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CHAPTER ONE

INTRODUCTION TO OPERATION RESEARCH

1.1. History and Definitions of Operations Research

 OR came in to existence as a discipline during World War II when there was a critical
need to manage scarce resources.
 The term “Operations research” was coined as a result of research on military
operations during this war.
 Since the war involved strategic and tactical problems which were greatly complicated,
to expect adequate solutions from individual or specialists in a single discipline was
unrealistic.
 Therefore, group of individuals who collectively were considered specialists in
Mathematics, Economics, Statistics and probability theory, engineering, behavioral, and
physical science were formed as special unit within the armed forces to deal with
strategic and tactical problems of various military operations.
 The objective was the most effective/efficient utilization of most limited military
resources by the use of quantitative techniques.
 After the war ended, scientists who had been active in the military OR groups made
efforts to apply the operations research approach to civilian problems, related to
business, industry, research and development, and even won Nobel prizes when they
returned to their peacetime disciplines.
1.2 Defining Operations Research:
The British/Europeans refer to "operational research", the Americans to "Operations
research" - but both are often shortened to just "OR" (which is the term we will use).
Another term which is used for this field is "Management Science" ("MS"). The Americans
sometimes combine the terms OR and MS together and say "OR/MS" or "ORMS". Yet
other terms sometimes used are "Industrial Engineering" ("IE"), "Decision Science" ("DS”)
and “problem solving”. In recent years there has been a move towards a standardization
upon a single term for the field, namely the term "OR".

o OR is the application of the methods of science to complex problems in the direction and
management of large systems of men, machines, materials and money in industry, business,
government and defense.
o OR is a systematic application of quantitative methods, techniques and tools to the analysis of
problems involving the operation of systems.
o OR is essentially a collection of mathematical techniques and tools which in conjunction with
systems approach, is applied to solve practical decision problems of an economic or
engineering nature.
o ORseeks the determination of the optimum course of action of a decision problem under the
restriction of limited resources. It is quite often associated almost exclusively with the use
of mathematical techniques to model and analyze decision problems.
o OR is the application of a scientific approach to solving management problems in order to
help managers make better decisions. As implied by this and other definitions, operations
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research encompasses a number of mathematically oriented techniques that have either

been developed within the field of management science or been adapted from other
disciplines, such as natural sciences, mathematics, statistics, and engineering.
1.3 Features of Operations Research Approach
The important features or characteristics of OR approach to any decision and control
problems can be summarized as:
i. Inter-disciplinary approach
ii. Methodological Approach
iii. Holistic Approach or Systems Orientation
iv. Objectivistic Approach
v. Decision Making
vi. Use of Computers
vii. Human factors
In deriving quantitative solution, we do not consider human factors which
doubtlessly play a great role in the problems. So study of the OR is incomplete
without a study of human factors.
1.4. Models and Modeling in Operations Research
What do we mean by the term model?
 An OR model is an abstract representation of an existing problem or situation.
 It can be in the form of a graph or chart, but mostly, an OR model consists of a set of
mathematical relationship. In OR terminology, these are called objective function and
constraints.
 Models attempt to describe the essence of a situation or activity by abstracting from
reality.
 So that the decision- maker can study the relationship among relevant variables in
isolation.
 Models do not, and cannot, represent every aspect of reality because of the
innumerable and changing characteristics of the real life problems to be represented.
 Instead, they are limited approximation of reality. For example, to study the flow of
materials through a factory, a scaled diagram on paper showing the factory floor,
position of equipment, tools, and workers can be constructed.
 It would not be necessary to give such details as the color of machines, the height of
the workers, or the temperature of the building.

For a model to be effective, it must be representative of those aspects of reality that are
being investigated and have a major impact on the decision situation.

A model is constructed to analyze and understand the given system for the purpose of
improving its performance. The reliability of the solution obtained from a model depends
on the validity of the model in representing the system under study. A model allows the
opportunity to examine the behavioral changes of a system without disturbing the on-going
operations.
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Note: The key to model building lies in abstracting only the relevant variables that affect
the criteria of the measures of performance of the given system and expressing the
relationship in a suitable form.
I. Classification of OR Models

There are many ways to classify models:

1. Classification based on structure

i. Physical Models

 These models provide a physical appearance of the real object under study either
reduced in size or scaled up.
 Physical models are useful only in design problems because they are easy to observe,
build, and describe.Since these models cannot be manipulated and are not very useful
for prediction, problems such as portfolio analysis selection, media selection,
production scheduling, etc cannot be analyzed by physical models.

1. Iconic models

They are least abstract, physical model and look like the reality. Example toy

2. Analog Models

They are physical models like iconic model. However they are more abstract than the iconic
ones. They substitute analogy for important aspects of reality. Examples include charts,
clock, thermometer, Barometer, blue prints, graphs and the like.
ii. Symbolic models

These models use symbols (letters, numbers) and functions to represent variables and their
relationships to describe the properties of the system.

2. Classification based on function or purpose

Models based on the purpose of their utility include:

I. Descriptive models

Descriptive models simply describe some aspects of a situation, based on observation,

survey, questionnaire results or other available data of a situation and do not recommend
anything. Example: Organizational chart, plant layout diagram, etc.
II. Predictive Models

 These models indicate “If this occurs, then that follow”. They relate dependent and
independent variables and permit trying out, “what if” questions.
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 In other words, these models are used to predict outcomes due to a given set of
alternatives for the problem. These models do not have an objective function as a part
of the model to evaluate decision alternatives.

For example, S = a + bA +cI is a model that describes how the sales (S) of a product
changes in advertising expenditures (A) and disposal personal income (I). Here, a, b, and c
are parameters whose values must be estimated.
III. Normative (Optimization) models

These models provide the “best” or “Optimal” solution to problems subject to certain
limitations on the use of resources. These models provide recommended courses of action.

For example, in mathematical programming, models are formulated for optimizing the
given objective function, subject to restrictions on resources in the context of the problem
under consideration and non-negativity of variables. These models are also called
prescriptive models, because they prescribe what the decision maker ought to do.

3. Classification Based on Time Reference

1. Static Models

Static models represent a system at some specified time and do not account for changes
over time.

For example, an inventory model can be developed and solved to determine an economic
order quantity for the next period assuming that the demand in planning period would
remain the same as that for today.
2. Dynamic models

In dynamic models, time is considered as one of the variables and allows the impact of
changes due to change in time.

Thus, sequences of interrelated decisions over a period of time are made to select the
optimal course of action to optimize the given objective. Dynamic programming is an
example of a dynamic model.

4. Classification based on Degree of certainty

1) Deterministic Models

If all the parameters, constants and functional relationships are assumed to be known with
certainty when the decision is made, the model is said to be deterministic.

Thus, in such a case, the outcome associated with a particular course of action is known.
That is, for a specific set of input values, there is a uniquely, determined output which
represents the solution of the model under consideration of certainty.
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The results of the models assume single value. Linear programming models are examples
of deterministic models.
2) Probabilistic (Stochastic) models

o Models in which at least one parameter or decision variable is a random variable are
called probabilistic (or stochastic).

o Since at least one decision variable is random, a dependent variable which is the
function of independent variable(s) will also be random.

o This means consequences or pay off due to certain changes in the independent
variable cannot be produced with certainty.

o It is possible to predict a pattern of values of both the variables by their probability

distribution. Insurance against risk of fire, accidents, sickness, etc are examples where the
pattern of events is studied in the form of a probability distribution.

5. Classification Based on Method of solution or Quantification

A. Heuristic Model

These models employ some sets of rules which, though perhaps not optimal, do facilitate
solutions of problems when applied in a consistent manner.
B. Analytical Models

These models have a specific mathematical structure and thus can be solved by known
analytical or mathematical techniques. Any optimization model (which requires
maximization or minimization of an objective function) is an analytical model.
C. Simulation Models

These models have a mathematical structure but are not solved by applying mathematical
techniques to get a solution. Instead, a simulation model is essentially a computer-assisted
experimentation on a mathematical structure of a real-life problem in order to describe and
evaluate its behavior under certain assumptions over a period of time.

Advantage of Models

Models in general are used as an aid for analyzing complex problems. However, a model
can also serve other purposes as:
i) A model provides economy in representation of the realities of the system.

That is, models help decision makers to visualize a system so that he/she can understand
the system’s structure or operation in a better way. For example, it easier to represent a
factory lay out on paper than to construct it. It is cheaper to try out modifications of such
systems by rearrangement on paper.
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ii) The problem can be viewed in its entirety, with all the components being
considered simultaneously.
iii) Models serve as aids to transmit ideas and visualization among people in the
organization.

For example, process chart can help the management to communicate about better work
methods to workers.

iv) A model allows us to analyze and experiment in a complex situation to a degree

that would be impossible in the actual system and its environment.

For example, the experimental firing of satellite may be costly and require years of
preparation.

v) Models simplify the investigation considerably and provide a powerful and

flexible for predicting the future state of the process or system.

1.5. Methodology of Operations Research

For effective use of OR techniques, it is essential to follow some steps that are helpful for
decision-makers to make better solution. The flow diagram representing the methodology
of OR is shown as:

Step 1 Observation and defining a problem

The first step in OR process is the identification of a problem that exists is a system
(organization).

Step 2- Formulating a model

Model formulation involves an analysis of the system under study, determining objective of
the decision-maker, and alternative course of action, etc, so as to understand and describe,
in precise terms, the problem that an organization faces.

The major steps which have to be taken in to consideration for formulating the model are:
 Problem Components.
 Decision environment
 Alternative courses of Action
 Measure of effectiveness
 Collecting Data and Constructing a Mathematical Model

Certain basic components required in every decision problem model are:

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 Controllable (decision) Variables

 Uncontrollable variable.
 Objective function.

A stated objective helps to focus attention on what the problem actually is.
 Constraints or Limitations
 Functional relationships
 Parameters- These are constants in the functional relationships. Parameters can be
deterministic or probabilistic in nature.

Step 3.Solving the Mathematical Model

This involves obtaining the numerical values of decision variables. Obtaining these values
depends on the specific form or type, of mathematical models.

Step 4.Validating (Testing) the solution

After solving the mathematical model, it is important to review the solution carefully to see
that values make sense and that the resulting decisions can be implemented. Some of the
reasons for validating the solution are:

(i) The mathematical model may not have enumerated all the limitations of the
problem under consideration.
(ii) Certain aspect of the problem may have been overlooked, omitted or simplified,
(iii) The data may have been incorrectly estimated or recorded, perhaps when entered in
to the computer.

Step 5implementing the solution

The decision-maker has not only to identify good decision alternatives but also to select
alternatives that are capable of being implemented.

Step 6 Modifying the Model

For a mathematical model to be useful, the degree to which it actually represents the system
or problem being modeled must be established.

