What is Operation Research?

How OR is useful in decision making in

business activities? What are different types of models used in OR?
Explain in brief

Briefly discuss the history of Operations Research. Also discuss the

Nature and characteristics of OR.

Definition:

"Operations research is the application of scientific methods to arrive at the optimal solutions
to the problems."

Operational Research (OR) is the use of advanced analytical techniques to improve decision
making. It is sometimes known as operations research, management science or industrial
engineering. People with skills in OR hold jobs in decision support, business analytics,
marketing analysis and logistics planning as well as jobs with OR in the title.

Meaning of Operations Research

Operations research OR means to apply scientific and mathematical methods for decision
making and problem solving.

OR does not provide decisions else it provides quantitative data to the managers. The
managers use this data for making decisions.

OR tries to find better solutions to different problems. Hence, it is used to solve complex
management problems.

OR helps to take decisions about operations and production.

OR was first used during the Second World War by England to solve their complex war
problems. England made OR teams. These teams included expert mathematicians,
statisticians, scientists, engineers, etc. These OR teams were very successful in solving
England's war problems. Therefore, United States of America (USA) also started using OR to
solve their war problems. After the war, soon industries and businesses also started using OR
to solve their complex management problems.

Characteristics or Features of Operations Research

1. Creating a Model: OR first makes a model. A model is a logical representation of a

problem. It shows the relationships between the different variables in the problem. It

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 is just like a mathematical formula. For e.g. Assets - Liabilities = Capital +
Accumulated Reserves.
2. Shows Important Variables: OR shows the variables which are important for solving
the problem. Many of the variables are uncontrollable.

3. Symbolises the Model: The OR model, its variables and goals are converted into
mathematical symbols. These symbols can be easily identified, and they can be used
for calculation.

4. Achieving the Goal: The main goal of OR is to select the best solution for solving the
problem.

5. Quantifying the Model: All variables in the OR model are quantified. That is, they
are converted into numbers. This is because only quantified data can be put into the
model to get results.

6. Using Mathematical Devices: Data is supplemented with mathematical devices to

narrow down the margin of error.

7. Use of Computer: The main focus is on decision-making and problem solving. For
this purpose computers are widely used.

8. Interdisciplinary: OR is interdisciplinary, because it uses techniques from

economics, mathematics, chemistry, physics, etc.

9. Highest Efficiency: The main aim of OR is to make decisions and solve problems.
This results in the highest possible efficiency.

Limitations of Operations Research

1. Costly: Operations Research (OR) is very costly. This is because OR makes

mathematical models for taking decisions and solving problems. The company has to
make various models for solving different problems. All this increments the cost.
2. Not Realistic: OR experts make very complex models for solving problems. These
models may not be realistic. Hence, they may not be useful for real-life situations.

3. Complex: OR is very complex concept. It is very difficult for an average manager to

understand it. Therefore, most managers do not use OR techniques.

Why is OR needed?

Because it makes sense to make the best use of available resources. Todays global markets
and instant communications mean that customers expect high-quality products and services
when they need them, where they need them. Organisations, whether public or private, need
to provide these products and services as effectively and efficiently as possible. This requires
careful planning and analysis the hallmarks of good OR. This is usually based on process
modelling, analysis of options or business analytics.
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Examples of OR in action

Scheduling: of aircrews and the fleet for airlines, of vehicles in supply chains, of
orders in a factory and of operating theatres in a hospital.
Facility planning: computer simulations of airports for the rapid and safe processing
of travellers, improving appointments systems for medical practice.

Planning and forecasting: identifying possible future developments in

telecommunications, deciding how much capacity is needed in a holiday business.

Yield management: setting the prices of airline seats and hotel rooms to reflect
changing demand and the risk of no shows.

Credit scoring: deciding which customers offer the best prospects for credit
companies.

Marketing: evaluating the value of sale promotions, developing customer profiles and
computing the life-time value of a customer.

Defence and peace keeping: finding ways to deploy troops rapidly.

Some OR methods and techniques

Computer simulation: allowing you to try out approaches and test ideas for
improvement.
Optimisation: narrowing your choices to the very best when there are so many
feasible options that comparing them one by one is difficult.

Probability and statistics: helping you measure risk, mine data to find valuable
connections and insights in business analytics, test conclusions, and make reliable
forecasts.

