CHAPTER ONE

1. Introduction to Operations Research

1.1. OR – Quantitative approach to decision making

Decision-making in today’s social and business environment has become a complex task. The
uncertainty of the future and the nature of competition and social interaction greatly increase
the difficulty of managerial decision-making. Knowledge and technology are changing rapidly,
the new problems with little or no precedents these problems and provide leadership in the
advancing global age, decision-makers cannot afford to make decisions by simply applying
their personal experiences, guesswork or intuition. Because the consequences of the wrong
markets, producing the wrong products, providing inappropriate services, etc., will have major,
often disastrous consequences for organizations.

Operations Research as one of the quantitative aid to decision-making, offers the decision
maker a method of evaluating every possible alternative (act or course of action) by using
various techniques to know the potential outcomes. This is not to say, however, that
management decision-making is simply about the application of operations research techniques.

In general, while solving a real-life problem, the decision-maker must examine in both from
quantitative as well as qualitative perspective. Information about the problem from both these
perspectives needs to be brought together and assessed in the context of the problem. Based on
some mixes of the two sources of information, a decision should be taken by the decision-
maker.

The evaluation of each alternative is extremely difficult or time consuming for two reasons:
First, the amount and complexity of information that must be processed; second the number of
alternative solutions could be so large that a decision maker simply can not evaluate all of them
to select an appropriate one. For these reasons when there is lack of qualitative information,
decision makers increasingly turn to quantitative methods and use computers to arrive at their
optimal solution to problems involving large number of alternatives. The study of these
methods and how decision makers use them in the decision process is the essence of operations
research approach.

1.2. History of Operations Research

It is generally agreed that operations Research came is 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 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.

There are three important factors behind the rapid development in the use of operations research
approach.
 (i) The economic and industrial boom after World War II resulted in continuous
mechanization, automation, decentralization of operations and division of
management factors. This industrialization also resulted in complex managerial
problems, and therefore application of operations research to managerial decision-
making become popular.
(ii) Many operation researchers continued their research after war. Consequently, some
important advancement were made in various operations research techniques: linear
programming and its solution by a method known as simplex method, statistical
quality control, dynamic programming, queuing theory and inventory theory were
well developed during this time.
(iii) Analytic power was made available by high-speed computers. The use of computers
made it possible to apply many OR techniques for practical decision analysis.

1.3. Nature and Significance of Operations Research

The Operations research approach is particularly useful in balancing conflicting objectives

(goals or interests), where there are many alternative courses of action available to the decision-
makers. In a theoretical sense, the optimum decision must be one that is best for the
organization as a whole. It is often called global optimum. A decision that is best for one or
more sections of the organization is usually called suboptimum decision. The OR approach
attempts to find global optimum by analyzing inter-relationships among the system components
involved in the problem. In other words, operations research attempts to resolve the conflicts of
interest among various sections of the organization and seeks the optimal solution which may
not be acceptable to one department but is in the interest of the organization as a whole.
1.4. Operation Research: Some definitions
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".

A few other definitions, which are commonly used and widely acceptable, are:

Operations research is a systematic application of quantitative methods, techniques and

tools to the analysis of problems involving the operation of systems.

Operations research 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.

Operations Research, in the most general sense, can be characterized as the application of
scientific methods, techniques and tools, to problems involving operations of a system so as
to provide those in control of the operations with optimum solutions to the problems.

Operation research seeks 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.

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 Operations research 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 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.
1.5. Features of Operations Research Approach

From the previous discussions and various definitions of OR, important features or
characteristics can be drawn. These features of OR approach to any decision and control
problems can be summarized as:

1.5.1. Inter-disciplinary approach

Interdisciplinary teamwork is essential because while attempting to solve a complex

management problem, one person may not have complete knowledge of all its aspects such as
economic, social, political, psychological, engineering, etc. This means we should not expect a
desirable solution to managerial problems from a single individual or discipline. Therefore, a
team of individuals specializing in mathematics, statistics, computer science, psychology, etc,
can be organized so that each aspect of the problem could be analyzed by a particular specialists
in that field.
But we shouldn’t forget that certain problem situations may be analyzed even by one
individual.

1.5.2. Methodological Approach

Operation research is the application of scientific methods, techniques and tools to problems
involving the operations of systems so as to provide those in control of operations with
optimum solutions to the problems.
Note: A system is defined as an arrangement of components designed to achieve a particular
objective(s) according to plan. The components may be either physical or conceptual
or both but they share a unique relationship with each other and with the overall
objective of the system.

1.5.3. Holistic Approach or Systems Orientated

While arriving at a decision, an operation research team examines the relative importance of all
conflicting and multiple objectives and the validity of claims of various departments of the
organization from the perspective of the whole organization.

