10,000)
0 0 5,000
Warehouse (d3) (100,000 – (40,000 – (15,000+2
30,000) 40,000) 0,000)
70,000 30,000 35,00
Fig. 3.3: Regret Matrix 2
257
EOLd1 = 50,000 (0.5) + 10,000 (0.3) + 0(2)

= 25,000 + 3,000+0
= N28,000
EOLd2 = 0.(0.5) + 0(0.3) + 5,000 (0.2)

= 0 + 0 + 1,000
= N1,000
EOLd3 = 70,000 (0.5) + 30,000 (0.3) + 35,000 (0.2)

= 35,000 + 9,000 + 7,000
= N51,000
Recommendation: Using the EOL criterion, the decision maker should

select alternative d2 and invest in office building worth N1,000.
The Optimum investment option is the one which minimises expected

opportunity losses, the action calls for investment in office building at
which point the minimum expected loss will be N1, 000.
You will notice that the decision rule under this criterion is the same
with that of the Minimax Regret criterion. This is because both methods
have the same objectives that is, the minimisation of loss. They are both
pessimistic in nature. However, loss minimisation is not the only form
minimisation problem. Minimisation problems could also be in the form
of minimisation of cost of production or investment. In analysing a
problem involving the cost of production you do not have to construct a
regret matrix because the pay-off in the table already represents cost.
NOTE: It should be pointed out that EMV and EOL decision criteria are
completely consistent and yield the same optimal decision alternative.
iii Expected value of perfect information
Taylor III (2007) is of the view that it is often possible to purchase

additional information regarding future events and thus make better
decisions. For instance, a farmer could hire a weather forecaster to
analyse the weather conditions more accurately to determine which
weather condition will prevail during the next farming season. However,
it would not be wise for the farmer to pay more for this information than
he stands to gain in extra yield from having this information. That is,
the information has some maximum yield value that represents the limit
of what the decision maker would be willing to spend. This value of
information can be computed as an expected value – hence its name,
expected value of perfect information (EVPI).
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The expected value of perfect information therefore is the maximum

amount a decision maker would pay for additional information. In the
view of Adebayo et al (2007), the value of perfect information is the
amount by which the profit will be increased with additional
information. It is the difference between expected value of optimum
quantity under risk and the expected value under certainty. Using the
EOL criterion, the value of expected loss will be the value of the perfect
information.
Expected value of perfect information can be computed as follows

EVPI = EVwPI – EMVmax
Where
EVPI = Expected value of perfect information
EVwPI = Expected value with perfect information
EMVmax = Maximum expected monetary value or Expected value
without perfect information (Or minimum EOL for a minimisation
problem)
Example 3.4
Using the data on payoff matrix 3 above.
Decision to State of Nature

invest Good Poor Turbulent
(N) (N) (N)
Apartment 50,000 30,000 15,000
building (d1)
Office building 100,000 40,000 10,000
(d2)
Warehouse (d3) 30,000 10,000 -20,000
Fig. 3.3: Pay-off Tale
EVwPI = Pj x best out on each state of nature (Sj).
The expected value with perfect information can be obtained by

multiplying the best outcome in each state of nature by the
corresponding probabilities and summing the results.
We can obtain the EVwPI from the table above as follows.
EVwP1 = 100,000 x 0.5 + 40,000 x 0.3 + 15,000 x 0.2

= 50,000 + 12,000 + 3,000
= N65,000
259
Recall that our optimum strategy as calculated earlier was N64,000.

EVP1 = EVwP1 – EMVmax
= N65000 - 64,000
= N1,000
The expected value of perfect information (EVPI) is N1000. This
implies that the maximum amount the investor can pay for extra
information is N1000. Because it is difficult to obtain perfect
information, and most times unobtainable, the decision maker would be
willing to pay some amount less than N1000 depending on how accurate
the decision maker believes the information is. Notice that the expected
value of perfect information (N1000) equals our expected opportunity
loss (EOL) of N1000 as calculated earlier.
Taylor III (2007) provides a justification for this. According to him, this
will always be the case, and logically so, because regret reflects the
difference between the best decision under a state of nature and the
decision actually made. This is the same thing determined by the
expected value of perfect information.
3.2.4 Decision under Conflict

Decision taken under conflict is a competitive decision situation. This
environment occurs when two or more people are engaged in a
competition in which the action taken by one person is dependent on the
action taken by others in the competition. In a typical competitive
situation the player in the competition evolve strategies to outwit one
another. This could by way intense advertising and other promotional
efforts, location of business, new product development, market research,
recruitment of experienced executives and so on. An appropriate
technique to use in solving problems involving conflicts is the Game
Theory (Adebayo ,et al. 2007).
Practice exercise
(1) Identify and discuss the situations under which decision are
made.
(2) An investor is confronted with a decision problem as represented
in the matrix below. Analyse the problem using the EMV and
EOL criteria and advise the decision maker on the best strategy to
adopt.
State of Nature Alternatives

Expand Construct Subcontract Prob.
High (N) 50,000 70,000 30,000 0.5
Moderate (N) 25,000 30,000 15,000 03
Low (N) 25,000 -40,000 -1,000 0.15
Nil (N) -45,000 -80,000 -10,000 0.05
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Hint: Note that the positions of the states of nature and the alternative
strategies have changed.
4.0 CONCLUSION
It is important for decision makers to always identify the situations they

are faced with and fashion out the best technique for analysing the
situation in order to arrive at the best possible alternative course of
action to adopt.
5.0 SUMMARY
In this unit, we have discussed the different situations under which a

decision maker is faced with decision problems. These decision
situations include Certainty, Uncertainty, Risk and Conflict situation.
Decision situations could also be referred to as decision environments.
We have also identified and discussed various techniques used in
solving problems under these situations. The deterministic approach to
decision analysis which includes simple arithmetic techniques for simple
problems and cost-volume analysis, linear programming, transportation
model, assignment models quenching modes etc. for complex problems
could be used to solve problems under situation of certainty.
1. Who is a decision maker?

2. List and explain four situations under which decisions can be
made.
3. Identify the techniques that can be used to analyse decision
problems under the following situations
a. Certainty
b. Uncertainty
c. Risk
d. Conflict
4. Consider the contingency matrix below
States of Nature
Alternatives S1 (N) S2(N) S3(N)
A1 100,000 75,000 1000
A2 625,000 12,000 920
A3 11,900 750 -73
Analyse the situation completely and advise the decision maker on the
optimal strategy to adopt under each criterion.
261

Dixon – Ogbechi, B.N. (2001). Decision Theory in Business. Lagos:

Philglad Nig. Ltd.
Gupta, P.K. & Hira, D.S. (2012). Operations Research, New Delhi: S.
Chand & Company.
Taylor III, B.W. (2007). Introduction to Management Science. (9th ed.).

New Jersey: Pearson Education Inc.
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UNIT 4 DECISION TREES
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition
3.2 Benefits of Using Decision Tree
3.2.1 Disadvantage of the Decision Tree
3.3 Components of the Decision Tree
3.4 Structure of a Decision Tree
3.5 How to Analyse a Decision Tree
3.6 The Secretary Problem
3.6.1 Advantages of the Secretary Problem over the
General Decision tree
3.6.2 Analysis of the Secretary Problem
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
So far, we have been discussing the techniques used for decision

analysis. We have demonstrated how to solve decision problems by
presenting them in a tabular form. However, if decision problems can be
presented on a table, we can also represent the problem graphically in
what is known as a decision tree. Also the decision problems discussed
so far dealt with only single stage decision problem.
2.0 OBJECTIVES
 describe a decision tree

 describe what decision nodes and outcome nodes are
 represent problems in a decision trees and perform the fold back
and tracing forward analysis
 calculate the outcome values using the backward pass
 identify the optimal decision strategy.
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3.0 MAIN CONTENT
3.1 Definition
A decision tree is a graphical representation of the decision process

indicating decision alternatives, states of nature, probabilities attached to
the states of nature and conditional benefits and losses (Gupta & Hira
2012). A decision tree is a pictorial method of showing a sequence of
inter-related decisions and outcomes. All the possible choices are shown
on the tree as branches and the possible outcomes as subsidiary
branches. In summary, a decision tree shows: the decision points, the
outcomes (usually dependent on probabilities and the outcomes values)
(Lucey, 2001).
3.2 Benefits of Using Decision Tree
Dixon-Ogbechi (2001) presents the following advantages of using the

decision tree
- They assist in the clarification of complex decisions making

situations that involve risk.
- Decision trees help in the quantification of situations.
- Better basis for rational decision making are provided by decision
trees.
- They simplify the decision making process.
3.2.1 Disadvantage of the Decision Tree
The disadvantage of the decision tree is that it becomes time consuming,

cumbersome and difficult to use/draw when decision options/states of
nature are many.
3.3 Components of the Decision Tree
It is important to note the following components of the structure of a

decision problem:
- The choice or Decision Node: Basically, decision trees begin

with choice or decision nodes. The decision nodes are depicted
by square ( ). It is a point in the decision tree where decisions
would have to be made. Decision nodes are immediately by
alternative courses of action in what can be referred to as the
decision fork. The decision fork is depicted by a square with
arrows or lines emanating from the right side of the square
( ).The number of lines emanating from the box depends
on the number of alternatives available.
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- Change Node: The chance node can also be referred to as state

of nature node or event node. Each node describes a situation in
which an element of uncertainty is resolved. Each way in this
uncertainty can be resolved is represented by an arc that leads
rightward from its chance node, either to another node or to an
end-point. The probability on each such arc is a conditional
probability, the condition being that one is at the chance node to
its left. These conditional probabilities sum to 1 (0ne), as they do
in probability tree (Denardo, 2002).
The state of nature or chance nodes are depicted by circles ( ), it

implies that at this point, the decision maker will have to compute
the expected monetary value (EMV) of each state of nature.
Again the chance event node is depicted this ( )
3.4 Structure of a Decision Tree
The structure and the typical components of a decision tree are shown in
the diagram below.
Action B1
me X1 D2
o
O u tc
Action B2
Outcome X2
n A1
tio Outcome X
A c 3
D1
Outcome Y1
Action A 2
c1
c t ion
A c
D3 Acti on 2
Outcome Y2
A cti
on c
3
Fig.4.1: Adapted from Lucey, T (2001). Quantitative Techniques.

(5th ed.). London: Continuum
The above is a typical construction of a decision tree. The decision tree

begins with a decision node D1, signifying that the decision maker is
first of all presented with a decision to make. Immediately after the
decision node, there are two courses of Action, A1 and A2.If the decision
maker chooses A1, there are three possible outcomes – X1 X2, X3. And
if chooses A2, there will be two possible outcomes Y1 and Y2 and so on.
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3.5 How to Analyse a Decision Tree
The decision tree is a graphical representation of a decision problem. It

is multi-state in nature. As a result, a sequence of decisions are made
repeatedly over a period of time and such decisions depend on previous
decisions and may lead to a set of probabilistic outcomes. The decision
tree analysis process is a form of probabilistic dynamic programming
(Dixon-Ogbechi, 2001).
Analysing a decision tree involves two states:
i. Backward pass: This involves the following steps
- starting from the right hand side of the decision tree, identify the
nearest terminal. If it is a chance event, calculate the EMV
(Expected Monetary Value). And it is a decision node; select the
alternative that satisfies your objective.
- Repeat the same operation in each of the terminals until you get
to the end of the left hand side of the decision tree.
ii. Forward pass: The forward pass analysis involves the following
operation.
- Start from the beginning of the tree at the right hand side, at each
point, select the alternative with the largest value in the case of a
minimisation problem or profit payoff, and the least payoff in the
case of a minimisation problem or cost payoff.
- Trace forward the optimal contingency strategy by drawing
another tree only with the desired strategy.
These steps are illustrate below:
Example 4.1
Contingency Matrix 1
Alternatives
Probability
States of Nature Stock Rice Stock Maize
(A1) (A2)
High demand 8,000 12,000 0.6
(S1) (N)
Low demand 4,000 -3,000 0.4
(S2) (N)
Fig. 4.2: Pay-off Matrix
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Question: Represent the above payoff matrix on a decision tree and find
the optimum contingency strategy.
We can represent the above problem on a decision tree thus:

S1(high demand)
8,000
0.6
A1(stock rice)S2(low demand)

0.4 6400
4,000
S1(high demand)
6400 12,000
A2(stock maize) 0.6
S2(high demand)
6000
0.4-3,000
Fig. 4.3: A Decision Tree
Next, we compute the EMY for alternatives A1 and A2.
EMVA1 = 8,000 x 0.6 + 4,000 x 0.4 = 6400

= 4800 x 1,600
EMVA2 = 12,000 x 0.6 + (-3,000) x 0.4

= 7,200 – 1,200 = N6,000
EMVA1 gives the highest payoff
We can now draw our optimal contingency strategy thus:
8,000
S1
6400
0.6
S2
A1 0.4
4,000
6400
Fig. 4.4: Optimal Contingency Strategy
267
The above decision tree problem is in its simplest form. They also could
be word problem to be represented on a decision tree diagram unlike the
above problem that has already been put in tabular form. Let us try one
of such problems.
Example 4.2
A client has contracted NOUNCIL, a real estate firm to help him sell
three properties A,B,C that he owns in Banana Island. The client has
agreed to pay NOUNCIL 5% commission on each sale. The agent has
specified the following conditions: NOUNCIL must sell property A
first, and this he must do within 60days. If and when A is sold,
NOUNCIL receives 5% commission on the sale, NOUNCIL can then
decide to back out on further sale or go ahead and try to sell the
remaining two property B and C within 60 days. If they do not succeed
in selling the property within 60days, the contract is terminated at this
stage. The following table summarises the prices, selling Costs (incurred
by NOUNCIL whenever a sale is made) and the probabilities of making
sales
Property Prices of Selling Cost Probability

property
A 12,000 400 0.7
B 25,000 225 0.6
C 50,000 450 0.5
Fig. 4.5: Pay-off Matrix
(i) Draw an appropriate decision tree representing the problem for

NOUNCIL.
(ii) What is NOUNCIL’s best strategy under the EMV approach?
(Question Adapted from Gupta and Hira (2012))
Solution
Hint: Note that the probabilities provided in the table are probabilities of
sale. Therefore, to get the probability of no sale, we subtract the
probability of sales from 1 probability of no sales = 1 – probability of
sales.
NOUNCIL gets 5% Commission if they sell the properties and satisfy

the specified conditions.
The amount they will receive as commission on sale of property A, B,

and C are as follows:
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Commission on A = 5/100 x 12,000 = N6000

Commission on B = 5/100 x 25,000 = N1250
Commission on C = 5/100 x 50,000 = N2500
The commission calculated above are conditional profits to NOUNCIL.

To obtain the actual profit accrued to NOUNCIL from the sale of the
properties, we subtract the selling cost given in the table above from the
commission.
NOUNCIL’S Actual profit
A = N600 – N400 = N200

B = N1250 - N225 = N1025
C = N2500 – N450 = N2050
We now construct our decision tree

0)
205
N
(
3 C
le ls .5
S 0
5 Do
1,02 es
not
)
(N sel
lC
B sll B .6 0.5 (N
Se 0 o)
Do
B es
not
2
alks sel
T 0.4 lB 5)
(N
O) ,1 02
)
(N
0) Tak
2( 0 eC
)
4
sB
A 50 ll 0.6
lls 0.7 0 Se
A Se (N2 Do
C C es
Do ells not
es S 0 .5 se
no 0.4 l l B(
A t se Do N
pt ll A es )
1 ce 0.3 (N not
Ac 0) se
0.7
0.5 l l C(N
Re O)
jec
tA
Fig. 4.6: A Decision Tree
Backward Pass Analysis
EMV of Node 3 = N (0.5 2050 + 0.5 x0) = N1025

EMV of Node 4 = N (0.6 x 1,025 + 0.4 x 0) =N615
EMV of Node B = [0.6 (1025 + 1025) + 0.4 x 0] = 1230
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Note: 0.6 (EMV of node 3 + profit from sales of B at node B)
EMV of Node C = [0.5 (2050 + 615) + 0.5 x 0] = N1332.50
Note: same as EMV of B above
EMV of Node 2 =N1332.50 (Higher EMV at B and C)

EMV of Node A = N[0.7 (200 + 1,332.50) + 0.3 x 0] = N1072.75
EMV of Node 1 =N1072.75
Optimal contingency strategy
Sells B
Sells A, N 200 takes C sells C N1025
Sell A 1332.5 615
1072.75- 1332.5
2050 0.5
\
0.7 N 1072.75
Fig. 4.7b: Optimal Contingency Strategy
The optimal contingency strategy path is revealed above. Thus the

optimum strategy for NOUNCIL is to sell A, if they sell A, then try sell
C and if they sell C, then try sell B to get an optimum expected amount
of N1072.75.
Let us try another example as adapted from Dixon – Ogbechi (2001).
3.6 The Secretary Problem
The secretary problem was developed to analyse decision problems that

are complex and repetitive in nature. This type of decision tree is a
modification upon general decision tree in that it collapses the branches
of the general tree and once an option is jettisoned, it cannot be recalled.
3.6.1 Advantages of the Secretary Problem over the General

Decision Tree
In addition to the advantages of the general decision try the secretary

problem has the following added advantages
(1) It is easy to draw and analyse.