Step 7 Establishing control over the solution

The dynamic environment and changes within the environment can have significant
implications regarding the continuing validity of models and their solutions. Thus, a control
procedure has to be established for detecting significant changes in decision variables of the
problem so that suitable adjustments can be made in the solution without having to build a
model every time a significant change occurs.

1.6. Basic Operations Research Models

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There is no unique set of problems which can be solved by using OR models or techniques.
Some OR models or techniques include:
1. Allocation Models

Allocation models are used to allocate resources to activate in such a way that some
measure of effectiveness (objective function) is optimized. Mathematical programming is
the broad term of OR techniques used to solve allocation problems.
a) If the measure of effectiveness such as profit, cost, etc., is represented as a linear
function of several variables and if limitations of resources (constraints) can be expressed
as a system of linear inequalities or equalities, the allocation problem is classified as linear
programming problems.
b) If the objective function of any or all constraints cannot be expressed as a system of
linear equalities or inequalities, the allocation problem is classified as a non-linear
programming problem.
c) When the solution values or decision variables for the problem are restricted to being
integer values, the problem is classified as an integer programming.
d) The problem having multiple, conflicting and incommensurable objective function
(goals) subject to linear constraints is called goal programming.
e) If decision variables in the linear programming problem depend on chance, such a
problem is called is called a stochastic programming problem.
f) If resources such as workers, machines or salesmen can be assigned to perform a
certain number of activities such as jobs or territories on one- to one basis so as to minimize
total time, cost or distance involved in performing a given activity, such problems are
classified as assignment problems.
g) Conversely, if the resources can be used for more than one activity, the allocation
problem is classified as a transportation problem.
2. Inventory Model

Inventory Models deal with the problem of determination of how much to order at a point
in time and when to place an order. The main objective is to minimize the sum of three
conflicting inventory costs: the Cost of holding or carrying extra inventory, the cost of
shortage or delay in delivery of items when it is needed, a cost of ordering or set-up.
3. Competitive (Game Theory) Model

These models are used to characterize the behavior of two or more opponents (called
players) who compete for the achievement of conflicting goals.
4. Network Models

These models are applied to the management (planning, controlling and scheduling) of
large-scale projects. PERT/CPM Techniques help in identifying potential trouble spots in a
project through the identification of the critical path. These techniques improve project
coordination and enable the efficient use of resources. Network methods are also used to
determine time-cost trade off, resource allocation and updating of activity time.
5. Decision analysis Model
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These models deal with the selection of an optimal course ofaction given the possible pay
offs and their associated probabilities of occurrence. These models are broadly applied to
problems involving decision making under risk and uncertainty.

CHAPTER TWO

2. LINEAR PROGRAMMING:
Application and Model Formulation
DEFINITION _ A linear programming problem (LP) is an optimization problem for
which we do the following:
1. We attempt to maximize (or minimize) a linear function of the decision variables.
The function that is to be maximized or minimized is called the objective function.
2. The values of the decision variables must satisfy a set of constraints. Each constraint must
be a linear equation or linear inequality.
3. A sign restriction is associated with each variable. For any variable xi, the sign restriction
specifies that xi must be either nonnegative (xi _ 0) or unrestricted in sign (urs). _
2.1. LINEAR PROGRAMMING MODELS
Linear programming models are mathematical representations of LP problems. Linear
programming models have certain characteristics in common. Knowledge of these
characteristics enables us to recognize problems that are amenable to a solution using LP
models, and to be able to correctly formulate an LP model. These characteristics can be
grouped as components and assumptions. The components relate to the structure of a model,
where as the assumptions reveal the conditions under which the model is valid.
2.1.1. COMPONENTS OF LP MODELS
There are four major components of LP models including: Objective function, decision
variables, constraints and parameters.

Objective and Objective Function

The criterion by which all decisions are evaluated. It provides the focus for problem solving.
In linear programming models, a single, quantifiable objective must be specified by the
decision maker. Because we are dealing with optimization, the objective will be either
maximization or minimization. Hence, every LP problem will be either maximization or a
minimization problem. Once the objective is specified, it becomes the measure of
effectiveness against which alternate solutions are judged. An LP model consists of a
mathematical statement of the objective called the objective function.
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Decision variables
They represent unknown quantities to be solved for. The decision maker can control the
value of the objective, which is achieved through choices in the levels of decision
variables. For example, how much of each product should be produced in order to obtain
the greatest profit?

Constraints
However, the ability of a decision maker to select values of the decision variables in an
LP problem is subject to certain restrictions or limits coming from a variety of sources.
The restrictions may reflect availabilities of resources (e.g., raw materials, labor time,
etc.), legal or contractual requirements (e.g., product standards, work standards, etc.),
technological requirements (e.g., necessary compressive strength or tensile strength) or
they may reflect other limits based on forecasts, customer orders, company policies, and
so on. In LP model, the restrictions are referred to as constraints. Only solutions that
satisfy all constraints in a model are acceptable and are referred to as feasible solutions.
The optimal solution will be the one that provides the best value for the objective
function.
Generally speaking, a constraint has four elements:
 A right hand side (RHS) quantity that specifies the limit for that constraint. It must
be a constant, not a variable.
 An algebraic sign that indicates whether the limit is an upper bound that cannot be
exceeded, a lower bound that is the lowest acceptable amount, or an equality that
must be met exactly.
 The decision variables to which the constraint applies.
 The impact that one unit of each decision variable will have on the right-hand side
quantity of the constraint.
Constraints can be arranged into three groups:
 System constraints – involve more than one decision variable,
 Individual constraints – involve only one variable, and
 Non-negativity constraints – specify that no variable will be allowed to take on a
negative value. The non-negativity constraints typically apply in an LP model,
whether they are explicitly stated or not.

Parameters
The objective function and the constraints consist of symbols that represent the decision
variables (e.g., X1, X2, etc.) and numerical values called parameters. The parameters are
fixed values that specify the impact that one unit of each decision variable will have on
the objective and on any constraint it pertains to as well as the numerical value of each
constraint.
The following simple example illustrates the components of LP models:
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2.1.2. ASSUMPTIONS OF LP MODELS

Linearity (proportionality)
The linearity requirement is that each decision variable has a linear impact on the objective
function and in each constraint in which it appears. In terms of a mathematical model, a
function or equation is linear when the variables included are all to the power 1 (not squared,
cubed, square root, etc.) and no products (e.g., x 1x2) appear. On the other hand, the amount of
each resource used (supplied) and its contribution to the profit (or cost) in the objective
function must be proportional to the value of each decision variable. For example, if
production of one unit requires 5 hours of a particular resource, then making 3 units of that
product requires 15 hours (3x5) of that resource.

Divisibility (Continuity)
The divisibility requirement pertains to potential values of decision variables. It is assumed
that non-integer values are acceptable. However, if the problem concerns, for example, the
optimal number of houses to construct, 3.5 do not appear to be acceptable. Instead, that type
of problem would seem to require strictly integer solutions. In such cases, integer-
programming methods should be used. It should be noted, however, that some obvious
integer type situations could be handled under the assumption of divisibility. For instance,
suppose 3.5 to be the optimal number of television sets to produce per hour, which is
unacceptable, but it would result in 7 sets per two hours, which would then be acceptable.

Certainty
This requirement involves two aspects of LP models. One aspect relates to the model
parameters, i.e., the numerical values. It is assumed that these values are known and constant.
In practice, production times and other parameters may not be truly constant. Therefore, the
model builder must make an assessment as to the degree to which the certainty requirement is
met. Large departures almost surely will have a significant effect on the model. The other
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aspect is the assumption that all relevant constraints have been identified and represented in
the model.
Additivity
The value of the objective function and the total amount of each resource used (or supplied),
must be equal to the sum of the respective individual contributions (profit or cost) by decision
variables. For example, the total profit earned from the sale of two products A and B must be
equal to the sum of the profits earned separately from A and B. Similarly, the amount of a
resource consumed for producing A and B must be equal to the sum of resources used for A
and B respectively.

Non-negativity
It assumes that negative values of variables are unrealistic and, therefore, will not be
considered in any potential solutions. Only positive values and zero will be allowed and the
non-negativity assumption is inherent in LP models.
2.1.3. Advantages of Linear Programming
Following are certain advantages of linear programming.
 Linear programming helps in attaining the optimum use of scarce productive
resources. It also indicates how a decision maker can employ productive resources
effectively by selecting and allocating these resources.
 LP techniques improve quality of decisions. The decision making approach of the
user of this technique becomes more objective and less subjective.
 Highlighting of bottlenecks in the production process is one of the most advantages of
this technique. For example, when a bottleneck occurs, some machines cannot meet
demand while others remain idle for some of the time.
 LP also helps in re-evaluation of a basic plan for changing conditions. If conditions
change when the plan is carried out, they can be determined so as to adjust the
remainder of the plan for best results.
2.1.4. Limitations of Linear Programming
In spite of having many advantages and wide area of applications, there are some
limitations associated with this technique. These are:
 LP treats all relationships among decision variables as linear. However, generally
neither the objective functions nor the constraints in real-life situations concerning
business and industrial problems are linearly related to variables.
 While solving an LP model, there is no guarantee that we will get integer valued
solutions. For example, in finding out how many men and machines would be
required to perform a particular job, a non-integer valued solution will be
meaningless. Rounding off the solution to the nearest integer will not yield an optimal
solution.
 An LP model does not take in to consideration the effect of time and uncertainty.
Thus, the LP model should be defined in such a way that any change due to internal as
well as external factors can be incorporated.
 It deals with only with a single objective, whereas in real-life situations we may come
across conflicting multi-objective problems.
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 Parameters appearing in the model are assumed to be constant but, in real life
situation they are frequently neither known nor constant.
2.1.5. FORMULATING LP MODELS
Just as it is to define a problem, careful formulation of the model that will be used to solve
the problem is important. Linear programming algorithms (solution techniques) are widely
used and understood and computer packages are readily available for solving LP problems.
Consequently, obtaining solutions is not the real issue, what is very important to note is
failure to check that all constraints have been accounted for and have been correctly
formulated results in ill-structuring of the model that can easily lead to poor decisions.
Steps in formulating LP models:
 Identify the decision variables.
 Determine the objective function.
 Identify the constraints.
 Determine appropriate values for parameters and determine whether an upper
limit, lower limit or equality is called for.
 Use this information to build a model.
 Validate the model.
In many cases, the decision variables are obvious; in others it might require brief discussion
with the appropriate manager. However, identifying the constraints and determining
appropriate values for the parameters can require considerable time and effort. Potential
sources of information include historical records, interviews with managers and staff, and
data collection. Validating the model will involve a critical review of the output, perhaps
under a variety of inputs, in order to decide if the results are reasonable.
Product Mix
Example 1. ABC private limited company is engaged in the production of power and traction
transformers. Both of these categories of transformers pass through three basic processes:
core preparation, core to coil assembly, and vapor phase drying. A power transformer yields a
contribution of Birr 50,000 and traction transformer contributes Birr 10,000. The time
required in the production of these two products in terms of hours for each of the processes is
as follows.