1.5.4. Objectivistic Approach

The OR approach seeks to obtain an optimal solution to the problem under analysis. For this, a
measure of desirability (or effectiveness) is defined, based on objective(s) of the organization.
A measure of desirability so defined is then used to compare alternative courses of action with
respect to their outcomes.
1.5.5. Decision Making – OR increases the effectiveness of management decisions. It is the
decision science which helps management to make better decisions. So the major premise of
OR is decision making, irrespective of the situation involved.
1.5.6. Use of Computers: OR often requires a computer to solve the complex mathematical
model or to perform a large number of computations that are involved.

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1.5.7. 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.
Operations research, though young, is a recognized and established discipline in the field of
business administration. The application of management science techniques is widespread, and
they have been frequently credited with increasing efficiency and productivity of business firms

1.6. Models and Modeling in Operations Research

Both simple and complex systems can easily be studied by concentrating on some portion or
key features instead of concentrating on every detail of it. This approximation or abstraction,
maintaining only the essential elements of the system, which may be constructed in various
forms by establishing relationships among specified variables and parameters of the system, is
called a model. In general, 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.

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. But oversimplification of problem can lead to a poor decision. Model enrichment
is accomplished through the process of changing constants in to variables, adding variables,
relaxing linear and other assumptions, and including randomness.

1.6.1. Classification of OR Model

As we discussed earlier, OR model is an abstract representation of an existing problem

situation. It can be in the form of a graph or chart, but most frequently an OR model consist of a
set of mathematical relationships. These mathematical relationships are made up of numbers
and symbols.

There are many ways to classify models:

I) Classification based on structure

a) 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 can not
manipulated and are not very useful for prediction, problems such as portfolio analysis

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 selection, media selection, production scheduling, etc cannot be analyzed by physical
models.

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

ii) Classification based on function or purpose

Models based on the purpose of their utility include:

a) 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.

b) Predictive Models: These models indicate “If this occurs, then that follow”. They relate
dependent and independent variables and permit trying out, “what if” questions. 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.

c) 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.

iii) Classification Based on Time Reference

a) 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.

b) 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.

iv). Classification based on Degree of certainty

a) 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. The results of
the models assume single value. Linear programming models are examples of deterministic
models.

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b) Probabilistic (Stochastic) models: Models in which at least one parameter or decision
variable is a random variable are called probabilistic (or stochastic). Since at least one
decision variable is random, a dependant variable which is the function of independent
variable(s) will also be random. This means consequences or pay off due to certain changes
in the independent variable cannot be produced with certainty. However, 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.

v) 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.

Simulation models are more flexible than mathematical ones and therefore, can be used to
represent a complex system which otherwise can not be represented mathematically. These
models do not provide general solution like those of mathematical Models.

1.6.2. 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 any. 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.
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.

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 1.6.3. 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:
Abstraction
Logic
Real World System Model Building
problem Choosing a - Establish relationships among variables
particular aspect of and parameters of the system.
reality which needs - Define objectives to be achieved and
attention limitations on resources

Solve the Model

Apply suitable OR technique to get solution in
terms of decision variables.

Modify the Model

Testing the Model and its solution

- Put values of decision variables in the

model under consideration
- See whether solution in valid or not
Not acceptable

Implementation and Control

- Interpret solution values

- Put the knowledge (result) gained
form the solution to work through
organizational policies Acceptable
- Monitor changes and exercise control.
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). The system must be continuously and closely observed so that problems can be
identified as soon as they occur or anticipated. Problems are not always the results of crisis; but
instead frequently involve an anticipatory or planning situation. Once it has been determined
that a problem exists, the problem must be clearly and concisely defined. Because improperly
defining a problem can easily result in no solution or an inappropriate solution. Since the
existence of a problem implies that the objectives of the firm are not being met in some way,
the goals (objectives of the organization) must also be clearly defined.

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. The first component of the problem to be defined is the decision
maker who is not satisfied with the existing state of affairs. The interaction with the
decision maker will help the OR specialist in knowing his/her objectives. That is, either

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 he/she has already obtained some solution of the problem and wants to retain it, or he
wants to improve it to a higher degree. If the decision maker has conflicting multiple
objectives, he/she may be advised to rank the objectives in the order of preference;
overlapping objectives may be eliminated.

 Decision environment

It is desirable to know about the resources such as managers, employees equipments, etc which
are required to carry out the policies of the organization considering the social and ecological
environment in which the organization functions. Knowledge of such factors will help in
modifying the initial set of decision-makers objectives.

 Alternative courses of Action

The problem arises only when there are several courses of action available for a solution. An
exhaustive list of course of action can be prepared in process of going through the above steps
of formulating the problem. Courses of action which are not feasible with respect to objectives
and resources may be ruled out.

 Measure of effectiveness

A certain measure of effectiveness or performance is required in order to evaluate the merit of

the several courses of action. The performance or effectiveness can be measured in different
units such as birr (net profits), percentage (share of market desired), time dimension (service or
waiting time).