(2) It saves time.
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3.6.2 Analysis of the Secretary Problem
The analysis of a secretary decision tree problem is similar to that of the

general decision tree. The only difference is that since the multi stage
decision problem could be cumbersome to formulate when the branches
become too many, the secretary problem collapses the different states of
nature into one. This will be demonstrated in the example below.
4.0 CONCLUSION
Decision trees provide a graphical method of presenting decision

problems. The problems are represented in a form of a tree diagram with
the probabilities and payoffs properly labelled for easier understanding,
interpretation, and analysis. Once a decision problem can be represented
in tabular form, it can also be presented in form of a decision tree.
However, the general decision tree could become complex and

cumbersome to understand and analysed if the nature of the problem is
also complex and involves a large number of options. The secretary
formulation method of the general decision tree was developed as an
improvement upon the general formulation to be used for analysing
complex and cumbersome decision problems. Generally, the decision
tree provides a simple and straight forward way of analysing decision
problems.
5.0 SUMMARY
Now let us cast our minds back to what we have learnt so far in this unit.
We learnt that the decision tree is mostly used for analysing a multi-
stage decision problem. That is, when there is a sequence of decisions to
be made with each decision having influence on the next. A decision
tree is a pictorial method of showing a sequence of inter-related
decisions and outcomes. It is a graphical representation that outlines the
different states of nature, alternatives courses of actions with their
corresponding probabilities. The branches of a decision tree are made up
of the decision nodes at which point a decision is to be made, and the
chance node at which point the EMV is to be computed.
1 What do you understand by the term decision tree?

2 Identify the two formulations of the decision tree and give the
difference between them.
3 Outline the advantages and disadvantage of a decision tree.
4 Write short notes on the following:
i Decision node
271
ii Chance even node

5 Identify and discuss the two method of analysis of a decision tree.
Dixon–Ogbechi, B.N. (2001). Decision Theory in Business. Lagos:

Philglad Nig. Ltd.

Chand & Company.
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MODULE 3
Unit 1 Operations Research (OR)

Unit 2 Modelling In Operations Research
Unit 3 Simulation
Unit 4 Systems Analysis
UNIT 1 OPERATIONS RESEARCH (OR)
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Development of Operations Research
3.2 Definition of Operations Research
3.3 Characteristics of OR
3.4 Scientific Method in Operations Research
3.4.1 The Judgement Phase
3.4.2 The Research Phase
3.4.3 The Action Phase
3.5 Necessity of Operations Research in Industry
3.6 Scope of Operations Research
3.7 Scope of Operations Research in Financial Management
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
We mentioned in unit 1, module 1, that the subject: Business Decision

Analysis takes its root from the discipline Operations Research or
Operational Research (OR). This unit is devoted to giving us
background knowledge of OR. It is however, not going to be by any
way exhaustive as substantial literature been developed about
quantitative approaches to decision making. The root of this literature
are centuries old, but much of it emerged only during the past half
century in tandem with the digital computer (Denardo, 2002). The above
assertion relates only to the development of the digital computer for use
in solving OR problems.
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2.0 OBJECTIVES
 briefly trace the development of OR

 define OR
 outline the characteristics of OR
 give reasons why operations research is necessary in industries.
3.0 MAIN CONTENT

3.1 Development of Operations Research
Gupta and Hira (2012) traced the development of Operations Research

(OR) thus:
i The period before World War II
The roots of OR are as old as science and society. Though the roots of
OR extend to even early 1800s, it was in 1885 when Frederick, W.
Taylor emphasised the application of scientific analysis to methods of
production, that the real start took place. Taylor conducted experiments
in connection with a simple shovel. His aim was to find that weight load
of ore moved by shovel would result in the maximum amount of ore
move with minimum fatigue. After many experiments with varying
weights, he obtained the optimum weight load, which though much
lighter than that commonly used, provided maximum movement of ore
during a day. For a “first-class man” the proper load turned out to be 20
pounds. Since the density of ore differs greatly, a shovel was designed
for each density of ore so as to assume the proper weight when the
shovel was correctly filled. Productivity rose substantially after this
change.
Henry L. Gantt, also of the scientific management era, developed job

sequencing and scheduling methods by mapping out each job from
machine to machine, in order to minimise delay. Now, with the Gantt
procedure, it is possible to plan machine loading months in advance and
still quote delivery dates accurately.
However, the first industrial Revolution was the main contributing

factor towards the development of OR. Before this period, most of the
industries were small scale, employing only a handful of men. The
advent of machine tools – the replacement of man by machine as a
source of power and improved means of transportation and
communication resulted in fast flourishing industries. If became
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increasingly difficult for a single man to perform all the managerial

functions (Planning, sales, purchasing production, etc). Consequently, a
division of management functions took place. Managers of production
marketing, finance, personal, research and development etc. began to
appear. For example, production department was sub-divided into
sections like maintenance, quality control, procurement, production
planning etc.
ii World War II
During War II, the military management in England called on a team of

scientists to study the strategic and tactical problems of air and land
defence. This team was under the leadership of Professor P. M. S.
Blackett of University of Manchester and a former Naval Officer.
“Blackett’s circus”, as the group was called, included three
Physiologists, two Mathematical Physicists, one Astrophysicist, one
Army officer, one Surveyor, one general physicist and two
Mathematicians. The objective of this team was to find out the most
effective allocation of limited military resources to the various military
operations and to activities within each operation. The application
included effective use of newly invented radar, allocation of British Air
Force Planes to missions and the determination best patters for searching
submarines. This group of scientist formed the first OR team.
iii Post World War II
Immediately after the war, the success of military teams attracted the
attention of industrial mangers who were seeking solutions to their
problems. Industrial operations research in U.K and USA developed
along different lines, and in UK the critical economic efficiency and
creation of new markets. Nationalisation of new key industries further
increased the potential field for OR. Consequently OR soon spread from
military to government, industrial, social and economic planning.
In the USA, the situation was different impressed by is dramatic success

in UK, defence operations research in USA was increased. Most of the
war-experienced OR workers remained in the military services.
Industrial executives did not call for much help because they were
returning to peace and many of them believed that it was merely a new
applicati0on of an old technique. Operations research has been known
by a variety of names in that country such as Operational Analysis,
Operations Evaluation, Systems Analysis, Systems Evaluation, Systems
Research, Decision Analysis, Quantitative Analysis, Decision Science,
and Management Science.
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3.2 Definition of Operations Research
Many definitions of OR have been suggested by writers and experts in

the field of operations research. We shall consider a few of them.
1 Operations Research is the applications of scientific methods by

inter disciplinary teams to problems involving the control of
organised (Man-Machine) systems so as to provide solutions
which best serve the purpose of the organisation as a whole
(Ackoff and Sasieni, 1991).
2 Operations Research is applied decision theory. It uses any

scientific, Mathematical or Logical means to attempt to cope with
the problems that confront the executive when he tries to achieve
a thorough going rationality in dealing with his decision problems
(Miller and Starr, 1973).
3 Operations research is a scientific approach to problem solving

for executive management (Wagner, 1973).
4 Operations Research is the art of giving bad answers to problems,

to which, otherwise, worse answers are given (Saaty, 1959).
3.3 Characteristics of OR
Ihemeje (2002) presents four vital characteristics of OR.
1 The OR approach is to develop a scientific model of the system

under investigation with which to compare the probable
outcomes of alternative management decision or strategies.
2 OR is essentially an aid to decision making. The result of an

operation study should have a direct effect on managerial action,
management decision based on the finding of an OR model are
likely to be more scientific and better informed.
3 It is based on the scientific method. It involves the use of
carefully constructed models based on some measurable
variables. It is, in essence, a quantitative and logical approach
rather than a qualitative one. The dominant techniques of OR are
mathematical and statistical.
Other characteristics of OR are:
4 It is system (executive) - oriented

5 It makes use of interdisciplinary teams
6 Application of scientific method
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7 Uncovering of new problems

8 Improvement in quality of decision.
3.4 Scientific Method in Operations Research
Of these three phases, the research phase is the longest. The other two
phases are equally important as they provide the basis of the research
phase. We now consider each phase briefly as presented by Gupta &
Hira (2012).
3.4.1 The judgement phase
The judgement phases of the scientific method of OR consists of the

following:
A Determination of the operation: An operation is the

combination of different actions dealing with resources (e.g. men
and machines) which form a structure from which an action with
regards to broader objectives is maintained. For example an act of
assembling an engine is an operation.
B Determination of objectives and values associated with the

operation: In the judgement phase, due care must be given to
define correctly the frame of references of operations. Efforts
should be made to find the type of situation, e.g. manufacturing,
engineering, tactical, strategic etc.
C Determination of effectiveness measures: The measure of

effectiveness implies the measure of success of a model in
representing a problem and providing a solution. It is the
connecting link between the objectives and the analysis required
for corrective action.
3.4.2 The Research Phase
The research phase of OR includes the following:
a. Observation and data collection: This enhances better

understanding of the problem.
b. Formulation of relevant hypothesis: Tentative explanations, when

formulated as propositions are called hypothesis. The
formulation of a good hypothesis depends upon the sound
knowledge of the subject–matter. A hypothesis must provide an
answer to the problem in question.
277
c. Analysis of Available Information and Verification of

Hypothesis: Quantitative as well as qualitative methods may be
used to analyse available data.
d. Prediction and Generalisation of Results and Consideration of

Alternative Methods: Once a model has been verified, a theory is
developed from the model to obtain a complete description of the
problem. This is done by studying the effect of changes in the
parameters of the model. The theory so developed may be used to
extrapolate into the future.
3.4.3 The Action Phase
The action phase consists of making recommendations for remedial

action to those who first posed the problem and who control the
operations directly. These recommendations consists of a clear statement
of the assumptions made, scope and limitations of the information
presented about the situation, alternative courses of action, effects of
each alternative as well as the preferred course of action.
A primary function of OR group is to provide an administrator with

better understanding of the implications of the decisions he makes. The
scientific method supplements his ideas and experiences and helps him
to attain his goals fully.
3.5 Necessity of Operations Research in Industry
Having studied the scientific methods of operations research, we now

focus on why OR is important or necessary in industries. OR came into
existence in connection with war operations, to decide the strategy by
which enemies could be harmed to the maximum possible extent with
the help of the available equipment. War situations required reliable
decision making. But the need for reliable decision techniques is also
needed by industries for the following reasons.
 Complexity: Today, industrial undertakings have become large

and complex. This is because the scope of operations has
increased. Many factors interact with each other in a complex
way. There is therefore a great uncertainty about the outcome of
interaction of factors like technological, environmental,
competitive etc. For instance, a factory production schedule will
take the following factors into account:
i Customer demand
ii Raw material requirement
iii Equipment capacity and possibility of equipment failure
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iv Restrictions on manufacturing processes.
It could be seen that, it is not easy to prepare a schedule which is both

economical and realistic. This needs mathematical models, which in
addition to optimisation, help to analyse the complex situation. With
such models, complex problems can be split into simpler parts, each part
can be analysed separately and then the results can be synthesised to
give insights into the problem.
 Scattered responsibility and authority: In a big industry,

responsibility and authority of decision-making is scattered
throughout the organisation and thus the organisation, if it is not
conscious, may be following inconsistent goals. Mathematical
quantification of OR overcomes this difficulty to a great extent.
 Uncertainty: There is a lot of uncertainty about economic

growth. This makes each decision costlier and time consuming.
OR is essential from the point of view of reliability.
3.6 Scope of Operations Research
We now turn our attention towards learning about the areas that OR
covers. OR as a discipline is very broad and is relevant in the following
areas:
 In industry: OR is relevant in the field or industrial management

where there is a chain of problems or decisions starting from the
purchase of raw materials to the dispatch of finished goods. The
management is interested in having an overall view of the method
of optimising profits. In order to take scientific decisions, an OR
team will have to consider various alternative methods of
producing the goods and the returns in each case. OR should
point out the possible changes in overall structure like installation
of a new machine, introduction of more automation etc.
Also, OR has been successfully applied in production, blending,

product mix, inventory control, demand forecast, sales and
purchases, transportation, repair and maintenance, scheduling and
sequencing, planning, product control, etc.
 In defence: OR has wide application in defence operations. In

modern warfare, the defence operations are carried out by a
number of different agencies, namely – Air force, Army, and
Navy. The activities perfumed by each of these agencies can
further be divided into sub-activities vis: operations, intelligence,
administration, training, etc. There is thus a need to coordinate
279
the various activities involved in order to arrive at an optimum

strategy and to achieve consistent goals.
 In management: Operations Research is a problem-solving

and decision-making science. It is a tool kit for scientific and
programmable rules providing the management a qualitative basis
for decision making regarding the operations under its control.
Some of the area of management where OR techniques have been
successfully applied are as follows:
A Allocation and distribution
i Optimal allocation of limited resources such as men, machines,

materials, time, and money.
ii Location and size of warehouses, distribution centres retail depots
etc.
iii Distribution policy.
B Production and Facility Planning
i Selection, location and design of production plants, distribution

centre and retail outlets.
ii Project scheduling and allocation of resources.
iii Preparation of forecast for the various inventory items and
computing economic order quantities and reorder levels.
iv Determination of number and size of the items to be produced.
C Procurement
i What, how, and when to purchase at minimum purchase cost.

ii Bidding and replacement policies.
iii Transportation planning and vendor analysis.
D Marketing
i Product selection, timing, and competitive actions.

ii Selection of advertisement media.
iii Demand forecast and stock levels.
E Finance
i Capital requirement, cash-flow analysis.

ii Credit policy, credit risks etc.
iii Profit plan for the organisation.
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F Personnel
i Selection of personnel, determination of retirement age and skills.

ii Recruitment policies and assignment of jobs.
iii Wages/salaries administration.
G Research and Development
i Determination of areas for research and development.

ii Reliability and control of development projects.
iii Selection of projects and preparation of budgets.
3.7 Scope of Operations Research in Financial Management
The scope of OR in financial management covers the following areas:
i Cash management: Linear programming techniques are helpful

in determining the allocation of funds to each section.
ii Inventory control: Inventory control techniques of OR can help
management to develop better inventory policies and bring down
the investment in inventories. These techniques help to achieve
optimum balance between inventory carrying costs and shortage
cost.
iii Simulation technique: Simulation considers various factors that
affect and present and projected cost of borrowing money from
commercial banks, and tax rates etc. and provides an optimum
combination of finance (debt, equity, retained earnings) for the
desired amount of capital.
iv Capital budgeting
It involves evaluation of various investment proposals (viz,
market introduction of new products and replacement of
equipment with a new one).
4.0 CONCLUSION
In this unit, you have learnt what operations research is all about. You
can now go on and apply the knowledge in your work.
5.0 SUMMARY
Operations Research (OR) began as an interdisciplinary activity to solve

complex military problems during World War II. Utilising principles
from mathematics, engineering, business, computer science, economics,
and statistics, OR has developed into a full-fledged academic discipline
with practical application in business, industry, government and
military. Currently regarded as a body of established mathematical
281
models and methods essential to solving complicated management

issues, OR provides quantitative analysis of problems from which
managers can make objective decisions. Operations Research and
Management Science (OR/MS) methodologies continue to flourish in
numerous decision making fields.
1. Trace the history and development of operations to the founding

fathers of the field of management.
2. Give two definitions of operations research with identified
authors.
3. Identify the four main characteristics of operations research.
4. Identify and briefly discuss the phases involved in the scientific
method in operations research.
Ackoff, R. & Sisieni, M. (1991). Fundamentals of Operations Research.

Churchman, C.W., Ackoff, R.L. & Arnoff, E.L. (1957). Introduction to

Operations Research. New York: John Wiley and Sons Inc.

Chand & Company.

Lagos- Sibon Books.
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UNIT 2 MODELLING IN OPERATIONS RESEARCH
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition
3.2 Classification of Models
3.3 Characteristics of Good Models
3.4 Advantages of Models
3.5 Limitations of Models
3.6 Constructing a Model
3.7 Types of Mathematical Models
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The construction and use of models is at the core of operations research.