Power transformer Traction Transformer

Core preparation 75 15
Core to Coil Assembly 160 30
Vapor Phase Drying 45 10

If the capacities available are 1000, 1500, and 750 machine hours in each processes
respectively, formulate the problem as LP?

Investment Application
Example2. An individual investor has Birr 70,000 to divide among several investments. The
alternative investments are municipal bonds with an 8.5% return, certificates of deposits
with a 10% return, Treasury bill with a 6.5% return, and income bonds with a 13% return.
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The amount of time until maturity is the same for each alternative. However, each
investment alternative has a different perceived risk to the investor; thus it is advisable to
diversify. The investor wants to know how much to invest in each alternative in order to
maximize the return. The following guidelines have been established for diversifying the
investment and lessening the risk perceived by the investor.
1. No more than 20% of the total investment should be in an income bonds.
2. The amount invested in certificates of deposit should not exceed the amount invested
in other three alternatives.
3. At least 30% of the investment should be in treasury bills and certificates of deposits.
4. The ratio of the amount invested in municipal bonds to the amount invested in
treasury bills should not exceed one to three.
5. The investor wants to invest the entire Birr 70,000

Required: Formulate a LP model for the problem.

Marketing Application
2. Supermarket store chain has hired an advertising firm to determine the types and amount of
advertising it should have for its stores. The three types of advertising available are radio
and television commercials, and newspapers advertisements. The retail chain desires to
know the number of each type of advertisement it should purchase in order to maximize
exposure. It is estimated that each ad or commercial will reach the following potential
audience and cost the following amount.
Exposure

Type of Advertisement (people /ad or commercial) Cost

Television commercial 20,000 Birr 15,000
Radio commercial 12,000 6,000
Newspaper advertisement 9,000 4,000
The company must consider the following resource constraints.
1. The budget limit for advertising is Birr 100,000
2. The television station has time available for 4 commercials.
3. The radio station has time available for 10 commercials.
4. The newspaper has space available for 7 ads.
5. The advertising agency has time and staff available for producing no more than a total
of 15 commercials and/or ads.
Chemical mixture
A chemical corporation produces a chemical mixture for the customer in 1000- pound
batches. The mixture contains three ingredients- Zinc, mercury and potassium. The mixture
must conform to formula specifications (i.e., a recipe) supplied by a customer. The company
wants to know the amount of each ingredient to put in the mixture that will meet all the
requirements of the mix and minimize total cost.
The customer has supplied the following formula specifications for each batch of mixture.
1. The mixture must contain at least 200 lb of mercury
2. The mixture must contain at least 300 lb of zinc
3. The mixture must contain at least 100 lb of potassium
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The cost per pound of mixture is Birr4, of zinc Birr 8 and of potassium Birr 9.
Required: Formulate LPM for the problem
2.3. Solving LP Model
Following the formulation of a mathematical model, the next stage in the application of LP to
decision-making problem is to find the solution of the model. An optimal, as well as feasible
solution to an LP problem is obtained by choosing from several values of decision variables
x1,x2…xn , the one set of values that satisfy the given set of constraints simultaneously and
also provide the optimal ( maximum or minimum) values of the given objective function. The
most common solution approaches are to solve graphically and algebraically the set of
mathematical relationships that form the model, thus determining the values of decision
variables.
2.3.1. GRAPHICAL LINEAR PROGRAMMING METHODS
Graphical linear programming is a relatively straightforward for determining the optimal
solution to certain linear programming problems involving only two decision variables.
Although graphic method is limited as a solution approach, it is very useful in the
presentation of LP, in that it gives a “picture” of how a solution is derived thus a better
understanding of the solution. Moreover, graphical methods provide a visual portrayal of
many important concepts.
In this method, the two decision variables are considered as ordered pairs (X 1, X2), which
represent a point in a plane, i.e., X1 is represented on X-axis and X2 on Y-axis.
Graphical method has the following advantages:
 It is simple
 It is easy to understand, and
 It saves time
Important Definitions
Solution The set of values of decision variables x j (j = 1,2,…, n) which satisfy the constraints
of an LP problem is said to constitute solution to that LP problem.
Feasible solution The set of values of decision variables xj (j = 1,2,…, n) which satisfy all
the constraints and non- negativity conditions of an LP problems simultaneously is said to
constitute the Feasible solution to that LP problem.
Infeasible solution The set of values of decision variables x j (j = 1,2,…, n) which do not
satisfy all the constraints and non- negativity conditions of an LP problems simultaneously is
said to constitute the infeasible solution to that LP problem.
 Degenerate A basic feasible solution is called degenerate if value of at least one
basic variable is zero.
 Non-degenerate A basic feasible solution is called non-degenerate if value of all
m basic variables are non- zero and positive.
Optimal solution A feasible solution which optimizes the objective function value of the
given LP problem is called an optimal solution.
Unbounded solution A solution which can increase or decrease the value of the LP problem
indefinitely is called an unbounded solution.
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Example
In order to demonstrate the method, let us take a microcomputer problem in which a firm is
about to start production of two new microcomputers, X 1 and X2. Each requires limited
resources of assembly time, inspection time, and storage space. The manager wants to
determine how much of each computer to produce in order to maximize the profit generated
by selling them. Other relevant information is given below:
Type 1 Type 2
Profit per unit $60 $50
Assembly time per unit 4 hrs 10 hrs
Inspection time per unit 2 hrs 1 hrs
Storage space per unit 3 cubic feet 3 cubic feet
Availability of company resources:
Resources Amount available
Assembly time 100 hrs
Inspection time 22 hrs
Storage space 39 cubic feet

The model is then:

Maximize 60X1 + 50X2
Subject to Assembly 4 X 1 +10 X 2< 100 hrs
Inspection 2 X 1 + 1 X 2<22 hrs
Storage 3 X 1 + 3 X 2<39 cubic feet
X1, X2 > 0

Graphical solution method involves the following steps.

Example
Zmin = 0.1x+0.07y
Subject to:
6x+2y > 18
8x+10y > 40
y> 1
x,y > 0
Find the values of x and y which makes the objective function minimum?
2.3.1.3. Graphical Solutions for the Special Cases of LP

i) Unboundedness
Unboundedness occurs when the decision variable increased indefinitely without violating
any of the constraints. The reason for it may be concluded to be wrong formulation of the
problem such as incorrectly maximizing instead of minimizing and/or errors in the given
problem. Checking equalities or rethinking the problem statement will resolve the problem.
Example:
 17

Max Z = 10X1 + 20X2

Subject to 2X1 + 4X2> 16
X1 + 5X2>15
X1, X2> 0

Following the above listed steps of graphical solution method, we find the following graph
for the above model:

The shaded area represents the set of all feasible solutions and as can be seen from the graph,
the solution is unbounded.

ii) Redundant Constraints

In some cases, a constraint does not form a unique boundary of the feasible solution space.
Such a constraint is called a redundant constraint. A constraint is redundant if its removal
would not alter the feasible solution space. Redundancy of any constraint does not cause any
difficulty in solving an LP problems graphically. Constraints appear redundant when it may
be more binding (restrictive) than others.

iii) Infeasibility
In some cases after plotting all the constraints on the graph, feasible area (common region)
that represents all the constraint of the problem cannot be obtained. In other words,
infeasibility is a condition that arises when no value of the variables satisfy all the
constraints simultaneously. Such a problem arises due to wrong model formulation with
conflicting constraints.
For example,
Max Z = 3X1+2X2
 18

Subject to: 2X1 + X2< 2

3X1 + 4X2> 12
X1, X2 > 0

iv) Multiple optimal solutions

Recall the optimum solution is that extreme point for which the objective function has
the largest value. It is of course possible that in a given problem there may be more than
one optimal solution.
There are two conditions that should be satisfied for an alternative optimal solution to exist:
 The given objective function is parallel to a constraint that forms the boundary of
the feasible region. In other words, the slope of an objective function is the same
as that of the constraint forming the boundary of the feasible region; and
 The constraint should form a boundary on the feasible region in the direction of
optimal movement of the objective function. In other words, the constraint should
be an active constraint.
Note: The constraint is said to be an active or binding or tight, if at optimality the left hand
side equals the right hand side. In other words, an equality constraint is always
active. An inequality sign may or may not be active
For example
Max Z = 8X1+16X2
Subject to: X1 + X2< 200 ……. C1
3X1 + 6X2< 900 ……. C2
X2< 125 ……. C3
X1, X2>0
 19

In the problem above, using extreme point method and solving for values of corner points
simultaneously, the objective function assumes its maximum value of 2,400 at two corner
points B (50,125) and C (100,100). Therefore, the optimal solution is found on the line
segment connecting the two corner points. One benefit of having multiple optimal solutions
is that for other (perhaps qualitative) reasons, a manager may prefer one of them to the others,
even though each would achieve the same value of the objective function. In practical terms,
one of the two corner points is usually chosen because of ease in identifying its values.
Other corner points are computed by identifying the two corner points and keeping the value
of the objective function constant, where 50  X1  100 and 100  X1  125. By selecting
one value for one of the decision variables from the domain, we determine the value for
another decision variable keeping the objective function’s value.
Let X1 = 80.
Then, Z = 8X1+16X2 2400 = 8(80) +16X2
16X2 = 1760
X2 = 110
2.3.2. THE SIMPLEX METHOD
The Simplex Algorithm steps
Step 1: Model Formulation
Step 2: standard Form
o To convert the inequality constraint into equality, we introduce slack,
surplus variables and /or artificial variables.
Slack variables represent unused capacity. Slack variables are
introduced in an inequality of the ‘less than or equal to’ type in LHS of the
constraints.
Surplus variables represent excess amount. Surplus variables are
introduced in an inequality of the ‘greater than or equal to’ type in LHS of
the constraints
The contribution (cost or profit) associated with the slack and surplus
variables are zero.
Artificial variables
o Artificial variables do not represent any quantity relating to the
decision problem,
 20

o During the simplex process, artificial variables are quickly eliminated

from the solution. In fact, the optimal solution must never contain an
artificial variable with a non-zero value.
o The interim value of an artificial variable can range from RHS value of
the constraint to zero.
o Artificial variables have the same non-negativity restriction that the
other types of variables have.

