Operations Research

Chapter One
1. Introduction to Operations Research

Unit objective:
Up on the completion of this unit, the learner would be able to:
 Define operations research
 Describe significance of OR
 Explain models and their importance
 Differentiate among different categories of models
 Elucidate methodology in OR
 Identify application areas of OR models
 Describe techniques in OR

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 can not 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.

? Dear learner, consider a problem of an investor considering

investment in three alternatives: Stock-market, real state and Bank Deposit. Discuss some
of the quantitative and qualitative factors (information) to be considered to suggest an
acceptable solution in each case?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_____________________
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.

ADU- Department of Business Administration Page 1

Operations Research

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 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.

? Dear learner, discuss with your colleagues about how conflicting interests arise in the
organization and how OR tries to balance these interests?
_________________________________________________________________________
_________________________________________________________________________

ADU- Department of Business Administration Page 2

Operations Research

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".

Because of the wide scope of application of operations research, giving a precise definition is
difficult. However, a few definitions of OR are given below.

Operations research 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. The distinctive approach is to develop a
scientific model of the system incorporating measurements of factors such as chance and
risk with which to predict and compare the out comes of alternative decisions, strategies,
or controls. The purpose is to help management in analyze its policy and actions
scientifically.
Operations Research Society, UK

Operations research is concerned with scientifically defining how to best design and
operate man-machine systems usually requiring the allocation of scarce resources.

Operations Research Society, America

Apart from being lengthy, the definition given by ORSUK, has been criticized, because it
emphasizes complex problems and large systems leaving the impression that it is a highly
technical approach suitable only to large organizations. The definition of ORSA contains an
important reference to the allocation of scarce resources. The key words used in the above
definitions are scientific approach, scarce resources, system and model. The UK definition
contains no reference to optimization, while the American definition has no reference to the word,
best.

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.

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

ADU- Department of Business Administration Page 3

Operations Research

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.

? Dear learners, would you discuss on the above definitions and define OR in your words?
___________________________________________________________________________
___________________________________________________________________________
________________________________________________________________________

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.

? Dear learner, can you mention situations which can be and can not be analyzed by a single
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 relation ship with each other and with the overall objective of the system.

1.5.3. Wholistic Approach or Systems Orientation

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.

ADU- Department of Business Administration Page 4

Operations Research

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.
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.

Activity
1. Operations research is an aid for the executive in making his/her decisions by providing
the needed quantitative information, based on scientific method analysis. Discuss.

2. Discuss the significance and scope of OR in modern management and Ethiopian

context?

3. Quantitative techniques complement the experience and judgment of an executive in

decision making. They do not and can not replace it. Discuss.

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.

? Dear learner, can you mention some of the limitations of models?

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
__

ADU- Department of Business Administration Page 5

Operations Research

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 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.

ADU- Department of Business Administration Page 6

Operations Research

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.

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 can not 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.

ADU- Department of Business Administration Page 7

Operations Research

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.

? Dear learner, do you think that the above classification of models is mutually exclusive?
Support your response with evidence.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
___
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 he investigation considerably and provide a powerful and flexible for
predicting the future state of the process or system.

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:

ADU- Department of Business Administration Page 8

 Operations Research

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

Not acceptable - Put values of decision variables in the

model under consideration
- See whether solution in valid or not

Implementation and Control

- Interpret solution values

- Put the knowledge (result) gained Acceptable
form the solution to work through
organizational policies
- 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.

? Dear learner, can you identify individual(s) who are responsible to identify problems and
problems they face while they identify these problems?
___________________________________________________________________________
_________

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. 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

ADU- Department of Business Administration Page 9

Operations Research

decision maker will help the OR specialist in knowing his/her objectives. That is, either
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-maker’s 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. Certain basic
components required in every decision problem model are:

o Controllable (decision) Variables - These are the issues or factors in the problem whose
values are to be determined (in the form of numerical values) by solving the model. The
possible values assigned to these variables are called decision alternatives (strategies or
courses of actions). Example, in LPP the number of units produced is a decision variable.

o Uncontrollable variable. These are the factors whose numerical value depends up on the
external environment prevailing around the organization. The values of these variables are
not under the control of the decision-maker and are also termed as state of nature.

 Objective function.

It is a representation of (i) the criterion that expresses the decision-maker’s 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

ADU- Department of Business Administration Page 10

Operations Research

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. A general decision problem model might take the
form:

Optimize (Max or Min) Z = f(x)

Subject to the constraints:

gi(x) (≤, = ≥ ) bi; i = 1,2,…..m and x ≥ 0

Where, x = a vector of decision variables (x1, x2, x3, xn)

f(x) = Criterion or objective function to be optimized

gi(x) = the ith constraint

bi = fixed amount of the ith resource

A model is referred to as a linear model if all functional relationships among decision variables
X1, X2, Xn in f(x) and g(x) are of a linear form. But if one or more of the relationships are non –
linear, the model is said to be a non-linear model.

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

deterministic or probabilistic in nature.

? Dear learner, take the case of furniture manufacturing unit at Adama

University. Identify and define the unstructured problem of the unit and
construct a real OR model for the unit?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
____
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 genera, 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.

ADU- Department of Business Administration Page 11

Operations Research

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

Some times 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
information
- Problems arise in context which people have

had no experience.

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

assumptions.
- One situation may contain many intertwined
problems. - it is assumed that there is a
solution to every problem
- Obvious problems are often symptoms of much
deeper problems. - Rigid thinking blocks ones view
point.
- The inability to identify accurately what is going
on can lead to inaccurate problem identification.

- 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.

(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

ADU- Department of Business Administration Page 12

Operations Research

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.

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.

1.7. 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.

1.8. Basic Operations Research Models

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

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.
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

ADU- Department of Business Administration Page 13

Operations Research

linear inequalities or equalities, the allocation problem is classified as linear programming

problems.
But, if the objective unction of any or all constraints can not be expressed as a system of linear
equalities or inequalities, the allocation problem is classified as a non-linear programming
problem.

When the solution values or decision variables for the problem are restricted to being integer
values, the problem is classified as an integer programming. The problem having multiple,
conflicting and incommensurable objective function (goals) subject to linear constraints is called
goal programming. If decision variables in the linear programming problem depend on chance,
such a problem is called is called a stochastic programming problem.

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. Conversely, if the resources can be used for more than one activity, the allocation
problem is classified as a transportation problem.

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.

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.
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.

Decision analysis Model

These models deal with the selection of an optimal course faction 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.

1.9. Operations Research Techniques

OR techniques can be loosely classified in to five categories

ADU- Department of Business Administration Page 14

Operations Research

Management Science Techniques

Linear Mathematical Probabilistic Inventory Net work Oth

Programming Techniques Techniques Techniques line

Linear programming Probability Certain Demand Net work flow Dyn

models Decision Analysis Uncertain Demand CPM/PERT Pro
Graphic Analysis Game Theory Bre
Simplex Method Markov Analysis Non
Post optimality Queuing prog
Transportation and Simulation
assignment Forecasting
Integer linear
programming
Goal Linear
Programming

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

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.

Note: This classification is loose as many of the techniques cross over between classifications.
Example, Net work, inventory models can be either deterministic or probabilistic.

Summary
 Management science is the application of a scientific approach to solving management
problems in order to help managers make better decisions.
 Management science encompasses a logical, systematic approach to problem solving,
which closely parallels what is known as scientific method for attacking problems and
includes generally recognized ordered set of steps including: Observation, definition of
problems, model construction, model solution, solution testing, implementation of
solution results.
 A management science model is an abstract representation of an existing problem
situation.
• Management science techniques roughly can be categorized as: Linear mathematical
programming, probabilistic techniques, inventory techniques, and network techniques,
other linear and nonlinear techniques.

ADU- Department of Business Administration Page 15

Operations Research

 Activity
1. Discuss what the management science approach to problem solving encompasses?
2. Explain what a model is and how it is used in management science?
3. The ultimate test of a manager who uses management science techniques is the ability
to transfer knowledge in this material in to the business world. What does it mean?
4. Suppose you are being interviewed by the manger of the commercial firm for a job in
a research department which deals with the application of quantitative techniques.
Explain the scope and purpose of quantitative technique and its usefulness to the firm.
Give some examples of the applications of quantitative techniques in industry.
5. Management science is an ongoing process. Why do you think is the reason?
6. Distinguish between model results that recommend a decision and model results that
are descriptive.

ADU- Department of Business Administration Page 16

Operations Research

Chapter Two
2. LINEAR PROGRAMMING: Application and Model
Formulation
Unit Objectives:
Up on completion of this unit, the learner is expected to:
 Recognize problems that can be solved using LP models.
 Formulate an LP model in mathematical terms.
 Solve Linear Programming Problems (LPP) using both graphic and simplex approach.
 Explain special cases in both graphic and simplex techniques.

INTRODUCTION
In 1947, George Danzig developed the use of algebra for determining solutions to problems that
involved the optimal allocation of scarce resources. In spite of numerous potential applications in
business, response to this new technique was low due to substantial computational burden, which
is now removed with subsequent advances in computer technology and related software during
the last three decades.

The term linear implies that all the mathematical relations used in the problem are linear or
straight-line relations, while the term programming refers to the method of determining a
particular program or plan of action, i.e., the use of algorithms that is a well defined sequence of
steps that will lead to an optimal solution. Taken as a whole, the term linear programming refers
to a family of mathematical techniques for determining the optimum allocation of resources and
obtaining a particular objective when there are alternative uses of the limited or constrained
resources.

The technique of linear programming is applicable to problems in which the total effectiveness
can be expressed as linear function of individual allocations and the limitations on resources give
rise to linear equation or inequalities of the individual allocations.
The usefulness of this technique is enhanced by the availability of several user-friendly soft wares
such as STORM, TORA, QSB+, LINDO, etc. However, there is no general package for building
an LP model. Model building is an art of practice.

? Dear learner, can you make differences between solutions of LP models solved manually
and using computers utilizing soft wares?
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________

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.

ADU- Department of Business Administration Page 17

Operations Research

2.1.1. COMPONENTS OF LP MODELS

There are four major components of LP models including: Objective function, decision variables,
constraints and parameters.

ADU- Department of Business Administration Page 18

Operations Research

Objective and Objective Function

The objective in problem solving is 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.

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:

ADU- Department of Business Administration Page 19

Operations Research

? Dear learner, can you give some of the examples of LP models which consist
of unit and system constraint and discuss the components of each constraint in
the model?
________________________________________________________________
________________________________________________________________
________________________________________________________________

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., x1x2) 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

ADU- Department of Business Administration Page 20

Operations Research

met. Large departures almost surely will have a significant effect on the model. The other
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.

? Dear learner, can you give examples for each of the above assumptions? What will
happen if the assumptions are not met?
______________________________________________________________________
______________________________________________________________________
____________________________________________________________________

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 can not 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 relation ships 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.

ADU- Department of Business Administration Page 21

Operations Research

 Parameters appearing in the model are assumed to be constant but, in real life situation
they are frequently neither known nor constant.

? Dear learner, can you mention some other advantages and disadvantages of LP?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

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.

2.2. LINEAR PROGRAMMING APPLICATIONS

There is a wide range of problems that lend themselves to solution by linear programming
techniques. This discussion is only meant to give an indication of the LP techniques for
managerial decision making and the apparent diversity of situations to which linear programming
can be applied. Some of these include production management (product mix, blending problems,
production planning, Assembly line balancing…), Marketing management (media selection,
traveling sales man problem, physical distribution), Financial management (portfolio selection,
profit planning), agricultural application, military applications, personnel management (staffing
problem, Determination of equitable salary and etc.

Product Mix
Organizations often produce similar services that use the same resources. For example, labor,
material cost, etc. because of limited resources available during any time period a decision
must be made concerning how much of each product to produce or make available. Linear
programming answers what mix of output (or service) will maximize profit given the
availability of scarce resources

Diet problem
It usually involves the mixing of raw materials or other ingredients to obtain an end product
that has certain characteristics. For example, what mix of inputs will achieve the desired

ADU- Department of Business Administration Page 22

Operations Research

results in the output for the least cost? Other applications that fall into this category include
mixing feed for livestock, mixing pet foods, mixing building materials (concrete, mortar,
paint), and so on.

Blending problems
They are very similar to diet problems. Strictly speaking, however, blending problems have
additional requirement, i.e. to achieve a mix that have specific consistency. For example, how
many quarts of the different juices each with different sugar content proportion must be mixed
together to achieve one gallon that has a sugar content of 17 percent?

Portfolio selection
These problems generally involve allocating a fixed dollar amount among a variety of
investments, such as bonds, sockets, real states, etc. The goal usually is to maximize income
or total return. The problems take on an added dimension when certain other requirements are
specified (for example, no more than 40 percent of the portfolio can be invested in bonds).

Dear learner, the section below presents some examples that demonstrate how a linear
programming model is formulated. Although these examples are simplistic, they are realistic and
represent the type of problem to which linear programming can be applied. By carefully studying
each of these examples, the learner can become familiar with the process of formulating linear
programming models.
Product Mix
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?