Operations research is concerned with scientifically deciding how to
best design and operate man-machine systems, usually under conditions
requiring the allocation of scarce resources. Modelling is a scientific
activity that aims to make a particular part or feature of the world easier
to understand, define, quantify, visualise, or simulate. Models are
typically used when it is either impossible or impractical to create
experimental conditions in which scientists can directly measure
outcomes. Direct measurement of outcomes under controlled conditions
will always be more reliable than modelled estimates of outcomes.
2.0 OBJECTIVES
 define a model
 describe modelling
 give a classification of models
 outline the advantages and disadvantages of models.
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3.0 MAIN CONTENT
3.1 Definition
Scientific modelling is an activity the aim of which is to make a

particular part or feature of the world easier to understand, define,
quantify, visualise, or simulate. It requires selecting and identifying
relevant aspects of a situation in the real world and then using different
types of models for different aims, such as conceptual models to better
understand, operational models to operationalise, mathematical models
to quantify, and graphical models to visualise the subject
(http://en.wikipedia.org/wiki/Scientific modelling)
Adebayo et al. (2010) define modelling as a process whereby a complex

life problem situation is converted into simple representation of the
problem situation. They further described a model as a simplified
representation of complex reality. Thus, the basic objective of any
model is to use simple inexpensive objects to represent complex and
uncertain situations. Models are developed in such a way that they
concentrate on exploring the key aspects or properties of the real object
and ignore the other objects considered as being insignificant. Models
are useful not only in science and technology but also in business
decision making by focusing on the key aspects of the business
decisions (Adebayo, et al. 2010).
3.2 Classification of Models
The following are the various schemes by which models can be

classified:
i. By degree of abstraction
ii. By function
iii. By structure
iv. By nature of the environment.
Let us now briefly discuss the above classifications of models as

presented by Gupta and Hira (2012).
i. By degree of abstraction
Mathematical models such as Linear Programming formulation of the

blending problem, or transportation problem are among the most
abstract types of models since they require not only mathematical
knowledge, but also great concentration to the real idea of the real-life
situation they represent.
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Language models such as languages used in cricket or hockey match

commentaries are also abstract models.
Concrete models such as models of the earth, dam, building, or plane are
the least abstract models since they instantaneously suggest the shape or
characteristics of the modelled entity.
ii. By function
The types of models involved here include:
Descriptive models which explain the various operations in non-

mathematical language and try to define the functional relationships and
interactions between various operations. They simply describe some
aspects of the system on the basis of observation, survey, questionnaire,
etc. but do not predict its behaviour. Organisational charts, pie charts,
and layout plan describe the features of their respective systems.
Predictive models explain or predict the behaviour of the system.

Exponential smoothing forecast model, for instance, predict the future
demand.
Normative or prescriptive models develop decision rules or criteria for

optimal solutions. They are applicable to repetitive problems, the
solution process of which can be programmed without managerial
involvement. Liner programming is also a prescriptive or normative
model as it prescribes what the managers must follow:
iii. By structure
 Iconic or physical models
In iconic or physical models, properties of real systems are represented

by the properties themselves. Iconic models look like the real objects but
could be scaled downward or upward, or could employ change in
materials of real object. Thus, iconic models resemble the system they
represent but differ in size, they are images. They thus could be full
replicas or scaled models like architectural building, model plane, model
train, car, etc.
 Analogue or schematic models
Analogue models can represent dynamic situations and are used more
often than iconic models since they are analogous to the characteristics
of the system being studied. They use a set of properties which the
system under study possesses. They are physical models but unlike
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iconic models, they may or may not look like the reality of interest.
They explain specific few characteristics of an idea and ignore other
details of the object. Examples of analogue models are flow diagrams,
maps, circuit diagrams, organisational chart etc.
 Symbolic or mathematical models
Symbolic models employ a set of mathematical symbols (letters,

numbers etc.) to represent the decision variables of the system under
study. These variables are related together by mathematical
equations/in-equations which describe the properties of the system. A
solution from the model is, then, obtained by applying well developed
mathematical techniques. The relationship between velocity,
acceleration, and distance is an example of a mathematical model.
Similarly, cost-volume-profit relationship is a mathematical model used
in investment analysis.
iv. By nature of environment
 Deterministic models
In deterministic models, variables are completely defined and the

outcomes are certain. Certainty is the state of nature assumed in these
models. They represent completely closed systems and the parameters of
the systems have a single value that does not change with time. For any
given set of input variables, the same output variables always result.
E.O.Q model is deterministic because the effect of changes in batch sise
on total cost is known. Similarly, linear programming, transportation,
and assignment models are deterministic models.
 Probabilistic models
These are the products of the environment of risk and uncertainty. The
input and/or output variables take the form of probability distributions.
They are semi-closed models and represent the likelihood of occurrence
of an event. Thus, they represent to an extent the complexity of the real
world and uncertainty prevailing in it. As a example, the exponential
smoothing method for forecasting demand a probabilistic model.
3.3 Characteristics of Good Models
The following are characteristics of good models as presented by Gupta

and Hira (2012)
1. The number of simplifying assumptions should be as few as

possible.
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2. The number of relevant variables should be as few as possible.

This means the model should be simple yet close to reality.
3. It should assimilate the system environmental changes without
change in its framework.
3.4 Advantages of a Model
1 It provides a logical and systematic approach to the problem.

2. It indicates the scope as well as limitation of the problem.
3. It helps in finding avenues for new research and improvement in
a system.
4. It makes the overall structure of the problem more
comprehensible and helps in dealing with the problem in its
entirety.
3.5 Limitations of a Model
1. Models are more idealised representations of reality and should

not be regarded as absolute in any case.
2. The reality of a model for a particular situation can be ascertained
only by conducting experiments on it.
3.6 Constructing a Model
Formulating a problem requires an analysis of the system under study.

This analysis shows the various phases of the system and the way it can
be controlled. Problem formulation is the first stage in constructing a
model. The next step involves the definition of the measure of
effectiveness that is, constructing a model in which the effectiveness of
the system is expressed as a function of the variables defining the
system. The general Operations Research form is
E = f(xi, yi),
Where E = effectiveness of the system,
xi = controllable variables,
yi = uncontrollable variables but do affect E.
Deriving a solution from such a model consists of determining those

values of control variables xi, for which the measure of effectiveness is
measure of effectiveness is optimised. Optimised includes both
maximisation (in case of profit, production capacity, etc.) and
minimisation (in case of losses, cost of production, etc.).
The following steps are involved in the construction of a model:
1. Selecting components of the system
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2. Pertinence of components
3. Combining the components
4. Substituting symbols.
3.7 Types of Mathematical Models
The following are the types of mathematical models available:
1. Mathematical techniques
2. Statistical techniques
3. Inventory models
4. Allocation models
5. Sequencing models.
4.0 CONCLUSION
We have seen that models and model construction are very critical in the
practice of operations research because they provide the process
whereby a complex life problem situation is converted into simple
representation of the problem situation. They further described a model
as a simplified representation of complex reality. The basic objective of
any model is to use simple inexpensive objects to represent complex and
uncertain situations. Models are developed in such a way that they
concentrate on exploring the key aspects or properties of the real object
and ignore the other objects considered as being insignificant.
5.0 SUMMARY
This unit introduced us to the concept of models. We have learnt about

the importance of models to operations research. The unit opened with a
consideration of various definitions of models. Among the definitions is
that by Adebayo et al. (2010) who defined modelling as a process
whereby a complex life problem situation is converted into simple
representation of the problem situation. A model as used in Operations
Research is defined as an idealised representation of real life situation. It
represents one of the few aspects of reality.
1. Differentiate between model and modelling.

2. List the different classifications of models we have.
3. List and explain the classification of models by structure.
4. Outline five characteristics of a good model.
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Chand & Company.
Reeb, J. & Leavengood, S. (1998). “Operations Research, Performance

Excellence in the Wood Products Industry”. October EM 8718.
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UNIT 3 SIMULATION
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition
3.2 Advantages of Simulation Technique
3.3 Application of Simulation
3.4 Limitations of Simulation Technique
3.5 Monte Carlo Simulation
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Simulation is primarily concerned with experimentally predicting the

behaviour of a real system for the purpose of designing the system or
modifying behaviour (Budnick et al. 1988). The main reason for a
researcher to resort to simulation is twofold. First of all, simulation is
probably the most flexible tool imaginable. Take queuing as an example.
While it is very difficult to incorporate reneging, jumping queues and
other types of customer behaviour in the usual analytical models this
presents no problem for simulation. A system may have to run for a very
long time to reach a steady state. As a result, a modeller may be more
interested in transient states, which are easily available in a simulation.
2.0 OBJECTIVES
 define simulation
 identify when to use simulation
 outline the advantages of simulation technique
 identify the areas of application of simulation.
3.0 MAIN CONTENT
3.1 Definition
According Budnick, et al. (1988), simulation is primarily concerned

with experimentally predicting the behaviour of a real system for the
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purpose of designing the system or modifying behaviour. In other

words, simulation is a tool that builds a model of a real operation that is
to be investigated, and then feeds the system with externally generated
data. We generally distinguish between deterministic and stochastic
simulation. The difference is that the data that are fed into the system are
either deterministic or stochastic. This chapter will deal only with
stochastic simulation, which is sometimes also referred to as Monte
Carlo simulation in reference to the Monte Carlo Casinos and the
(hopefully) random outcome of their games of chance.
According to Gupta and Hira (2012), simulation is an imitation of

reality. “They further stated that simulation is the representation of
reality through the use of models or other device which will react in the
same manner as reality under given set of conditions. Simulation has
also been defined the use of a system model that has the designed
characteristics of reality in order to produce the essence of actual
operation. According to Donald G. Malcom, a simulated model may be
defined as one which depicts the working of a large scale system of
men, machine, materials, and information operating over a period of
time in a simulated environment of the actual real world condition.
3.2 Advantages of Simulation Technique
When the simulation technique is compared with the mathematical

programming and slandered probability analysis, offers a number of
advantages over these techniques. Some of the advantages are:
1. Simulation offers solution by allowing experimentation with

models of a system without interfering with the real system.
Simulation is therefore a bypass for complex mathematical
analysis.
2. Through simulation, management can foresee the difficulties and
bottlenecks which may come up due to the introduction of new
machines, equipment or process. It therefore eliminates the need
for costly trial and error method of trying out the new concept on
real methods and equipment.
3. Simulation is relatively free from mathematics, and thus, can be
easily understood by the operating personnel and non-technical
managers. This helps in getting the proposed plan accepted and
implemented.
3.3 Application of Simulation
Simulation is quite versatile and commonly applied technique for

solving decision problems. It has been applied successfully to a wide
range of problems of science and technology as given below:
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1. In the field of basic sciences, it has been used to evaluate the area
under a curve, to estimate the value of , in matrix inversion and
study of particle diffusion.
2. In industrial problems including shop floor management, design
of computer systems, design of queuing systems, inventory
control, communication networks, chemical processes, nuclear
reactors, and scheduling of production processes.
3. In business and economic problems, including customer
behaviour, price determination, economic forecasting, portfolio
selection, and capital budgeting.
4. In social problems, including population growth, effect of
environment on health and group behaviour.
3.4 Limitations of Simulation Technique
Despite the many advantages of simulation, it might suffer from some

deficiencies in large and complex problems. Some of these limitations
are given as follows:
i. Simulation does not produce optimum results when the model

deals with uncertainties, the results of simulation only reliable
approximations subject to statistical errors.
ii. Quantification of variables is difficult in a number of situations;
it is not possible to quantify all the variables that affect the
behaviour of the system.
iii. In very large and complex problems, the large number of
variables and the interrelationship between them make the
problem very unwieldy and hard to program.
iv. Simulation is by no means, a cheap method of analysis.
v. Simulation has too much tendency to rely on simulation models.
This results in application of the technique to some simple
problems which can more appropriately be handled by other
techniques of mathematical programming.
3.5 Monte Carlo Simulation
The Monte Carlo method of simulation was developed by two

mathematicians Jon Von Neumann and Stainslaw Ulam, during World
War II, to study how far neurone would travel through different
materials. The technique provides an approximate but quite workable
solution to the problem. With the remarkable success of this technique
on the neutron problem, it soon became popular and found many
applications in business and industry, and at present, forms a very
important tool of operation researcher’s tool kit.
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The technique employs random number and is used to solve problems

that involve probability and where physical experimentation is
impracticable, and formulation of mathematical model is impossible. It
is a method of simulation by sampling technique. The following are
steps involved in carrying out Monte Carlo simulation.
1. Select the measure of effectiveness (objective function) of the

problem. It is either to be minimised or maximised.
2. Identify the variables that affect the measure of effectiveness
significantly. For example, a number of service facilities in a
queuing problem or demand, lead time and safety stock in
inventory problem.
3. Determine the cumulative probability distribution of each
variable selected in step 2. Plot these distributions with the values
of the variables along the x-axis and cumulative probability
values along the y-axis.
4. Get a set of random numbers.
Example:
Customers arrive at a service facility to get required service. The

interval and service times are constant and are 1.8minutes and minutes
respectively. Simulate the system for 14minutes. Determine the average
waiting time of a customer and the idle time of the service facility.
Solution
The arrival times of customers at the service station within 14 minutes

will be:
Customer : 1 2 3 4 5 6 7 8
Arrival time : 0 1.8 3.6 5.4 7.2 9.0 10.8 12.6
(minutes)
The time at which the service station begins and ends within time period
of 14 minutes is shown below. Waiting time of customers and idle time
of service facility are also calculated
Customer Service Waiting time Idle time of

Begins ends of customer service facility
1 0 4 0 0
2 4 8 4-1.8 = 2.2 0
3 8 12 8-3.6 = 4.4 0
4 12 16 12-5.4 = 6.6 0
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The waiting time of the first four customers is calculated above. For the
remaining, it is calculated below.
Customer : 5 6 7 8
Waiting time (min) : 14 – 7.2 = 6.8 5.0 3.2 1.4
Therefore, average waiting time of a customer
= 0 + 2.2 + 4.4 + 6.6 + 6.8 + 5 + 3.2 + 1.4 =29.6 = 3.7 minutes

8 8
Idle time of facility = nil.
4.0 CONCLUSION
This unit will assist you to deal with a complex problem solving
situation.
You can apply it in investment appraisal, inventory control and

evaluating queuing system.
There are soft-wares that will assist you to generate iterations of

simulated numbers.
You need to purchase some of them.
5.0 SUMMARY
This unit provides for us an overview of simulation. It takes us through

various conceptualisations on the definition of simulation. Simulation
has been defined as the representation of reality through the use of
models or other device which will react in the same manner as reality
under given set of conditions. A good example of simulation is a
children amusement or a cyclical park where children enjoy themselves
in a simulated environment like Amusement Parks, Disney Land,
Planetarium shows where boats, train rides, etc. are done to simulate
actual experience. It is quite versatile and commonly applied technique
for solving decision problems such as basic sciences, in industrial
problems including shop floor management, in business and economic
problems etc.
1. What do you understand by the term simulation?

2. Explain six advantages of simulation.
3. Identify and explain five areas of application of simulation.
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4. Give five limitations of simulation.