Big-M method
o A value M is assigned to each artificial variable, where M represents a
number higher than any finite number. For this reason, the method of
solving the problems where artificial variables are involved is termed as the
'Big M Method'.
o When the problem is of the minimization nature, we assign in the
objective function a coefficient of +M to each of the artificial variables.
o On the other hand, for the problems with the objective function of
maximization type, each of the artificial variables introduced has a
coefficient -M.

Coefficient of extra variables Presence

in the objective function of
Types of
MaxZ MinZ variables
Extra variables to be
in the
Constrain added
initial
t
solution
mix
< Add only slack variable 0 0 Yes
Subtract surplus variable 0 0 No
> and
Add artificial variable -M +M Yes
= Add artificial variable -M +M Yes

Step 3: Set up the initial simplex tableau.

: The entries in the Cj - Zj, row represent the net contribution to the
objective function that results by introducing one unit of each of
the respective column variables. A plus value indicates that a
greater contribution can be made by bringing the variable for that
column into the solution. A negative value indicates the amount by
which contribution would decrease if one unit of the variable for
that column were brought into the solution.
Step 4: Optimality test
 21

o We test if the current solution is optimum or not.

o If all the elements or entries in the Cj- Zj row (i.e., index row) are
negative or zero, then the current solution is optimum (Maximization
problems). If there some positive number exists, the current solution can
be further improved by removing one basic variable from the basis and
replacing it by some non-basic one.
o If all the elements or entries in the Cj- Zj row (i.e., index row) are
positive or zero, then the current solution is optimum (minimization
problems)
Step 5: select entering and leaving variables, and determine the
pivot element
Entering Variable
To improve the current feasible solution, we replace one current basic
variable (called the leaving variable) by a new non-basic variable
(called the entering variable).
o The non-basic variable at the top of the key column is the entering
variable that will replace a basic variable. One way of doing this is by
identifying the column with the largest positive value in the C j - Zj row
of the simplex table. The column with the largest positive entry in the
Cj - Zj row is called the key or pivot column.
Remark: for minimization problems, the selection of the entering
variable is based on the largest negative value in the row C-Z of a tableau
Leaving Variable
o Next, we determine the departing variable to be replaced in the basis
solution.
o This is accomplished by dividing each number in the quantity column
by the corresponding number in the key column selected in identifying the
entering variable.

Replacement Ratio (RR) = Solution Quantity (Q)

Corresponding values in pivot column

o The row with the minimum ratio is the key row or pivot row. The
corresponding variable in the key row (the departing variable) will leave the
basis.
Remark: Rules for Ties. In choosing a key column and a key row,
whenever there is a tie between two numbers, the following rules may be
followed:
o The column farthest to the left may be selected if there is a tie between
two numbers in the index row.
o The nearest ratio to the top may be selected whenever there is a tie
between two replacement ratios in the ratio column.
 22

Pivot element
o We identify the key or pivot element. This is the number that lies at
the intersection of the key column and key row of a given simplex tableau.
Step 6: Performing pivot operation
Now we evaluate or update the new solution in the following way:
o New values for the key row are computed by simply dividing every
element of the key row by the key element to obtain a unit vector (1) in the
key element.
o The new values of the elements in the remaining rows for the new
simplex table can be obtained by performing elementary row operations on
all rows so that all elements except the key element (1) in the key column
are zero, i.e. unit vector.
o Compute the values of the Cj - Zj row.
Step 7: Repeat step 4- 6 until optimal solution has been reached
Example 1:Micro computer case (Max with < constraint)

Maximize 60X1 + 50X2

Subject to Assembly 4 X 1 +10 X 2< 100 hrs
Inspection 2 X 1 + 1 X 2<22 hrs
Storage 3 X 1 + 3 X 2<39 cubic feet
X1, X2 > 0
Example 2 (Max with mixed constraint inequalities)
Maximize Z= 2X1 + 3X2 + 4X3
Subject to 3X 1 +X 2 + 4X3 < 600
2 X 1 + 4X 2 + 2X3 ≥ 480
2X 1 + 3 X 2+3X3 = 540
X1, X2, X3 > 0
Example 3 (Min with ≥ constraint inequalities)
Min Z = 7X1+9X2
Subject to 3X1+6X2 ≥ 36
8X1+4X2 ≥ 64
X1,X2 ≥ 0
SPECIAL ISSUES
Several special situations which one many encounter during the application of simplex method are
summarized below:
1. Non-feasible Solution/ Infeasibility
Recognized by the presence of an artificial variable in a solution that appears optimal (i.e., a
tableau in which the signs of the values in row C – Z indicate optimality), and it has a nonzero
quantity.

Example:
 23

Cj 5 8 0 0 M

BV X1 X2 S1 S2 A2 Q

5 X1 1 1 -2 3 0 200

8 X2 0 1 1 2 0 100
M A2 0 0 0 -1 1 20
Zj 58 -2 31-M M 1,800+200M
Cj -
0 0 2 M-31 0
Zj
2. Unbounded Solution
a. A solution is unbounded if the objective function can be
improved without limit.
b. An unbounded solution will exist if there are no positive values in
the pivot column.
Example:
Maximization case:
6 9 0 0
Cj

SV X1 X2 S1 S2 Q

9 X2 -1 1 2 0 30

0 S2 -2 0 -1 1 10

Zj -9 9 18 0 270
Cj - Zj 15 0 -18 0

3. Degeneracy
a) Tie for leaving basic variable (key row)/ A conditions that occurs when there is a tie for the
lowest nonnegative ratio which, theoretically, makes it possible for subsequent solutions to cycle
(i.e., to return to previous solutions).
Example

5 8 2 0 0 0
Cj

SV X1 X2 X3 S1 S2 S3 Q

8 X2 1/4 1 1 -2 0 0 10

0 S2 4 0 1/3 -1 1 0 20
0 S3 2 0 2 2/5 0 1 10

Zj 2 8 8 16 0 0 80

Cj - 3 0 -6 -16 0 0
Zj
 24

b) Tie between slack and artificial variable

c) Tie for entering variables
o If there is a tie between two decision variables, then the selection can be made arbitrary.
o If there is a tie between a decision variable and a slack (or surplus) variable, then select the
decision variable to enter into basis first.
o If there is a tie between slack or surplus variable, then selection can be made arbitrary.

Example:
If the equation is max Z:

Cj

SV X1 X2 S1 S3 Q

Zj
Cj - Zj 52 5 0

4. Multiple Optimum Solutions

a. Occur when the same maximum value of the objective function
might be possible with a number of different combinations of
values of the decision variables because the objective function is
parallel to a binding constraint.

Example:
Maximization problem

Cj 3 2 0 0
BV X1 X2 S1 S2 Q
2 X2 3/2 1 1 0 6
0 S2 1 0 1/2 1 3

Zj 3 2 2 0 12
Cj - Zj 0 0 -2 0

POST OPTIMALITY ANALYSIS

1. DUALIITY
The term ‘dual’ in a general sense implies two or double. Every linear programming
problem can have two forms. The original formulation of a problem is referred to as its
Primal form. The other form is referred to as its dual LP problem or in short dual form.
 25

The dual involves setting up and solving an LP problem that is almost a ‘mirror image’ of
an LP problem that has been formulated. Both in its formulation and solution, the dual is
the flip flop version of the primal.
Formulating the Dual
The following rules which guide the formulation of the dual problem will give you the
summary of the general relationship between primal and dual LP problems.
1. If the primal’ objective is to minimize, the dual’s will be to maximize; and the vice
versa
2. The coefficient’s of the primal’s objective function become the RHS values for the
dual’s constraints.
3. The primal’s RHS values become the coefficients of the dual’s objective function.
4. The coefficients of the first “row” of the primal’s constraints become the coefficients
of the first “column” of the dual’s constraint …..
5. The ≤ constraints become ≥ and the vice versa.
Example 1 (the micro computer problem)
1
Maximize z = 60x + 50x 2
Subject to:
1
4x + 10x 2 ≤ 100
1
2x + x 2 ≤22
1
3x +3x 2 ≤ 39
X1, x2 ≥0
EXAMPLE 2 (max. with mixed constraints)
Formulate the dual of this LP model.
1
Maximize z = 50x + 80x 2
Subject to:
1 1
C 3x + 5x 2 ≤ 45
1
C2 4x + 2x 2 ≥16
1
C3 6x +6x 2 = 30
1
x ,x 2 ≥ 0
Example 3
1
Mininize z = x + 2x 2
Subject to:
1 1
C 2x + 54x 2 ≤ 160
1
C2 x - x 2 =16
 26

1
C3 x ≥10
1
x ,x 2 ≥0

Comparison of the Primal and Dual Simplex Solutions

Cross -referencing the values in the primal and dual final simplex tableaus is shown as
follows.

PRIMAL HOW LEBELED/ WHERE CORRESPONDENCE IN

FOUND IN THE PRIMAL THE DUAL
-Decision variable 1
s1,s2,s3,…….
x ,x 2 x 3 ,…..
- slack variable s1,s2,s3,……. y1,y2,y3,……..

- shadow prices Z row under slack column Quantity column in decision

variable rows.
- solution quantities Quantity column
C-Z row under slack and
decision variable columns
Example
Final tableau of Dual solution to the Microcomputer problem
C 100 2 39 0 0 Quantity
Basis 2
y1 y2 y3 s1 s2 Primal shadow prices
y3 39 16/3 0 1 1/3 - 40/3
2/3
y2 22 -6 1 0 -1 1 10

Z 76 22 39 - - 740
C- 9 4
Z

24 0 0 9 4

Primal solution quantities

Final tableau of Primal solution to the Microcomputer problem:

C 60 50 0 0 0 Quantity
Basis x1 x2 s1 s2 s3
s1 0 0 0 1 6 -16/3 24
x1 60 1 0 0 1 -1/3 9
x2 50 0 1 0 -1 2/3 4
Z 60 50 0 10 40/3 740
C-Z 0 0 0 -10 -40/3
 27