Problem structuring: helpful when complex decisions are needed in situations with
many stakeholders and competing interests.

Why Linear Programming is required? What are the assumptions of

linear Programming? Narrate in brief the advantage and application
of Linear Programming.

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Linear Programming

Operations management often presents complex problems that can be modeled by linear
functions. The mathematical technique of linear programming is instrumental in solving a
wide range of operations management problems.

Linear Program Structure

Linear programming models consist of an objective function and the constraints on that
function. A linear programming model takes the following form:

Objective function:

Z = a1X1 + a2X2 + a3X3 + . . . + anXn

Constraints:

b11X1 + b12X2 + b13X3 + . . . + b1nXn < c1

b21X1 + b22X2 + b23X3 + . . . + b2nXn < c2

.
.
.
bm1X1 + bm2X2 + bm3X3 + . . . + bmnXn < cm

In this system of linear equations, Z is the objective function value that is being optimized, Xi
are the decision variables whose optimal values are to be found, and ai, bij, and ci are
constants derived from the specifics of the problem.

Linear Programming Assumptions

Linear programming requires linearity in the equations as shown in the above structure. In a
linear equation, each decision variable is multiplied by a constant coefficient with no
multiplying between decision variables and no nonlinear functions such as logarithms.
Linearity requires the following assumptions:

Proportionality - a change in a variable results in a proportionate change in that

variable's contribution to the value of the function.
Additivity - the function value is the sum of the contributions of each term.

Divisibility - the decision variables can be divided into non-integer values, taking on
fractional values. Integer programming techniques can be used if the divisibility
assumption does not hold.
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In addition to these linearity assumptions, linear programming assumes certainty; that is, that
the coefficients are known and constant.

Problem Formulation

With computers able to solve linear programming problems with ease, the challenge is in
problem formulation - translating the problem statement into a system of linear equations to
be solved by computer. The information required to write the objective function is derived
from the problem statement. The problem is formulated from the problem statement as
follows:

1. Identify the objective of the problem; that is, which quantity is to be optimized. For
example, one may seek to maximize profit.
2. Identify the decision variables and the constraints on them. For example, production
quantities and production limits may serve as decision variables and constraints.

3. Write the objective function and constraints in terms of the decision variables, using
information from the problem statement to determine the proper coefficient for each
term. Discard any unnecessary information.

4. Add any implicit constraints, such as non-negative restrictions.

5. Arrange the system of equations in a consistent form suitable for solving by computer.
For example, place all variables on the left side of their equations and list them in the
order of their subscripts.

The following guidelines help to reduce the risk of errors in problem formulation:

Be sure to consider any initial conditions.

Make sure that each variable in the objective function appears at least once in the
constraints.

Consider constraints that might not be specified explicitly. For example, if there are
physical quantities that must be non-negative, then these constraints must be included
in the formulation.

The Effect of Constraints

Constraints exist because certain limitations restrict the range of a variable's possible values.
A constraint is considered to be binding if changing it also changes the optimal solution. Less
severe constraints that do not affect the optimal solution are non-binding.

Tightening a binding constraint can only worsen the objective function value, and loosening a
binding constraint can only improve the objective function value. As such, once an optimal

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solution is found, managers can seek to improve that solution by finding ways to relax
binding constraints.

Shadow Price

The shadow price for a constraint is the amount that the objective function value changes per
unit change in the constraint. Since constraints often are determined by resources, a
comparison of the shadow prices of each constraint provides valuable insight into the most
effective place to apply additional resources in order to achieve the best improvement in the
objective function value. The reported shadow price is valid up to the allowable increase or
allowable decrease in the constraint.

Applications of Linear Programming

Linear programming is used to solve problems in many aspects of business administration
including:

product mix planning

distribution networks

truck routing

staff scheduling

financial portfolios

corporate restructuring

What is simulation? Explain Monte Carlo Technique of simulation

with its advantage as well as disadvantage.

Simulation

Simulation is a flexible methodology we can use to analyze the behavior of a present or

proposed business activity, new product, manufacturing line or plant expansion, and so on
(analysts call this the 'system' under study). By performing simulations and analyzing the
results, we can gain an understanding of how a present system operates, and what would
happen if we changed it -- or we can estimate how a proposed new system would behave.
Often -- but not always -- a simulation deals with uncertainty, in the system itself, or in the
world around it.