Gupta, P.K. & Hira, D.S. (2012). Operations Research. New – Delhi: S.
Chand & Company.
Jawahar, S. (2006). Overview of System Analysis & Design- Lesson

Note No. 1. Ashok Educational Foundation.
Eiselt, H.A. & Sandblom, C. (2012). Operations Research: A Model

Based Approach. (2nd ed.). New York: Springer Heidelberg.
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UNIT 4 SYSTEMS ANALYSIS
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition
3.2 The Systems Theory
3.3 Elements of a System
3.4 Types of Systems
3.5 Forms of Systems
3.5.1 Conceptual System
3.5.2 Mechanical System
3.5.3 Social System
3.5.4 Deterministic System
3.5.5 Probabilistic System
3.6 The Concept of Entropy in a System
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The word ‘system’ has a long history which can be traced back to Plato
(Philebus), Aristotle (Politics) and Euclid (Elements). It had meant
"total", "crowd" or "union" in even more ancient times, as it derives
from the verb sunìstemi, uniting, putting together.
"System" means "something to look at". You must have a very high
visual gradient to have systematisation. In philosophy, before Descartes,
there was no "system". Plato had no "system". Aristotle had no
"system"(McLuhan. 1967)
In the 19th century the first to develop the concept of a "system" in the
natural sciences was the French physicist Nicolas Léonard Sadi Carnot
who studied thermodynamics. In 1824 he studied the system which he
called the working substance, i.e. typically a body of water vapour, in
steam engines, in regards to the system's ability to do work when heat is
applied to it. The working substance could be put in contact with either a
boiler, a cold reservoir (a stream of cold water), or a piston (to which the
working body could do work by pushing on it). In 1850, the German
physicist Rudolf Clausius generalised this picture to include the concept
of the surroundings and began to use the term "working body" when
referring to the system.
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2.0 OBJECTIVES
 define a system
 identify and describe the types of systems
 highlight the different forms of systems we have
 describe how a system is analysed
 discuss the concept of entropy.
3.0 MAIN CONTENT
3.1 Definition
The term system is derived from the Greek word systema, which means
an organised relationship among functioning units or components. A
system exists because it is designed to achieve one or more objectives.
We come into daily contact with the transportation system, the telephone
system, the accounting system, the production system, and, for over two
decades, the computer system. Similarly, we talk of the business system
and of the organisation as a system consisting of interrelated
departments (subsystems) such as production, sales, personnel, and an
information system. None of these subsystems is of much use as a
single, independent unit. When they are properly coordinated, however,
the firm can function effectively and profitably.
There are more than a hundred definitions of the word system, but most
seem to have a common thread that suggests that a system is an orderly
grouping of interdependent components linked together according to a
plan to achieve a specific objective. The word component may refer to
physical parts (engines, wings of aircraft, car), managerial steps
(planning, organising and controlling), or a system in a multi-level
structure. The component may be simple or complex, basic or advanced.
They may be single computer with a keyboard, memory, and printer or a
series of intelligent terminals linked to a mainframe. In either case, each
component is part of the total system and has to do its share of work for
the system to achieve the intended goal. This orientation requires an
orderly grouping of the components for the design of a successful
system.
3.2 The Systems Theory
The general systems theory states that a system is composed of inputs, a

process, outputs, and control. A general graphic representation of such a
system is shown below.
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X
CONTROL
TRANSFORMATION PROCESS
INPUT OUTPUT
Fig. 4.1: An Operational System
Adapted from Ihemeje, (2002). Fundamentals of Business Decision

Analysis, Lagos- Sibon Books Limited.
The input usually consists of people, material or objectives. The process

consists of plant, equipment and personnel. While the output usually
consists of finished goods, semi-finished goods, policies, new products,
ideas, etc.
The purpose of a system is to transform inputs into outputs. The system

theory is relevant in the areas of systems design, systems operation and
system control. The systems approach helps in resolving organisational
problems by looking at the organisation as a whole, integrating its
numerous complex operations, environment, technologies, human and
material resources. The need to look at the organisation in totality is
premised on the fact that the objective if the different units of the
organisation when pursued in isolation conflict with one another. For
instance, the operation of a manufacturing department favours long and
uninterrupted production runs with a view to minimising unit cost of
production, including set-up costs. However, this will result in large
inventories, and leading to high inventory costs. The finance department
seeks to minimise costs as well as capital tied down in inventories. Thus,
there is a desire for rapid inventory turnover resulting in lower inventory
levels. The marketing department seeks favourable customer service and
as a result, will not support any policy that encourages stock outs or
back ordering. Back ordering is a method of producing later to satisfy a
previously unfulfilled order. Consequently, marketing favours the
maintenance of high inventory levels in a wide variety of easily
accessible locations which in effect means some type of capital
investment in warehouse or sales outlets. Finally, personnel department
aims at stabilising labour, minimising the cost of firing and hiring as
well as employee discontentment. Hence, it is desirable from the point
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of view of personnel to maintain high inventory level of producing even

during periods of fall in demand.
3.3 Elements of a System
The following are considered as the elements of a system in terms of

Information Systems:
 Input
 Output
 Processor
 Control
 Feedback
 Input: Input involves capturing and assembling elements that

enter the system to be processed. The inputs are said to be fed to
the systems in order to get the output. For example, input of a
'computer system' is input unit consisting of various input devices
like keyboard, mouse, joystick etc.
 Output: The element that exists in the system due to the

processing of the inputs is known as output. A major objective of
a system is to produce output that has value to its user. The
output of the system maybe in the form of cash, information,
knowledge, reports, documents etc. The system is defined as
output is required from it. It is the anticipatory recognition of
output that helps in defining the input of the system. For example,
output of a 'computer system' is output unit consisting of various
output devices like screen and printer etc.
 Processor(s): The processor is the element of a system that

involves the actual transformation of input into output. It is the
operational component of a system. For example, processor of a
'computer system' is central processing unit that further consists
of arithmetic and logic unit (ALU), control unit and memory unit
etc.
 Control: The control element guides the system. It is the decision-

making sub-system that controls the pattern of activities
governing input, processing and output. It also keeps the system
within the boundary set. For example, control in a 'computer
system' is maintained by the control unit that controls and
coordinates various units by means of passing different signals
through wires.
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 Feedback: Control in a dynamic system is achieved by feedback.

Feedback measures output against a standard in some form of
cybernetic procedure that includes communication and control.
The feedback may generally be of three types viz., positive,
negative and informational. The positive feedback motivates the
persons in the system. The negative indicates need of an action,
while the information. The feedback is a reactive form of control.
Outputs from the process of the system are fed back to the control
mechanism. The control mechanism then adjusts the control
signals to the process on the basis of the data it receives. Feed
forward is a protective form of control. For example, in a
'computer system' when logical decisions are taken, the logic unit
concludes by comparing the calculated results and the required
results.
3.4 Types of Systems
Systems are classified in different ways:
1. Physical or abstract systems

2. Open or closed systems
3. 'Man-made' information systems
4. Formal information systems
5. Informal information systems
6. Computer-based information systems
7. Real-time system.
Physical systems are tangible entities that may be static or dynamic in

operation.
An open system has many interfaces with its environment. i.e. system
that interacts freely with its environment, taking input and returning
output. It permits interaction across its boundary; it receives inputs from
and delivers outputs to the outside. A closed system does not interact
with the environment; changes in the environment and adaptability are
not issues for closed system.
3.5 Forms of Systems
A system can be conceptual, mechanical or social. A system can also be

deterministic or probabilistic. A system can be closed or open.
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Conceptual system
A system is conceptual when it contains abstracts that are linked to

communicate ideas. An example of a conceptual system is a language
system as in English language, which contains words, and how they are
linked to communicate ideas. The elements of a conceptual system are
words.
Mechanical system
A system is mechanical when it consists of many parts working together

to do a work. An example of a social system is a typewriter or a
computer, which consists of many parts working together to type words
and symbols. The elements of the mechanical system are objects.
Social system
A system is social when it comprises policies, institutions and people.

An example of a social system is a football team comprising 11 players,
or an educational system consisting of policies, schools and teachers.
The elements of a social system are subjects or people.
Deterministic system
A system is deterministic when it operates according to a predetermined

set of rules. Its future behaviour can therefore be predicted exactly if it’s
present state and operating characteristics are accurately known.
Example s of deterministic systems are computer programmes and a
planet in orbit. Business systems are not deterministic owing to the fact
that they interfere with a number of in determinant factors, such as
customer and supplier behaviour, national and international situations,
and climatic and political conditions.
Probabilistic system
A system is probabilistic when the system is controlled by chance events

and so its future behaviour is a matter of probability rather than
certainty. This is true of all social systems, particularly business
enterprises. Information systems are deterministic enterprises in the
sense that a pre-known type and content of information emerges as a
result of the input of a given set of data.
Closed system
A system is closed when it does not interface with its environment i.e. it
has no input or output. This concept is more relevant to scientific
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systems that to social systems. The nearest we can get to a closed social
system would be a completely self-contained community that provides
all its own food, materials and power, and does not trade, communicate
or come into contact with other communities.
Open system
A system is open when it has many interfaces with its environment, and
so needs to be capable of adopting their behaviour in order to continue
to exist in changing environments. An information system falls into this
category since it needs to adapt to the changing demands for
information. Similarly, a business system must be capable of
reorganising itself to meet the conditions of its environment, as detected
from its input; it will more rapidly tend towards a state of
disorganisation (Ihemeje, 2002).
3.6 The Concept of Entropy in a System
The term entropy is used as a measure of disorganisation. Thus, we can

regard open systems as tending to increase their entropy unless they
receive negative entropy in the form of information from their
environment. In the above example, if increased cost of cost of materials
were ignored, the product will become unprofitable and as a result, the
organisation may become insolvent, that is, a state of disorganisation.
4.0 CONCLUSION
In our everyday life, the word system is widely used. It has become
fashionable to attach the word system to add a contemporary flair when
referring to things or processes. People speak of exercise system,
investment system, delivery system, information system, education
system, computer system etc. System may be referred to any set of
components, which function in interrelated manner for a common cause
or objective.
A system exists because it is designed to achieve one or more objectives.

We come into daily contact with the transportation system, the telephone
system, the accounting system, the production system, and, for over two
decades, the computer system. Similarly, we talk of the business system
and of the organisation as a system consisting of interrelated
departments (subsystems) such as production, sales, personnel, and an
information system.
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5.0 SUMMARY
This unit discusses the concept of systems analysis. The origin of system
analysis has been traced to the Greek word systema, which means an
organised relationship among functioning units or components. A
system exists because it is designed to achieve one or more objectives. It
can be defined is a collection of elements or components or units that are
organised for a common purpose. The general systems theory states that
a system is composed of inputs, a process, outputs, and control. The
input usually consists of people, material or objectives. The process
consists of plant, equipment and personnel. While the output usually
consists of finished goods, semi-finished goods, policies, new products,
ideas, etc. A system consists of the following element: input, output,
processor, control, feedback, boundary and interface, and environment.
Depending on the usage, a system has the following are types of
systems: Physical or abstract systems, Open or closed systems, Man-
made information systems, Formal information systems, Informal
information systems, Computer-based information systems and Real-
time system. A system can be conceptual, mechanical or social. A
system can also exist in the following forms- it can be deterministic or
probabilistic, closed or open, mechanical, social, and conceptual.
It has been quite an exciting journey through the world of systems

analysis.
1 What do you understand term system?

2 With the aid of a well labelled diagram, describe how a system
works.
3 What understand by the concept of entropy of a system?
4 List and explain the elements of a system.

Lagos: Sibon Books.
Jawahar, S. (2006). Overview of Systems Analysis & Design: Lesson

Note No. 1.
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MODULE 4
Unit 1 Sequencing
Unit 2 Games Theory
Unit 3 Inventory Control
UNIT 1 SEQUENCING
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 The Problem: (Definition)
3.2 Assumptions Made in Sequencing Problems
3.3 Nature of Scheduling
3.4 Loading Jobs in Work Centres
3.4.1 Gantt Charts
3.4.2 Assignment Method
3.5 Priority Rules for Job Sequencing
3.6 Applicability
3.7 Types of Sequencing Problems
3.7.1 Sequencing Jobs in Two Machines
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
Sequencing problems involves the determination of an optimal order or

sequence of performing a series jobs by number of facilities (that are
arranged in specific order) so as to optimise the total time or cost.
Sequencing problems can be classified into two groups:
The group involves n different jobs to be performed, and these jobs

require processing on some or all of m different types of machines. The
order in which these machines are to be used for processing each job
(for example, each job is to be processed first on machine A, then B, and
thereafter on C i.e., in the order ABC) is given. Also, the expected actual
processing time of each job on each machine is known. We can also
determine the effectiveness for any given sequence of jobs on each of
the machines and we wish to select from the (n!)m theoretically feasible
alternatives, the one which is both technologically feasible and
optimises the effectiveness measure.
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2.0 OBJECTIVES
 explain what scheduling involves and the nature of scheduling

 mention the use of Gantt charts and assignment method for
loading jobs in work centres
 discuss what sequencing involves and the use of priority rules
 solve simple problems on scheduling and sequencing.
3.0 MAIN CONTENT
3.1 Definition
Scheduling refers to establishing the timing of the use of equipment,

facilities and human activities in an organisation, that is, it deals with the
timing of operations. Scheduling occurs in every organisation,
regardless of the nature of its operation. For example, manufacturing
organisations, hospitals, colleges, airlines, etc. schedule their activities
to achieve greater efficiency. Effective Scheduling helps companies to
use assets more efficiently, which leads to cost savings and increase in
productivity. The flexibility in operation provides faster delivery and
therefore, better customer service. In general, the objectives of
scheduling are to achieve trade-offs among conflicting goals, which
include efficient utilisation of staff, equipment and facilities and
minimisation of customer waiting tune, inventories and process times
(Adebayo, et al. 2006).
3.2 Assumptions Made in Sequencing Problems
Principal assumptions made for convenience in solving the sequencing

problems are as follows:
1 The processing times Ai and Bi etc. are exactly known to us and

they are independent of order of processing the job on the
machine. That is whether job is done first on the machine, last on
the machine, the time taken to process the job will not vary it
remains constant.
2 The time taken by the job from one machine to other after
processing on the previous machine is negligible. (Or we assume
that the processing time given also includes the transfer time and
setup time).
3 Only one operation can be carried out on a machine at a
particular time.
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4 Each job once started on the machine, we should not stop the
processing in the middle. It is to be processed completely before
loading the next job.
5 The job starts on the machine as soon as the job and the machine
both become idle (vacant). This is written as job is next to the
machine and the machine is next to the job. (This is exactly the
meaning of transfer time is negligible).
3.3 Nature of Scheduling
Scheduling technique depends on the volume of system output, the

nature of operations and the overall complexity of jobs. Flow shop
systems require approaches substantially different from those required
by job shops. The complexity of operations varies under these two
situations.
1. Flow shop
Flow shop is a high-volume system, which is characterised by a

continuous flow of jobs to produce standardised products. Also, flow
shop uses standardised equipment (i.e. special purposed machines) and
activities that provide mass production. The goal is to obtain a smooth
rate of flow of goods or customer through the system in order to get high
utilisation of labour and equipment. Examples are refineries, production
of detergents etc.
2. Job shop
This is a low volume system, which periodically shift from one job to
another. The production is according to customer’s specifications and
orders or jobs usually in small lots. General-purpose machines
characterise Job shop. For example, in designer shop, a customer can
place order for different design.
Job-shop processing gives rise to two basic issues for schedulers: how to
distribute the workload among work centre and what job processing
sequence to use.
3.4 Loading Jobs in Work Centres
Loading refers to the assignment of jobs to work centres. The operation

managers are confronted with the decision of assigning jobs to work
centres to minimise costs, idle time or completion time.
The two main methods that can be used to assign jobs to work centres or
to allocate resources are:
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1. Gantt chart
2. Assignment method of linear programming
3.4.1 Gantt Charts
Gantt charts are bar charts that show the relationship of activities over
some time periods. Gantt charts are named after Henry Gantt, the
pioneer who used charts for industrial scheduling in the early 1900s. A
typical Gantt chart presents time scale horizontally, and resources to be
scheduled are listed vertically, the use and idle times of resources are
reflected in the chart.
The two most commonly used Gantt charts are the schedule chart and
the load chart.
3.4.2 Assignment Method
Assignment Method (AM) is concerned specifically with the problem of

job allocation in a multiple facility production configuration. That is, it
is useful in situations that call for assigning tasks or jobs to resources.
Typical examples include assigning jobs to machines or workers,
territories to sales people, etc. One important characteristic of
assignment problems is that only one job (or worker) is assigned to one
machine (or project). The idea is to obtain an optimum matching of tasks
and resources. A chapter in this book has treated the assignment method.
3.5 Priority Rules for Job Sequencing
Priority rules provide means for selecting the order in which jobs should
be done (processed). In using these rules, it is assumed that job set up
cost and time are independent of processing sequence. The main
objective of priority rules is to minimise completion time, number of
jobs in the system, and job lateness, while maximising facility
utilisation. The most popular priority rules are:
I. First Come, First Serve (FCFS): Job is worked or processed in

the order of arrivals at the work centre.
2. Shortest Processing Time (SPT): Here, jobs are processed based
on the length of processing time. The job with the least
processing time is done first.
3. Earliest Due Date (EDD): This rule sequences jobs according to
their due dates, that is, the job with the earliest due date is
processed first.
4. Longest Processing Time (LPT): The job with the longest
processing time is started first.
5. Critical Ratio: Jobs are processed according to the smallest ratio
of time remaining until due date to processing time remaining.
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The effectiveness of the priority rules is frequently measured in the light

of one or more performance measures namely; average number of jobs,
job flow time, job lateness, makes span, and facility utilisation etc.
3.6 Applicability
The sequencing problem is very much common in Job workshops and

Batch production shops. There will be number of jobs which are to be
processed on a series of machine in a specified order depending on the
physical changes required on the job. We can find the same situation in
computer centre where number of problems waiting for a solution. We
can also see the same situation when number of critical patients waiting
for treatment in a clinic and in Xerox centres, where number of jobs is in
queue, which are to be processed on the Xerox machines. Like this we
may find number of situations in real world.
3.7 Types of Sequencing Problems
There are various types of sequencing problems arise in real world. All
sequencing problems cannot be solved. Though mathematicians and
Operations Research scholars are working hard on the problem
satisfactory method of solving problem is available for few cases only.
The problems, which can be solved, are:
(a) ‘n’ jobs are to be processed on two machines say machine A and
machine B in the order AB. This means that the job is to be
processed first on machine A and then on machine B.
(b) ‘n’ jobs are to be processed on three machines A,B and C in the
order ABC i.e. first on machine A, second on machine B and third
on machine C.
(c) ‘n’ jobs are to be processed on ‘m’ machines in the given order.
d) Two jobs are to be processed on ‘m’ machines in the given order.
(Murthy, 2007)
 Single machine scheduling models
The models in this section deal with the simplest of scheduling

problems: there is only a single machine on which tasks are to be
processed. Before investigating the solutions that result from the use of
the three criteria presented in the introduction.
 ‘N’ jobs and two machines
If the problem given has two machines and two or three jobs, then it can
be solved by using the Gantt chart. But if the numbers of jobs are more,
then this method becomes less practical. (For understanding about the
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Gantt chart, the students are advised to refer to a book on Production

and Operations Management (chapter on Scheduling). Gantt chart
consists of X -axis on which the time is noted and Y-axis on which jobs
or machines are shown. For each machine a horizontal bar is drawn. On
these bars the processing of jobs given in a sequence is marked. Let us
take a small example and see how Gantt chart can be used to solve the
same.
Example 1
There are two jobs job 1 and job 2. They are to be processed on two
machines, machine A and Machine B in the order AB. Job 1 takes 2
hours on machine A and 3 hours on machine B. Job 2 takes 3 hours on
machine A and 4 hours on machine B. Find the optimal sequence which
minimises the total elapsed time by using Gantt chart.
Solution
Jobs. Machines (Time in hours)