Solution
Step1. Identify decision variables
Since the products to be produced are power and traction transformers using the available
resource to attain the objective set, we consider them as decision variables. This is because the
organization’s problem here is how many of each product to produce in order to attain the
objective, which requires the management decision.
LetX1 = the no of power transformers to be produced.
X2= the no of traction transformer to be produced

ADU- Department of Business Administration Page 23

Operations Research

Step2. Determine Objective Function

From the problem above, we understand that the problem is maximization problem.
Hence,
Zmax = 50,000X1+ 10,000X2
This is because, each unit of X1 contributes Birr 50,000 and X2 contributes Birr
10,000 to objective function.
Step 3. Identify constraints
Here we have two constraints: structural and non-negativity constraints. The
structural constraint is the amount of machine hours available in each process.
Step 4. Determining Parameters
Parameters are already identified in the table of the problem.

Note: Step 3 and 4 can be performed simultaneously as:

75X1 + 15X2 < 1000 hrs- Core preparation process
160X1 + 30X2 < 1500 hrs- Core to Coil Assembly Machine hour constraint
45X1 + 10X2 < 750 hrs- Vapor Phase Drying
X1, X2 > 0
Step 5. Building and validating the model
Zmax = 50,000X1+ 10,000X2
Subject to:
75X1 + 15X2 < 1000 hrs
160X1 + 30X2 < 1500 hrs
45X1 + 10X2 < 750 hrs
X1, X2 > 0

Investment Application
1. 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. 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.
ADU- Department of Business Administration Page 24
Operations Research

The investor wants to invest the entire Birr 70,000.

Required: Formulate a LP model for the problem.

Solution
Decision variables
Four decision variables represent the monetary amount invested in each investment alternative.
Let X1, X2, X3 and X4 represent investment on municipal bonds, certificates of deposits, Treasury
bill, and income bonds respectively.
Objective function
The problem is maximization because from the word problem we know that the objective of the
investor is to maximization return from the investment in the four alternatives.
Therefore, the objective function is expressed as:
Zmax = 0.085 X1+ 0.1X2+ 0.065X3+0.13X4
Where,
Z = total return from all investment
0.085 X1=return from the investment in municipal bonds.
0. 100 X2=return from the investment in certificates in deposit

0.065 X3=return from the investment in treasury bills

0.130 X4=return from the investment in income bonds
Model Constraints
In this problem the constraints are the guide lines established for diversifying the total
investment. Each guideline is transformed in to mathematical constraint separately.

Guideline 1 above is transformed as:

X4 <20 %(70,000)  X4 <14,000
Guideline 2
X2< X1 +X3+ X4  X2 - X1 -X3- X4< 0
Guideline 3
X2+ X3> 30 %( 70,000)  X2 + X3 > 21,000
Guideline 4
X1/ X3< 1/3 3X1<X33X1-X3< 0
Finally,
X1+ X2+ X3+X4 = 70,000, because the investor’s money equals to the sum of money invested
in all alternatives.
This last constraint differs from and inequalities previously developed in that there is a
specific requirement to invest an exact amount. Therefore, the possibility to invest more or
less than Birr 70,000 is not considered.

This problem contains all three types of constraints possible in LP problems: and =. As
this problem demonstrates there is no restriction on mixing these types of constraints.

The complete LPM for this problem can be summarized as:

Zmax = 0.085 X1+ 0.1X2+ 0.065X3+0.13X4

Subjected to:
X4 <14,000
X2 - X1 -X3 - X4 < 0
X2 + X3 > 21,000
3X1-X3 < 0
X1 + X2 + X3 + X4 = 70,000,
X1+ X2+ X3+X4 0
Marketing Application
ADU- Department of Business Administration Page 25
Operations Research

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 news papers 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
News paper 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 news paper 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.

Decision variables
Let X1 = number of television commercials
X2 = number of radio commercials
X3 = number of news paper ads
Objective function
It is not only profit which is to be maximized. In this problem the objective to be maximized is
audience exposure.

Zmax = 20,000x1 + 12,000x2 + 9,000x3, where

Z = total level of audience exposure

20,000x1 = estimated number of people reached by television commercials

12,000x2 = estimated number of people reached by radio commercials
9,000x3 = estimated number of people reached by news paper ads

Model constraints
Budget constraint
15,000x1 + 6,000x2 + 4,000x3 Birr 100,000
Capacity constraint
Television commercials and radio commercials are limited to 4 and 10 respectively and news
paper ads are limited to 7.
X1 4 television commercials
X2 10 radio commercials
X3 7 news paper ads

Policy constraint
The total number of commercials and ads can not exceed 15
X1 + X2 + X3 15
The complete linear programming model for this problem is summarized as:
Zmax = 20,000X1 + 12,000X2 + 9,000X3
Sub. to:

ADU- Department of Business Administration Page 26

Operations Research

15,000X1 + 6,000X2 + 4,000X3 Birr 100,000

X1 4
X2 10
X3 7
X1 + X2 + X3 15
X1, X2 , X3 0
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
The cost per pound of mixture is Birr4, of zinc Birr 8 and of potassium Birr 9.
Required: Formulate LPM for the problem

Solution
Decision variables
The model of this problem consists of three decision variables representing the amount of each
ingredient in the mixture.
X1 = number of lb of mercury in a batch
X2 = number of lb of zinc in a batch
X3 = number of lb of potassium in a batch

Objective function
Zmin = 4x1 + 8x2 + 9x3
Constraints
X1 200 lb… specification 1
X2 300 lb… specification 2
X3 100 lb… specification 3
Finally, the sum of all ingredients must equal 1000 pounds.
x1 + x2 + x3 = 1000 lb

The complete LPM of the problem is:

Zmin = 4x1 + 8x2 + 9x3

Subject to:
X1 200 lb
X2 300 lb
X3 100 lb
x1 + x2 + x3 = 1000 lb
x1, x2 , x3 0

Activity

ADU- Department of Business Administration Page 27

Operations Research

The manager of a department store in Adama is attempting to decide on the types and amounts of
advertising the store should use. He has invited representatives from the local radio station,
television station, and newspaper to make presentations in which they describe their audiences.

a. The television station representative indicates that a TV commercial, which costs Birr 15,000,
would reach 25,000 potential customers. The break down of the audience is as follows.

Male Female

Old 5,000 5,000

Young 5,000 10,000

b. The news paper representative claims to be able to provide an audience of 10,000 potential
customers at a cost of Birr 4000 per ad. The break down of the audience is as follows.

Male Female

Old 4,000 3,000

Young 2,000 1,000

c. The radio station representative says that the audience for one of the station’s commercials,
which costs Birr 6000, is 15,000 customers. The break down of the audience is as follows.

Male Female

Old 1,500 1,500

Young 4,500 7,500

The store has the following advertising policy:

a. Use at least twice as many radio commercials as news paper ads.
b. Reach at least 100,000 customers
c. Reach at least twice as many young people as old people
d. Make sure that at least 30% of the audience is women.
Available space limits the number newspaper ads to 7. The store wants to know the optimal
number of each type of advertising to purchase to minimize total cost.
Required:
Formulate appropriate linear programming model.

2. An electronic company produces three types of parts for automatic machines. It purchases
casting of the parts from the local foundry and then finishes parts on drilling, shaping and
polishing machines.
The selling prices of parts A, B, and C respectively are Birr8, 10, 14. All parts made can be sold.
Casting for parts A, B and C respectively costs Birr 5, 6 and 10. The shop possesses only one of
each type of machine. Costs per hour to run each of the three machines are Birr 20 for drilling, 30
for shaping, and 30 for polishing. The capacities (parts per hour) for each part on each machine
are shown in the following table:

Machine Capacity per hour

Part A Part B Part C

ADU- Department of Business Administration Page 28

Operations Research

Drilling 25 40 25
Shaping 25 20 20
Polishing 40 30 40

The management of the shop wants to know how many parts of each type it should produce per
hour in order to maximize profit for an hour’s run. Formulate this problem as an LP model so as to
maximize total profit to the company.

2.3. Solving LP Models

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
Sub-unit objective:
Up on completion of this sub unit, the learner will be able to:
 Define graphic approach
 Differentiate between objective function and extreme/ corner point approach
 Solve maximization and minimization problems using the two approaches
 Describe special cases in graphic approach
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. More over,
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 xj (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 x j (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 xj (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.
Basic solution For a set of m simultaneous equations in n variables ( n>m), a solution obtained by
setting ( n-m) variables equal to zero and solving for remaining m equations in m variables is
called a basic solution.
The (n-m) variables whose value did not appear in this solution are called non-basic variables and
the remaining m variables are called basic variables.

ADU- Department of Business Administration Page 29

Operations Research

Basic feasible solution A feasible solution to LP problem which is also the basic solution is
called the basic feasible solution. That is, all basic variables assume non-negative values. Basic
feasible solutions are of two types:
 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 Basic feasible solution A basic feasible solution which optimizes the objective function
value of the given LP problem is called an optimal basic feasible solution.
Unbounded solution A solution which can increase or decrease the value of OF of the LP
problem indefinitely is called an unbounded solution.

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, X1 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.

Step 1. Plot each of the constraints

The step begins by plotting the non-negativity constraint, which restricts our graph only to the
first quadrant. We then can deal with the task of graphing the rest of the constraints in two
parts. For example, let us take the first constraint 4X 1 + 10X2 < 100 hrs. First we treat the
constraint as equality: 4X1 + 10X2 = 100. Then identify the easiest two points where the line
intersects each axis by alternatively equating each decision variable to zero and solving for the
other: when X1=0, X2 becomes 10 and when X2=0, X1 will be 25. We can now plot the straight
line that is boundary of the feasible region as we have got two points (0, 10) and (25,0).

ADU- Department of Business Administration Page 30

Operations Research

Step 2. Identify the feasible region

The feasible region is the solution space that satisfies all the constraints simultaneously. It is
the intersection of the entire region represented by all constraints of the problem. We shade in
the feasible region depending on the inequality sign. In our example above, for all the
constraints except the non-negativity constraint, the inequality sign is ‘less than or equal to’
and it represents region of the plane below the plotted lines.

? Dear learner, can you mention some of the advantages and disadvantages of
graphic method of solving LP models?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
__

Step 3. Locate the optimal solution.

The feasible region contains an infinite number of points that would satisfy all the constraints
of the problem. Point that will make the objective function optimum will be our optimal
solution. This point is always found among the corner points of the solution space.

ADU- Department of Business Administration Page 31

Operations Research

Once the constraints are plotted and feasible region is determined, we use either of the two
graphic methods of Graphic approach to find a solution for LP model consisting of only two
decision variables:
i) The extreme point enumeration method
ii) The objective (Iso-profit or cost) function line approach

2.3.1.1.The Objective Function Approach

This approach involves plotting an objective function line on the graph and then using that line to
determine where in the feasible solution space the optimal point is. We use the same logic as
plotting a constraint line except that it is not an equation until we equate it to some right hand side
quantity. Any quantity will do till we find a line that would last touch the feasible solution space.

The optimal solution to an LP problem will always occur at a corner point because as the
objective function line is moved in the direction that will improve its value (e.g., away from the
origin in our profit maximization problem), it will last touch one of these intersections of
constraints. Then we determine which two constraints intersect there (in our case inspection and
storage constraints) and solve the equations simultaneously to obtain the mix of the two decision
variables that gives the value of the objective function at the optimum. Simultaneously solving
inspection and storage equations, we find the quantity of type 1 microcomputer to be produced
(X1) = 9 and that of type 2 (X2) = 4 giving the maximum profit of 60(9) + 50(4) = Birr740.

Note: The maximization problems the movement of the iso-lines is outward from the origin;
while for minimization the movement is inward to the origin.
2.3.1.2. The Extreme Point Approach
Corner or extreme point graphic method states that for problems that have optimal solutions, a
solution will occur at the corner point in the case of unique solution, while in the case of multiple
solutions, at least one will occur at a corner point as these multiple solutions will be combinations
of those points between two corner points. The necessary steps for this approach is after graphing
the problem, we determine the values of the decision variables at each corner point of the feasible
region either by inspection or using simultaneous equations. We then substitute the values at each
corner point into the objective function to obtain its value at each corner point and select the one
with the highest value of the objective function (for a maximum problem) or lowest value (for a
minimum problem) as the optimal solution.
i) Extreme Method of Solving Maximization Problems with < constraint
Maximization of objective function involves finding the point where the combination of
products results in maximum value of objective function. The constraints are connected with <

ADU- Department of Business Administration Page 32

Operations Research

sign. The solution space lies below the slant line and is bounded by the line segments. The
origin and other points below the slant lines are in the solution space (i.e., feasible region).

Using this method for our example, simultaneously solving for corner points a, b, c, and d, we
find corresponding profit values of 500, 700, 740, and 660, respectively giving us the same
solution as the above one at C. Therefore, the optimal solution is x1= 9 units and x2 = 4 units
while the optimal value of objective function is 740.
Interpretation:
For a firm to maximize its profit (740), it should produce 9 units of the Model I microcomputer
and 4 units of model II.