Managerial Significance of Duality

Duality is important for two important decisions:
A) For deciding how much to pay for additional unit of resources.
The maximum amount that should be paid for one additional unit of a resource is called its
shadow price (also called simplex multiplier). The shadow price is also defined as the rate
of change in the optimal objective function value with the respect to the unit change in the
availability of a resource. Precisely for any constraint, we have,
Shadow Price = change in the optimal objective function value
Unit change in the availability of a resource
o The total marginal value of the resources equals the optimal objective function value.
The dual variables equal the marginal value of resources (shadow prices).
B) For evaluating the potential impact of a new decision variable
Relative to a product, a manager would want to know what impact adding a new product
would have on the solution quantities and the profit; relative to resources, a manager can
refer to a dual solution to determine how much profit one unit of each resource equivalent
to. Whereas the primal gives solution results in terms of the amount of profit gained from
producing products, the dual provides information on the value of the constrained resources
in achieving that profit.
Advantages of Duality
o It is advantageous to solve the dual of a primal having less number of constraints,
because the number of constraints usually equals the number of iterations required to solve
the problem.
o It avoids the necessity of adding surplus or artificial variables and solve the problem
quickly.
o The dual variables provide an important economic interpretation of the final solution
of an LP problem.
o It is quite useful when investigating change in the parameters of an LP problem
( called Sensitivity analysis)
2. Sensitivity Analysis
o Sensitivity analysis carries the LP analysis beyond the determination of the optimal
solution and begins with the final simplex tableau. Its purpose is to explore how changes in
any of the parameters of a problem would affect the solution.
o Two obvious questions need to be raised and answered: will the optimal value of the
objective function change? Will the optimal value of the decision variables change?
o Sensitivity analysis enables to answer such questions without having to resolve an
entire problem
There are possible categories of parametric changes are distinguished:
1. A change in the value of an objective function coefficient
2. A change in the right-hand side (RHS) value of a constraint
3. A change in a coefficient of a constraint
Sensitivity analysis involves identification of ranges of change for various parameters.
There are three aspects of these ranges:
a) Which range pertains to a given solution?
 28

b) How can the range be determined?

c) What impact on the optimal solution does a change within the range have?
Range of Optimality: Basic Variables
Range of optimality: range of values for an objective function coefficient for which the
optimal solution will remain the same.
Steps to determine the range of optimality
1. denote the change in the decision variable’s OFC with the amount
2. Add to the original value of the OFC.
3. Substitute the sum found in step 2 for the original OFC in the appropriate segments of
the optimal simplex table.
4. Use the results from step 3 to develop a revised simplex table.
5. Find the values of that will keep the basis optimal in the revised simplex table.
6. Upper limit= Original OFC+ smallest positive . If there is no positive value, the
upper limit =∞
7. Lower limit=original OFC- absolute value of the negative value
Note:
Within the range of optimality, the optimal values of the solution variables (both decision
variables and slack/surplus variables) will not change. However, the optimal value of the
objective function will change. Procedures to calculate the optimal value of the objective
function value:
1. Determine whether the OFC is within its range of optimality
2. If the coefficient is within its range, don’t change the basis or basic variable amounts.
To find the optimal OF value
o Substitute the new coefficients for the old coefficient.
3. If the coefficient is outside its range
o Replace the new OFC in the appropriate segments of the optimal simplex table
o Recalculate the z and C-Z row entries in the table
o Use the simplex iteration procedure to develop a revised optimal simplex table.
Range of insignificance: Non-basic decision variables
Range of insignificance: indicate the range in OFC value that will not cause that variable to
come into the basis. Hence, for values that are within a non-basic variable’s range of
insignificance, neither the optimal values of the basic decision variables nor the objective
function will change.
Procedure to determine the range of insignificance
1. Determine the C-Z value for the variable
2. Determine the upper limit
Upper limit=Original OFC+ absolute the C-Z value
For minimization.
Lower limit=original OFC – C-Z value.
Range of feasibility: Non-binding Constraint
Range of feasibility (of a non-binding constraint) is the amount by which its RHS can be
changed without causing it to become it to become binding. That amount is simply the
value of its slack or surplus variable in the optimal solution.
 29

Within the range of feasibility, neither the optimal solution quantities nor the optimal value
of the OF will change.
Range of Feasibility: Binding Constraint
Shadow price: the amount that the OF will change for a unit change in the RHS value of the
corresponding constraint. They are located in row Z of the optimal simplex table in the
slack/surplus columns. Shadow prices are valid only within the range of feasibility of a
constraint.
Steps to determine the range of feasibility
1. For each constraint, the entries in the associated slack/ surplus column must be
divided into the values in the quantity column.
2. Determine the allowable increase and the upper limit
Allowable Increase
o Indicates how much the constraint can be increased before it reaches its upper limit
of feasibility
o The negative ratio closest to zero.
Upper limit = original RHS -smallest negative ratio
3. Determine the allowable decrease and the lower limit
Allowable decrease
o Indicates how much the constraint can be decreased before it reaches its lower limit of
feasibility
o The smallest positive ratio.
Lower limit=original RHS-smallest positive ratio
Note: for minimization problem, the rules are reversed
Upper limit=original RHS+ smallest positive ratio
Lower limit= original RHS + smallest negative ratio
Example 1: Maximization (Microcomputer problem)
Maximize Z=60x1+ 50x2
Subject to
Assembly time 4x1 + 10x2 ≤ 100
Inspection time 2x1+ 1x2 ≤ 22
Storage space 3x1 + 3x2≤ 39
X1, X2> = 0
The final tableau for the microcomputer is shown in the following table since sensitivity analysis
starts from final tableau.
Cj 60 50 0 0 0 Quantity
Basis x1 x2 s1 s2 s3
s1 0 0 0 1 6 -16/3 24
x1 60 1 0 0 1 -1/3 9
x2 50 0 1 0 -1 2/3 4
Z 60 50 0 10 40/3 740
C-Z 0 0 0 -10 -40/3

Required
a) Range of optimality for each basic decision variable
 30

b) Optimal value of the variables and the objective function if the unit contribution of
i) Model 1 microcomputer increased to 80.
ii) Model 2 microcomputer decreased to 20.
c) Range of insignificance for each non-basic decision variable
d) Determine the range of feasibility for the non-binding constraint.
e) Determine the range of feasibility for the binding constraints.
f) The optimal solution for
i) A 3 cubic feet increase in storage space
ii) An 8 cubic feet increase in storage space.
iii) A 6 cubic feet decrease in storage space
iv) A 9 cubic feet decrease in storage space
Example 2: Minimization
Minimize Z= 20x1+ 12x2 +16X3
Subject to
X1 + x2 ≥25
X2 - x3= 0
X3 ≤ 5
X1, X2, X3≥ 0
The final tableau is shown in the following table since sensitivity analysis starts from final
tableau.
20 12 16 0 0 Quantity
Cj x1 x2 X3 S1 s3
Basis
X1 20 1 0 1 -1 0 25
X2 12 0 1 -1 0 0 0
S3 0 0 0 1 0 1 5
Z 20 12 8 -20 0 500
C-Z 0 0 8 20 0
Required
a) Determine each of the following
i) Range of optimality
ii) Range of insignificance
iii) Range of feasibility (for the non-binding constraint)
iv) Range of feasibility (for the binding constraint)
b) If the coefficient of X1 increased by $ 5, what impact would that have on the
quantities and on the value of the OF?
c) If the coefficient of X2 is decreased by $ 10, what impact would that have on the
quantities and on the value of the OF?
d) What impact on the solution would
i) Increases of 10 units in the first constraint have?
ii) A decrease of 10 units in the first constraint has?

CHAPTER 3
TRANSPORTATION AND ASSIGNMENT MODELS
 31

3.1. Transportation Models

The purpose of using an LP model for transportation problems is to minimize transportation costs,
taking into account the origin supplies, the destination demands, and the transportation costs. The
transportation method is similar in certain respects to the simplex technique because
o Both involve an initial feasible solution that is evaluated to determine if it can be improved.
o Moreover, both involve displaying initial and improved solutions in a series of tableaus or
tables.
Examples of transportation problems include shipments from warehouses to retail stores; shipment
from factories to warehouses; shipments between departments within a company, and production
scheduling.
Formulating the Model
a. Supply quantity (capacity) of each origin.
b. Demand quantity of each destination.
c. Unit transportation cost for each origin-destination route.
Assumptions
The transportation algorithm requires the assumption that:
 All goods be homogeneous, so that any origin is capable of supplying any destination, and
 Transportation costs are a direct linear function of the quantity shipped over any route.
 Though it will be modified later in our discussion, we shall add one additional requirement
that the total quantity available is equal to the total demand.
Example
Harley’s Sand and Gravel Pit have contracted to provide topsoil for three residential housing
developments. Topsoil can be supplied from three different “farms” as follows:
Farm Weekly capacity (cubic yards)
A 100
B 200
C 200
Demand for the topsoil generated by the construction projects is:
Project Weekly demand(cubic yards)
1 50
2 150
3 300
The manager of the sand and gravel pit has estimated the cost per cubic yard to ship over each of
the possible routes:
Cost per cubic yard to
From Project #1 Project #2 Project #3
Farm A Birr4 Birr 2 Birr 8
Farm B 5 1 9
Farm C 7 6 3
This constitutes the information needed to solve the problem.
Finding and Initial Feasible Solution
A number of different approaches can be used to find an initial feasible solution. Three of these are
described here:
o The northwest-corner method.
o An intuitive approach/Least cost method
o Vogel’s / Penalty Method
 32

1. The Northwest-Corner Method

The northwest corner method gets its name because the starting point for the allocation process is
the upper left-hand (Northwest) corner of the transportation table.
o Begin with the upper left-hand cell, and allocate as many units as possible to that cell. This
will be the smaller of the row supply and the column demand. Adjust the row and column quantities
to reflect the allocation.
o Remain in a row or column until its supply or demand is completely exhausted or satisfied,
allocating the maximum number of units to each cell in turn, until all supply has been allocated (and
all demand has been satisfied because we assume total supply and demand are equal).

2. The Intuitive Approach / least cost method

This approach, also known as the minimum-cost method, uses lowest cell cost as the basis for
selecting routes. The procedure is as follows:
a) Identify the cell that has the lowest unit cost. If there is a tie, select one arbitrarily. Allocate a
quantity to this cell that is equal to the lower of the available supply for the row and the demand for
the column.
b) Cross out the cells in the row or column that has been exhausted (or both, if both have been
exhausted), and adjust the remaining row or column total accordingly.
c) Identify the cell with the lowest cost from the remaining cells. Allocate a quantity to this cell
that is equal to the lower of the available supply of the row and the demand for the column.
d) Repeat steps (ii) and (iii) until all supply and demand have been exhausted.
3. Vogel’s Approximation Method (VAM)
Steps in VAM
a) Construct the cost, requirement, and availability matrix i.e. cost matrix with column and row
information.
b) Compute a penalty for each row and column in the transportation table. The penalty is merely
the difference between the smallest cost and the next smallest cost element in that particular row
or column.
c) Identify the row and column with the largest penalty. In this identified row (column), choose
the cell which has the smallest cost and allocate the maximum possible quantity to this cell. Delete
the row (column) in which capacity (demand) is exhausted. When there is a tie for penalty, select
one arbitrarily. After allocation, cross that row or column and disregard it from further
consideration.
d) Repeat steps 1 to 3 for the reduced table until the entire capabilities are used to fill the
requirement at different warehouses.
e) From step 4 we will get initial feasible solution. Now for initial feasible solution find the total
cost.