Simulation Applications
Simulation Models

Simulation Methods

Monte Carlo Simulation

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Simulation Applications

Simulation is one of the most widely used quantitative methods -- because it is so flexible and
can yield so many useful results. Here's just a sample of the applications where simulation is
used:

Choosing drilling projects for oil and natural gas

Evaluating environmental impacts of a new highway or industrial plant

Setting stock levels to meet fluctuating demand at retail stores

Forecasting sales and production requirements for a new drug

Planning aircraft sorties and ship movements in the military

Planning for retirement, given expenses and investment performance

Deciding on reservations and overbooking policies for an airline

Selecting projects with uncertain payoffs in capital budgeting

Simulation Models

In a simulation, we perform experiments on a model of the real system, rather than the real
system itself. We do this because it is faster, cheaper, or safer to perform experiments on the
model. While simulations can be performed using physical models -- such as a scale model
of an airplane -- our focus here is on simulations carried out on a computer.

Computer simulations use a mathematical model of the real system. In such a model we use
variables to represent key numerical measures of the inputs and outputs of the system, and we
use formulas, programming statements, or other means to express mathematical relationships
between the inputs and outputs. When the simulation deals with uncertainty, the model will
include uncertain variables -- whose values are not under our control -- as well as decision
variables or parameters that we can control. The uncertain variables are represented by
random number generators that return sample values from a representative distribution of
possible values for each uncertain element in each experimental trial or replication of the
model. A simulation run includes many hundreds or thousands of trials.

Our simulation model -- often called a risk model -- will calculate the impact of the uncertain
variables and the decisions we make on outcomes that we care about, such as profit and loss,
investment returns, environmental consequences, and the like. As part of our model design,
we must choose how numerical values for the uncertain variables will be sampled on each
trial.

Simulation Models

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A simulation model is a mathematical model that calculates the impact of uncertain inputs
and decisions we make on outcomes that we care about, such as profit and loss, investment
returns, environmental consequences, and the like. Such a model can be created by writing
code in a programming language, statements in a simulation modelling language, or formulas
in a Microsoft Excel spreadsheet. Regardless of how it is expressed, a simulation model will
include:

Model inputs that are uncertain numbers -- we'll call these uncertain variables
Intermediate calculations as required

Model outputs that depend on the inputs -- we'll call these uncertain functions

It's essential to realize that model outputs that depend on uncertain inputs are uncertain
themselves -- hence we talk about uncertain variables and uncertain functions. When we
perform a simulation with this model, we will test many different numeric values for the
uncertain variables, and we'll obtain many different numeric values for the uncertain
functions. We'll use statistics to analyze and summarize all the values for the uncertain
functions (and, if we wish, the uncertain variables).

Simulation Methods

Complex manufacturing and logistics systems often call for discrete event simulation, where
there are "flows" of materials or parts, people, etc. through the system, and many steps or
stages with complex interrelationships. Special simulation modeling languages are often
used for these applications.

But a great many situations -- including almost all of the examples above -- have been
successfully handled with simulation models created in a spreadsheet using Microsoft Excel.
This minimizes the learning curve, since you can apply your spreadsheet skills to create the
model. Simple steps or stages, such as inventory levels in different periods, are easy to
represent in columns of a spreadsheet model. You can solve a wide range of problems with
Monte Carlo simulation of models created in Excel, or in a programming language such as
Visual Basic, C++ or C#.

Running a simulation generates a great deal of statistical data that must be analyzed with
appropriate tools. Professional simulation software, such as Frontline Systems' Risk Solver,
allows you to easily create charts and graphs, a wide range of statistics and risk measures,
perform sensitivity analysis and parameterized simulations, and use advanced methods for
simulation optimization.

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Monte Carlo Simulation

Monte Carlo simulation -- named after the city in Monaco famed for its casinos and games of
chance -- is a powerful method for studying the behavior of a system, as expressed in a
mathematical model on a computer. As the name implies, Monte Carlo methods rely on
random sampling of values for uncertain variables that are "plugged into" the simulation
model and used to calculate outcomes of interest. With the aid of software, we can obtain
statistics and view charts and graphs of the results. To learn more, consult our Monte Carlo
simulation tutorial.