? Dear learner, what are the values of decision variables at each corner point? (Hint:
Solve simultaneously those lines which intersected each other). Can you mention
some of the characteristics of the LP graphs consisting of sign?
___________________________________________________________________
___________________________________________________________________
_______________________________________________________________

ii) Extreme Method of Solving Minimization Problems with > constraints

Solving minimization problems involve where the objective functions (like cost function) will be
minimum. The constraints are connected to RHS values with > sign. But, in real world problems,
mixes of constraint is also possible. The value of RHS involves the lowest value of the constraint.
The solution space lies above the slant lines and it is not enclosed. It extends indefinitely above
the lines in the first quadrant. This means simply that cost increases without limit as more and
more units are produced. The minimum cost will occur at a point along the inner boundary of the
solution space. The origin and other points below the lines are not in the solution space.
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?

ADU- Department of Business Administration Page 33

 Operations Research

Solution
Coordinates
Corner point x y Zmin=0.1x+0.07y
A 0 9 0.63

B 25/11 24/11 0.38

C 15/4 1 0.445

? Dear learner, can you draw a graph for the above problem and determine
values for each corner point of the feasible region?
What difference can you make between LP problems consisting of > and <signs?
________________________________________________________________
________________________________________________________________
________________________________________________________________

SLACK VERSUS SURPLUS

Slack is the amount of a scarce resource that is unused by a given solution. Slack can potentially
exist in a < constraint. Slack variables are considered in the objective function by using a
coefficient of zero for each of them. When all the constraints are written as equalities after adding
a slack variable to each of them, the linear program is said to be in standard form. For example,
in the Assembly constraint 4X1 +10X2 < 100 hrs, the slack value is 100 – [4(9) +10(4)] = 24.
Surplus on the other hand is the amount by which the optimal solution causes a > constraint to
exceed the required minimum amount. It can be determined in the same way that slack can, i.e.,
substitute the optimal values of the decision variables into the left side of the constraint and solve.
The difference between the resulting value and the original right hand side amount is the amount
of surplus. Surplus should also be accounted for in the objective function by using coefficients of
zero like wise.

? Dear learner, can you find slack and surplus amounts of the constraints in
the above problems?
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________

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:
Max Z = 10X1 + 20X2

ADU- Department of Business Administration Page 34

Operations Research

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
Subject to: 2X1 + X2 < 2
3X1 + 4X2 > 12
X1, X2 > 0

ADU- Department of Business Administration Page 35

Operations Research

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

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

ADU- Department of Business Administration Page 36

Operations Research

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

? Dear learner, can you identify other combination of decision variables that will optimize
the objective function and can you check whether the two conditions for multiple solution
is satisfied?
________________________________________________________________________
________________________________________________________________________
_____________________________________________________________________

2.3.1.4. Mix of constraints

It is only in some cases that the maximization problems consist of constraints connected to the
RHS value with only <. By the same token, constraints of minimization problems are not always
connected to their RHS with>. This is to mean that both maximization and minimization problems
may consist of constraints connected to RHS with a mix of algebraic signs ( <, >, =).
Example
Z Min a) 1500x+2400y
Subjected to:
4x+Y>24 …I
2x+3y>42 …II
X+4y>36 …III
X<14 …IV
y<14 …V
x, y>0
Plot the constraints.
2x+3y>42 y
2x+3y=42
If x=0,
2x+3y=42
2(0) +3y=42
2(0) +3y=42 24_(0,24)
y=42/3 IV
y=14
The coordinates (0,14)
If y=0, 18 _ I
2x+3y=42

ADU- Department of Business Administration Page 37

Operations Research

2x+3(0)=42 A (2.5,14) (14,14)

x=42/2 B V
x=21 (0, 14) E (3, 12)
Constraint III 12 _
X+4y>36 Feasible
X+4y=36 region multiple solution line
If x=0, (0,9) (double lined)
 x+4y=36
 y=36/4 6_ C (14, 5.5)
 y=9
The coordinates (0, 9) D
If y=0, (12,6) II III x
x+4(0) =36 (0, 0)
x =36 (6,0) (14,0) (21,0) (36,0)
The coordinates (36, 0) 6 12 18 24 36

1 2 3 4 5
Corner constraints Coordinates Objective functions
points intersected x y 1500x+2400y
A I&V 2.5 14 37,350
B IV&V 14 14 54,600
C III&IV 14 5.5 34,200
D II&III 12 6 32,400
E I&II 3 12 33,300
The minimum value of the objective function is 32,400. Therefore, the optimum solution is found
at the corner point D, where constraint II&III are intersected. Hence, optimal solution: x =12, y =
6.

? Dear learner, how would the above optimal solution change if only objective function if
modified as Zmin1600x+2400y while all other constraints remain as they are?
_________________________________________________________________________
_________________________________________________________________________
______________________________________________________________________

2.4. Comparison of the two graphical solution methods

After having plotted the constraints of the given LP problem and identified the feasible solution
space, select one of the graphical solution methods and proceed to solve the given LP problem.
Extreme Point method Objective function / Iso-profit (or cost)
Method

i) Identify coordinates of each of the extreme (or i) determine the slope x1,x2 of the objective
corner points of feasible region by either drawing function and join intercepts to reveal the profit

ADU- Department of Business Administration Page 38

Operations Research

perpendiculars on x and y axis or by solving the or cost line.

two intersecting equations.
ii) compute the profit(cost) at each extreme points ii) In case of maximization, maintain the same
by substituting that point’s coordinates in to the slope through a series of parallel lines, and
objective function. move the line up and to the right until it
touches the feasible region at only one point.
But in case of minimization, move down and
to the left until it touches only one point in
the region.
iii) Identify the optimal solution at that extreme iii) Compute the coordinates of the point with a
highest profit in a maximization touched by iso-profit (or cost) line on the
problem or lowest cost in minimization problem. on the feasible region.
iv) Compute the profit or cost

Summary
 The term linear programming refers to a family of mathematical techniques
for determining the optimum allocation of resources and obtaining a
particular objective when there are alternative uses of the limited or
constrained resources.
 The linear programming models exhibit certain common characteristics: An
objective function to be maximized or minimized, a set of constraints,
decision variables for measuring the level of activity, and linearity among all
constraint relationships and the objective function.
 The graphic approach to the solution LP problems is not efficient means of
solving problems. For one thing, drawing accurate graphs is tedious. More
over the graphic approach is limited to models with only two decision
variables.
 Special cases that one face solving a problem graphically include: Mix of
constraints, unbounded solution, infeasibility, redundancy, multiple solution

2.5. Activity
1. Peniel House and Furniture manufacturer produces two products: Beds and Chairs. Each unit of
Bed requires 3 hrs in molding unit, 4hrs in painting unit, and 1 hr in finishing. On the other hand,
each unit of Chair requires 3 hrs in molding unit, 2 hrs in the paint shop and 2 hours in finishing.
Each week, there are 210 hrs available in molding, 200hrs in painting, and 120 hrs in finishing
unit. The demand for Beds can not exceed 40 units per week. Each unit of Bed contributes Birr 20
to profit, while each unit of chair contributes Birr 30. Determine the number of units of each
product per week to maximize the profit? (Use Graphic Method to solve the given LP problem).

ADU- Department of Business Administration Page 39

Operations Research

2. A firm plans to purchase at least 200 quintals of scrap containing high metal quality metal X
and low quality metal Y. It decides that the scrap to be purchased must contain at least 100
quintals of X-metal and not more than 35 quintals of Y-metal. The firm can purchase the scrap
from two suppliers ( A and B) in unlimited quantities. The percentage of X and Y metals in terms
of weight in the scrap supplied by A and B is given below.
Metals Supplier A Supplier B
X 25% 75%
Y 10% 20%
The price of A’s scrap is Birr 200 per quintal and that of B is Birr 400 per quintal. The firm wants
to determine the quantities that it should buy from the two suppliers so that total cost is
minimized? (Use graphic approach)
3. Personal Mini Warehouses is planning to expand its successful Orlando business into Tampa.
In doing so, the company must determine how many storage rooms of each size to build. Its
objective and constrains follow:

Maximize monthly earnings= 50X1 +20X2

Subject to:
2X1+4X2<400 (Advertising budget available)
100X1 +50X2<8,000(Square footage required)
X1 <60(Rental limit expected)
X1 X2>0
Where
X1=Number of large spaces developed
X2=Number of large spaces developed
(Use graphical method)
3. The owner of a telephone subscription service specializes in taking order for two magazines x
and y. She has formulated the following model that describes the unit contribution to profit and
the use of scarce resources involved.
Zmax=0.6x+0.9y
Subject to:
6x+12y< 480 min … I
10x+6y< 480min … II
x > 20 … III
x,y>0
4. A firm makes two products X and Y, and has a total production capacity of 9 tones per day, x
and y requiring the same production capacity. The firm has a permanent contract to supply at least
two tones of x and at least three tones of y per day to another company. Each tone of x requires 20
machine hours of production time and each tone of y requires 50 machine hours of production
time. The daily maximum possible number of machine hours is 360. The entire firm’s out put can
be sold and the cost per tone is 100 and 120 birr respectively and the selling price per tone of x

ADU- Department of Business Administration Page 40

Operations Research

and y is 180 and 240 Birr respectively. It is required to determine the production schedule for
maximum profit using graphic approach? What is the maximum profit?
5. Repi Soap Company wishes to make a new detergent from two of its current soaps: Soap A and
soap B. The company wants the new detergent to contain at least 20 ounces of cleaning ingredient
D. Each pound of soap A costs $0.2 and contains 5 ounces of D, whereas each pound of B costs
0.25 and one ounce of D. Furthermore, for ecological reasons, the amount of soap A must be no
more than that of soap B. Finally, the new mixture must weight exactly 12 pounds. How many
pounds of each soap should be used in the mixture in order to meet the above requirements at a
minimum cost? What is the minimum cost?

2.3.2. THE SIMPLEX METHOD

Over View
Dear learner, in our previous section we tried to thoroughly discuss about graphic approach of LP
problems, where the LP consists of only two decision variables. But, the real world problems may
consist of even very large number of decision variables which can not be solved using graphic
approach. Therefore, in this section we will try to see about simplex method, which is more
comprehensive as compared to graphic approach.
? Dear learner, discuss the differences and similarities between graphic and simplex
approaches of solving LPM
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Section objective:
Up on completion of this section, the learner will be able t:
 Define simplex approach and concepts in simplex approach
 Standardize LP models
 Differentiate between slack, surplus and artificial variables
 Solve both maximization and minimization problems using simplex approach
 Explain special cases in simplex method and how to handle them
The graphical method of solving linear programming problems is a simple way to find a solution
since the optimum solution is searched among the corner points of the solution space. However,
the graphical method is restricted to problems with two decision variables. When the number of
variables and the number of constraints increase, it becomes difficult to visualize the solution
space. As a result, the graphical method cannot be employed successfully in such cases. In order
to avoid this limitation, the simplex method, or iterative or step by step method is efficient method
for solving linear programming problems, which was developed by George B.Datzing in 1947.

The simplex method is an algebraic procedure that starts with a feasible solution that is not
optimal and systematically moves from one feasible solution to another until an optimal solution
is found. Incase of the graphical approach, optimal solution occurs at the extreme points where the
constraints intersect. Solutions where constraints intersect are called basic solutions, and those
satisfying all of the constraints together with non-negativity constraints are called basic feasible
solutions.

ADU- Department of Business Administration Page 41

Operations Research

Constraints are generally expressed using inequalities either in ‘less than’ or ‘greater than’ or in
mixed form. Thus, constraints are not in standard form, meaning they should be converted into
equalities. To convert the inequality constraint into equality, we introduce slack or surplus
variables. In economic terminology, slack variables represent unused capacity and surplus
variables represent excess amount. The contribution (cost or profit) associated with the slack and
surplus variables is zero. An inequality of the ‘less than or equal to’ type is transformed into
equality by introducing a non-negative slack variable, as follows: -

Example
Non Standard form Standard form
X1+2X2 <= 6 X1+2X2+S1= 6
, where X1 and X2 are decision variables and S1 is a slack variable, added to the
smaller side of the inequality.

On the other hand, an inequality with ‘greater than or equal to’ type is changed into equality by
subtracting surplus variable as follows: -

Example
Non Standard form Standard form
X1+2X2 <=6 X1+2X2+S1=6
, where X1 & X2 are decision variables and S1 is a slack variable, added to the
smaller side of the inequality.

As stated above, since both the slack and surplus variables are insignificant with no contribution
in the objective function, they are represented with coefficient of zero in the objective function.