Method of finding optimal solution: Modified Distribution (MODI) method

The MODI method Procedure
Step 1: For an IBFS with m+n-1 occupied cells, calculate row and column index numbers.
The index numbers are determined in such a way that for any occupied cell, the sum of the row
index and the column index equals the cell’s unit transportation cost:
Row index + Column index = Cell cost
Ui + Vj = cij
 33

The index numbers are determined sequentially in a manner dictated by the position of occupied
cells. The process always begins by assigning a value of zero as the index number of row 1.
Step 2: for unoccupied cells, calculate opportunity cost by using the r/ship

eij= Cij- Ui- Vj

The + signs in the path indicate units to be added, the – signs indicate units to be subtracted.
Step 3: Examine the sign of each eij
a) If eij ˃0, then the current basic feasible solution is optimal
b) If eij ˂0, then an improved solution can be entering unoccupied cell in the basis. An unoccupied cell having the largest negative value of eij is chosen for
entering into the solution mix.

Step 4: Construct a closed path (or loop) for the unoccupied cell with largest negative opportunity cost.

o Start the closed path with the selected unoccupied cell and mark a plus (+1) sign in this cell.

o trace a path along the rows (or columns) to an occupied cell, mark the corner point with minus (-).

o Every corner of the loop must be an occupied cell.

Step 5: Select the smallest quantity amongst the cells marked with minus sign on the corners of
the closed loop.
o Allocate this value to the selected unoccupied cell and add it to the other occupied cells
marked with plus signs
o And subtract it from the occupied cells marked with minus signs.
Step 6: obtain a new improved solution and calculate the new total transportation cost.
Step 7: check for Optimality. The procedure terminates when all eij ≥0 for unoccupied cells.

Special Issues
There are a number of special issues in relation to the transportation model. They are:
1. Determining if there are alternate optimal solutions.
2. Defining and handling degeneracy (too few occupied cells to permit evaluation of a solution).
3. Avoiding unacceptable or prohibited route assignments.
4. Dealing with problems in which supply and demand are not equal.
5. Solving maximization problems.
1. Unequal Supply and Demand

a) Demand ˂ supply: A dummy column is added if demand is less than supply.

b) Demand ˃ supply: A dummy row is added if supply is less than demand
Example
Suppose that Farm C in the Harley problem has experienced an equipment breakdown, and it will
be able to supply only 120 cubic yards of topsoil for a period of time.
2. Unacceptable Routes
In some cases, an origin-destination combination may be unacceptable. This may be due to weather
factors, equipment breakdowns, labor problems, or skill requirements that either prohibit, or make
undesirable, certain combinations (routes).
Example
Suppose that in the Harley problem route A-3 was suddenly unavailable because of recent flooding.
3. Alternate Optimal Solutions
 34

Sometimes, transportation problems have multiple optimal solutions. In such instances, it can be
useful for a manager to be aware of alternate solutions, because this gives the manager an option of
bringing non-quantitative considerations into the decision. In the case of the transportation problem,
the existence of an alternate solution is signaled by an empty cell’s evaluation equal to zero.
Example: consider the optimal solution obtained in the Harley problem
4. Maximization
Some transportation type problems concern profits or revenues rather than costs. In such cases, the
objective is to maximize rather than to minimize. Such problems can be handled by adding one
additional step at the start:
o Identify the cell with the largest profit and subtract all the other cell profits from that value.
Then replace the cell profits with the resulting values.
o These values reflect the opportunity costs that would be incurred by using routes with unit
profits that are less than the largest unit profit.
o Replace the original unit profits with these opportunity cost solution. This will be identical to
maximizing the total profit.
o The remainder of the steps for developing an initial feasible solution, evaluation of empty
cells, and reallocation are identical to those used for cost minimization. When the optimal
distribution plan has been identified, use the original cell values (i.e., profits) to compute the total
profit for that plan.
Example
Suppose in the Harley problem, the cell values had been unit profits instead of unit costs.
5. Degeneracy
A solution is degenerate if the number of occupied cells is less than the number of rows plus the
number of columns minus one. i.e., there are too few occupied cells to enable all the empty cells to
be evaluated.
o For the MODI method, it means that it will be impossible to determine all of the row and
column index numbers.
o Obviously, some modification has to be made to determine if such a degenerate solution is
optimal. The modification is to treat some of the empty cells as occupied cells. This is accomplished
by placing a delta () in one of the empty cells. The delta represents an extremely small quantity
(e.g., 0.001 unit)
Exercises

1.Oranges are grown, picked, and then stored in warehouses in Tampa, Miami, and Fresno.
These warehouses supply oranges to markets in New York, Philadelphia, Chicago, and Boston.
The following table shows the shipping costs per truckload ($100s), supply, and demand.
To
From New York Philadelphia Chicago Boston Supply
Tampa 9 14 12 17 200
Miami 11 10 6 10 200
Fresno 12 8 15 7 200
Demand 130 170 100 150
Because of an agreement between distributors, shipments are prohibited from Miami to
Chicago.
a) Set up the transportation tableau for this problem and determine the initial solution using
the minimum cell cost method.
b) Solve using MODI.
 35

c) Are there multiple optimum solutions? Explain. If so, identify them.

d) Formulate this problem as a linear programming model.
2.Steel mills in three cities produce the following amounts of steel:
Location Weekly Demand (tones)
Bethlehem 130
Birmingham 210
Gary 320
These mills supply steel to four cities where manufacturing plants have the following
demand.
Location Weekly Demand (tons)
1. Detroit 130
2. St. Louis 70
3. Chicago 180
4. Norfolk 240
Shipping costs per ton of steel are as follows
From 1 2 3 4
A $14 9 16 18
B 11 8 7 16
C 16 12 10 22

Because of a truckers' strike, shipments are presently prohibited from Birmingham to

Chicago.

a. Set up a transportation tableau for this problem and determine the initial solution.
Identify the method used to find the initial solution.
b. Solve this problem using MODI.
c. Are there multiple optimum solutions? Explain. If so, identify them.
d. Formulate this problem as a general linear programming model.

3.Below is a linear programming problem.

minimize Z = 17x11 + l0x12 + 15x13 + llX21 + 14x22 + l0x23 + 9x31 + 13x32 + llx33 + 19x41 + 8x42 +
12x43
Subject to
x11 + x 12 + x 13 = 120
x 21 + x 22 + x 23 = 70
x 31 + x 32 + x 33 = 180
x 41 + x 42 + x 43 = 30
x l1 + x 21 + x 31 + x 41 = 200
x 12 + x 22 + x 32 + x 42 = 120
x 13 + x 23 + x 33 + x 43 = 80
a. Set up the transportation tableau for this problem and determine the initial solution using
VAM.
b. Solve using the stepping-stone method.
c. Calculate the optimal allocation and total cost
 36

4.2 Assignment Problems

In assignment problem, the question is how should the assignment be made in order that the total
cost involved is minimized (or the total value is maximized when pay-offs are given in terms of,
say, profits).
Example
A manager has prepared a table that shows the cost of performing each of the four jobs by each of
the four employees. The manager has stated that his goal is to develop a set of job requirements that
will minimize the total cost of getting all the four jobs done. It is further required that the jobs be
performed simultaneously, thus requiring one job being assigned to each employee.
Employee
Job A B C D

1 $ 15 20 18 24
2 12 17 16 15
3 14 15 19 17
4 11 14 12 13

Hungarian Assignment Method (HAM)

A method, designed specially to handle the assignment problems in an efficient way, called the
Hungarian Assignment Method, is available, which is based on the concept of opportunity cost. It is
shown in figure 6.1 and discussed here. For a typical balanced assignment problem involving a
certain number of persons and an equal number of jobs, and with an objective function of the
minimization type, the method is applied as listed in the following steps:
Step 1: Locate the smallest cost element in each row of the cost table. Now subtract this smallest
from each element in that row. As a result, there shall be at least one zero in each row of this new
table, called the Reduced Cost Table (Row Reduction).
Step 2: In the reduced cost table obtained, consider each column and locate the smallest element in
it. Subtract the smallest value from every other entry in the column. As a consequence of this
action, there would be at least one zero in each of the rows and columns of the second reduced cost
table (Column Reduction).
Step 3: Draw the minimum number of horizontal and vertical lines (not diagonal ones) that are
required to cover the entire ‘zero’ elements. If the number of lines drawn is equal to n (the number
of rows/columns) the solution is optimal, and proceeds to step 6. If the number of lines drawn is
smallest than n, go to step 4.
Step 4: Select the smallest uncovered (by the lines) cost element. Subtract this element from all
uncovered elements including itself and add this element to each value located at the intersection of
any lines. The cost elements through which only one line passes remain unaltered.
Step 5: Repeat steps 3 and 4 until an optimal solution is obtained.
Step 6: Given the optimal solution, make the job assignments as indicated by the ‘zero’ elements.
This done as follows:
a) Locate a row which only ‘zero’ element. Assign the job corresponding to this element to its
corresponding person. Cross out the zero’s, if any, in the column corresponding to the element,
which is indicative of the fact that the particular job and person are no more available.
b) Repeat (a) for each of such rows which contain only one zero. Similarly, perform the same
operation in respect of each column containing only one ‘zero’ element, crossing out the zero(s), if
any, in the row in which the element lies.
 37

c) If there is no row or column with only a single ’zero’ element left, then select a row/column
arbitrarily and choose one of the jobs (or persons) and make the assignment. Now cross the
remaining zeros in the column and row in respect of which the assignment is made.
d) Repeat steps (a) through (c) until all assignments are made.
e) Determine the total cost with reference to the original cost table
Special Issues
When we solve assignment problems, there are cases which are treated differently from the usual
way.
Example
A small clothing store has four salespeople and three departments. Since each person has a different
level of experience and ability, each will generate different sales in each dept. the sores manager
has estimated the sales volume that can be expected from each person in each dept.
Joe does not have the interest, knowledge or ability to sell accessories. Jim has always had trouble
selling shoes. Therefore, the store manager does not want to assign Joe to accessories or Jim to
shoes. The manager wants to know which salesperson to assign to which department to maximize
sales
Monthly Sales Volume
Salesperson Suits Shoes Accessories

Nancy $300 300 200

Joe 600 600 -
Barbara 400 400 100
Jim 200 - 500
1.Unbalanced Assignment Problems
a) Dummy row
b) Dummy column
2.Constrained/Prohibited/ Assignment Problems
It happens sometimes that a worker cannot perform a certain job or is not to be assigned a particular
job. To cope with this situation, the cost of performing that job by such person is taken to be
extremely large (which is written as M).
3. Multiple Optimal Solutions
In the process of making assignments, it was stated earlier that we select a row/column with only a
single zero to make an assignment. However, a situation may wherein the various rows and
columns, where assignment are yet to be done, have all multiple zeros.
4. Maximization Case in Assignment Problem
In some situations, the assignment problem may call for maximization of profit, revenue, e.t.c. as
the objective..
For dealing with a maximization problem, we first change it into an equivalent minimization
problem. Usually, the largest value of all values in the given matrix is located and then each one of
the values is subtracted from it (the largest value is taken so as to avoid the appearance of negative
signs). Then the problem is solved the same way as a minimization problem is.