Monte Carlo simulation is especially helpful when there are several different sources of
uncertainty that interact to produce an outcome. For example, if we're dealing with uncertain
market demand, competitors' pricing, and variable production and raw materials costs at the
same time, it can be very difficult to estimate the impacts of these factors -- in combination --
on Net Profit. Monte Carlo simulation can quickly analyze thousands of 'what-if' scenarios,
often yielding surprising insights into what can go right, what can go wrong, and what we can
do about it.

Explain the basic concepts of Sensitivity Analysis. What are the

different factors affecting the given solutions and how do we resolve
them? Give a brief comment on each of them.

Why sensitivity analysis is known as post optimality analysis? Also

discuss the importance of sensitivity analysis in LPP.

Sensitivity Analysis deals with finding out the amount by which we can change the input data
for the output of our linear programming model to remain comparatively unchanged. This
helps us in determining the sensitivity of the data we supply for the problem. If a small
change in the input (for example in the change in the availability of some raw material)
produces a large change in the optimal solution for some model, and a corresponding small
change in the input for some other model doesn't affect its optimal solution as much, we can
conclude that the second problem is more robust then the first. The second model is less
sensitive to the changes in the input data.

We will consider the case of sensitivity of the optimum solution to changes in the availability
of the resources. (Right hand side of the constraints)
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If in any linear programming problem there are n variables and m constraints we can think as
the right hand sides as being the representatives of the amount of resources. For example,
consider our old chemical company model:

Maximize z =

subject to,

The right hand sides represented various resources: the amount of raw materials 1 and 2, the
market limit, and the daily demand. Now if these right hand sides were changed the whole
problem would change. Suppose we want to know is the worth of any particular resource.
More precisely, we want to know how much is the amount of the first raw material being 24
units available really important. If we increase the amount from 24 to 25 our optimal value
changes to 21.75, whereas previously it was 21. So a unit increase in the amount of the first
resource changes the optimal value (which is the total profit) by 0.75. This can be therefore
thought of as the unit worth of the first resource. The technical term for this is the first
resources' shadow price.

What do you understand by infeasibility and unboundedness in LPP?

1. Infeasible: A linear programming problem is infeasible if a feasible solution to

the problem does not exist; that is, there is no vector x for which all the
constraints of the problem are satisfied.
2. Unbounded: A linear programming problem is unbounded if the constraints
do not sufficiently restrain the cost function so that for any given feasible
solution, another feasible solution can be found that makes a further
improvement to the cost function.
3. Has an optimal solution Linear programming problems that are not infeasible
or unbounded have an optimal solution; that is, the cost function has a unique
minimum (or maximum) cost function value. This does not mean that the
values of the variables that yield that optimal solution are unique, however.

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What are the differences among Linear programming problem,
Integer programming problem and Goal programming problem.
What are the different types of integer programming problem?

Linear Programming:

Linear programming (LP; also called linear optimization) is a method to achieve the best
outcome (such as maximum profit or lowest cost) in a mathematical model whose
requirements are represented by linear relationships. Linear programming is a special case of
mathematical programming (mathematical optimization).

More formally, linear programming is a technique for the optimization of a linear objective
function, subject to linear equality and linear inequality constraints. Its feasible region is a
convex polyhedron, which is a set defined as the intersection of finitely many half spaces,
each of which is defined by a linear inequality. Its objective function is a real-valued affine
function defined on this polyhedron. A linear programming algorithm finds a point in the
polyhedron where this function has the smallest (or largest) value if such a point exists.

Goal Programming:

Goal programming is a branch of multiobjective optimization, which in turn is a branch of

multi-criteria decision analysis (MCDA), also known as multi-criteria decision making
(MCDM). This is an optimization programme. It can be thought of as an extension or
generalisation of linear programming to handle multiple, normally conflicting objective
measures. Each of these measures is given a goal or target value to be achieved. Unwanted
deviations from this set of target values are then minimised in an achievement function. This
can be a vector or a weighted sum dependent on the goal programming variant used. As
satisfaction of the target is deemed to satisfy the decision maker(s), an underlying satisficing
philosophy is assumed. Goal programming is used to perform three types of analysis:

1. Determine the required resources to achieve a desired set of objectives.

2. Determine the degree of attainment of the goals with the available resources.

3. Providing the best satisfying solution under a varying amount of resources and
priorities of the goals.

Advantages and Disadvantages of Goal Programming

A major strength of goal programming is its simplicity and ease of use. This accounts for the
large number of goal programming applications in many and diverse fields. Linear Goal
programmes can be solved using linear programming software as either a single linear
programme, or in the case of the lexicographic variant, a series of connected linear
programmes.
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Goal programming can hence handle relatively large numbers of variables, constraints and
objectives. A debated weakness is the ability of goal programming to produce solutions that
are not Pareto efficient. This violates a fundamental concept of decision theory that is no
rational decision maker will knowingly choose a solution that is not Pareto efficient.
However, techniques are available to detect when this occurs and project the solution onto the
Pareto efficient solution in an appropriate manner.

The setting of appropriate weights in the goal programming model is another area that has
caused debate, with some authors suggesting the use of the Analytic Hierarchy Process or
interactive methods for this purpose.

Integer Programming

Integer programming is concerned with optimization problems in which some of the variables
are required to take on discrete values. Rather than allow a variable to assume all real values
in a given range, only predetermined discrete values within the range are permitted. In most
cases, these values are the integers giving rise to the name of this class of models.

The integrality requirement underlies a wide variety of applications. There are many
situations, such as distributing goods from warehouses to factories or finding the shortest path
through a network, where the flow variables are logically required to be integer valued. In
manufacturing, products are often indivisible so a production plan that calls for fractional
output is not acceptable. There are also many situations that require logical decisions of the
form yes/no, go/no go, assign/dont assign. Clearly these are discrete decisions that when
quantified allow only two values. They can be modeled with binary variables that assume
values of zero or one. Designers faced with selecting from a finite set of alternatives,
schedulers seeking the optimal sequence of activities, or transportation planners searching for
the minimum cost routing of vehicles all face discrete decision problems.

When optimization models contain both integer and continuous variables they are referred to
as mixed-integer programs. The power and usefulness of these models to represent real-world
situations cannot be overstated, but along with modeling convenience comes substantial
computational difficulty. Only relatively small problems containing integer variables can be
solved to optimality in most cases. At first glance this might seem counterintuitive given our
ability to solve huge linear programs. However, the discrete nature of the variables gives rise
to a combinatorial explosion of possible solutions. In the worst case, a majority of these
solutions must be enumerated before optimality can be confirmed. Consequently, when the
number of integer variables in a problem gets large, solving a model to optimality becomes
very difficult, if not impossible. Rather, heuristic methods that do not guarantee optimality
must be used to find solutions

Discuss the problem of degeneracy in transportation problem.

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In a transportation problem, degeneracy occurs when the number of Allocations are less than
(Rows +Columns 1), where

M= number of rows

N=number of columns

This is also called as Rim condition. If rim condition is satisfied, the solution is not
degenerate.

But if number of allocations are less than (m + n 1), then the solution is degenerate. To
remove degeneracy, we need to take Epsilon which is an imaginary allocation almost equal
to zero.

Explain with transportation practical example.

Discuss the concept of Brand Switching with an example. What is

steady state condition in Markov Analysis?
Markov Systems, State Transition Diagram, Transition Matrix

A Markov system (or Markov process or Markov chain) is a system that can be in one of
several (numbered) states, and can pass from one state to another each time step according to
fixed probabilities.

If a Markov system is in state i, there is a fixed probability, p ij, of it going into state j the next
time step, and pij is called a transition probability.

A Markov system can be illustrated by means of a state transition diagram, which is a

diagram showing all the states and transition probabilities. (See example opposite.)

The matrix P whose ijth entry is pij is called the transition matrix associated with the system.
The entries in each row add up to 1. Thus, for instance, a 2 2 transition matrix P would be set
up as in the following figure.

Long Term Behavior of Markov Systems

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If P is a transition matrix for a Markov system, and if v is a distribution vector with the
property that vP = v, then we refer to v as a steady state (distribution) vector.