To find a unique solution, the number of variables should not exceed the number of equations.
When the number of variables is more than the number of equations, the number of solutions is
unlimited. So as to get a unique solution, we have to set at least (n-m) variables to zero, where n is
the number of variables and m is the number of equalities. Those variables that are set to zero are
called non basic variables indicating they are not in the solution. The variables that are in solution
are called basic variable.
.
To demonstrate the simplex method, we will use the microcomputer problem with the following
objective function and constraints.
The Microcomputer Problem, which was discussed in graphic approach, can be standardized as:

Max. Z = 60X1+50X2+0S1+0S2+0S3
Subject to 4X1+10X2+S1 = 100
2X1+X2+S2 = 22
3X1+3X2+S3 = 39
, where X1 & X2 are decision variables and S1, S2 & S3 are slack variables.
Here, the number of variables (5) is greater than the number of equations (3). Therefore, the
decision variables are set to zero and we have
X1 = 0, X2 = 0, S1 = 100, S2 = 22, and S3 = 39.
This solution will serve as an initial feasible solution. An initial feasible solution is a first solution
used to generate other basic feasible solutions. The initial basic feasible solution is obtained by
setting all the decision variables to zero. As a result, the initial basic feasible solution is entirely

ADU- Department of Business Administration Page 42

Operations Research

composed of the slack variables. X 1 & X2 are non basic variables since they are not in solution. S 1,
S2 & S3 are basic variables since they are in solution.

A tableau is a system of displaying the basic feasible solution, the constraints of the standard
linear programming problem as well as the objective function in a tabular form. A tableau is
useful in summarizing the result of each iteration, i.e. the process of moving from one
solution/corner to another solution/corner in order to select the optimal solution.

THE SIMPLEX ALGORITHM

2.3.2.1. Maximization case
The solution steps of the simplex method can be outlined as follows:
Step1. Formulate the linear programming model of the real world problem, i.e., obtain a
mathematical representation of the problem's objective function and constraints.
Step2. Express the mathematical model of L.P. problem in the standard form by adding slack
variables in the left-hand side of the constraints and assign a zero coefficient to these in
the objective function.
Thus we can restate the problem in terms of equations:

Maximize Z = C1X1+ C2X2 + ... +CnXn + OS1 + OS2 +... +0Sm

Subject to a11X1+a12X2+... + a1nxn+s1i =b1
a2lX1+al22X2+... + a2nXn+S2 = b2
amlXl + am2 X2 +... + amNxn + Sm = bm
, where X1, X2... Xn and S1, S2 ... Sm are non-negative.

Note that the slack variables have been assigned zero coefficients in the objective function. The
reason is that these variables typically contribute nothing to the value of the objective function.
Step 3. Design the initial feasible solution. An initial basic feasible solution is obtained by setting
the decision variables to zero.
X1= X2 = ... = Xn = 0. Thus, we get S1 = b1, S2 = b2 ... Sm = bm.

Step 4. Set up the initial simplex tableau. For computational efficiency and simplicity, the initial
basic feasible solution, the constraints of the standard LPP as well as the objective
function can be displayed in a tabular form, called the simplex tableau as shown
below:

Initial Simplex Tableau

Cj C1 C2 ... Cn,, 0 0 ... 0 Quantity Column Ratio
(Contribution Per Unit) XB/
amn
Basic variables CB X1, X2, ... Xn S1 S2 ... Sm b(=Xj)
S1 CB1 a11 a12 ... a1n 1 0 ... 0 b1=Xb1
S2 CB2 a21 a22 ... a2n 0 1 ... 0 b2=Xb2
Sm CBm am1 am2…amn 0 0 ... 1 bm=Xbm
Zj=∑CBiXj 0 0 ... 0 0 0 ... 0 ∑CBiXj
Cj-Zj C1-Z1 C2-Z2 ... Cn-Zn

ADU- Department of Business Administration Page 43

Operations Research

(Net contribution per

unit)

The interpretation of the data in the above tableau is given as under. Other simplex tableau will
have similar interpretations.
In the first row labeled "Cj", we write the coefficients of the variables in the objective
function. These values will remain the same in subsequent tableaus.
The second row shows the major column headings.
In the first column of the second row, under the label "Basic variables" (also called
Product mix column), the basic variables are listed.
In the second column of the second row, under the label "CB", the coefficients of the
current basic variables in the objective function are listed. Thus the coefficients of S 1, S2...
Sm, which are included in the initial feasible solution, are written in the CB column.
The values listed under the non-basic variables (X1, X2… Xn) in the initial simplex tableau
consists of the coefficients of the decision variables in the constraint set. They can be
interpreted as physical rates of substitution.
The values listed under the basic variables (S 1, S2... Sm) in the initial simplex tableau
represents the coefficients of the slack variables in the constraints set.
In the next column (also called Quantity column), we write the solution values of the basic
variables.
To find an entry in the Z j row under a column, we multiply the entries of that column by
the corresponding entries of ‘CB’ column and add the results, i.e., Z j= ∑CBiXj. The Zj row
entries will all be equal to zero in the initial simplex tableau. The other Z j entries represent
the decrease in the value of objective function that would result if one of the variables not
included in the solution were brought into the solution. The Z j entry under the “Quantity
Column" gives the current value of the objective function.
The last row labeled "Cj-Zj", called the index row or net evaluation row, is used to
determine whether or not the current solution is optimal or not. The calculation of C j-Zj
row simply involves subtracting each Z j value from the corresponding C j value for that
column, which is written at the top of that column. We observe that C j -Zj, values are
meaningful for the non basic variables only. This is because for a basic variable, Z j= 1 x Cj
= Cj so that Cj-Zj=Cj-Cj=o.

Note: The entries in the C - Z , row represent the net contribution to the objective function that
j j

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. Index row elements are also known as the
shadow prices (or accounting prices)
Step 5. We test if the current solution is optimum or not. 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. If
there exists some positive number, the current solution can be further improved by
removing one basic variable from the basis and replacing it by some non-basic one. So
start trying to improve the current solution in line with the following steps.

Step 6. Further, iterate towards an optimum solution. To improve the current feasible solution,
we replace one current basic variable (called the departing variable) by a new non-
basic variable (called the entering variable).

ADU- Department of Business Administration Page 44

Operations Research

We now determine the variable to enter into the solution mix, the entering 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 C j - Zj row is
called the key or pivot column. The non-basic variable at the top of the key column is the
entering variable that will replace a basic variable.
Next, we determine the departing variable to be replaced in the basis solution. 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. We compute the
ratio b1/a1j, b2/a2j... bm/amn. This is called replacement ratio.

Replacement Ratio (RR) = Solution Quantity (Q)

Corresponding values in pivot
column
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.
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 7. Evaluate the new solution by constructing a second simplex tableau. After identifying the
entering and departing variable, all that remains is to find the new basic feasible
solution by constructing a new simplex tableau from the current one.
Now we evaluate or update the new solution in the following way:
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.
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.
New entries in the CB column and XB column are entered in the new table of the current
solution.
Compute the values of the Cj - Zj row. If all the numbers in Cj - Zj row are either negative
or zero, an optimum solution has been obtained.

Step 8. If any of the numbers in Cj - Zj row are positive, repeat the steps (6-7) again until an
optimum solution has been obtained.

Note: 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:
The column farthest to the left may be selected if there is a tie between two numbers in the
index row.
The nearest ratio to the top may be selected whenever there is a tie between two
replacement ratios in the ratio column.

Example (Maximization Case)

Finding the initial Feasible Solution
As discussed above, the initial feasible solution is found by setting the decision variables to zero.
Max Z = 60X1+50X2+0S1+0S2+0S3
Subject to 4X1+10X2+S1 = 100
2X1+ X2+S2 = 22
3X1+ 3X2+S3 = 39
X1, X2 > = 0

ADU- Department of Business Administration Page 45

Operations Research

Initial Simplex tableau

Cj 60 50 0 0 0 Quantity
Basic V. X1 X2 S1 S2 S3
S1 0 4 10 1 0 0 100
S2 0 2 1 0 1 0 22
S3 0 3 3 0 0 1 39
Zj 0 0 0 0 0 0
Cj-Zj 60 50 0 0 0

Interpretation of the Initial Feasible Solution

To be noted first is that the values of each basic variable (variables that are in solution) is
composed of a single 1 and the rest 0’s. This is called a unit vector. Basic variables will have a
unit vector. Moreover, ‘1’ will appear in the same row that the variable appears in. The unit vector
concept will help us in developing subsequent tableaus when we want to change the list of
variables that are in solution.

The Zj row in the quantity column indicates that the value of the objective function is 0.

The values in the Cj-Zj row indicate the net contribution of the variables if one unit of each
variable is added into that solution. For example, the 60 in column X 1 indicates that bringing one
unit of X1 would increase the value of the objective function by $60. The same is true for the X 2
column, i.e. bringing one unit of X 2 would increase the value of the objective function by $50. On
the other hand, since the slack variables are at their maximum, their values in the C j-Zj row are all
0. According to what has been said before, we have the following rule in order to identify an
optimal solution.

A simplex solution in a maximization problem is optimal if the C j-Zj row consists of entirely zeros
and negative numbers, i.e. there are no positive values in the row.

So for our case in the initial tableau, we have two positive values under the non-basic variables,
which indicate that further improvement of the solution is possible. As a result, we go for the
optimal solution by developing the second simplex tableau.

Developing the Second Simplex Tableau

In the initial feasible solution, the slack variables form entirely the basic variables and the
decision variables entirely form the non-basic variables. Since further improvement is possible,
one of the decision variables will be brought into the solution and one of the current basic
variables will be leaving the solution. ‘Which non-basic variable should be brought into the
solution and which basic variable should leave the solution?’ is a major concern here.

In answering the first question, the non-basic variable that should enter the solution should be the
one with the highest positive value in the Cj-Zj row since bringing that non-basic variable into the
solution would make the highest contribution to the solution (objective function) and result in the

ADU- Department of Business Administration Page 46

Operations Research

largest profit potential. As a result, the variable with the highest value in the C j-Zj row of the
initial simplex tableau is the X1 column with a value 60. Therefore, X1 should enter the basis or
the solution mix. The X1 column is now called the pivot column. The numbers in this column (4 2
3) indicate the amount of the basic variables needed to get one unit of X 1. For example, the
number 4 indicates that 4 units of the first slack are needed to obtain one unit of X1.

Since X1 has the highest profit potential, we need to make as much X 1 units as possible. The
amount of X1 that can be made depends on the values in the pivot column and the amount of slack
available shown under the quantity column. By dividing the values in the pivot column by their
respective values in the quantity column, we can identify the variable that is most limiting. The
values obtained by dividing will help us in determining the variable that should leave the solution.

Cj 60 50 0 0 0 Quantity
Basic V. X1 X2 S1 S2 S3

S1 0 4 10 1 0 0 100 100/4 = 25
S2 0 2 1 0 1 0 22 22/2 = 11
S3 0 3 3 0 0 1 39 39/3 = 13
Zj 0 0 0 0 0 0
Cj-Zj 60 50 0 0 0

Pivot Column
Pivot Row Pivot Element
In interpreting the ratios obtained by the division, I only the constraint was the first one, we could
make 25 units of X1. But there are also other constraints. Therefore, the one with the smallest non-
negative ratio is the most restrictive since it determines the amount of X 1. In this particular case,
there is only enough of the second constraint to make 11 units of X 1. In making the 11 units of X 1,
the second resource (S2) will be down to zero indicating that S 2 will leave out the solution mix.
The row of the leaving variable is called the pivot row. The intersection of the pivot row and the
pivot column is called the pivot element. As a rule,
The leaving variable is the one with the smallest non-negative ratio.

If a zero is obtained in the results of division, none of the corresponding variable is needed to
obtain one unit of the entering variable. If a negative value is obtained in the division, bringing the
entering variable into the solution would increase the amount of the basic variable. These values
will not limit the amount of the entering variable. Therefore, there is no need to divide the
quantity column by zero or negative.

Since we have determined the leaving and the entering variables and since the initial feasible
solution can be improved further, we need to develop the second tableau in order to find the
optimal solution. In developing the second tableau, we should compute for revised values of the
constraint equations, the Zj row and the Cj-Zj row and remember that the variables in solution will
have a unit vector, with a value of 1 in the intersection of the column and the row of the basis, i.e.
the pivot element.

To obtain a unit vector in the basis column, we perform elementary row operations resulting in
new row values by either multiplying/dividing all the elements in a row by a constant or
adding/subtracting the multiple of a row to or from another row.

ADU- Department of Business Administration Page 47

Operations Research

In computing for the new row values from our initial simplex tableau, we first multiply the second
constraint by ½ obtaining the values as follows:
1X1+1/2X2+0S1+1/2S2+0S3 = 11, which results in making the pivot element 1.
Next, we multiply the above new row values by 4 and subtract it from the first constraint
obtaining the following results:
0X1+8X2+1S1+2S2+0S3 = 56.
Then, we multiply the new row values in the pivot row by 3 and subtract it from the third
constraint resulting as follows:
0X1+3/2X2+0S1-3/2S2+1S3 = 6.
Having these new row values, we develop the second simplex tableau as shown below.