CHAPTER 4
DECISION ANALYSIS MODELS
4.1. Characteristics of Decision Theory
Decision theory problems are characterized by the following:
 38

1. List of alternatives: are a set of mutually exclusive and collectively exhaustive

decisions that are available to the decision maker (sometimes, not always, one of these
alternatives will be to “do nothing”.)
2. States of nature: - the set of possible future conditions, or events, beyond the control
of the decision maker, that will be the primary determinants of the eventual consequence of
the decision. The states of nature, like the list of alternatives, must be mutually exclusive
and collectively exhaustive.
3. Payoffs: - the payoffs might be profits, revenues, costs, or other measures of value.
Usually the measures are financial. Usually payoffs are estimated values. The more
accurate these estimates, the more useful they will be for decision making purposes and the
more likely, it is that the decision maker will choose an appropriate alternative. The number
of payoffs depends on the number of alternative/state of nature combination.
4. Degree of certainty: - the approach often used by a decision maker depends on the
degree of certainty that exists. There can be different degrees of certainty. One extreme is
complete certainty and the other is complete uncertainty. The later exists when the
likelihood of the various states of nature are unknown. Between these two extremes is risk
(probabilities are unknown for the states of nature). Knowledge of the likelihood of each of
the states of nature can play an important role in selecting a course of active.
5. Decision criteria: - the decision maker’s attitudes toward the decision as well as the
degree of certainty that surrounds a decision. Example; maximize the expected payoffs.
6. The Payoff Table
A payoff table is a device a decision maker can use to summarize and organize information
relevant to a particular decision. It includes a list of alternatives, the possible future states of
nature, and the payoffs associated with each of the alternative/state of nature combinations.
If probabilities for the states of nature are available, these can also be listed. The general
format of the table is illustrated below:
States of nature
S1 S2 S3
A1 V11 V12 V13
Alternatives A2 V21 V22 V23
A3 V31 V32 V33
where:
Ai = the ith alternative
Sj = the jth states of nature
Vij = the value or payoff that will be realized if alternative i is chosen and event j
occurs.
Decision situations can be categorized in to three classes: Situation of certainty, Situations
where probabilities cannot be assigned to future occurrences and Situations where
probabilities can be assigned to future occurrences. In this chapter we will discuss each of
these classes of decision situations separately.
6.3. Decision Making Under Certainty
The simplest of all circumstances occurs when decision making takes place in an
environment of complete certainty. When a decision is made under conditions of complete
certainty, the attention of the decision maker is focused on the column in the payoff table
 39

that corresponds to the state of nature that will occur. The decision maker then selects the
alternative that would yield the best payoff, given that state of nature.
EXAMPLE
The following payoff table provides data about profits of the various states
of nature/alternative combination.
S1 S2 S3
A1 4 16 12
A2 5 6 10
-1 4 15 A3

If we know that S2 will occurs the decision maker then can focus on the first
raw of the payoff table. Because alternative A1 has the largest profit (16), it
would be selected.
6.4. Decision Making under Complete Uncertainty
Under complete uncertainty, the decision maker either is unable to estimate the
probabilities for the occurrence of the different state of nature, or else he or she lacks
confidence in available estimates of probabilities, and for that reason, probabilities are not
included in the analysis.
A decision making situation includes several components- the decision themselves and the
actual event that may occur future, known as state of nature. At the time the decision is
made, the decision maker is uncertain which state of nature will occur in the future, and has
no control over them.
Decisions made under these circumstances are at the opposite end of the spectrum from the
certainty case just mentioned. Once the decision has been organized in to a payoff table,
several criteria are available making the actual decision. There are several approaches
(criteria) to decision making under complete uncertainty. Some of these discussed in this
section include: maximax, maximin, minimax regret, Hurwicz, and equal likelihood.
1. Maximax/ minimin
With the maiximax criterion, the decision maker selects the decision that will result in the
maximum of the maximum payoffs.( In fact this is how this criterion derives its name-
maximum of maximum). The maximax is very optimistic. The decision maker assumes that
the most favorable state of nature for each decision alternative will occur. For example, the
investor would optimistically assume that good economic conditions will prevail in the
future. The best payoff for each alternative is identified, and the alternative with the
maximum of these is the designated decision.
If the pay off table consists of costs instead of profits, the opposite selection would be
indicated: The minimum of minimum costs. For the subsequent decision criteria we
encounter, the same logic in the case of costs can be used.
2. Maximin/ minimax Criteria
This approach is the opposite of the previous one, i.e. it is pessimistic. This strategy is a
Conservative one; it consists of
o Identify the worst (minimum) payoff for each alternative,
 40

o Selecting the alternative that has the best (maximum) of the worst payoffs.
In effect, the decision maker is setting a floor on the potential payoff by selecting
maximum of the minimum; the actual payoff can’t be less than this amount. It involves
selecting best of the worst.
If it were cost, the conservative approach would be to select the maximum cost for each
decision and select the minimum of these costs.
3. Minimax Regret
Both the maximax and maximin strategies can be criticized because they focus only on a
single, extreme payoff and exclude the other payoffs. Thus, the maximax strategy ignores
the possibility that an alternative with a slightly smaller payoff might offer a better overall
choice.
An approach that does take all payoffs in to consideration is Minimax regret. In order to use
this approach, it is necessary to develop an opportunity loss table. The opportunity loss
reflects the difference between each payoff and the best possible payoff in a column (i.e.,
given a state of nature). Hence, opportunity loss amounts are found by identifying the best
payoff in a column and, then, subtracting each of the other values in the column from that
payoff. Therefore, this decision avoids the greatest regret by selecting the decision
alternative that minimizes the maximum regret.
The values in an opportunity loss table can be viewed as potential “regrets” that might be
suffered as the result of choosing various alternatives. A decision maker could select an
alternative in such a way as to minimize the maximum possible regret. This requires
identifying the maximum opportunity loss in each row and, then, choosing the alternative
that would yield the best (minimum) of those regrets.
Although this approach makes use of more information than either Maximin or Maximax,
it still ignores some information, and, therefore, can lead to a poor decision.
4. Principle Of Insufficient Reason/ Equal likelihood/ Laplace
The Minimax regret criterion’s weakness is the inability to factor row differences. Hence,
sometimes the minimax regret strategy will lead to a poor decision because it ignores
certain information.
The principle of insufficient reason offers a method that incorporates more of the
information. It treats the states of nature as if each were equally likely, and it focuses on the
average payoff for each row, selecting the alternative that has the highest row average.
The basis for the criterion of insufficient reason is that under complete uncertainty, the
decision maker should not focus on either high or low payoffs, but should treat all payoffs
(actually, all states of nature), as if they were equally likely. Averaging row payoffs
accomplishes this.
5. The Hurwitz Criterion
The Hurwitz criterion strikes a compromise between the maximax and maximin criterion.
The principle underlying this decision criterion is that the decision maker is neither totally
optimistic, nor totally pessimistic. With Hurwitz criterion, the decision payoffs are
weighted by a coefficient of optimism, a measure of a decision maker’s optimism. The
coefficient of optimism, which is defined as, is between zero and one (0<<1). If  = 1,
then the decision maker is said to be completely optimistic, if = 0, then the decision maker
 41

is completely pessimistic. Given this definition, if  is coefficient of optimism, 1- is

coefficient of pessimism.
The Hurwitz criterion requires that for each alternative, the maximum payoff is multiplied
by  and the minimum payoff be multiplied by 1-.
A limitation of Hurwicz criterion is the fact that  must be determined by the decision
maker. Regardless of how the decision maker determines, it is still a completely a
subjective measure of the decision maker’s degree of optimism. Therefore, Hurwicz
criterion is a completely subjective decision making criterion.
6.5. Decision Making Under Risk
It is often possible for the decision maker to know enough about the future state of nature to
assign probabilities to their occurrences. The term risk is often used in conjunction with
partial uncertainty, presence of probabilities for the occurrence of various states of nature.
The probabilities may be subjective estimates from managers or from experts in a particular
field, or they may reflect historical frequencies. If they are reasonably correct, they provide
the decision maker with additional information that can dramatically improve the decision
making process.Given that probabilities can be assigned, several decision criteria are
available to aid the decision maker. Some of these are discussed below.
1. Expected Monetary Value (EMV)
The EMV approach provides the decision maker with a value which represents an average
payoff for each alternative. The best alternative is, then, the one that has the highest EMV.
The average or expected payoff of each alternative is a weighted average:
EMVi = Σ Pj.Vij
i=1
Where:
EMVi = the EMV for the ith alternative
Pi = the probability of the ith state of nature
Vij = the estimated payoff for alternative i under state of nature j.
Note: the sum of the probabilities for all states of nature must be 1.
It does not necessarily follow that the decision maker will receive a payoff equal to the
expected monetary value of a chosen alternative. Similarly, the expected payoffs for either
of the other alternatives do not equal any payoffs in those rows. What, then, is the
interpretation of the expected payoff? Simply a long-run average amount; the approximate
average amount one could reasonably anticipate for a large number of identical situations.
2. Expected Opportunity Loss (EOL)
The table of opportunity loss is used rather than a table of payoffs. Hence, the opportunity
losses for each alternative are weighted by the probabilities of their respective state of
nature to compute a long run average opportunity loss, and the alternative with the smallest
expected loss is selected as the best choice.
Note: The EOL approach resulted in the same alternative as the EMV approach
(Maximizing the payoffs is equivalent to minimizing the opportunity losses).
3. Expected Value of Perfect Information (EVPI)
It can sometimes be useful for a decision maker to determine the potential benefit of
knowing for certain which state of nature is going to prevail. The EVPI is the measure of
 42

the difference between the certain payoffs that could be realized under a condition
involving risk.
Note: The EVPI is exactly equal to the EOL. The EOL indicates the expected opportunity
loss due to imperfect information, which is another way of saying the expected payoff that
could be achieved by having perfect information.
Note: The expected value approach is particularly useful for decision making when a
number of similar decisions must be made; it is a long-run approach. For one-shot
decisions, especially major ones, other methods (perhaps, maximax or maximin) may be
preferable. In addition, non monetary factors, although not included in a payoff table, may
be of considerable importance. Unfortunately, there is no convenient way to include them
in an expected value analysis.