A B
1 2 3
2 3 4
(a) Total elapsed time for sequence 1, 2 i.e. first job 1 is processed
on machine A and then on second machine and so on.
Draw X - axis and Y- axis, represent the time on X - axis and two
machines by two bars on Yaxis. Then mark the times on the bars to show
processing of each job on that machine.
Machines
Sequence 1, 2
T = Elapse Time = 9 hours (Optimal)
J1 J2
A
J1 J2
0 1 2 3 4 5 6 7 8 9
Time in hours
309
Sequence 1, 2
T = Elapse Time = 9 hours (Optimal sequence)
Machines
J1 J2
J1
0 1 2 3 4 5 6 7 8 9
Time in hours
Fig. 13.1: Gantt Chart
Source: Murthy, R. P. (2007). Operations Research (2nd ed.). New

Delhi: New Age International (P) Limited Publisher
Both sequences shows the elapsed time = 9 hour.
The drawback of this method is for all the sequences, we have to write
the Gantt chart and find the total elapsed times and then identify the
optimal solution. This is laborious and time consuming. If we have more
jobs and more machines, then it is tedious work to draw the chart for all
sequences.
Hence we have to go for analytical methods to find the optimal solution

without drawing charts.
1 Analytical method
A method has been developed by Johnson and Bellman for simple

problems to determine a sequence of jobs, which minimises the total
elapsed time. The method:
1. ‘n’ jobs are to be processed on two machines A and B in the

order AB ( i.e. each job is to be processed first on A and then on
B) and passing is not allowed. That is whichever job is processed
first on machine A is to be first processed on machine B also,
whichever job is processed second on machine A is to be
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processed second on machine B also and so on. That means each

job will first go to machine A get processed and then go to
machine B and get processed. This rule is known as no passing
rule.
2. Johnson and Bellman’s method concentrates on minimising the

idle time of machines. Johnson and Bellman have proved that
optimal sequence of ‘n’ jobs which are to be processed on two
machines A and B in the order AB necessarily involves the same
ordering of jobs on each machine. This result also holds for three
machines but does not necessarily hold for more than three
machines. Thus total elapsed time is minimum when the
sequence of jobs is same for both the machines.
3. Let the number of jobs be 1,2,3,…………n

The processing time of jobs on machine A beA1, A2, A3
…………. An
The processing time of jobs on machine B beB1, B2, B3
…………..Bn
Jobs Machine Time in Hours

Machine A Machine B Order of Processing is
AB
1 A1 B1
2 A2 B2
3 A3 B3
I AI BI
S AS BS
T AT BT
N AN BN
4. Johnson and Bellman algorithm for optimal sequence states that

identify the smallest element in the given matrix. If the smallest
element falls under column 1, i.e. under machine I then do that
job first. As the job after processing on machine 1 goes to
machine2, it reduces the idle time or waiting time of machine 2.
If the smallest element falls under column 2 i.e. under machine 2
then do that job last. This reduces the idle time of machine1. i.e.
if r the job is having smallest element in first column, then do the
rth job first. If s the job has the smallest element, which falls
under second column, then do the s the job last. Hence the basis
for Johnson and Bellman method is to keep the idle time of
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machines as low as possible. Continue the above process until all

the jobs are over.
1 2 3……….. n-1 n
r s
If there are ‘n’ jobs, first write ‘n’ number of rectangles as

shown. Whenever the smallest elements falls in column 1 then
enter the job number in first rectangle. If it falls in second
column, then write the job number in the last rectangle. Once the
job number is entered, the second rectangle will become first
rectangle and last but one rectangle will be the last rectangle.
5. Now calculate the total elapsed time as discussed. Write the table
as shown. Let us assume that the first job starts at Zero th time.
Then add the processing time of job (first in the optimal
sequence) and write in out column under machine 1. This is the
time when the first job in the optimal sequence leaves machine 1
and enters the machine 2. Now add processing time of job on
machine 2. This is the time by which the processing of the job on
two machines over. Next consider the job, which is in second
place in optimal sequence. This job enters the machine 1 as soon
the machine becomes vacant, i.e. first job leaves to second
machine. Hence enter the time in-out column for first job under
machine 1 as the starting time of job two on machine 1. Continue
until all the jobs are over. Be careful to see that whether the
machines are vacant before loading. Total elapsed time may be
worked out by drawing Gantt chart for the optimal sequence.
6. Points to remember
(a) If there is tie i.e. we have smallest element of same value in both columns,
then:
(i) Minimum of all the processing times is Ar which is equal to Bs i.e. Min (Ai,
Bi ) = Ar =
Bs then do the r th job first and s th job last.
(ii) If Min (Ai, Bi) = Ar and also Ar = Ak(say). Here tie occurs between the two
jobs
having same minimum element in the same column i.e. first column we can do
either
rth job or k th job first. There will be two solutions. When the ties occur due to
element in the same column, then the problem will have alternate solution. If
more
number of jobs have the same minimum element in the same column, then the
problem
will have many alternative solutions. If we start writing all the solutions, it is a
tedious
job. Hence it is enough that the students can mention that the problem has
alternate
solutions. The same is true with Bi s also. If more number of jobs have same
312 minimum
element in second column, the problem will have alternate solutions.
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Example 2
There are seven jobs, each of which has to be processed on machine A

and then on Machine B(order of machining is AB). Processing time is
given in hour. Find the optimal sequence in which the jobs are to be
processed so as to minimise the total time elapsed.
JOB: 1 2 3 4 5 6 7
MACHINE: A (TIME IN HOURS). 3 12 15 6 10 11 9
MACHINE: B (TIME IN HOURS). 8 10 10 6 12 1 3
Solution
By Johnson and Bellman method the optimal sequence is:
1 4 5 3 2 7 6
Optimal Machine:A Machine:B Machine Job Remarks.

Sequence idle idle
time time
In out In out A B
1 0 3 3 11 3 -
4 3 9 11 17 2 Job finished
early
5 9 19 19 31 2 Machine A
take more
time
3 19 34 34 44 3 Machine A
takes more
time.
2 34 46 46 56 2 - do-
7 46 55 56 59 1 Job finished
early.
6 55 66 66 67 1 7 Machine A
takes more
time. Last is
finished
on machine
A at 66 th
hour.
Total Elapsed Time =
67
hours
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Example 3
Assuming eight jobs are waiting to be processed. The processing time

and due dates for the jobs are given below: Determine the sequence
processing according to (a) FCFS (b) SPT (c) EDD and (d) LPT in the
light of the following criteria:
(i) Average flow time

(ii) Average number of jobs in the system
(iii) Average job lateness
(iv) Utilisation of the workers.
JOB PROCESSING TIME DUE DATE (DAYS)

A 4 9
B 10 18
C 6 6
D 12 19
E 7 17
F 14 20
G 9 24
H 18 28
Solution
(a) To determine the sequence processing according to FCFS
The FCFS sequence is simply A-B-C-D-E-F-G-H- as shown below:
Job Processing Flow time Job due Job lateness (0
Time date of negative)
A 4 4 9 0
B 10 14 18 0
C 6 20 6 14
D 12 32 19 13
E 7 39 17 22
F 14 53 20 33
G 9 62 24 38
H 18 80 28 52
80 304 172
The first come, first served rule results in the following measures of
effectiveness:
1. Average flow time = Sum of total flow time
Number of jobs
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= 304days = 38jobs
8
2. Average number of jobs in the system = Sum of total flow time

Total processing time
= 304days = 3.8jobs
80
3. Average job lateness = Total late days = 172 x 21.5 = 22days

Number of days 8
4. Utilisation = Total processing time = 80 = 0.2631579

Sum of total flow time 304
0.2631579 x 100% = 26.31579 = 26.32%
(b) To determine the sequence processing according to SPT
SPT processes jobs based on their processing times with the highest
priority given to the job with shortest time as shown below:
Job Processing Time Flow Job due date Job lateness (0

time of negative)
A 4 4 9 0
B 6 10 6 4
C 7 17 17 0
D 9 26 24 2
E 10 36 18 18
F 12 48 19 29
G 14 62 20 42
H 18 80 28 52
80 283 147
The measure of effectiveness is:
1. Average flow time = Sum of total flow time = 283

Number of jobs 8
= 35.375days = 35.38 days
2. Average number of jobs in the system = Sum of total flow time

Total processing time
315
= 283days = 3.54jobs
80
3. Average job lateness = Total late days = 147

Number of days 8
= 18.375days
=18.38days
4. Utilisation = Total processing time= 80

Sum of total flow time 283
0.2826855 x 100%
= 28.27%
(c) To determine the sequence processing according to EDD
Using EDD, you are processing based on their due dates as shown
below:
Job Processing Flow time Job due date Job lateness (0

Time of negative)
A 6 6 6 0
B 4 10 9 1
C 7 17 17 0
D 9 27 18 9
E 10 39 19 20
F 12 53 20 33
G 14 62 24 38
H 18 80 28 52
80 294 153
1. Average flow time = 294 = 36.75days

8
2. Average number of jobs in the system = 294

80 3.675 = 3.68days
3. Average job lateness = 153 = 19.125

8
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= 19.13days
=18.38days
4. Utilisation = 80= 0.272108843

294
0.282108843 x 100
= 27.21%
(d) To determine the sequence processing according to LPT
LPT selects the longer, bigger jobs first as presented below:
Job Processing Flow time Job due Job lateness

Time date (0 of
negative)
A 18 18 28 0
B 14 32 20 12
C 12 44 19 25
D 10 54 18 36
E 9 63 24 39
F 7 70 17 53
G 6 76 6 70
H 4 80 9 71
80 437 306
1. Average flow time = 437 = 54.625days

8
= 54.63days
2. Average number of jobs in the system =437 = 5.4625

80
5.46days
3. Average job lateness = 306 = 38.25days

8
4. Utilisation = 80= 0.183066361

437 0.183066361 x 100%
= 18.31%
The summary of the rules are shown in the table below:
317
Average Average Average job Utilisation%

flow time number of lateness job
(days) jobs in the
system
FCFS 38 3.8 21.5 26.32
SPT 35.38 3.54 18.38 28.27
EDD 36.75 3.68 19.13 27.21
LPT 54.63 5.46 38.25 18.31
As it can be seen from the table, SPT rule is the best of the four
measures and is also the most superior in utilisation of the system. On
the other hand, LPT is the least effective measure of the three,
3.7.1 Sequencing Jobs in Two Machines

Johnson’s rule is used to sequence two or more jobs in two different
machines or work centres in the same order. Managers use Johnson rule
method to minimise total timer for sequencing jobs through two
facilities. In the process, machine total idle time is minimised. The rule
does not use job priorities.
Johnson’s rule involves the following procedures
1) List the jobs and their respective time requirement on a machine.
2) Choose the job with the shortest time. if the shortest time falls
with the first machine, schedule that job first; if the time is at the
second machine, schedule the job last. Select arbitrary any job if
tie activity time occur.
3) Eliminate the scheduled job and its time
4) Repeat steps 2 and 3 to the remaining jobs, working toward the
centre of the sequence until all the jobs are properly scheduled.
Example 4
You arc given the operation times in Hours for 6 jobs in two machines
as follow:
Job Machine 1 Machines 2

Time (Hours) Time (Hours)
P 20 20
Q 16 12
R 33 36
S 8 28
T 25 33
U 48 60
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(a) Determine the sequence that will minimise idle times on the two
machines
(b) The time machine I will complete its jobs
(c) The total completion time for all the jobs
(d) The total idle time
Solution
Using the steps outlined earlier for optimum sequencing of jobs, we

obtained
1st 2nd 3rd 4th 5th 6t7h
S T R U E Q
We then use tabular method to solve the remaining questions
Job 1 II III IV V VI VII

sequen Machi Machi Machi Machi Machi Machi Idle
ce ne 1 ne 1 in ne I ne 2 ne 2 nes 2 Ti
Durati Out Durati In Out me
on on
S 8 0 8 28 8 36 8
T 25 8 33 33 36 69 0
R 33 33 66 36 69 105 0
U 48 66 114 60 114 174 9
P 20 114 134 20 174 194 0
Q 16 134 150 12 194 206 0
(a) Machine 1 will complete his job in150 hours

(b) Total completion time is 206 hours
(c) Total idle time is 17 hours.
Note that machine 2 will wait 8 hours for its first job and also wait 9
hours after completing job R.
In general, idle time can occur either at the beginning of job or at the
end of sequence of jobs. In manufacturing organisations, idle times can
be used to do other jobs like maintenance, dismantling or setting up of
other equipment.
4.0 CONCLUSION
Sequencing problems involves the determination of an optimal order or

sequence of performing a series jobs by number of facilities (that are
arranged in specific order) so as to optimise the total time or cost.
319
Sequencing problems can be classified into two groups. The first group
involves n different jobs to be performed, and these jobs require
processing on some or all of m different types of machines. The order in
which these machines are to be used for processing each job (for
example, each job is to be processed first on machine A, then B, and
thereafter on C i.e., in the order ABC) is given.
5.0 SUMMARY
Scheduling, which occurs in every organisation, refers to establishing

the timing of the use of equipment, facilities and human activities in an
organisation and so it deals with the timing of operations. Scheduling
technique depends on the volume of system output, the nature of
operations and the overall complexity of jobs. The complexity of
operation varies under two situations, namely, Flow Shop system and
Job Shop system. Flow Shop is a high volume system while Job Shop is
a low volume system. Lading refers to assignment of jobs to work
centres. The two main methods that can be used to assign jobs to work
centres are used of Gant chart and Assignment Method. Job sequencing
refers to the order in which jobs should be processed at each work
station.
1. Explain the following concepts (a) Scheduling (b) Flow shop

(c)Job shop(d) Sequencing.
2. Describe two main methods used to assign jobs to work centres.
3. Define the following (a) Average flow time (b) Average number
of jobs in the system (c) Utilisation.
4. State the priority rules for sequencing.

Adebayo, O.A., Ojo, O. & Obamire, J.K. (2006). Operations Research
Denardo, E. V. (2002). The Science of Decision Making: A Problem-

Chand & Company.
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UNIT 2 GAMES THEORY
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Decision Making
3.2 Description of a Game
3.3 Some Important Definitions in Games Theory
3.4 Assumptions Made in Games Theory
3.5 Description and Types of Games
3.5.1 Two-Person Zero-Sum Game
3.5.2 Pure Strategies
3.5.3 Dominating Strategies
3.5.4 Mixed Strategies
3.5.5 Optimal Strategies in 2 X 2 Matrix Game
3.5.6 Equilibrium Pairs
3.5.7 Optimal Strategies in 2 X N Matrix Game
3.5.8 Optimal Strategies for M X 2 Zero-Sum Games
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
The theory of games (or game theory or competitive strategies) is a
mathematical theory that deals with the general features of competitive
situations. This theory is helpful when two or more individuals or
organisations with conflicting objectives try to make decisions. In such a
situation, a decision made by one person affects the decision made by
one or more of the remaining decision makers, and the final outcome
depend depends upon the decision of all the parties (Gupta and Hira,
2012).
According to Adebayo, et al. (2006), game theory is a branch of

mathematical analysis used for decision making in conflict situations. It
is very useful for selecting an optimal strategy or sequence of decision
in the face of an intelligent opponent who has his own strategy. Since
more than one person is usually involved in playing of games, games
theory can be described as the theory of multiplayer decision problem.
The Competitive strategy is a system for describing games and using
mathematical techniques to convert practical problems into games that
need to be solved. Game theory can be described as a distinct and
interdisciplinary approach to the study of human behaviour and such
321
disciplines include mathematics, economics, psychology and other

social and behavioural sciences. If properly understood it is a good law
for studying decision- making in conflict situations and it also provides
mathematical techniques for selecting optimum strategy and most
rational solution by a player in the face of an opponent who already has
his own strategy.
2.0 OBJECTIVES
 define the concept of a game

 state the assumptions of games theory
 describe the two-person zero-sum games
 explain the concept of saddle point solution in a game.
3.0 MAIN CONTENT
3.1 Decision Making
Making decision is an integral and continuous aspect of human life. For

child or adult, man or woman, government official or business
executive, worker or supervisor, participation in the process of decision-
making is a common feature of everyday life. What does this process of
decision making involve? What is a decision? How can we analyze and
systematise the solving of certain types of decision problems? Answers
of all such question are the subject matter of decision theory. Decision-
making involves listing the various alternatives and evaluating them
economically and select best among them. Two important stages in
decision-making are: (i) making the decision and (ii) implementation of
the decision.
3.2 Description of a Game