 Collecting Data and Constructing a Mathematical Model

After the problem is clearly defined and understood, the next step is to collect required data and
then formulate a mathematical model. Model construction consists of hypothesizing
relationships between variables subject to and not subject to control by decision-maker.

 Objective function.

It is a representation of (i)the criterion that expresses the decision-makers manner of

evaluating the desirability of alternative values of decision variables, and (ii) how that
criterion is to be optimized (minimized or maximized. A stated objective helps to focus
attention on what the problem actually is.

 Constraints or Limitations

These are the restrictions on the values of the decision variables. These restrictions can arise
due to limited resources such as space, money, manpower, material, etc. The constraints may be
in the form of equations or inequalities.

 Functional relationships

In a decision problem, the decision variables in the objective function and in the constraints are
connected by a specific functional relationship.

 Parameters- These are constants in the functional relationships. Parameters can be

deterministic or probabilistic in nature.

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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. Solving the model requires the
use of various mathematical tools and numerical procedures. In general, there are two
categories of methods used for solving an OR model.
 Optimization model. These models yield the best value for the decision variables both
for unconstrained and constrained problems. In constrained problems, these values
simultaneously satisfy all of the constraints and provide an optimal or acceptable value
for the objective function or measure of effectiveness. The solution so obtained is called
the optimal solution to the Problem.
 Heuristic Model. These methods yield values of the variables that satisfy all the
constraints, but not necessarily provide optimal solution. However, these values provide
an acceptable value of the objective function.

Heuristic Methods are sometimes described as “rules of thumb” which work. These
methods are used when obtaining optimal solution is either very time consuming or the
model is complex.

Difficulties in problem solving

Sometimes difficulties in problem solving arise due to lack of an appropriate methodology
for it and psychological perceptions on the part of the problem solver. The major difficulties
in problem solving:
(i) Failure to recognize the existence of a problem (iii) Failure to use all available
information
- Some people tend to personalize problems
- The problem-solver fails to seek out
- Problems arise in context which people have had no information
experience.

ii)Failure to define the correct problem iv) Failure to recognize or question

- One situation may contain many intertwined assumptions.
problems.
- Obvious problems are often symptoms of much - it is assumed that there is a
deeper problems. solution to every problem

- The inability to identify accurately what is going - Rigid thinking blocks ones view
on can lead to inaccurate problem identification. point.
- Attitudes and beliefs can blind the problem
solver to the real causes on undesirable
situations.

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.

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 (ii) Certain aspect of the problem may have been overlooked, omitted or simplified,
(iii) The data may have been incorrect estimated or recorded, perhaps when entered in to
the computer.

Step 5. Implementing the solution

The decision-maker has not only to identify good decision alternatives but also to select
alternatives that are capable of being implemented. It is important to ensure that any solution
implemented is continually reviewed and updated in the light of a changing environment.

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. If during validation, the solution cannot be
implemented, one needs to (a) identify constraint that were omitted during the original problem
formulation or (b) find if some of the original constraints were incorrect and need to be
modified. In all such cases, one must return to the model formulation step and carefully make
the appropriate modifications to represent more accurately the given problem. A model must be
applicable for a reasonable time period and should be updated from time to time, taking in to
consideration the past, present, and future aspects of the problem.

Step7. 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.

1.7. Features of OR solution

A solution that works but is quite expensive compared to the potential savings from its
application should not be considered successful. Also a solution that is well within the budget
but which does not accomplish the objective is not successful either. The following are features
of good solution:
 Technically appropriate. The solution should work technically; meet the constraints and
operate in the problem environment.
 Reliable. The solution must be useful for a reasonable period of time under the
conditions for which it was designed.
 Economically viable. The economic value should be more that what it costs to develop
and should be seen as wise investment in hiring OR talents.
 Behaviorally appropriate. The solution should be behaviorally appropriate and must
remain valid for reasonable period of time within the organization.

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 1.8. Operations Research Techniques

OR techniques can be loosely classified in to five categories

Management Science Techniques

Linear Mathematical Programming

Probabilistic Techniques Inventory Techniques Net work Techniques Other linear and non-linear Techniques

Linear programming models Probability Certain Demand Net work flow Dynamic Programming
Graphic Analysis Decision Analysis Uncertain Demand CPM/PERT Break-even Analysis
Simplex Method Game Theory Non-linear programming
Post optimality Markov Analysis
Transportation and assignmentQueuing
Integer linear programming Simulation
Goal Linear Programming Forecasting

Source: Taylor, 1990, Introduction to Management Science, 3rd edition, Brown Publisher

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Linear Mathematical Programming Techniques refer to a predetermined set mathematical
solution steps used to solve a problem, while probabilistic techniques are techniques with model
parameters that are not known with certainty. Inventory models are specifically designed for the
analysis of inventory problems frequently encountered by business firms. On the other hand,
network techniques consist of models that are represented as diagrams rather than strictly
mathematical relationship. As such, these models offer a pictorial representation of a system.
Other linear and non-linear Techniques deal with calculus-based models.

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