CHAPTER 5
NETWORKS ANALYSIS MODELS: CPM/PERT
5.1. Basic concepts and Terms
1. Project
It is essential to identify the various activities involved in the execution of Projects. The large and
complex projects of any organization involve a number of interrelated activities, which might be
performed independently, simultaneously, or one after the other. Modern management has designed
a network models approach to solve the problem associated with the allocation of scarce resources
of manpower, material, money and time to these interrelated activities.

A project can be defined as being a series of activities designed to achieve a specific objective, and
which has a definite beginning and a definite end. For network analysis to be of use, the project
must be capable of being split into a number of discrete activities, which relate together in a logical
and well-defined manner.
2. Network analysis
Network analysis involves the breaking down of a project into its constituent activities, and the
presentation of these activities in diagrammatic form. Networks are one of the important tools of
management science which easily solve problem by presenting in visual formats.
3. Network
It is the graphic representation of logically and sequentially connected arrows and nodes
representing activities and events of a project. Networks are also called arrow diagram.
a) Activity
An activity represents some action and is a time consuming effort necessary to complete a particular
part of the overall project. Thus each and every activity has a point where it ends.
It is represented in the network by an arrow.
A
The straight lines connecting the circles
represent a task that takes time or resources; these lines are called activities. The arrow heads show
the direction of the activity.
Preceding, succeeding and concurrent activities
Preceding Activities
Activities which must be accomplished before a given event can occur are termed as preceding
activities.
Succeeding activities
 43

Activities, which cannot be accomplished until any event has occurred, are termed as succeeding
activities. Activities that can be accomplished concurrently are known as concurrent activities.
This classification is relative, which means that one activity can be proceeding to a certain event,
and the same activity can be succeeding to some other event or it may be a concurrent activity with
one or more activities.
Dummy Activity
Certain activities, which neither consume time nor resources but are used simply to represent a
connection or a link between the events, are known as dummies. It is shown in the network by a
dotted (broken) line. The purpose of introducing dummy activity is:
o To maintain uniqueness in the numbering system as every activity may have distinct set of
events by which the activity can be identified.
o To maintain a proper logic in the network.
b) Nodes
The beginning and end points of an activity are called events or nodes. Event is a point in the line
and does not consume any resource. A numbered circle represents it. The head event has always a
number higher than the tail event.

Tail Head
Merge and burst events
It is not necessary an event to be the ending event of the only one activity but can be the ending
event of two or more activities. Such event is defined as a Merge event.

Merge event

If the event happened to be the beginning event of two or more

activities, it is defined as a Burst event.

Burst event
Illustration: A mini-project having four activities to be accomplished. Activity is the first activity
to be followed immediately by activity B and activity C. the last activity starts immediately after
activity B and C are completed.

B
A

4. Rules for drawing a network

o A complete network should have only one point
C of entry -the start event, and one point of exit
-the finish event.
o Every activity must have one preceding event -the tail, and one following event - each activity
has one head.
o Several activities may use the same tail event, and the same head event, but no two activities
may share the same head and tail events.
o Time flows from left to right.
o An activity must be completed in order to reach the end-event.
 44

o Dummy activities should only be introduced if absolutely necessary.

5. Numbering the Events
After the network is drawn in a logical sequence, every event is assigned a number. The number
sequence must be in such a way that it should reflect the flow of the network. In event numbering,
the following rules should be observed:
o Event numbers should be unique.
o Event numbering should be carried out a sequential basis from left to right.
o The initial event, which has all outgoing arrows with no incoming arrow, is numbered 0 or 1.
o The head of an arrow should always bear a number higher than the one assigned at the tail of
the arrow.
o Gaps should be left in the sequence of event numbering to accommodate subsequent
inclusion of activities, if necessary.
6. Common Errors in Drawing Networks
There are three types of errors, which are most common in network construction. These are:
a) Formation of a loop: If an activity were represented as going back in time, a closed loop
would occur. In a network diagram looping error is also known as cycling error. Cycling (looping)
in a network can result through a simple error or while developing the activity plans, one tries to
show the repetition of an activity before beginning the next activity.
A closed loop would produce an endless cycle in computer programmers with a built- in routine for
detection or identification of the cycle. Thus one property of a correctly constructed network
diagram is that it is non-cyclic.

B
b) Dangling: No activity should end without being joined to
A
the end event. If it is not so, a dummy activity is
introduced in order to maintain the continuity of
the system. Such end-events other than the end of the project as a whole are
called dangling events. All activities C must contribute to the
progression of the network or be discarded as irrelevant.

B
A E
D
C
c) Danglin F Redundancy: If a dummy
activity is the only activity emanating from an event, it can be eliminated.

Dummy D F

5.2 Critical
A Path Method (CPM)
By using CPM/ PERT,
C
managers are able to obtain
B E
o An estimate of how long the project will take
o An indication of which activities are the most critical to timely completion of the
project
o An estimation of how long any activity can be delayed without lengthening the project.
 45

The aim of the CPA is to show the critical path or the sequence of activities where a delay will
result in the overall project being delayed. An activity is said to be critical if a delay in its start will
cause a further delay in the completion of the entire project. The sequence of critical activities in a
network is called the critical path. It is the longest path in the network from the starting event to the
ending event and defines the minimum time required to complete the project. In the network it is
denoted by double line. This path identifies all the critical activities of the project. Hence, for the
activity (i,j) to lie on the critical path, following condition must be satisfied.
a) ESi= LSi
b) EFi = LFj
c) ESj- ESi = LFj- LFi = 0.
ES i, EF j, are the earliest start, and finish time of the event j and i. LS i, LF j, are the latest start,
finish time of the event j and i.
The procedure of determining the critical path
Step 1: List all the jobs and then draw arrow (network) diagrams. Each job indicated by an arrow
with the direction of the arrow showing the sequence of jobs. The length of the arrow has no
significance. The arrows are placed based on the predecessor, successor, and concurrent relation
within the job.
Step2. Indicate the normal time ( tij) for each activity ( i,j) above the arrow which is deterministic.
Step 3: Calculate the earliest start time and the earliest finish time for each event and write the
earliest time Ei for each event i. Also calculate the latest finish and latest start times.
Step 4: Indurate the various times namely normal time, earliest time and latest time on the arrow
diagram.
Step 5: Determine the total float for each activity by taking the difference between the earliest start
and the latest start time.
Step 6: Identify the critical activities and connect them with the beginning event and the ending
event in the network diagram by double line arrows. This gives the critical path.
Step 7: Calculate the project duration.
5.3 Project Evaluation and Review Technique (PERT)
PERT is a time-oriented technique designated to cater for projects where it is not possible to
estimate the exact duration of the activity. It uses statistical theory to estimate how long a project is
likely to last, and the probability of completing the project by a particular date.
PERT involves four key activities
PERT is a further development of the CPA approach which deals with the influence of changes in
time on the cost of a project. In summary, the approach involves four key activities:
1.Estimating the normal duration for an activity and the normal cost associated with this time
period.
2.Estimating the extent to which this normal duration may be reduced and the additional costs of
doing so
3. Addressing those activities on the critical path, so that each activity is ranked in terms of the cost
of saving one week of time
4.The project managers assessing the potential benefits of saving time on the project against the
incremental costs of doing so.
Probabilistic Time Estimates
PERT develops both a measure of central tendency (a mean) and a measure of dispersion ( a
standard deviation) of the time required to complete each activity of a project. Having been
provided with these two parameters of the completion time distributions for a project probabilities
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of finishing the project in any specified lessen or greater time than the mean time can be readily
determined.
Probabilistic time estimates can be made with the help of the following three estimates.
1. Optimistic time estimate (to) : It is a time required for the completion of an activity under
optimum conditions.
2. Pessimistic time (tp): It is a time estimate under worst conditions.
3. The most likely time estimate (tm): It is the most probable amount that will be required.
Thus by making use of the above, one can estimate project completion times as;
Expected time = te = to + 4tm + tp, Where t is time
6
Standard deviation =  = tp-t0
6
Variance =  = ( tp - to)
2 2

36
Example: A research & development department is developing a new power supply for a
console television set. It has broken the job down into the following form:

Job Immediate Expected tome

predecessors (days)
A - 5
B A 7
C B 2
D B 3
E C 1
F D 2
G C 1
H E,F 3
I G,H 10

Required:
a) Draw an arrow diagram representing the project.
b) Find the total float for each activity.
c) Find the critical path and the total project duration.
d) Find the ES,EF,LS and LF of each activity
5.4. Time- Cost Trade Offs: Crashing

Crashing -is accelerating project of those critical activities that have the lowest ratio of incremental
cost to incremental time saved
Crash time -is the minimum time in which activity can be completed in case additional remoras are
inducted.
Crash cost -is the total cost of completing an activity in crash time.

The objective of project crash cost analysis is to reduce the total projected completion time (to
avoid late penalties, to take advantage of monetary incentives for timely completion of a project, or
to free resources for we on other the projects), while minimizing the cost of crashing.
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Crashing means adding extra resources and managers are usually interested in speeding up project
at the least additional cost. In order to make a rational decision about which activities (if any) to
crash and the extent of crashing desirable, a manager needs the following information:
1. Regular time and crash time estimates for each activity (normal)
2. Regular (normal) cost and crash cost estimates for “
3. A list of activities that are on the critical path

Note: Activities on critical path are potential candidates for crashing between shortening non
critical activities would not have an impact on total project duration and activities are crashed
according to crashing costs. Crash those activities with the lowest cost first. Moreover, crashing
should continue as long as the cost to crash is less than the benefit received from crashing. These
benefits might take the form of incentive payments for early completion of the project as part of a
government contract, or they might reflect savings in the indirect project costs, or both
The general procedure for crashing is:
1. Obtain estimates of regular and crash times and costs for each activity.
2. Determine the lengths of all paths and path slack times.
3. Determine which activities are on the critical path.
4. Crash critical activities, in order of increasing costs, as long as crashing costs do not exceed
benefits.
 Note that two or more paths may become critical as the original critical path becomes shorter, so
that subsequent improvements will require simultaneous shortening of two or more paths. In some
cases it will be most economical to shorten an activity that is on two or more of the critical paths.
This is true whenever the crashing cost for a joint activity is less than the sum of crashing one
activity on each separate path

Cost/time = Crash cost - Normal Cost

Normal time – Crash time

Crash Normal
Time

Example: Using information below develop an optimum time – cost solution. Assume that
indirect project costs are birr 1000 per day.
Activity Normal time Crash time Cost/day to crash
a 6 6 -
b 10 8 500
c 5 4 300
d 4 1 700
e 9 7 600
f 2 1 800
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