To find a steady state distribution for a Markov System with transition matrix P, we solve the
system of equations given by

x+y+z+... =1
[x y z . . . ]P = [x y z . . .]
where we use as many unknowns as there are states in the Markov system. A steady state
probability vector is then given by
v = [x y z . . . ]
A regular Markov system is one for which some power of its transition matrix has no zero
entries. A regular Markov system has only one steady state vector.

Long Term Behavior If the higher and higher powers of P approach a fixed matrix P , we
refer to P as the steady state or long-term transition matrix. If a Markov system is regular,
then its long-term transition matrix is given by the square matrix whose rows are all the same
and equal to the steady state probability vector

[x y z . . .].
Computing the Steady State Matrix Numerically

Explain with Markov practical example.

Why is it important to study queuing system in Management

discipline? Discuss various types of queuing systems in brief.

A mathematical method of analyzing the congestions and delays of waiting in line. Queuing
theory examines every component of waiting in line to be served, including the arrival
process, service process, number of servers, number of system places and the number of
"customers" (which might be people, data packets, cars, etc.). Real-life applications of
queuing theory include providing faster customer service, improving traffic flow, shipping
orders efficiently from a warehouse and designing telecommunications systems such as call
centers.

Queueing theory is the mathematical study of waiting lines, or queues. In queueing theory a
model is constructed so that queue lengths and waiting times can be predicted. Queueing
theory is generally considered a branch of operations research because the results are often
used when making business decisions about the resources needed to provide a service.

Queueing theory has its origins in research by Agner Krarup Erlang when he created models
to describe the Copenhagen telephone exchange. The ideas have since seen applications
including telecommunication, traffic engineering, computing and the design of factories,
shops, offices and hospitals.
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Explain the convex polygon in context to LPP.

A two-dimensional polygon that is "convex" is one that has three or more linear sides where,
when you move around the polygon and move from one side to the next, you always turn left
or always turn right. All "feasible regions" in linear programming (LP) problems are convex
polygons (some in more dimensions than two).

Explain transportation and transhipment in detail.

The Transportation Problem

There is a type of linear programming problem that may be solved using a simplified version
of the simplex technique called transportation method. Because of its major application in
solving problems involving several product sources and several destinations of products, this
type of problem is frequently called the transportation problem. It gets its name from its
application to problems involving transporting products from several sources to several
destinations. Although the formation can be used to represent more general assignment and
scheduling problems as well as transportation and distribution problems. The two common
objectives of such problems are either (1) minimize the cost of shipping m units to n
destinations or (2) maximize the profit of shipping m units to n destinations.

Let us assume there are m sources supplying n destinations. Source capacities, destinations
requirements and costs of material shipping from each source to each destination are given
constantly. The transportation problem can be described using following linear programming
mathematical model and usually it appears in a transportation tableau.

There are three general steps in solving transportation problems.

We will now discuss each one in the context of a simple example. Suppose one company has
four factories supplying four warehouses and its management wants to determine the
minimum-cost shipping schedule for its weekly output of chests. Factory supply, warehouse
demands, and shipping costs per one chest (unit) are shown in Table 1

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 Table 1 Data for Transportation Problem

At first, it is necessary to prepare an initial feasible solution, which may be done in several
different ways; the only requirement is that the destination needs be met within the
constraints of source supply.

1 The Transportation Matrix

The transportation matrix for this example appears in Table 2, where supply availability at
each factory is shown in the far right column and the warehouse demands are shown in the
bottom row. The unit shipping costs are shown in the small boxes within the cells (see
transportation tableau at the initiation of solving all cells are empty). It is important at this
step to make sure that the total supply availabilities and total demand requirements are equal.
Often there is an excess supply or demand. In such situations, for the transportation method
to work, a dummy warehouse or factory must be added. Procedurally, this involves inserting
an extra row (for an additional factory) or an extra column (for an ad warehouse). The
amount of supply or demand required by the dummy equals the difference between the
row and column totals.

In this case there is:

Total factory supply 51

Total warehouse requirements 52

This involves inserting an extra row - an additional factory. The amount of supply by the
dummy equals the difference between the row and column totals. In this case there is 52 51
= 1. The cost figures in each cell of the dummy row would be set at zero so any units sent
there would not incur a transportation cost. Theoretically, this adjustment is equivalent to the
simplex procedure of inserting a slack variable in a constraint inequality to convert it to an
equation, and, as in the simplex, the cost of the dummy would be zero in the objective
function.