Second Simplex Tableau

Cj 60 50 0 0 0 Quantity
Basic V. X1 X2 S1 S2 S3
S1 0 0 8 1 -2 0 56
X2 60 1 1/2 0 1/2 0 11
S3 0 0 3/2 0 -3/2 1 6
Zj 60 30 0 30 0 660
Cj-Zj 0 20 0 -30 0

Interpretation of the Second Simplex Tableau

The profit obtained at this point of solution is $660. In the Cj-Zj row, we search for the highest
positive value. If there is, it means that we can further improve this solution. Therefore, we have a
positive value in the Cj-Zj row which indicates that this is not the optimal solution. As a result, we
go for the next tableau.

Developing the Third Tableau

Here, we select the entering and the leaving variables. The entering variable is the one with the
highest Cj-Zj row value which is the X2 column. This means that bringing one unit of X2 into the
solution increases profit by $20. Therefore, the X 2 will be the entering variable designated as the
pivot column.

To determine the leaving the variable, we divide the values in the pivot column by their
corresponding row values in the quantity column. The result obtained, as shown in the table below
indicates that S3 is the leaving variable with the smallest non-negative ratio. This means that S 3 is
the most limiting resource for how much units of X2 can be made.

Basic V
S1
X2
S2

Pivot Row

ADU- Department of Business Administration Page 48

Operations Research

Pivot Column Pivot Element

After identifying the entering and the leaving variables, we perform elementary row operations as
follows. To obtain a unit vector with 1 in the pivot element, we multiply the pivot row by 2/3
resulting as follows:
0X1+1X2+0S1+-1S2+2/3S3 = 4
Then, multiply the above new row values by 8 and subtract it from the first constraint (row)
resulting as follows:
0X1+0X2+1S1+6S2+-16/3S3 = 24.
For row 2, first multiply the new row values in the pivot row by ½ and subtract it from the second
row resulting as follows:
1X1+0X2+0S1+1S2+-1/3S3 = 9.
And the third tableau looks like the following.

Third Simplex Tableau

Cj 60 50 0 0 0 Quantity
Basic V. X1 X2 S1 S2 S3
S1 0 0 0 1 6 -16/3 56
X1 60 1 0 0 1 -1/3 11
X2 50 0 1 0 -1 2/3 6
Zj 0 0 10 40/3 0 740
Cj-Zj 0 0 -10 -40/3 0

Interpreting the Third Tableau

All the values in the Cj-Zj row are zero and negative indicating that there can no be additional
improvement. This makes the third tableau to contain the optimal solution with the following
basic variables:
S1 = 24, X1 = 9, and X2 = 4 producing a maximum profit of $740.
This means that in order to achieve the maximum profit, the company should produce 9 units of
X1 and 4 units of X2 leaving 24 hours of unused resource of the second constraint.

SIMPLEX MAXIMIZATION WITH MIXED CONSTRAINTS

(= AND >= CONSTRAINTS)

The Big M Method—introducing slack, surplus and artificial variables

If any problem constraint has negative constants on the right side, multiply both sides by
-1 to obtain a constraint with a non-negative constant. (If the constraint is an inequality,
this will reverse the direction of the inequality.)
Introduce a slack variable in each <= constraints.
Introduce a surplus variable and an artificial variable in each >= constraint.
Introduce an artificial variable in each '='constraint.
For each artificial variable Ai, add -MAi to the objective function in case of maximization
and
+MAi in case of minimization. Use the same constant M for all artificial variables.
Form the simplex tableau for the modified problem.
Solve the modified problem using the simplex method.

ADU- Department of Business Administration Page 49

Operations Research

Relate the solution of the modified problem to the original problem:

If the modified problem has no solution, then the original problem has no solution.
If any artificial variables are non-zero in the solution to the modified problem, then
the original problem has no solution.
Note. The artificial variables are introduced for the limited purpose of obtaining an initial
solution and are required for the constraints of >= type or the constraints with '=' sign. It is not
relevant whether the objective function is of the minimization or the maximization type.
Obviously, since artificial variables do not represent any quantity relating to the decision problem,
they must be driven out of the system and must not remain in the final solution (and if at all they
do, it represents a situation of infeasibility). This can be ensured by assigning an extremely high
cost to them. Generally, 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'. When the problem is of the
minimization nature, we assign in the objective function a coefficient of +M to each of the
artificial variables. On the other hand, for the problems with the objective function of
maximization type, each of the artificial variables introduced has a coefficient -M.

In case of equality constraints, a slack variable is not acceptable since these constraints require a
precise amount. To overcome this problem, artificial variables are introduced which are added to
= and >= constraints. They have no physical representation for their purpose is to allow the use of
simplex process. As a result, they should not appear in the final optimal solution. Assignment of
coefficients for artificial variables depends on the type of the problem, whether it is a
maximization or a minimization problem. In case of maximization problem, a large negative
contribution or coefficient in the objective function would ensure the removal of artificial
variables from the optimal solution, commonly represented by -M. For minimization problems,
introducing a large positive coefficient would ensure the non-existent of artificial variables in the
optimal solution, commonly represented by M.

In addition to this, a slack is not allowed in >= constraints since they can only happen an excess
amount that is more than the minimum amount of a constraint. This excess amount is represented
by a surplus variable and is subtracted from the constraint.
Example – Maximization Problems with Mixed Constraints
Assume the following maximization problem with mixed constraints.
Max. Z = 6X1+8X2
Subject to X2 <= 4
X1+X2 = 9
6X1+2X2 >= 24

In solving for this problem, introducing a slack variable is not acceptable since they represent
unused capacity and there is no unused capacity in = and >= constraints. Therefore, for >=
constraints, we introduce a surplus variable and for both >= and = constraints we introduce
artificial variables resulting as follows.
Max Z = 6X1+8X2+0S1+0S2-MA2-MA3
Subject to X2+ S1 = 4
X1+X2+A2 = 9
6X1+2X2-S3+A3 = 24
X1, X2 > = 0
Wouldn’t it be possible to set A2 as A1 and A3 as A2 in the above standardized LPM form?

Developing the Initial Simplex Tableau

ADU- Department of Business Administration Page 50
Operations Research

In the initial tableau, we list the variable in the order of decision variable, slack/surplus variables
and finally artificial variables. And for constraints, use artificial variables, and/or slack variables
and/or surplus variables for the initial solution. Therefore the initial tableau for the problem is
represented as follows.

Initial Simplex Tableau

Cj 6 8 0 0 -M -M Quantity
Basic V. X1 X2 S1 S3 A2 A3
S1 0 0 1 1 0 0 0 4
A2 -M 1 1 0 0 1 0 9
A3 -M 6 2 0 -1 0 1 24
Zj -7M -3M 0 +M -M -M -33M
Cj-Zj 6+7M 8+3M 0 -M 0 0

Since this is a maximization problem, the entering variable is the one with the maximum C j-Zj
value. Therefore, the variable with the maximum C j-Zj is X1, the decision variable. And the
leaving variable is with the minimum non-negative ratio which is A 3, the artificial variable. Since
this artificial variable is not needed we remove it from the next tableau.
Developing the Second Simplex Tableau
After identifying the entering and the leaving variable, the usual elementary row operations are
performed to obtain a unit vector in the entering variable column. The end result after performing
the row operations is as follows which shows the second tableau.
Second Simplex Tableau
Cj 6 8 0 0 -M Quantity
Basic V. X1 X2 S1 S3 A2
S1 0 0 1 1 0 0 4
A2 -M 0 2/3 0 1/6 1 5
X1 6 1 1/3 0 -1/6 0 4
Zj 6 2-2/3M 0 -1-M/6 -M 24-5M
Cj-Zj 0 6+2/3M 0 1+M/6 0

Again here, we identify the leaving the entering variables, i.e. the pivot row and the pivot column
respectively. The entering variable with the highest C j-Zj row value is X2 and the leaving variable
with the smallest ratio is S1.

Developing the Third Simplex Tableau

Selecting the entering and leaving variables, we go for obtaining a unit vector in the pivot column
by using the elementary row operations. We get the following third tableau.

Third Simplex Tableau

Cj 6 8 0 0 -M Quanti
Basic V. X1 X2 S1 S3 A2 ty

ADU- Department of Business Administration Page 51

Operations Research

X2 8 0 1 1 0 0 4
A2 -M 0 0 -2/3 1/6 1 7/3
X1 6 1 0 -1/3 -1/6 0 8/3
Zj 6 8 6+2/3M -1-M/6 -M 48-7/3
Cj-Zj 0 0 -6-2/3M 1+M/6 0

Similarly, we identify the entering and the leaving variables which are S 3 and A2 respectively
representing the maximum Cj-Zj value and the minimum ratio.

Developing the Fourth Simplex Tableau

Perform elementary row operations usual to have a unit vector in the entering variable column and
you will get the following fourth tableau.
Fourth Simplex Tableau
Cj 6 8 0 0 Quantity
Basic V. X1 X2 S1 S3
X2 8 0 1 1 0 4
S3 0 0 0 -4 1 14
X1 6 1 0 -1 0 5
Zj 6 8 2 0 62
Cj-Zj 0 0 -2 0

This tableau represents the final tableau since we have only zeros and negative values in the C j-Zj
row which indicates that it is the optimal solution. So we have the following results for each of the
variables and the profit obtained.
X1 = 5, X2 = 4, S3 = 14, and Profit = 62

2.3.2.2. MINIMIZATION LINEAR PROGRAMMING PROBLEMS

Big M-method
/Charnes Penalty Method/
The Big-M Method is a technique, which is used in removing artificial variables from the basis .In
this method; we assign coefficients to artificial variables, undesirable from the objective function
point of view. If objective function Z is to be minimized, then a very large positive price (called
penalty) is assigned to each artificial variable. Similarly, if Z is to be maximized, then a very large
negative cost (also called penalty) is assigned to each of these variables. Following are the
characteristics of Big-M Method:
a. High penalty cost (or profit) is assumed as M
b. M as a coefficient is assigned to artificial variable A in the objective function Z.
c. Big-M method can be applied to minimization as well as maximization problems with the
following distinctions:
i. Minimization problems
-Assign +M as coefficient of artificial variable A in the objective function Z
of the minimization problem.
ii. Maximization problems:

ADU- Department of Business Administration Page 52

Operations Research

-Here –M is assigned as coefficient of artificial variable A in the objective

function Z of the maximization problem.
d. Coefficient of S (slack/surplus) takes zero values in the objective function Z
e. For minimization problem, the incoming variable corresponds to the highest negative value of
Cj-Zj.
f. The solution is optimal when there is no negative value of Cj-Zj.(For minimization LPP case)
The various steps involved in using simplex method for minimization problems are:
Step 1. Formulate the linear programming model, and express the mathematical model of L.P.
problem in the standard form by introducing surplus and artificial variables in the left
hand side of the constraints. Assign a 0 (zero) and +M as coefficient for surplus and
artificial variables respectively in the objective function. M is considered a very large
number so as to finally drive out the artificial variables out of basic solution.
Step 2. Next, an initial solution is set up. Just to initiate the solution procedure, the initial basic
feasible solution is obtained by assigning zero value to decision variables. This
solution is now summarized in the initial simplex table. Complete the initial simplex
table by adding two final rows Z, and C j - Zj. These two rows help us to know whether
the current solution is optimum or not.
Step 3. Now; we test for optimality of the solution. If all the entries of C j - Zj, row are positive,
then the solution is optimum. However, this situation may come after a number of
iterations. But if at least one of the Cj - Zj values is less than zero, the current solution
can be further improved by removing one basic variable from the basis and replacing it
by some non-basic one.
Step 4. (i) Determine the variable to enter the basic solution. To do this, we identify the column
with the largest negative value in the Cj - Zj row of the table.
(ii) Next we determine the departing variable from the basic solution. If an artificial
variable goes out of solution, then we discard it totally and even this variable may not
form part of further iterations. Same procedure, as in maximization case, is employed
to determine the departing variable.

Step 5. We update the new solution now. We evaluate the entries for next simplex table in
exactly the same manner as was discussed earlier in the maximization case.

Step 6. Step (3—5) are repeated until an optimum solution is obtained.

So the following are the essential things to observe in solving for minimization problems:
The entering variable is the one with the largest negative value in the C j-Zj row while the
leaving variable is the one with the smallest non-negative ratio.
The optimal solution is obtained when the C j-Zj row contains entirely zeros and positive
values.

Example: Assume the following minimization problem.

Min Z = 7X1+9X2
Subject to 3X1+6X2 >= 36
8X1+4X2 > = 64
X1, X2 > = 0

ADU- Department of Business Administration Page 53

Operations Research

We introduce both surplus and artificial variables into both constraints as follows.

Min Z = 7X1+9X2+0S1+0S2+MA1+MA2
Subject to 3X1+6X2 –S1+A1 = 36
8X1+4X2-S2+A2 = 64
X1, X2 > = 0

So the subsequent tableaus for this problem are shown below. To remind in these tableaus is in
transforming from one tableau to another, we perform elementary row operations to obtain the
unit vector in the pivot column for the entering variable into the solution.