In our day-to-day life we see many games like Chess, Poker, Football,
Base ball etc. All the games are pleasure-giving games, which have the
character of a competition and are played according to well- structured
rules and regulations and end in a victory of one or the other team or
group or a player. But we refer to the word game in this unit the
competition between two business organisations, which has more
earning competitive situations. In this chapter game is described as:
A competitive situation is called a game if it has the following

characteristics (Assumption made to define a game):
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1. There is finite number of competitors called Players. This is to

say that the game is played by two or more number of business
houses. The game may be for creating new market, or to
increase the market share or to increase the competitiveness of
the product.
2. A play is played when each player chooses one of his courses of
actions. The choices are made simultaneously, so that no player
knows his opponent's choice until he has decided his own course
of action. But in real world, a player makes the choices after the
opponent has announced his course of action.
Algebraic sum of gains and losses: A game in which the gains of one
player are the losses of other player or the algebraic sum of gains of
both players is equal to zero, the game is known as Zero sum game
(ZSG). In a zero sum game the algebraic sum of the gains of all players
after play is bound to be zero. i.e. If gi as the pay of to a player in an-
person game, then the game will be a zero sum game if sum of all gi is
equal to zero.
In game theory, the resulting gains can easily be represented in the

form of a matrix called pay–off matrix or gain matrix as discussed in 3
above. A pay-off matrix is a table, which shows how payments should
be made at end of a play or the game. Zero sum game is also known as
constant sum game. Conversely, if the sum of gains and losses does not
equal to zero, the game is a non zero-sum game. A game where two
persons are playing the game and the sum of gains and losses is equal
to zero, the game is known as Two-Person Zero-Sum Game (TPZSG).
A good example of two- person game is the game of chess. A good
example of n- person game is the situation when several companies are
engaged in an intensive advertising campaign to capture a larger share
of the market (Murthy, 2007)
3.3 Some Important Definitions in Games Theory

Adebayo et al. (2010) provide the following important definitions in
game theory.
 Player: A player is an active participant in a game. The games

can have two persons (two-person game) or more than two
persons (multi person or n-person game)
 Moves: A move could be a decision by player or the result of a
chance event.
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 Game: A game is a sequence of moves that are defined by a set

of rules that governs the players’ moves. The sequence of moves
may be simultaneous.
 Decision maker: A decision-maker is a person or group of
people in a committee who makes the final choice among the
alternatives. A decision-maker is then a player in the game.
 Objective: An objective is what a decision-maker aims at
accomplishing by means of his decision. The decision-maker may
end up with more than one objective.
 Behaviour: This could be any sequence of states in a system. The
behaviours of a system are overt while state trajectories are
covert.
 Decision: The forceful imposition of a constraint on a set of
initially possible alternatives.
 Conflict: A condition in which two or more parties claim
possession of something they cannot all have simultaneously. It
could also be described as a state in which two or more decision-
makers who have different objectives, act in the same system or
share the same resources. Examples are value conflicts, territorial
conflict, conflicts of interests, etc.
 Strategy: it is the predetermined rule by which a player decides
his course of action from a list of courses of action during the
game. To decide a particular strategy, the player needs to know
the other’s strategy.
 Perfect information: A game is said to have perfect information
if at every move in the game all players know the move that have
already been made. This includes any random outcomes.
 Payoffs: This is the numerical return received by a player at the
end of a game and this return is associated with each combination
of action taken by the player. We talk of “expected payoff’ if its
move has a random outcome.
• Zero-sum game: A game is said to be zero sum if the sum of
player’s payoff is zero. The zero value is obtained by treating
losses as negatives and adding up the wins and the losses in the
game. Common examples are baseball and poker games.
3.4 Assumptions Made in Games Theory
The following are assumptions made in games theory.
 Each player (decision-maker) has available to him two or more

clearly specified choices or sequence of choices (plays).
 A game usually leads to a well-defined end-state that terminates
the game. The end state could be a win, a loss or a draw.
 Simultaneous decisions by players are assumed in all games.
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 A specified payoff for each player is associated with an end state

(eg sum of payoffs for zero sum-games is zero in every end-
state).
 Repetition is assumed. A series of repetitive decisions or plays
results in a game
 Each decision-maker (player) has perfect knowledge of the game
and of his opposition, i.e. he knows the rules of the game in
details and also the payoffs of all other players. The cost of
collecting or knowing this information is not considered in game
theory.
 All decision-makers are rational and will therefore always select
among alternatives, the alternative that gives him the greater
payoff.
The last two assumptions are obviously not always practicable in real
life situation. These assumptions have revealed that game theory is a
general theory of rational behaviour involving two or more decision
makers who have a limit number of courses of action of plays, each
leading to a well-defined outcome or ending with games and losses that
can be expressed as payoffs associated with each courses of action and
for each decision maker. The players have perfect knowledge of the
opponent’s moves and are rational in taking decision that optimises their
individual gain.
The various conflicts can be represented by a matrix of payoffs. Game

theory also proposes several solutions to the game. Two of the proposed
solutions are:
1. Minimax or pure strategy: In a minimax strategy each player

selects a strategy that minimises the maximum loss his opponent
can impose upon him.
2. Mixed strategy: A mixed strategy which involves probability
choices.
Lot of experiments have been performed on games with results showing

conditions for (i) cooperation (ii) defection and (iii) persistence of
conflict.
3.5 Description and Types of Games
Games can be described in terms of the number of players and the type
of sum obtained for each set of strategies employed. To this end we have
the following types of games:
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 Two-person zero-sum games. Here two players are involved and

the sum of the pay-offs for every set of strategies by the two
players is zero
 Two-person non zero-sum games. Here two players are involved
and there is one strategy set for which the sum of the payoffs is
not equal to zero.
 Non-constant sum games. The values of payoffs for this game
vary.
 Multi-person non-constant-sum games. Many players are
involved in the game and the payoffs for the players vary.
3.5.1 Two-Person Zero-Sum Game

This game involves two players in which losses are treated as negatives
and wins as positives and the sum of the wins and losses for each set of
strategies in the game is zero. Whatever player one wins player two
loses and vice versa. Each player seeks to select a strategy that will
maximise his payoffs although he does not know what his intelligence
opponent will do. A two-person zero-sum game with one move for each
player is called a rectangular game.
Formally, a two-person zero-sum game can be represented as a triple (A,

B, y) where A [al, a2.. . .amj and B [b 1, b2 bn] and are payoff functions,
eij such that y [ai bj = eij. This game can be represented as an m x n
matrix of payoffs from player 2 to player 1 as follows:
[ [a1, b1]  [aj, b2] ……..  [ai, bn]

 (am, b1] y [am b2] ……..  [am, bn]
The two-person zero-sum games can also be represented as follows:

Suppose the choices or alternatives that are available for player 1 can be
represented as l,2,3...m. While the options for player two can be
represented as 1,2,3.,.n. If player 1 selects alternative i and player 2
selects alternative j then the payoff can be written as a. The table of
payoffs is as follows:
Alternatives for player 1
1 2 3 … n
1 a11 a12 a13 ... a1n
Alternative for player 2 2 a21 a22 a23 ... a2n
3 a31 a32 a33 ... a3n
.
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m am1 am2 am3 … amn

A saddle point solution is obtained if the maximum of the minimum of
rows equals the minimum of the maximum of columns i.e. maximin =
minimax i.e. max(min a9) = min(max a9).
Example 1
Investigate if a saddle point solution exists in this matrix
2 1 -4
-3 6 2
Solution
min
2 1 1 -4
-3 6 2 -3
Max 2 6 3
maxi (minij) = max (-4, -3) = -3

minj (maxj aij) = min (2,6,3) = 2
maxi (minj aij) = minj (maxi aij)
So a saddle point solution does not exist.
Example 2
We shall consider a game called the “matching penny” game which is

usually played by children. In this game two players agree that one will
be even and the other odd. Each one then shows a penny. The pennies
are shown simultaneously and each child shows a head or tail. If both
show the same side “even” wins the penny from odd and if they show
different sides odd wins from even. Draw the matrix of payoffs
Solution
The pay-off table is as follows:
Odd (Player 2)
Head Tail
Head (1,-1) (-1, 1)
Even Tail (-1, 1) (1,-1)
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(Player 1)
The sum in each cell is zero; hence it is a zero sum game. Now A (H, T),
B (H, T) and y (H,H)= y(T,T) 1 while y (H,T)=(T,H)=-1, In matrix
form, if row is for even and column is for odd we have the matrix of
payoffs given to player I by players 2 as
1 -1
-1 1
Solution of two-person zero-sum games
Every two-person zero-sum game has a solution given by the value of

the game together with the optimal strategies employed by each of the
two players in the game. The strategies employed in a two person zero
sum game could be
i. Pure strategies
ii. Dominating strategies
iii. Mixed strategies
Example 3
Find the solutions of this matrix game
- 200 -100 - 40
400 0 300
300 -20 400
Solution
We check if max (min a ij) min (max aij) in order to know whether it has
a saddle point solution. We first find the minimum of rows and
miximum of columns as follows.
- 200 -100 - 40 - 200

400 0 300 0
300 -20 400 -20
Max 400 0 400
So maxi (minjaij) = max (-200, 0, -20) = 0
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min(max aij) = mm (400, 0, 400). So a saddle point solution exists at

(row2, column2)
i.e. (r2 c2) The value of the game is 0.
3.5.2 Dominating Strategies
In a pay-off matrix row dominance of i oven occurs if a i>aj, while

column dominance of I over occurs if b1 b1. If dominance occurs,
column j is not considered and we reduce the matrix by dominance until
we are left with 1 x I matrix whose saddle point, solution can be easily
found. We consider the matrix
3 4 5 3
3 1 2 3
1 3 4 4
Observation shows that every element in column 1 is less than or equal

to that of column 4 and we may remove column 4 the dominating
column. Similarly b3 dominates b2 and we remove the dominating
column b3. The game is reduced to
3 4
3 1
1 3
In row dominance, we eliminate the dominated rows a, (where a.> a,)

while in column dominance we eliminate the dominating column b j
(wherei≤bj) since player 2 desired to concede the least payoff to the row
player and thus minimise his losses.
This procedure is iterated using row dominance. Since a1 dominates a2

and also dominates a3 we remove the dominated rows a2 and a3. This is
due to the fact that player 1, the row player, wishes to maximise his
payoffs. We then have a 1 x 1 reduced game [3 4] which has a saddle
point solution. Generally if a dominated strategy is reduced for a game,
the solution of the reduced game is the solution of the original game.
3.5.3 Mixed Strategies
Suppose the matrix of a game is given by
2 -1 3
A=
-1 3 -2
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Inspection shows that i column dominance cannot be used to obtain a

saddle point solution. If no saddle point solution exists we randomise the
strategies. Random choice of strategies is the main idea behind a mixed
strategy. Generally a mixed strategy for player is defined as a
pro6a6iffty distribution on the set of pure strategies. The minimax
theorem put forward by von Neumann enables one to find the optimal
strategies and value of a game that has no saddle point solution and he
was able to show that every two-person zero-sum game has a solution in
mixed if not in pure strategy.
3.5.4 Optimal Strategies in 2 X 2 Matrix Game

Linear optimisation in linear programming enables one to calculate the
value and optimal actions especially when the elements of A are more
than 2. We now demonstrate how to solve the matching pennies matrix
with a simple method applicable when A has two elements and B is
finite. Here the value is given as maximin ( [a1,b1] + (1-)  (a2 b2),
 ,(a1,b2) + (1-)  (a2, b2) )
The matric is odd
1 11
1 -1
1--1 1
Note here that the maximin criterion cannot hold since max (mm of row)
max (-1, -1)-1 while min (max of columns) = min (1,1) 1 and no saddle
point solution exists.
Let “even” choose randomised action (, 1 - ) i.e  = a (a1) and (1-) =
 (a2). Using formula above, we have max mm ( - 1 + , -  + 1 - )
 + -l (1 - ) = -+ 1 (1 —) using principle of equalising expectations.
This gives 2 -1, 1 -2
4 =2. And  = ½.
Similarly if optimal randomised action by player 2= 1,

then we get 1 + (1-1)-1, ,+1 -1)
1(1) + -1(1- 1) = 1 (-1) + (1 - 1). Simplify both sides of the equation
to get 21-1 = 1 - 211=1/2 and so randomised action by player 1 is ( 1/2,
1
/2) and also ( 1/2, 1/2) by player 1
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The value can be obtained by substituting = 1/2 into 2 - 1 or I - 2 or by

substituting 1 = 1/2 into 21 - I or 1 -21. If we do this we get a value of
zero. So the solution is as follows:
Optimal strategies of (1/2,1/2) for player 1 and (1/2, 1/2) for player 2 and
the value of the game is 0.
It is obvious that there is no optimal mixed strategy that is independent

of the opponent.
Example 4
Two competing telecommunication companies MTN and Airtel both

have objective of maintaining large share in the telecommunication
industry. They wish to take a decision concerning investment in a new
promotional campaign. Airtel wishes to consider the following options:
r1: advertise on the Internet

r2: advertise in all mass media
MTN wishes to consider these alternatives

c1: advertise in newspapers only
c2: run a big promo
If Airtel advertises on the Internet and MTN advertises in newspapers,

MTN will increase its market share by 3% at the expense of V-Mobile.
If MTN runs a big promo and Airtel advertises on the Internet, Airtel
will lose 2% of the market share. If Airtel advertises in mass media only
and MTh advertises in newspapers, Airtel will lose 4%. However, if
Airtel advertises in mass media only and MTN runs a big promo, Airtel
will gain 5% of the market share.
a) Arrange this information on a payoff table

b) What is the best policy that each of the two companies should
take?
Solution
a) The matrix of payoff is as follows
MTN
c1 c2
Airtelr1 3 -2
-4 5
We first cheek if a saddle point solution exists. We use the minimax

criterion to do this. Now for the rows,
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Minimax (3,5) = 3 while for the columns

Maximin = Max (-4, -2) = -2.
Since minimax is not equal to maximin, no saddle point solution exists.

We then randomise and use the mixed strategy.
Let (, 1 - ) be the mixed strategies adopted by Airtel while (8, 1-8) be
the strategies adopted by MTN
Then for Airtel.  (3)+-4(1 - )-2+5(1 -)

3 - 4+4 =-2 +5 - 5
7 - 4 -7 +5.
Solving we obtain
 = 9/14 and 1 - 5/14
The randomised strategies by V-Mobile will be (9/4)
For MTN, 3 -2(1-)=-41i+5(1-1)
3+21 - 2=-4+5-51
51 -2= -91+5. Solving, we obtain 1= 1/2and 1-1=1/2
The value of the game can be found by substituting 9/14 into 78-4 or –
79+5; or V2 into 5 -2 or -9+5. When we do this we obtain the value
1
/2. So Airtel should advertise on the Internet 9/14 of the time and
advertise on the mass media 5/14 of the time. On the other hand, MTN
should advertise in the newspapers only 50% (1/2) of the time and run a
big promo 1/2 of the time. The expected gain of Airtel is 1/2 of the market
share.
3.5.5 Equilibrium Pairs
In mixed strategies, a pair of optimal strategies a* and b* is in

equilibrium if for any other a and b, E(a,b*) <E(a*,b*) <E(a*, b)
A pair of strategies (a*, b*) in a two person zero sum game is in
equilibrium if and only if {(a*, b*), E(a*, b*)} is a solution to the game.
Nash Theory states that any two person game (whether zero-sum or non-
zero-sum) with a finite number of pure strategies has at least one
equilibrium pair. No player can do better by changing strategies, given
that the other players continue to follow the equilibrium strategy.
3.5.6 Optimal Strategies in 2 X N Matrix Game
Suppose we have a matrix game of
5 2 4
3 4 5
Now
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maxi (minjaij)= max(2,3)=3 while = min(max) 4.
The two players now have to look for ways of assuring themselves of
the largest possible shares of the difference
maxi (minj aij) - mini (maxj aij) ≥ 0
They will therefore need to select strategies randomly to confuse each

other. When a player chooses any two or more strategies at random
according to specific probabilities this device is known as a mixed
strategy.
There are various method employed in solving 2x2, 2xn, mx2 and m x n
game matrix and hence finding optimal strategies as we shall discuss in
this and the next few sections. Suppose the matrix of game is m x n. If
player one is allowed to select strategy I. with probability pi and player
two strategy II with probability q. then we can say player 1 uses strategy
P=(P1,P2…Pm)
While player 2 selects strategy

q=(q1,q2,...qn).
The expected payoffs for player 1 by player two can be explained in

m n
E  * 
i 1 j 1
pi (pi)q
In this game the row player has strategy q = (q1, q2.. .q). The max-mm
reasoning is used to find the optimal strategies to be employed by both
player. We demonstrate with a practical example:
Example 5
Let the matrix game be
5 2 4
3 4 5
Solution
Inspection shows that this does not have a saddle point solution. The
optimal strategy p” for the row player is the one that will give him the
maximum pay-off. Since p = (p p2). Let the expected value of the row
be represented by E1player. If player 2 plays column 1 is =
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5p+3(l .p) 2p+3p
If player 2 plays column 2 we have
E2(p) = 2P+ 4 (l-P) = -2P+4 and if player 2 plays column 3 we have