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 Table 2 "Transportation Matrix for Chests Problem With an Additional Factory
(Dummy)"

2 Initial Feasible Solution

Initial allocation entails assigning numbers to cells to satisfy supply and demand constraints.
Next we will discuss several methods for doing this: the Northwest-Corner method, Least-
Cost method, and Vogel's approximation method (VAM).

Table 3 shows a northwest-corner assignment. (Cell A-E was assigned first, A-F second, B-
F third, and so forth.) Total cost : 10*10 + 30*4 + 15*10 + 30*1 + 20*12 + 20*2 + 45*12 +
0*1 = 1220($).

Inspection of Table 3 indicates some high-cost cells were assigned and some low-cost cells
bypassed by using the northwest-comer method. Indeed, this is to be expected since this
method ignores costs in favor of following an easily programmable allocation algorithm.

Table 4 shows a least-cost assignment. (Cell Dummy-E was assigned first, C-E second, B-H
third, A-H fourth, and so on.) Total cost : 30*3 + 25*6 + 15*5 +10*10 + 10*9 + 20*6 +
40*12 + 0*1= 1105 ($).

Table 5 shows the VAM assignments. (Cell Dummy-G was assigned first, B-F second, C-E
third, A-H fourth, and so on.) Note that this starting solution is very close to the optimal
solution obtained after making all possible improvements (see next chapter) to the starting
solution obtained using the northwest-comer method. (See Table 3.) Total cost: 15*14 +
15*10 + 10*10 + 20*4 + 20*1 + 40*5 + 35*7 + 0*1 = 1005 ($).

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 Table 3 Northwest Corner Assignment

Table 4"Least - Cost Assignment"

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 Table 5 "VAM Assignment"

3 Develop Optimal Solution

To develop an optimal solution in a transportation problem involves evaluating each unused

cell to determine whether a shift into it is advantageous from a total-cost stand point. If it is,
the shift is made, and the process is repeated. When all cells have been evaluated and
appropriate shifts made, the problem is solved. One approach to making this evaluation is the
Stepping stone method.

The term stepping stone appeared in early descriptions of the method, in which unused cells
were referred to as "water" and used cells as "stones" from the analogy of walking on a
path of stones half-submerged in water. The stepping stone method was applied to the VAM
initial solution, as shown in Table 5

Table 6 shows the optimal solutions reached by the Stepping stone method. Such solution is
very close to the solution found using VAM method.

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 Table 6 "Optimal Matrix, With Minimum Transportation Cost of $1,000."

4 Alternate Optimal Solutions

When the evaluation of any empty cell yields the same cost as the existing allocation, an
alternate optimal solution exists (see Stepping Stone Method alternate solutions). Assume
that all other cells are optimally assigned. In such cases, management has additional
flexibility and can invoke nontransportation cost factors in deciding on a final shipping
schedule.

Table 7 "Alternate Optimal Matrix for the Chest Transportation Problem, With
Minimum Transportation Cost of $1,000.

5 Degeneracy

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Degeneracy exists in a transportation problem when the number of filled cells is less than the
number of rows plus the number of columns minus one (m + n - 1). Degeneracy may be
observed either during the initial allocation when the first entry in a row or column satisfies
both the row and column requirements or during the Stepping stone method application,
when the added and subtracted values are equal. Degeneracy requires some adjustment in the
matrix to evaluate the solution achieved. The form of this adjustment involves inserting some
value in an empty cell so a closed path can be developed to evaluate other empty cells. This
value may be thought of as an infinitely small amount, having no direct bearing on the cost of
the solution.

Procedurally, the value (often denoted by the Greek letter epsilon, - ) is used in exactly the
same manner as a real number except that it may initially be placed in any empty cell, even
though row and column requirements have been met by real numbers. A degenerate
transportation problem showing a Northwest Corner initial allocation is presented in Table 8,
where we can see that if were not assigned to the matrix, it would be impossible to evaluate
several cells.

Once a has been inserted into the solution, it remains there until it is removed by
subtraction or until a final solution is reached.

While the choice of where to put an is arbitrary, it saves time if it is placed where it may
be used to evaluate as many cells as possible without being shifted.

Table 8 "Degenerate Transportation Problem With Added.