Initial Simplex Tableau

Cj 7 9 0 0 M M Quant
Basic X1 X2 S1 S2 A1 A2 ity
V.
A M 3 6 -1 0 1 0 36
1

A M 1 4 0 -1 0 1 64
2

Zj 11M 10M -M -M M M 50M

Cj-Zj 7-11M 9-10M M M 0 0
Second Simplex Tableau
Cj 7 9 0 0 M Quantity
Basic V. X1 X2 S1 S2 A1
A1 M 0 9/2 -1 3/8 1 12
X1 7 1 ½ 0 -1/8 0 8
Zj 7 7/2+9/2M -M 3/8M-7/8 M 56+12M
Cj-Zj 0 11/2-9/2M M 7/8-3/8M 0

Third Simplex Tableau

Cj
Basi
X2
X1
Zj
Cj-Z

The third tableau represents a final tableau since it is the optimal solution with entirely zeros and
non-negative values in the Cj-Zj row.
Therefore, the optimal solution is: X1 = 20/3 and X2 = 8/3 and value of objective function is 212/3.

Types Extra variables to be Coefficient of extra variables Presence

of added in the objective function of
constra MaxZ variables
int in the

ADU- Department of Business Administration Page 54

Operations Research

MinZ initial
solution
mix
< Add only slack variable 0 Yes
0
Subtract surplus variable 0 No
> and 0
Add artificial variable -M Yes
+M
= Add artificial variable -M Yes
+M

Summary

? Dear learner, why do you think that artificial variables did not appear in the optimal
solution? What is the guarantee not to get artificial variable in the optimal solution?

2.4. SPECIAL ISSUES

Several special situations which one many encounter during the application of simplex method are
summarized below:
Non-feasible Solution/ Infeasibility
A situation with no feasible solution may exist if the problem was formulated incorrectly.
Infeasibility comes about when there is no solution that satisfies all of the problem’s constraints.

In the simplex method, an infeasible solution is indicated by looking at the final tableau Whenever
the optimality criteria is satisfied but still there exist an artificial variable in the basis or solution
mix, this is the indication of infeasibility.

Example:
Minimization case

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 5 8 -2 31-M M 1,800+200M
Cj - Z j 0 0 2 M-31 0

Even though all Cj - Zj are positive or 0(i.e. the criterion for an optimal solution in a minimization
case), no feasible solution is possible because an artificial variable (A2) remains in the solution
mix.

ADU- Department of Business Administration Page 55

Operations Research

Unbounded Solution
No finite solution may exist in problems that are not bounded. This means that a variable can be
infinitely large without violating a constraint. In the simplex method, the condition of
unboundedness will be discovered prior to reaching the final tableau. We will note the problem
when trying to decide which variable to remove from the solution mix.

The procedure in unbounded solution is to divide each quantity column number by the
corresponding pivot column number. The row with the smallest positive ratio is replaced. But if
the entire ratios turn out to be negative or undefined, it indicates that the problem is unbounded.
A negative ratio means that increasing that variable would increase resources. A zero ratio
means that increasing the variable would not use any resources.

Example:
Maximization case:
Cj 6 9 0 0

SV X1 X2 S1 S2 Q

9 X2 -1 1 2 0 30 RR

30/-1=-30
0 S2 -2 0 -1 1 10 Unacceptable
RRs
Zj -9 9 18 0 270
10/-2=-5
Cj - Z j 15 0 -18 0

The solution in the above case is not optimal because not all Cj - Zj entries are 0 or negative, as
required in a maximization problem. The next variable to enter the solution should be X1.To
determine which variable will leave the solution, we examine the ratios of the quantity
Pivotcolumn
Column
numbers to their corresponding numbers in the X1 or pivot column. Since both pivot column
numbers are negative, an unbounded solution is indicated.
Note: When unbounded solutions occur, no outgoing variable will exist.
Degeneracy
/Tie for leaving basic variable (key row)/
If there is a tie for the smallest ratio, this is a signal that degeneracy exists. Degeneracy can occur
right in the first (initial tableau). This normally happens when the number of constraints is less
than the number of variables in the LP model. Such problems can be overcome by trial and error
method. If this is resolved by a proper selection of the key element, degeneracy can be avoided.
The main drawback to degeneracy is the increase in the computation, which reduces the efficiency
of the simplex method considerably.
Example

ADU- Department of Business Administration Page 56

Operations Research

5 8 2 0 0 0
Cj
Q
SV X1 X2 X3 S1 S2 S3

8 X2 1/4 1 1 -2 0 0 10
RR
0 S2 4 0 1/3 -1 1 0 20
10/1/4=40
0 S3 2 0 2 2/5 0 1 10
20/4=5 Tie for the smallest
Zj 2 8 8 16 0 0 80 ratio
Indicates degeneracy.
3 0 -6 -16 0 0 10/2=5
Cj - Z j
Degeneracy
could lead to a situation known as cycling, in which the simplex algorithm alternatives back and
forth between the same non-optimal solutions, i.e., it puts a new variable in, then takes it out in
the next tableau, puts it back in, and so on.
One simple way of dealing with the issue is to select either row (S2 or S3 in this case) arbitrary. If
we are unlucky and cycling does occur, we simply go back and select the other row. How ever,
the number of iterations required to arrive at the optimal solution can be minimized by adopting
the following rule:
 Divide the coefficient of slack variables in the simplex table where degeneracy is detected
by the corresponding positive numbers of the key column in the row, starting from left to
right.
 The row which contains smallest ratio comparing from left to right column wise becomes
the key row.
For the above example:
Column
Row s2 s3
s2 1 0
s3 0 1
Divide the coefficients by the corresponding element of the key column, we obtain the
following:
Column
Row s2 s3
s2 ¼= ¼ 0/4=0
s3 0/2 =0 ½=1/2
Comparing the ratios from left to right column wise until they are not equal, the minimum ratio
occurs for the second row (0). Therefore, s3 is selected to leave the basis.

ADU- Department of Business Administration Page 57

Operations Research

Note: When there is a tie between a slack and artificial variable to leave the basis, the
preference shall be given to artificial variable to leave the basis and there is no need to apply the
procedure for resolving such cases.
Two incoming variables
/ Or Tie for entering variables/
In order to break this tie, the selection for the key column (entering variable) can be made
arbitrary. However; the number of solution can be minimized by adopting the following rules:
1. If there is a tie between two decision variables, then the selection can be made arbitrary.
2. 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.
3. 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 - Z j 5 2 5 0

In such a case,X1 is the entering variable

Multiple Optimum Solutions
This situation occurs when there can be infinite number of solutions possible for a given problem.
This situation can be recognized in a simplex method when one of the non-basic variables in the
Cj-Zj, row have a value of zero. This is to mean in the optimal solution when non basic variable
(variable not in the basis) has a zero value in C-Z row, this is the indication of existence of
multiple solution. To obtain the other solution, we will make a non- basic variable with a zero C-Z
value to enter in to the basis and solve in the same way as the one we did in the previous
discussion.
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 - Z j 0 0 -2 0

ADU- Department of Business Administration Page 58

Operations Research

MaxZ=3X1+2X2
X1=0, X2=6, S2=3 and MaxZ=12 or: X1=3, X2=3/2 and MaxZ=12

The Cj - Zj value of the non-basic variable (X1) is 0. Thus, this shows the existence of alternative
optimal solution. Can you identify more alternative optimal solutions?

? Dear learner, can you raise examples of your own for each of the above
special issues and show how each relate to graphic approach?

Summary
 The simplex method is an algebraic procedure that starts with a feasible solution that
is not optimal and systematically moves from one feasible solution to another until
an optimal solution is found
 The variations described in general simplex approach include; maximization and
minimization problems, mixed constraint problems, problems with multiple optimal
solution, problems with no feasible solution, undounded problems, tied pivot
columns and rows.
 Multiple optimal solution are identified by Cj-Zj(or Zj- Cj) =0 for a non basic
variable. To determine the alternate solution(s), enter the non basic variable(s) with
a Cj-Zj value equal to zero.
 An infeasible problem is identified in the simplex procedure when an optimal
solution is achieved and one or more of the basic variables are artificial.
 The unbounded problems are identified in the simplex procedure when it is not
possible to select a pivot row- that is, when the replacement ratio is negative or
undefined.
 Degeneracy occurs when there is a tie for pivot row.

Activity
1. The crumb and Custard bakery makes cakes and pies. The main ingredients are flour and sugar.
The following linear programming model has been developed for determining the number of
cakes and pies (x1 and x2 to produce each day to maximize profit.
Max Z=x1 + 5x2
Subject to:
8x1+10x2< 25(flour, lb)
2x1+4x2< 16(sugar, lb)
x1< 5(demand for cakes)
x1,x2 >0
Solve this model using graphical and simplex method and compare the answers.

2. A transistor radio Co., manufactures models A, B, and C which have profit contribution of Birr
16, Birr 30 and Birr 50 respectively. The weekly minimum production requirements are 20 for
model A, 120 for model B, and 60 for model C. Each type of radio requires a certain amount of
time for the manufacturing of component parts, assembly and packaging. Specifically a dozen unit
of model A requires 3 hrs for manufacturing of component parts, 4b hrs for assembly and 1 hr for
packaging. The corresponding figure for a dozen unit of model B is 3.5, 5 and 1.5 and for a dozen
unit of C are 5, 8, and 3 hrs. During the forth coming week, the company has availability of 120
hrs of manufacturing, 160 hrs of assembly, and 45 hrs of packaging time.

ADU- Department of Business Administration Page 59

Operations Research

Required:
a) Formulate the scheduling problem as LPM.
b) Solve the problem using simplex method
c) Identify basic and non basic variables at each iteration

3. A company has two plants, each of which produces and supplies two products: A and B. The
plants can each work up to 16 hrs a day. In plant 1, it takes 3 hrs to prepare and pack 1000 gallons
of A and 1 hr to prepare and pack 1 quintal of B. In plant 2, it takes 2 hrs to prepare and pack
1000 gallons of A and 1.5 hrs to prepare and pack a quintal of B. In plant 1, it costs Birr 15,000 to
prepare and pack 1000 gallons of A and Birr 28,000 to prepare and pack a quintal of B, whereas
these costs are Birr 18,000 and Birr 26,000 respectively in plant 2. The company is obliged to
produce daily at least 10,000 gallons of A and 8 quintals of B.
a) Formulate the problem as LPM to find out as to how the company should organize its
production so that the required amounts of the two products be obtained at minimum cost.
b) Solve the problem using simplex method

4. A manufacturing company is engaged in producing three types of products: A, B, and C. The

production department produces each day components sufficient to make 50 units of A, 25 units
of B, and 30 units of C. The management is confronted with the problem of optimizing the daily
production of products in assembly department where only 100 man hrs are available daily to
assemble the products. The following additional information is available.

Type of product Profit contribution per unit (Birr) Assembly time per product (hrs)
A 12 0.8
B 20 1.7
C 45 2.5
The company has a daily order commitment for 20 units of product A, and a total of 15 units of
product B and C.
Required:
a) Formulate the problem as LPM so as to maximize the total profit?
b) Solve the problem using the algebraic method

Chapter Three
3. Post optimality Analysis

ADU- Department of Business Administration Page 60

Operations Research

Dear learner, in the previous chapters we discussed about how to solve LP problems using
either graphic or simplex approach which is a base for this section. This unit deals with the other
version of the simplex model, dual and the sensitivity of the optimal solution to changes in
different parameters.
Objectives:
Up on completing this chapter, the learners would be able to:
 Explain what post optimality analysis is
 Describe the dual and primal forms of LP problems
 Conduct sensitivity analysis on different parameters
3.1. DUALITY
Section objective:
Up on completion of this sub section the learner will be able to:
 Define duality
 Describe the importance of duality
 Explain how to convert dual in to primal and the vice versa
 Formulate dual when the constraints are mixed
 Elucidate how to read the solution for primal from dual’s solution and vice versa.
 Analyze the impact of addition of a new product on the decision
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. In general, however, it is
immaterial which of the two problems called primal or dual, since the dual of the dual is primal.
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.

In the context of LP, duality implies that each LP problem can be analyzed in two different ways,
but having equivalent solution. For example, consider the problem of production planning. By
using the primal LP problem, the production manager attempts to optimize resource allocation by
determining quantities for each product to be produced that will maximize profit. But through
dual LP problem approach, he attempts to achieve production plan that optimizes resource
allocation so that each product is produced at that quantity such that its marginal opportunity cost
equals its marginal return. Thus, the main focus of dual is to find for each resource its best
marginal value or shadow price. This value reflects the scarcity of resources, i.e., the maximum
additional prices to be paid to obtain one additional unit of the resources to maximize profit under
the resource constraints. If resource is not completely used, i.e., there is slack, then its marginal
value is zero.