E3(p) 4(p)+5(1-p) =p+5.So, E1(p) = 2p +3; E2(p) = 2p+4 and E3(p) = p+5
are the payoffs for player 1 against the three part strategies of player 2,
we give arbitrary values for p to check which of these strategies by
player2 will yield the largest payoff for player 1.
Let p 3/4 ……. E1=-2x3/4+3=41/2

E2(p) = 2x¼+421/2 E2(p) =-3/4+5=41/4.
So the two largest are E1(p), E3(p) and we equate them to get
2p = 3 = p+5
so 3p= 2, p=2/3
Ej(p) = (2 x 2/3) + 3 41/3

E = -2(p) -2 x 22/3 + 4 = 22/3 and E3(p) = 2/3 + 5 = 741/3
So(2/3, 1/3) is optimal for player 1. To get the optimal strategy for player
2, we observe that it is advisable for player 2 to play column 2 in other
to ensure that the payoff to row player is minimal. So the game is
reduced to
5 4
3 5
Let (q, l-q) be the strategy for player 2 in a required game.
So 5q + 4 (1-q) 3q +5(l-q)
5q+4-4q=3q+5-5q
q +45-2q
3q=l q=1/3
So it is optimal for player 2 to play mixed strategy with probability

q(1/3,O,2/3).If we substitute q = 1/3 into q+4 or 5-2q, we obtain 41/3 as
before. This is the value of the game.
4.0 CONCLUSION
The above analysis shows that number system is the foundation of any
mathematical analysis. It cut across all discipline, it is used daily by
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every individual in daily life be it in the home, office, or business. It is

very essential to know the basics of numbers as a means of evaluation of
any transaction; this is because numbers help us to measure quantity,
price and other variables of life.
5.0 SUMMARY
For child or adult, man or woman, government official or business

executive, worker or supervisor, participation in the process of decision-
making is a common feature of everyday life. A competitive situation is
called a game if it has the following characteristics- there is finite
number of competitors called Players. A list of finite or infinite number
of possible courses of action is available to each player; a list of finite or
infinite number of possible courses of action is available to each player;
a play is played when each player chooses one of his courses of actions;
all players act rationally and intelligently. Each player is interested in
maximising his gains or minimising his losses; each player makes
individual decisions without direct communication between the players;
it is assumed that each player knows complete relevant information.
1. What do you understand by a game?

2. Write short notes on the following:
• Player
• Moves
• Game
• Decision maker
• Objective
• Behaviour.
3. Find the optimal strategies for the matrix game
-2 2
X= 3 -2
-2 3
Adebayo, O.A., Ojo, O. & Obamire, J. K. (2006). Operations Research

Murthy, R. P. (2007). Operations Research. (2nd ed.). New Delhi: New

Age International (P) Limited Publishers.
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UNIT 3 INVENTORY CONTROL
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main Content
3.1 Definition of Inventory and Inventory Control
3.2 Basic Concepts in Inventory Planning
3.3 Necessity for Maintaining Inventory
3.4 Causes of Poor Inventory Control Systems
3.5 Classification of Inventories
3.6 Costs Associated with Inventory
3.7 Purpose of Maintaining Inventory or Objective of
Inventory cost Control
3.8 Other Factors to be considered in Inventory Control
3.9 Inventory Control Problem
3.10 The Classical EOQ Model (Demand Rate Uniform,
Replenishment Rate Infinite)
4.0 Conclusion
5.0 Summary
1.0 INTRODUCTION
One of the basic functions of management is to employ capital

efficiently so as to yield the maximum returns. This can be done in
either of two ways or by both, i.e. (a) By maximising the margin of
profit; or (b) By maximising the production with a given amount of
capital, i.e. to increase the productivity of capital. This means that the
management should try to make its capital work hard as possible.
However, this is all too often neglected and much time and ingenuity are
devoted to make only labour work harder. In the process, the capital
turnover and hence the productivity of capital is often totally neglected.
Inventory management or inventory control is one of the techniques of
materials management which helps the management to improve the
productivity of capital by reducing the material costs, preventing the
large amounts of capital being locked up for long periods, and
improving the capital-turnover ratio. The techniques of inventory control
were evolved and developed during and after the Second World War and
have helped the more industrially developed countries to make
spectacular progress in improving their productivity.
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2.0 OBJECTIVES
 define inventory control

 explain the basic concepts in inventory control
 identify the issues that necessitate maintaining inventory
 identify causes of poor inventory control systems
 discuss the various classifications of inventories.
3.0 MAIN CONTENT
3.1 Definition of Inventory and Inventory Control
The word inventory means a physical stock of material or goods or

commodities or other economic resources that are stored or reserved or
kept in stock or in hand for smooth and efficient running of future affairs
of an organisation at the minimum cost of funds or capital blocked in the
form of materials or goods (inventories). The function of directing the
movement of goods through the entire manufacturing cycle from the
requisitioning of raw materials to the inventory of finished goods in an
orderly manner to meet the objectives of maximum customer service
with minimum investment and efficient (low cost) plant operation is
termed as inventory control (Murthy, 2007).
Gupta and Hira (2012) defined an inventory as consisting of usable but

idle resources such as men, machines, materials, or money. When the
resources involved are material, the inventory is called stock. An
inventory problem is said to exist if either the resources are subject to
control or if there is at least one such cost that decrease as inventory
increases. The objective is to minimise total (actual or expected) cost.
However, in situations where inventory affects demand, the objective
may also be to minimise profit.
3.2 Basic Concepts in Inventory Planning
For many organisations, inventories represent a major capital cost, in

some cases the dominant cost, so that the management of this capital
becomes of the utmost importance. When considering the inventories,
we need to distinguish different classes of items that are kept in stock. In
practice, it turns out that about 10% of the items that are kept in stock
usually account for something in the order of 60% of the value of all
inventories. Such items are therefore of prime concern to the company,
and the stock of these items will need close attention. These most
important items are usually referred to as “A items” in the ABC
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classification system developed by the General Electric Company in the

1950s. The items next in line are the B items, which are of intermediate
importance. They typically represent 30% of the items, corresponding to
about 30% of the total inventory value. Clearly, B items do require some
attention, but obviously less than A items. Finally, the bottom, 60% of
the items is the C items. They usually represent maybe 10% of the
monetary value of the total inventory. The control of C items in
inventory planning is less crucial than that of the A and B items. The
models in this chapter are mostly aimed at A items.
3.3 Necessity for Maintaining Inventory
Though inventory of materials is an idle resource (since materials lie

idle and are not to be used immediately), almost every organisation.
Without it, no business activity can be performed, whether it is service
organisation like a hospital or a bank or it a manufacturing or trading
organisation. Gupta and Hira (2012) present the following reasons for
maintain inventories in organisations.
1. It helps in the smooth and efficient of an enterprise.

2. It helps in providing service to the customer at short notice.
3. In the absence of inventory, the enterprise may have to pay high
prices due to piecemeal purchasing.
4. It reduces product cost since there is an added advantage of
batching and long, uninterrupted production runs.
5. It acts as a buffer stock when raw materials are received late and
shop rejection is too many.
3.4 Causes of Poor Inventory Control Systems
a. Overbuying without regard to the forecast or proper estimate of

demand to take advantages of favourable market.
b. Overproduction or production of goods much before the customer
requires them
c. Overstocking may also result from the desire to provide better
service to the custom.
d. Cancellation of orders and minimum quantity stipulations by the
suppliers may also give rise to large inventories (Gupta and Hira,
2012).
3.5 Classification of Inventories
Inventories may be classified as those which play direct role during

manufacture or which can be identified on the product and the second
one are those which are required for manufacturing but not as a part of
production or cannot be identified on the product. The first type is
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labelled as direct inventories and the second are labelled as indirect

inventories. Further classification of direct and indirect inventories is as
follows:
A. Direct inventories
(i) Raw material inventories or Production Inventories: The

inventory of raw materials is the materials used in the
manufacture of product and can be identified on the product. In
inventory control manager can concentrate on the
(a) Bulk purchase of materials to save the investment
(b) To meet the changes in production rate
(c) To plan for buffer stock or safety stock to serve against the
delay in delivery of inventory against orders placed and
also against seasonal fluctuations. Direct inventories
include the following:
 Production inventories - items such as raw
materials, components and subassemblies used to
produce the final products.
 Work-in-progress inventory - items in semi-
finished form or products at different stages of
production.
 Miscellaneous inventory - all other items such as
scrap, obsolete and unsaleable products, stationary
and other items used in office, factory and sales
department, etc.
(ii) Work-in-process inventories or in process inventories: These
inventories are of semi-finished type, which are accumulated
between operations or facilities. As far as possible, holding of
materials between operations should be minimised if not avoided.
This is because; as we process the materials the economic value

(added labour cost) and use values are added to the raw material,
which is drawn from stores. Hence if we hold these semi-finished
material for a long time the inventory carrying cost goes on
increasing, which is not advisable in inventory control. These
inventories serve the following purposes:
(a) Provide economical lot production

(b) Cater to the variety of products
(c) Replacement of wastages
(d) To maintain uniform production even if sales varies.
(iii) Finished goods inventories: After finishing the production

process and packing, the finished products are stocked in stock
339
room. These are known as finished goods inventory. These are

maintained to:
(a) To ensure the adequate supply to the customers

(b) To allow stabilisation of the production level, and
(c) To help sales promotion programme.
(iv) MRO inventory or spare parts inventories: Maintenance,

repair, and operation items such as spare parts and consumable
stores that do not go into final products but are consumed during
the production process. Any product sold to the customer, will be
subjected to wear and tear due to usage and the customer has to
replace the worn-out part. Hence the manufacturers always
calculate the life of the various components of his product and try
to supply the spare components to the market to help after sales
service. The use of such spare parts inventory is:
(a) To provide after sales service to the customer
(b) To utilise the product fully and economically by the customer.
(iv) Scrap or waste inventory or miscellaneous inventory: While
processing the materials, we may come across certain wastages
and certain bad components (scrap), which are of no use. These
may be used by some other industries as raw material. These are
to be collected and kept in a place away from main stores and are
disposed periodically by auctioning.
B. Indirect inventories
Inventories or materials like oils, grease, lubricants, cotton waste and

such other materials are required during the production process. But we
cannot identify them on the product. These are known as indirect
inventories. In our discussion of inventories, in this chapter, we only
discuss about the direct inventories. Inventories may also be classified
depending on their nature of use. They are:
(i) Fluctuation inventories: These inventories are carried out to

safeguard the fluctuation in demand, non-delivery of material in
time due to extended lead-time. These are sometimes called as
Safety stock or reserves. In real world inventory situations, the
material may not be received in time as expected due to trouble in
transport system or some times, the demand for a certain material
may increase unexpectedly. To safeguard such situations, safety
stocks are maintained. The level of this stock will fluctuate
depending on the demand and lead-time etc.
(ii) Anticipation inventory: When there is an indication that the

demand for company’s product is going to be increased in the
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ECO 314
coming season, a large stock of material is stored in anticipation. Some

times in anticipation of raising prices, the material is stocked. Such
inventories, which are stocked in anticipation of raising demand or
raising rises, are known as anticipation inventories.
(iii) Lot size inventory or cycle inventories: This situation happens in

batch production system. In this system products are produced in
economic batch quantities. It sometime happens that the materials
are procured in quantities larger than the economic quantities to
meet the fluctuation in demand. In such cases the excess
materials are stocked, which are known as lot size or cycle
inventories.
3.6 Costs Associated with Inventory
While maintaining the inventories, we will come across certain costs

associated with inventory, which are known as economic parameters.
Most important of them are discussed below:
A. Inventory Carrying Charges, or Inventory Carrying Cost or

Holding Cost or Storage Cost (C1) or (i%)
This cost arises due to holding of stock of material in stock. This cost
includes the cost of maintaining the inventory and is proportional to the
quantity of material held in stock and the time for which the material is
maintained in stock. The components of inventory carrying cost are:
i. Rent for the building in which the stock is maintained if it is a

rented building. In case it is own building, depreciation cost of
the building is taken into consideration. Sometimes for own
buildings, the nominal rent is calculated depending on the local
rate of rent and is taken into consideration.
ii. It includes the cost of equipment if any and cost of racks and any
special facilities used in the stores.
iii. Interest on the money locked in the form of inventory or on the
money invested in purchasing the inventory.
iv. The cost of stationery used for maintaining the inventory.
v. The wages of personnel working in the stores.
vi. Cost of depreciation, insurance.
B. Shortage cost or Stock-out-cost- (C2)
Sometimes it so happens that the material may not be available when

needed or when the demand arises. In such cases the production has to
be stopped until the procurement of the material, which may lead to miss
the delivery dates or delayed production. When the organisation could
341
not meet the delivery promises, it has to pay penalty to the customer. If
the situation of stock out will occur very often, then the customer may
not come to the organisation to place orders that is the organisation is
losing the customers In other words, the organisation is losing the
goodwill of the customers The cost of good will cannot be estimated. In
some cases it will be very heavy to such extent that the organisation has
to forego its business. Here to avoid the stock out situation, if the
organisation stocks more material, inventory carrying cost increases and
to take care of inventory cost, if the organisation purchases just
sufficient or less quantity, then the stock out position may arise. Hence
the inventory manager must have sound knowledge of various factors
that are related to inventory carrying cost and stock out cost and
estimate the quantity of material to be purchased or else he must have
effective strategies to face grave situations. The cost is generally
represented as so many naira and is represented by C2.
C. Set up cost or ordering cost or replenishment cost (C3)
For purchase models, the cost is termed as ordering cost or procurement

cost and for manufacturing cost it is termed as set up cost and is
represented by C3.
(i) Set up cost: The term set up cost is used for production or
manufacturing models. Whenever a job is to be produced, the
machine is to set to produce the job. That is the tool is to be set
and the material is to be fixed in the jobholder. This consumes
some time. During this time the machine will be idle and the
labour is working. The cost of idle machine and cost of labour
charges are to be added to the cost of production. If we produce
only one job in one set up, the entire set up cost is to be charged
to one job only. In case we produce ‘n’ number of jobs in one set
up, the set up cost is shared by ‘n’ jobs. In case of certain
machines like N.C machines, or Jig boarding machine, the set up
time may be 15 to 20 hours. The idle cost of the machine and
labour charges may work out to few thousands of naira. Once the
machine set up is over, the entire production can be completed in
few hours if we produce more number of products in one set up
the set up cost is allocated to all the jobs equally. This reduces the
production cost of the product. For example let us assume that the
set up cost is N 1000/-. If we produce 10 jobs in one set up, each
job is charged with N 100/- towards the set up cost. In case, if we
produce 100 jobs, the set up cost per job will be N10/-. If we
produce, 1000 jobs in one set up, the set up cost per job will be
Re. 1/- only. This can be shown by means of a graph as shown in
figure 15.1.
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(ii) Ordering cost or replenishment cost: The term Ordering cost or

Replenishment cost is used in purchase models. Whenever any
material is to be procured by an organisation, it has to place an
order with the supplier. The cost of stationary used for placing
the order, the cost of salary of officials involved in preparing the
order and the postal expenses and after placing the order enquiry
charges all put together, is known as ordering cost. In Small Scale
Units, this may be around N 25/- to N 30/- per order. In Larger
Scale Industries, it will be around N 150 to N 200 /- per order. In
Government organisations, it may work out to N 500/- and above
per order. If the organisation purchases more items per order, all
the items share the ordering cost. Hence the materials manager
must decide how much to purchase per order so as to keep the
ordering cost per item at minimum. One point we have to
remember here, to reduce the ordering cost per item, if we
purchase more items, the inventory carrying cost increases. To
keep inventory carrying cost under control, if we purchase less
quantity, the ordering cost increase. Hence one must be careful
enough to decide how much to purchase? The nature of ordering
cost can also be shown by a graph as shown in figure 8.1. If the
ordering cost is C3 per order (can be equally applied to set up
cost) and the quantity ordered / produced is ‘q’ then the ordering
cost or set up cost per unit will be C3/q is inversely proportional
to the quantity ordered, i.e. decreased with the increase
in ‘q’ as shown in the graph below.
C0
(q/2)C1
Ordering cost
Order quantity C3/q
Fig. 3.1: Ordering Cost
Source: Murthy, P. R. (2007). Operations Research (2nd ed.). New