Number of filled cells = 4

6 Transportation Problem with a Maximization as a Criterion

A fictive corporation A has a contract to supply motors for all tractors produced by a fictive
corporation B. Corporation B manufactures the tractors at four locations around Central
Europe: Prague, Warsaw, Budapest and Vienna. Plans call for the following numbers of
tractors to be produced at each location:

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Prague 9 000

Warsaw 12 000

Budapest 9 000

Corporation A has three plants that can produce the motors. The plants and production
capacities are

Hamburg 8 000

Munich 7 000

Leipzig 10 000

Dresden 5 000

Due to varying production and transportation costs, the profit earns on each motor depends
on where they were produced and where they were shipped. The following transportation
table (Table 9) gives the accounting department estimates of the euro profit per unit (motor).

Table 9 "The Euro Profit Per One Shipped Motor"

Table 10 shows a highest - profit assignment (Least Cost method modification). In contrast
to the Least Cost method it allocates as much as possible to the highest-cost cell. (Cell
Hamburg - Budapest was assigned first, Munich - Warsaw second, Leipzig - Warsaw third,
Leipzig Budapest fourth, Dresden Prague fifth and Leipzig Prague sixth.) Total profit :
3 335 000 euro.

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Table 10 "Highest - Profit Assignment"

Applying the Stepping Stone method (modified for maximization purposes) to the initial
solution we can see that no other transportation schedule can increase the profit and so the
Highest Profit initial allocation is also an optimal solution of this transportation problem.

7 The Transshipment Problem

The transshipment problem is similar to the transportation problem except that in the
transshipment problem it is possible to both ship into and out of the same node (point). For
the transportation problem, you can ship only from supply points to demand points. For the
transshipment problem, you can ship from one supply point to another or from one demand
point to another. Actually, designating nodes as supply points or demand points becomes
confusing when you can ship both into and out of a node. You can make the designations
clearer if you classify nodes by their net stock position-excess (+), shortage (-), or 0.

One reason to consider transshipping is that units can sometimes be shipped into one city at a
very low cost and then transshipped to other cities. In some situations, this can be less
expensive than direct shipment. Let's consider the balanced transportation problem as an
example.

Picture 1 shows the net stock positions for the three warehouses and four customers. Say that
it is possible to transship through Pilsen to both Innsbruck and Linz. The transportation cost
from Pilsen to Innsbruck is 300 euro per unit, so it costs less to ship from Warsaw to
Innsbruck by going through Pilsen. The direct cost is 950 euro, and the transshipping cost is
600 + 300 = 900 euro. Because the transportation cost is 300 euro from Pilsen to Innsbruck,
the cost of transshipping from Prague through Pilsen to Innsbruck is 400 euro per unit. It is
cheaper to transship from Prague through Pilsen than to ship directly from Prague to
Innsbruck.

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Picture 1 "Transhipment Example in the Form of a Network Model"

There are two possible conversions to a transportation model. In the first conversion, make
each excess node a supply point and each shortage node a demand point. Then, find the
cheapest method of shipping from surplus nodes to shortage nodes considering all
transhipment possibilities. Let's perform the first conversion for the Picture 1 example.
Because a transportation table Prague, Warsaw, and Vienna have excesses, they are the supply
points. Because Krakow, Pilsen, Innsbruck, and Linz have shortages, they are the demand
points. The cheapest cost from Warsaw to Innsbruck is 900 euro, transhipping through Pilsen.
The cheapest cost from Prague to Innsbruck is 400 euro, transhipping through Pilsen too. The
cheapest cost from all other supply points to demand points is obtained through direct
shipment. Table 11 shows the balanced transportation table for this transhipment problem.
For a simple transportation network, finding all of the cheapest routes from excess nodes to
shortage nodes is easy. You can list all of the possible routes and select the cheapest.
However, for a network with many nodes and arcs, listing all of the possible routes is
difficult.

Table 11 "The Transhipment Problem After Conversion to a Transportation

Model"

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The second conversion of a transhipment problem to a transportation model doesn't require
finding all of the cheapest routes from excess nodes table to shortage nodes. The second
conversion requires more supply and demand nodes than the first conversion, because the
points where you can ship into and out of, occur in the converted transportation problem
twice first as a supply point and second as a demand point.

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