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

Analysis of the dual can also enable a manager to evaluate the potential impact of a new product,
and it can be used to determine the marginal values of resources (i.e. constraints). 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.
ADU- Department of Business Administration Page 61
Operations Research

? Often the manager is less concerned about profit than about the use of resource in
dual. Do you agree? Dear learner, would you discuss with your class mates.
____________________________________________________________________
____________________________________________________________________
________________________________________________________________

3.1.1. Formulating the Dual

There are two important forms of primal and dual problems, namely the symmetrical ( or
canonical) and the standard form.
Symmetrical form
Suppose the primal LP problem is given in the form
Maximize Zx = c1x1+ c2x2 + ... +cnxn
Subject to
a11x1+a12x2+... + a1nxn b1
a21x1+a22x2+... + a2nxn b2
am1x1+am2x2+... + amnxn bm
x1,x2... xn 0
and then the corresponding dual LP problem is defined as:
Minimize Zy = b1y1+ b2y2 + ... +bmym
Subject to
a11y1+a21y2+... + am1ym c1
a12y1+a22y2+... + am2ym c2
a1ny1+an2y2+... + amnym cn
y1,y2... ym 0

The above pair of LP problems can be expressed in the general LP model form as

Primal Dual

Max Zx = Min Zy =

Subject to constraints Subject to constraints

; i = 1, 2,.., m ; i= 1,2, ..., n

aij = aji
and xj 0; j = 1,2,…,n and yi 0; j = 1,2,…,m

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 …..

ADU- Department of Business Administration Page 62

Operations Research

5. The ≤ constraints become ≥ and the vice versa.

Consider this Primal problem:

Minimize 40x1 + 44x2 + 48x3

Subject to: 1x1 + 2x2 + 3x3 > 20
4x1 + 4x2 + 4x3 > 30
x1, x2, x3 > 0
The dual of this problem is:

Maximise Z = 20y1 + 30y2

Subject to:
1y1 + 4y2 < 40
2y1 + 4y2 < 44
3y1 + 4y2 < 48
y1, y2 > 0

The following table shows how the primal problem is transformed into its dual.

Primal Dual
Objective Minimize 40x1 + 44x2 + 48x3 Maximize 20y1 + 30y2
function and Subject to Subject to
right-hand 1  20 1 
side values 40
2  30 2 
44
3 
48
Primal Dual
Constraint 1 1x1 + 2x2 + 3x3  1 1y1 + 4y2 
coefficients 2 4x1 + 4x2 + 4x3  2 2y1 + 4y2 
3 3y1 + 4y2 

We can see from the table that the original objective was to minimize, whereas the objective of
the dual is to maximize. In addition, the coefficients of the primal’s objective function become
the right-hand side values for the dual’s constraints, whereas the primal’s right-hand side values
become the coefficients of the dual’s objective function.

Note that the primal has three decision variables and two constraints; whereas the dual has two
decision variables and three constraints.

The constraint coefficients of the primal are constraint coefficients of the dual, except that the
coefficients of the first “row” of the primal become the coefficients of the first “column” of the
dual, and the coefficients of the second “row” of the primal become the coefficients of the second
“column” of the dual.

When the primal problem is a maximization problem with all < constraints, the dual is a
minimization problem with all > constraints.

3.1.2. Formulating the Dual when the Primal has Mixed Constraints
In order to transform a primal problem into its dual, it is easier if all constraints in a maximization
problem are of the < variety, and in a minimization problem, every constraint is of the > variety.

To change the direction of a constraint, multiply both sides of the constraints by -1. For example,

ADU- Department of Business Administration Page 63

Operations Research

-1(2x1 + 3x2 > 18) is -2x1-3x2 < -18

If a constraint is an equality, it must be replaced with two constraints, one with a < sign and the
other with a > sign. For instance,
4x1 + 5x2 = 20
will be replaced by
4x1 + 5x2 < 20
4x1 + 5x2 > 20
Then one of these must be multiplied by -1, depending on whether the primal is maximization or a
minimization problem.
EXAMPLE:
Formulate the dual of this LP model.
Maximize z = 50x + 80x
Subject to:
C 3x + 5x ≤ 45
C 4x + 2x ≥16
C3 6x +6x = 30
x ,x ≥ 0
SOLUTION
Since the problem is a max problem, put all the constraints in to the ≤ form. Subsequently, C and
C3 will be first adjusted in to ≤ constraints.
- C will be multiplied by -1:
-1(4x + 2x ≥16) becomes -4x - 2x ≤ -16
- C3 is equality, and must be restated as two separate constraints. Thus, it becomes:
6x +6x ≤ 30 and 6x +6x ≥30. Then the second of these must be multiplied by -1.
-1(6x +6x ≥30) becomes -6x -6x ≤ -30
After making the above adjustments, rewrite the LP model again.
Maximize z = 50x + 80x
Subject to:
C 3x + 5x ≤ 45
C -4x - 2x ≤ -16
C3 6x +6x ≤ 30
C4 -6x -6x ≥ -30
x ,x ≥0

? Dear learner, would you guess the reason why the RHS quantity consists
of negative values and do you think that it contradicts with rules of LP?
____________________________________________________________
____________________________________________________________
____________________________________________________________
___

ADU- Department of Business Administration Page 64

Operations Research

The dual of the above problem will be:

Minimize 45y1 - 16y2 + 30y3 – 30y4
Subject to
C 3y1 -4y2 + 6y3 – 6y4 ≥ 50
C 3y1 - 2y2 + 6y3 – 6y4 ≥ 80
y1, y2, y3, y4 ≥ 0

3.1.3. 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 x ,x x ,….. s1,s2,s3,…….
- 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:
To show that the flip-flopping of values between the primal and the dual carries over to their final
simplex tableaus, let us look at the following tables. The first table contains the final tableau for
the dual and the second one contains the final tableau for the primal.

Final tableau of Dual solution to the Microcomputer problem

C 100 22 39 0 0 M M Quantity
Basis y1 y2 y3 s1 s2 a1 a2
y3 39 16/3 0 1 1/3 -2/3 -1/3 2/3 40/3
y2 22 -6 1 0 -1 1 1 -1 10 Primal
Z 76 22 39 -9 -4 9 4 740
shadow
C-Z 24 0 0 9 4 9-M 4-M
prices

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

The primary concern with a simplex solution is often three fold:

1. Which variables are in solution?
2. How much of each variable is in the optimal solution?
3. What are the shadow prices for the constraints?

ADU- Department of Business Administration Page 65

Operations Research

Let’s consider how we can obtain the answers to these questions from the dual solution. Notice
that the solution quantities of the dual are equal to the shadow prices of the primal (i.e. 40/3 and
10). Next, notice that the values of the solution quantities of the primal (i.e., 24, 9, and 4) can be
found in the bottom row of the dual. Now, in the primal solution, s 1 equals 24. In the dual, the 24
appears in the y1 column. The implication is that a slack variable in the primal solution becomes a
real variable (i.e., a decision variable) in the dual. The reverse is also true: A real variable in the
primal solution becomes a slack variable in the dual. Therefore, in the primal solution we have x 1
= 9 and x2 = 4; in the dual, 9 appears under s1 in the bottom row, and 4 appears under s2. Thus, we
can read the solution to the primal problem from the bottom row of the dual: In the first three
columns of the dual, which equate to slack variables of the primal, we can see that the fist slack
equals 24 and the other two are zero. Under the dual’s slack columns, we can read the primal
values of the decision variables. In essence, then, the variables of the primal problem become the
constraints of the dual problem, and vice versa.

3.1.4. Economic Interpretation of the Dual

Suppose the microcomputer firm has been approached by a representative of a department store
chain that wants the firm to make computers that will be sold under the store’s brand name. The
microcomputer company has only a limited capacity for producing computers, and therefore,
must, decide whether to produce its own computers or produce computers for the department
store.

For convenience, the original problem is repeated here:

x1 = number of Model I
x2 = number of Model II’s

Maximize 60x1 + 50x2

Subject to: Assembly time: 4x1 + 10x2 < 100
Inspection time: 2x1 + 1x2 < 22
Storage space: 3x1 + 3x2 < 39
x1, x2 >= 0

The manager of the firm would reason in the following way. For each unit of Model I that the
firm sacrifices to produce computers for the department store, it will gain 4 hours of assembly
time, 2 hours of inspection time, and 3 cubic feet of storage space, which can be applied to the
store computers. However, it will also give up a unit profit of $60. Therefore, in order for the
firm to realistically consider the store’s offer, the amounts of scarce resources that will be given
up must produce a return to the firm that is at least equal to the foregone profit. Hence, the value
of 4 assembly hours + 2 inspection hours + 3 cubic feet of storage space > $60. By similar
reasoning, giving up one unit of Model II will require that the value received by giving up 10
assembly hours + 1 inspection hour + 3 cubic feet of storage must equal or exceed the Model II
profit of $50 per unit. These, then, become the constraints of the dual problem. Thus:

Value Received Resources Minimum Profit

Per Unit of Freed Up Required
Model I 4y1 + 2y2 + 3y3 $60
Model II 10y1 + 1y2 + 3y3 $50

Hence the constraints of the dual refer to the value of capacity (i.e., the scarce resources). The
formulation indicates that in order to switch from making units of Models I and II to making
computers for the department store, the value received from that switch must be at least equal to
the profit foregone on the microcomputer models. The variables y 1, y2 and y3 are the marginal
values of scarce resources (assembly time, inspection time, and storage space). Solving the dual
will tell us the imputed values of the resources given our optimal solution.

ADU- Department of Business Administration Page 66

Operations Research

Naturally, the department store would want to minimize the use of the scarce resources, because
the computer firm almost certainly would base its charges on the amount of resources required.
Consequently, the objective function for the dual problem focuses on minimizing the use of the
scarce resources. Thus:

Minimize: 100y1 + 22y2 + 39y3

Looking at the optimal solution to the dual of the microcomputer problem, we can see the
marginal values of y2 and y3 in the Quantity column, but not the value of y 1. This is because the
optimal solution to the primal did not completely use up all of the assembly capacity.
Consequently, no amount of either x1 or x2 would need to be given up to obtain one free hour of
assembly time. Thus, the marginal value of one hour of assembly time is $0.

Finally, the optimal dual solution always yields the same value of the objective function as the
primal optimal. In this case, it is 740. The interpretation is that the imputed value of the
resources that are required for the optimal solution equals the amount of profit that the optimal
solution would produce.

3.1.5. Adding another Variable

The concepts introduced in the preceding section also can be applied to evaluating the feasibility
of adding another decision variable to the problem. For example, suppose the microcomputer
firm is considering a third model of microcomputer that will yield a profit of Birr 70 per unit, and
this will need resource requirements of 8 hours of assembly time, 4 hours of inspection time, and
5 cubic feet of storage space per unit. The dual constraint for this model would be:
8y1 + 4y2 + 5y3 > 70
In order to determine if this new variable would come into the optimal (primal) solution, we can
substitute the dual solution of y 1 = 0, y2 = 10, and y3 = 40/3 (i.e., the shadow prices, or marginal
values of the resources) into this constraint to see if it would be satisfied. Thus, we find, 8(0) +
4(10) + 5(40/3) = 106.67. Because this amount is greater than the new dual constraint, the original
solution remains optimal. Hence, the new variable (x 3) would not come into solution.
Conversely, if the dual constraint has not been satisfied, the new variable would have come into
solution. In this instance, the marginal value of scarce resources that would be required for the
new model exceeds the marginal contribution to profit that the new model would provide. That is,
Birr106.67 > Birr70.

Note: The value of this approach is that it is not necessary to rework the entire problem in order to
test the potential impact that adding a new decision variable would have on the optimal solution.

3.1.6. Managerial Significance of Duality

The importance of the dual LP problem in terms of the information which it provides about the
value of the resources. The economic analysis is concerned with deciding whether or not to secure
more resource and how much to pay for these additional resources. The significance of the study
dual is as follows;
 The dual variables provide the decision maker a basis 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 total marginal value of the resources equals the optimal objective function value. The
dual variables equal the marginal value of resources (shadow prices).
Note: The value of ith dual variable is the rate at which the primal objective function value will
increase as the ith resource increases, assuming that all other data is unchanged.
3.1.7. Advantages of Duality

ADU- Department of Business Administration Page 67

Operations Research

 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.
 It avoids the necessity of adding surplus or artificial variables and solve the problem
quickly.
 The dual variables provide an important economic interpretation of the final solution of an
LP problem.
 It is quite useful when investigating change in the parameters of an LP problem ( called
Sensitivity analysis)

Activity
Convert the following in to dual and solve it using simplex approach
1. Min Z= 4x1 +x2
Subject to:
3 x1+ x2 = 3
4x1+ 3x2 > 6
x1+ 2x2 < 3
x1,x2 > 0
b Min Z=2x1 +8x2
Subject to:
5x1+ x2 > 10
2x1+ 2x2 > 14
x1+ 4x2 > 14
x1, x2 >0

ADU- Department of Business Administration Page 68

Operations Research

3.2. Sensitivity Analysis

 Overview
Dear learners, this section take you beyond the optimal solution to analyze the impact of change in
the parameters on the optimal solutions. Assumptions may not always hold. If this is the case, it
should be tested. This section will do this purpose.