Delhi: New Age International Publishers
343
(iii) Procurement cost: These costs are very much similar to the
ordering cost/set up cost. This cost includes cost of inspection of
materials, cost of returning the low quality materials,
transportation cost from the source of material to the
purchaser‘s site. This is proportional to the quantity of materials
involved. This cost is generally represented by ‘b’ and is
expressed as so many naira per unit of material. For convenience,
it always taken as a part of ordering cost and many a time it is
included in the ordering cost/set up cost.
D. Purchase price or direct production cost
This is the actual purchase price of the material or the direct production
cost of the product. It is represented by ‘p’. i.e. the cost of material is N
‘p’ per unit. This may be constant or variable. Say for example the cost
of an item is N 10/- item if we purchase 1 to 10 units. In case we
purchase more than 10 units, 10 percent discount is allowed. i.e. the cost
of item will be N9/- per unit. The purchase manager can take advantage
of discount allowed by purchasing more. But this will increase the
inventory carrying charges. As we are purchasing more per order,
ordering cost is reduced and because of discount, material cost is
reduced. Materials manager has to take into consideration these cost –
quantity relationship and decide how much to purchase to keep the
inventory cost at low level.
3.7 Purpose of Maintaining Inventory or Objective of

Inventory Cost Control
The purpose of maintaining the inventory or controlling the cost of

inventory is to use the available capital optimally (efficiently) so that
inventory cost per item of material will be as small as possible. For this
the materials manager has to strike a balance between the interrelated
inventory costs. In the process of balancing the interrelated costs i.e.
Inventory carrying cost, ordering cost or set up cost, stock out cost and
the actual material cost. Hence we can say that the objective of
controlling the inventories is to enable the materials manager to place
and order at right time with the right source at right price to purchase
right quantity. The benefits derived from efficient inventory control are:
i. It ensures adequate supply of goods to the customer or adequate

of quantity of raw materials to the manufacturing department so
that the situation of stock out may be reduced or avoided.
ii. By proper inventory cost control, the available capital may be
used efficiently or optimally, by avoiding the unnecessary
expenditure on inventory.
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ECO 314
iii. In production models, while estimating the cost of the product the
material cost is to be added. The manager has to decide whether
he has to take the actual purchase price of the material or the
current market price of the material. The current market price
may be less than or greater than the purchase price of the material
which has been purchased some period back. Proper inventory
control reduces such risks.
iv. It ensures smooth and efficient running of an organisation and
provides safety against late delivery times to the customer due to
uncontrollable factors
v. A careful materials manager may take advantage of price
discounts and make bulk purchase at the same time he can keep
the inventory cost at minimum.
3.8 Other Factors to be Considered in Inventory Control
There are many factors, which have influence on the inventory, which
draws the attention of an inventory manager, they are:
(i) Demand
The demand for raw material or components for production or demand

of goods to satisfy the needs of the customer, can be assessed from the
past consumption/supply pattern of material or goods. We find that the
demand may be deterministic in nature i.e., we can specify that the
demand for the item is so many units for example, ‘q’ units, per unit of
time. Also the demand may be static, i.e. it means constant for each time
period (uniform over equal period of times).
The supply of inventory to the stock may deterministic or probabilistic

(stochastic) in nature and many a times it is uncontrollable, because, the
rate of production depends on the production, which is once again
depends on so many factors which are uncontrollable / controllable
factors Similarly supply of inventory depends on the type of supplier,
mode of supply, mode of transformation etc.
(iii) Lead time or delivery lags or procurement time
Lead-time is the time between placing the order and receipt of material
to the stock. In production models, it is the time between the decisions
made to take up the order and starting of production. This time in
purchase models depends on many uncontrollable factors like transport
mode, transport route, agitations, etc. It may vary from few days to few
months depending on the nature of delay.
345
(iv) Type of goods
The inventory items may be discrete or continuous. Sometimes the

discrete items are to be considered as continuous items for the sake of
convenience.
(v) Time horizon

The time period for which the optimal policy is to be formulated or the
inventory cost is to be optimised is generally termed as the Inventory
planning period of Time horizon. This time is represented on X - axis
while drawing graphs. This time may be finite or infinite.
In any inventory model, we try to seek answers for the following

questions:
(a) When should the inventory be purchased for replenishment?

For example, the inventory should be replenished after a period ‘t’ or
when the level of the inventory is qo.
(b) How much quantity must be purchased or ordered or

produced at the time of replenishment so as to minimise the
inventory costs?
For example, the inventory must be purchased with the supplier who is
supplying at a cost of Np/- per unit. In addition to the above depending
on the data available, we can also decide from which source we have to
purchase and what price we have to purchase? But in general time and
quantity are the two variables, we can control separately or in
combination.
3.9 Inventory Control Problem

The inventory control problem consists of the determination of three
basic factors:
1. When to order (produce or purchase)?

2. How much to order?
3. How much safety stock to be kept?
When to order: This is related to lead time (also called delivery lag) of
an item. Lead time may interval between the placement of an order for
an item and its receipt in stock. It may be replenishment order on an
outside or within the firm. There should be enough stock for each item
so that customers’ orders can be reasonably met from this stock until
replenishment.
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ECO 314
How much to order: Each order has an associated ordering cost or cost
of acquisition. To keep this cost low, the number of orders has to be as
reduced as possible. To achieve limited number of orders, the order size
has to be increased. But large order size would imply high inventory
cost.
How much should the safety stock be? This is important to avoid
overstocking while ensuring that no stock out takes place.
The inventory control policy of an organisation depends upon the

demand characteristics. The demand for an item may be dependent or
independent. For instance, the demand for the different models of
television sets manufactured by a company does not depend upon the
demand for any other item, while the demand for its components will
depend upon the demand for the television sets.
3.10 The Classical EOQ Model (Demand Rate Uniform,

Replenishment Rate Infinite)
According Gupta and Hira 2012, the EOQ model is one of the simplest
inventory models we have. A store keeper has an order to supply goods
to customers at a uniform rate R per unit. Hence, the demand is fixed
and known. Not shortages are allowed, consequently, the cost of
shortage C2is infinity. The store keeper places an order with a
manufacturer every t time units, where t is fixed; and the ordering cost
per order is C3. Replenishment time is negligible, that is, replenishment
rate is infinite so that the replacement is instantaneous (lead time is
zero). The holding cost is assumed to be proportional to the amount of
inventory as well as the time inventory is held. Hence the time of
holding inventory I for time T is C1IT, where C1, C2 and C3 are assumed
to be constants. The store keeper’s problem is therefore to the following:
i. How frequently should he place the order?

ii. How many units should he order in each order placed?
This model is represented schematically below.
If orders are placed at intervals t, a quantity q = Rt must be ordered in

each order. Since the stock in small time dt is Rtdt the stock in time
period t will be
347
Inventory Graph for the Basic Inventory Control Model
t t t
T
Fig. 3.2: Inventory Situation for EOQ Model
 Cost of holding inventory during time t = 1 C1Rt2.

2
Order cost to place an order = C3.
 Total cost during time t = 1 C1Rt2 + C3.

2
Average total cost per unit, C(t) = 1 C1Rt + C3………….......…. (1)
2 t
C will be minimum if dC(t) = 0 and d2C(t) is positive.

dt dt2
Differentiating equation (1) w.r.t ‘t’
d2C(t)=1 C1R – C3 = 0, which gives t = 2C3 .

dt 2 t2 C1R
Differentiating w.r.t.‘t’
d2C(t) = 2C3 which is positive for value of t given by the above

equation.
dt2 t3 ,
Thus C(t) is minimum for optimal time interval,
to = 2C3
C1 R ………………………..............…. (2)
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ECO 314
Optimum quantity q0to be ordered during each order,
q0 = Rt0= 2C3R …………………............… (3)

C1
This is known as the optimal lot size (or economic order quantity)
formula by r. H. Wilson. It is also called Wilson’s or square root
formula or Harris lot size formula.
Any other order quantity will result in a higher cost.

The resulting minimum average cost per unit time,
C0(q) = 1 C1R.2C3+ C3 C1R

2 C1R 2C3
= 1 C1C3R + 1 C1C3R = 2C1C3R ……............... (4)

√2 √2
Also, the total minimum cost per unit time, including the cost of the
item
= √2C1C3R + CR, …………………………………….. (5)
Where C is cost/unit of the item

Equation (1) can be written in an alternative form by replacing t by q/R
as
The average inventory is and it is time dependent.
It may be realised that some of the assumptions made are not satisfied in
actual practice. For instance, in real life, customer demand is usually not
known exactly and replenishment time is usually not negligible.
Corollary 1. In the above model, if the order cost is C3 + bq instead of

being fixed, where b is the cost of order per unit of item, we can prove
that there no change in the optimum order quantity due to changed order
cost.
Proof. The average cost per unit of time, .

From equation (5),
349
is positive
That is,
, which is necessarily positive for above value of q.
, which is the same as equation (3)
Hence, there is no change in the optimum order quantity as a result of

the change in the cost of order.
Corollary 2. In the model in figure discussed above, the lead time has
been assumed to be zero. However, most real life problems have
positive lead time L from the order for the item was placed until it is
actually delivered. The ordering policy of the above model therefore,
must satisfy the reorder point.
If L is the lead time in days, and R is the inventory consumption rate in

units per day, the total inventory requirements during the lead time =
LR. Thus we should place an order q as soon as the stock level becomes
LR. This is called reorder point p = LR.
In practice, this is equivalent to continuously observing the level of

inventory until the reorder point is obtained. That is why economic lot
size model is also called continuous review model.
If the buffer stock B is to maintained, reorder level will be
P = B + LR ………………………………....………........................ (6)
Furthermore, if D days are required for reviewing the system,
……………….. .......................(7)
Assumptions in the EOQ formula
The following assumptions have been made while deriving the EOQ
formula:
1. Demand is known and uniform (constant)

2. Shortages are not permitted; as soon as the stock level becomes
zero, it is instantaneously replenished.
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ECO 314
3. Replenishment stock is instantaneous or replenishment rate is

infinite.
4. Lead time is zero. The moment the order is placed, the quantity
ordered is automatically received.
5. Inventory carrying cost and ordering cost per order remain
constant over time. The former has a linear relationship with the
quantity ordered and the latter with the number of order.
6. Cost of the item remains constant over time. There are no price-
breaks or quantity discounts.
7. The item is purchased and replenished in lots or batches.
8. The inventory system relates to a single item.
Limitations of the EOQ model
The EOQ formula has a number of limitations. It has been highly

controversial since a number of objections have been raised regarding its
validity. Some of these objections are:
1. In practice, the demand neither known with certainty nor it is

uniform. If the fluctuations are mild, the formula can be
applicable but for large fluctuations, it loses its validity. Dynamic
EOQ models, instead, may have to be applied.
2. The ordering cost is difficult to measure. Also it may not be
linearly related to the number of orders as assumed in the
derivation of the model. The inventory carrying rate is still more
difficult to measure and even to define precisely.
3. It is difficult to predict the demand. Present demand may be quite
different from the past history. Hardly any prediction is possible
for a new product to be introduced in the market.
4. The EOQ model assumes instantaneous replenishment of the
entire quantity ordered. The practice, the total quantity may be
supplied in parts. EOQ model is not applicable in such a
situation.
5. Lead time may not be zero unless the supplier is next-door and
has sufficient stock of the item, which is rarely so.
6. Price variations, quantity discounts and shortages may further
invalidate the use of the EOQ formula.
However, the flatness of the total cost curve around the minimum is an
answer to the many objections. Even if we deviate from EOQ within
reasonable limits, there is no substantial change in cost. For example, if
because of inaccuracies and errors, we have selected an order quantity
20%more (or less) than q0the increase in total cost will be less than 20%.
351
Example 1
A stock keeper has to supply 12000 units of a product per year to his
customer. The demand is fixed and known and the shortage cost is
assumed to be infinite. The inventory holding cost is N 0.20k per unit
per month, and the ordering cost per order is N350. Determine
i. The optimum lot size q0

ii. Optimum scheduling period t0
iii. Minimum total variable yearly cost.
Solution
Supply rate R=
C1 = N 0.20K per unit per month, C3 = N350 per order.
i. q0 =
ii.
iii.
Example 2
A particular item has a demand of 9000 unit/year. The cost of a single

procurement is N100 and the holding cost per unit is N 2.40k per year.
The replacement is instantaneous and no shortages are allowed.
Determine
i. The economic lot size

ii. The number of orders per year
iii. The time between orders
iv. The total cost per if the cost of one unit is N1.
Solution
R = 9000 units/year
C3 = N100/procurement, C1 = N2.40/unit/year
i.
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ECO 314
ii.
iii.
iv.
= 9000 + 2080 = N11080/year
Example 3
A stockist has to supply 400 units of a product every Monday to his

customer. He gets the product at N 50 per unit from the manufacturer.
The cost of ordering and transportation from the manufacturer is N75
per order. The cost of carrying the inventory is 7.5% per year of the cost
of the product. Find
i. The economic lot size

ii. The total optimal cost (including the capital cost)
iii. The total weekly profit if the item is sold for N55 per unit
Solution
R = 400 units/week
C3 = N75per order
C1 = 7.5% per year of the cost of the product
i.
ii.
353
iii.
4.0 CONCLUSION
This unit has looked at inventory control as an essential aspect of
managerial function. This is the life wire of any firm aspiring for
growth, survival, and continuity.
The sum of an inventory control system is to minimise costs and

establish:
a. the optimum amount of stock to be ordered
b. the period between orders.
In a given business organisation, an inventory is defined as the total

stocks of various kinds including: basic raw materials; partly finished
goods and materials; sub-assemblies; office and workshop supplies and
finished goods.
An inventory must be carried by a firm for various reasons.

1. Anticipating normal demand.
2. Taking advantage of bulk purchase discounts.
3. Meeting emergency shortages.
4. As a natural part of the production process.
5. Absorbing wastages and unpredictable fluctuations.
5.0 SUMMARY
The discussion in this unit can be summarised as follow:
Just like any other activity in a business set up, the costs associated with
inventories include:
 ordering costs
 holding costs and
 stock out costs.
Two basic inventory systems were identified, including:
 The re-order level system and

 The periodic review system.
Two basic inventory control models are currently in use. These include:
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ECO 314
 basic model
 adapted basic model.
1. What do you understand by the term inventory control?

2. Identify and discuss the different classifications of inventories.
3. Give six limitations of the EOQ model.
4. Outline the assumptions of the EOQ formula.

Eiselt, H.A. & Sandblom, C.L. (2012). Operations Research: A Model
Based Approach. (2nd ed.). New York: Springer Heidelberg.
Chand & Company.
355

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ECO 314

NATIONAL OPEN UNIVERSITY OF NIGERIA

SCHOOL OF ARTS AND SOCIAL SCIENCES

COURSE CODE: ECO 314

COURSE TITLE: OPERATIONS RESEARCH

Unit 1 Mathematical Programming (Linear Programming).. 1

Unit 1 Elements of Decision Analysis.................................. 72

Module 3 .................................................................................... 114

Unit 1 Operations Research (OR).......................................... 114

Module 4 .................................................................................... 145

Unit 1 Sequencing................................................................. 145

Course Team Mr. S.J. Babatunde (Course Developer/Writer) -

NATIONAL OPEN UNIVERSITY OF NIGERIA

National Open University of Nigeria

All Rights Reserved

ECO 314: Operations Research is a three-credit course for students

After successfully completing the course you will surely be in a better

WHAT YOU WILL LEARN IN THIS COURSE

The course is made up of 15 units, covering areas such as:

 Mathematical Programming (Linear Programming)

In all, this course will introduce you to some fundamental aspects of

The aims of the course will be achieved by your ability to:

 identify and explain elements of decision analysis

At the end of this course, you should be able to:

 identify and explain elements of decision analysis

 trace the history and evolution of operation research

WORKING THROUGH THE COURSE

The major components of the course are:

There are four modules of 15 units in this course:

Unit 1 Mathematical Programming (Linear Programming)

Unit 1 Elements of Decision Analysis

Unit 1 Operations Research (OR)

REFERENCES AND FURTHER READING

The presentation schedule included in your course materials gives you

Your assessment will be based on tutor-marked assignments (TMAs)

TUTOR-MARKED ASSIGNMENTS (TMAs)

FINAL EXAMINATION AND GRADING

COURSE MARKING SCHEME

The table below indicates the total marks (100%) allocation.

Units Title of Work Week’s Assessment

HOW TO GET THE MOST FROM THIS COURSE

The following is a practical strategy for working through the course. If

1. Read this Course Guide thoroughly.

TUTORS AND TUTORIALS

There are some hours of tutorials (2-hour sessions) provided in support

Do not hesitate to contact your tutor by telephone, e-mail, or discussion

On successful completion of the course, you would have developed

Unit 1 Mathematical Programming (Linear Programming)

UNIT 1 MATHEMATICAL PROGRAMMING (LINEAR

Linear programming deals with the optimisation (maximisation or

and additivity (e.g., amount of a resource required for a certain number

At the end of this unit, you should be able to:

 explain the requirements for linear programming

3.0 MAIN CONTENT

3.1 Requirements for a Linear Programming Problem

All organisations, big or small, have at their disposal, men, machines,

Generally speaking, linear programming can be used for optimisation

1. There must be a well-defined objective function (profit, cost or

2. There must be constraints on the amount or extent of attainment