Under this section, we will discuss about sensitivity analysis which involves an examination of
the potential impact of changes in any of the parameters (i.e. numerical values) of a problem (e.g.,
a change in the amount of scarce resource available).
When LP models are formulated, the input data of the model (also called parameters) such as: (i)
profit (or cost) contribution (Cj) per unit of decision variable, ii) availability of resources(bi), and
(iii) consumption of resources per unit of decision variables (a ij), implicitly assumed constant and
known with certainty during a planning period. However, rarely does a manager know all of these
parameters exactly. In reality the model parameters are simply estimates (or best “guesses”) that
are subject to change. For this reason it is of interest to the manager to see what effect a change in
a parameter will have in the solution to the model. Changes may be either to the reactions to
anticipated uncertainties in the parameters or reactions to the information gained from the dual.
The analysis of the parameter changes and their effects on the model solution is known as
sensitivity analysis.

? Dear learner, discuss with your group members about why sensitivity analysis is
conducted?
__________________________________________________________________________
__________________________________________________________________________
_________________________________________________________________

Section Objective
Up on completion of this section, the learner will be able to:
 Define sensitivity analysis
 Describe the significance of sensitivity analysis
 Conduct sensitivity analysis on Two parameters; namely
o Coefficient of OF- when the variable is in the solution mix and not
o RHS
3.2. Sensitivity Analysis
As it is indicated above, sensitivity analysis is the study of sensitivity of the optimal solution of an
LP problem due to discrete variations (changes) in its parameters. The degree of sensitivity of the
solution due to these changes can range from no change to all to a substantial change in the
optimal solution of the given LP problem.

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, such as the coefficients of the constraints, coefficients of the objective
function, or the right hand side values; would affect the solution. For this, instead of resolving the
entire problem as anew problem with new parameters, we may consider the original optimal
solution as an initial solution for the purpose of knowing the ranges, both lower and upper, within
which a parameter may assume a value.
For instance, a manager may want to consider obtaining an additional amount of scarce resource
that might be available, in which case the manager would want to know the answers to questions
such as:
b. Will an increase in the right hand side of this constraint affect the objective function?

ADU- Department of Business Administration Page 69

Operations Research

c. If so, how much of the resource can be used?

d. Given the answer to the preceding question, what will be the revised optimal solution?

Conversely, the decision maker might be facing a situation in which the amount of scarce resource
available is less than the original amount, in which case the issues would be:
a. Will the decreased level of the resource have an impact on the value of the objective
function?
b. If yes, how much of an impact will it have, and what will be the revised optimal solution?
The process of studying the sensitivity of the optimal solution of an LP problem is also called post
optimality analysis because it is done after an optimal solution, assuming a given set of
parameters, has been obtained for the model.

The discussion here covers only two types of changes: changes in the right hand side levels of the
constraints, and changes in the coefficients of the objective function as change in the coefficient
of constraints is beyond the coverage of this material.

To demonstrate sensitivity analysis, the microcomputer example will again be used.

Maximize 60x1 + 50x2

Subject to
Assembly time 4x1 + 10x2 ≤ 100
Inspection time 2x1 + 1x2 ≤ 22
Storage space 3x1 + 3x2 ≤ 39
X1, X2 > = 0

The most obvious way to ascertain the effect of a change in the parameter of the model is to make
the change in the original model, resolve the model, and compare the solution result with the
original solution. However, resolving a problem can be very time consuming and as it will be
demonstrated below, it is unnecessary. In most cases the effect of changes in the model can be
determined directly from the final simplex tableau.
3.2.1. A Change in the RHS of a constraint
The first step in determining how a change in the RHS (Right Hand Side) of a constraint (e.g., the
amount of scarce resource that is available for use) would influence the optimal solution is to
examine the shadow prices in the final simplex tableau. Shadow prices are the values in the Z row
in the slack columns.
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

Negatives of
shadow prices
A shadow price is a marginal value; it indicates the impact that a one-unit change in the amount of
a constraint would have on the values of the objective function. As we can see from the table, the
shadow prices are $0 for s 1 (Assembly time), $10 for s2 (Inspection time), and $40/3 for s 3
(Storage space). These tell us that an increase in the amount of assembly time would have no
effect on profit; if inspection time is increased by one hour, it will increase the profit by $10, and

ADU- Department of Business Administration Page 70

Operations Research

if storage space is increased by 1 cubic foot, profit would increase by $40/3. The reverse also
holds. If we decrease them by such respective amounts, the decrease in profit will take the same
figure.

What shadow prices do not tell us is the extents to which the level of a scarce resource can be
changed and still have the same impact per unit. The ability to use additional amounts of a
resource will disappear at some point because of the fixed amounts of the other constraints.
Therefore, we need to determine the range over which we can change the right hand side
quantities and still have the same shadow price. This is called the range of feasibility, or the right
hand side range.

The key to computing the range of feasibility for the constraint lies in each slack column of the
final simplex tableau. To compute the range for each constraint, the entries in the associated slack
column must be divided into the values in the Quantity column. For example, for the storage
column values, the resulting ratios are:

24 9 4
-16/3 = -4.5 -⅓ = -27 ⅔ = +6

Here, the smallest positive ratio indicates how much the constraint level can be decreased before it
reaches the lower limit of its range of feasibility, and the smallest negative ratio (i.e. the negative
ratio closest to 0) indicates how much the storage constraint can be increased before it reaches its
upper limit of feasibility. The general rule applies when computing the upper and lower limits on
the range of feasibility for maximization problem is:

Allowable decrease: The smallest positive ratio

Allowable increase: Negative ratio closest to zero.

Note: The reverse rule will be true for minimization problems.

Alternative Method
Assume q1 symbolically represent quantity in the original model, and  stands for change.
Max. Z = 60X1+50X2
Subject to 4X1+10X2 <100
2X1+X2 < 22
3X1+3X2 < 39
If we consider the same example as in the previous example, i.e., change in q3 = 39. If q3
changes by some amount, the new q’3 equals the original q3 +. The  changes form a separate
column identical to the s1 column in the final simplex tableau. Therefore, to determine the 
change, we need only observe the slack (si) column corresponding to the model constraint quantity
(qi) being changed.

Final simplex tableau

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

ADU- Department of Business Administration Page 71

Operations Research

C-Z 0 0 0 -10 -40/3

Recall that the requirement of simplex method is that the quantity values can not be negative. If
any q1 value becomes negative, the solution no longer be feasible. Thus the inequalities
24-16/3 > 0
9-/3> 0
4 + 2/3 > 0
are solved for :
24-16/3 > 0 9-/3> 0 4 + 2/3 > 0
72-16 > 0 27- > 0 12+2 > 0
3 3 3
72-16> 0 27- > 0 12+2 > 0
72>16 27 >  2 > - 12
4.5 >  < 27  > -6
 < 4.5
Since the new q3 = 39 +, then  = q3 -39. These values are substituted to the above inequalities to
result in:
 < 4.5  < 27  > -6
q3 -39 < 4.5 q3 -39 < 27 q3 -39> -6
q3 < 43.5 q3 < 66 q3 > 33

Summarizing these inequalities, we have:

33 < 43.5< q3 <66
The value 66 can be eliminated since q3 must be less than 43.5; thus
33 < q3 < 43.5
As long as q3 remains in this range, the present basic solution variables remain positive and
feasible. However, the quantity value of those basic variables may change.

? Dear learner, can you determine the range within which q1&q2 vary with out
causing the basic solution mix change?
_________________________________________________________________
_________________________________________________________________
______________________________________________________________

Once we have computed these limits, we proceed to assess the impact that a contemplated change
would have on the optimal solution.

Example
The manager in the microcomputer problem is contemplating a change in the level of the storage
constraint – an increase of 3 cubic feet. Determine the revised optimal solution for the change.

Solution
First, note that an increase of 3 cubic feet is within the range. Then, the effect of an increase of
three cubic feet is computed in the following way:

Basis s3 Current solution Change Revised solution

s1 -16/3 24 3(-16/3)= -16 8
x1 -⅓ 9 3(-⅓) = -1 8
x2 ⅔ 4 3(⅔) = +2 6

ADU- Department of Business Administration Page 72

Operations Research

Z 40/3 740 3(40/3) = +40 780

For an increase in storage space of 8 cubic feet, we take the upper limit of 4.5 cubic feet for the
computation. The resulting revised figures, then, would be s 1= 0, x1=7.5, x2=7, and Profit =800.
Note, however, that beyond the upper limit, s 3 would come into solution, replacing S1, which
would no longer be slack. The amount of slack would be 8- 4.5=3.5 cubic feet. Consequently, the
revised solution would be s3=3.5, x1=7.5, x2=7, and Profit = 800.

3.2.2. A Change in an Objective Function Coefficient

It is useful to know how much the contribution of a given decision variable to the objective
function can change without changing the optimal solution. There are two cases: Changes for a
variable that is not currently in the solution mix, and Changes for a variable that is currently in the
solution mix.

If a variable is not currently in the solution in a maximization problem, its objective function
coefficient would have to increase by an amount that exceeds the C-Z value for that variable in the
final tableau in order for it to end up as a basic variable in the optimal solution. The range over
which a non-basic variable’s objective function coefficient can change without causing that
variable to enter the solution mix is called its range of insignificance.
RANGE OF INSIGNIFICANCE: the range over which a non-basic variable’s objective
function coefficient can change without causing that variable to enter the solution mix.
Maximize 3x + 2x + 5x
Subject to:
C1 x + 2x + 2x ≤ 18
C2 3x + 2x + 6x ≤ 12
C3 2x + 3x + 4x ≤ 12
x ,x x , ≥ 0

C 3 2 5 0 0 0
Basis x x x s s Quantity
s
s 0 0 0 0 1 1/5 -4/5 4/5
x 3 1 0 2 0 3/5 -2/5 12/5
x 2 0 1 0 0 -2/5 3/5 12/5
Z 3 2 6 0 1 0 12
C-Z 0 0 -1 0 -1 0

In the above tableau we see that x is a non- basic variable. To determine the range over which the
objective function coefficient of x would change without changing the optimal solution, recall
how a variable in a max problem enters the solution mix. Because x is not in solution, its
objective function coefficient would need to increase in order for it to come in to solution ( i.e, to
make its c-z value positive). The amount of increase must be greater than the absolute value of its
c-z value, which is │-1│. Therefore, its objective function coefficient must increase by more than
1. Hence, the range of insignificance for x is 6 or less (i.e, its Z value). In general the rule is:
Range of insignificance for a non- basic variable is ≤ the Z value of the variable. The allowable
increase is the absolute value of its own C-Z value.

ADU- Department of Business Administration Page 73

Operations Research

RANGE OF OPTIMALITY: the range over which objective function coefficient of a

variable that is in solution can change with out changing the optimal values of the decision
variables. Note, however, that such a change would change the optimal value of the objective
function.

For variables that are in solution, the determination of the range of optimality (the range over
which the objective function coefficient of a variable that is in the solution can change without
changing the optimal values of the decision variables) requires a different approach. Divide the
values in row C-Z by the corresponding row values of the variable in question and follow the
following rule for both maximization and minimization problems.

Allowable increase: The smallest positive ratio of C-Z value and the
variable’s substitution rate.
Allowable decrease: the smallest negative ratio of C-Z value and the
variable’s substitution rate.

Note: If there is no positive ratio, it means that there is no upper limit on that variable’s
objective function coefficient.
Example
Determine the range of optimality for the decision variables in the microcomputer problem.

Solution
The final simplex tableau for that problem is repeated here for convenience.

Cj 60 50 0 0 0
Basis x1 x2 s1 s2 s3 Quantity
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

For x1 we find:
Column x1 x2 s1 s2 s3
C-Z value 0/1 = 0 0/0 = Undefined 0/0 = Undefined -10/1 = -10 -40/3 = +40
x1 row value -1/3

The smallest positive ration is +40. Therefore, the coefficient of X1 can be increased by Birr 40
without changing the optimal solution. The upper end of its range of optimality is this amount
added to its current (original) value. Thus, its upper end is (Birr60 +Birr40) = Birr100. Also, the
smallest negative ratio is -10; therefore, the x 1 coefficient can be decreased by as much as Birr10
from its current value, making the lower end of the range equal to (Birr60 - Birr10 )= Birr 50.

For x2 we find:
Column x1 x2 s1 s2 s3
C-Z value 0/0 = Undefined 0/1= 0 0/0 = Undefined -10/-1 = +10 -40/3 = -20
ADU- Department of Business Administration Page 74
Operations Research

x2 row value ⅔

The smallest positive ration is +10. This tells us that the x 2 coefficient in the objective function
could be increased by Birr10 to (Birr50 + Birr10) = Birr 60. The smallest negative ratio is -20,
which tells us that the x 2 coefficient could be decreased by Birr20 to (Birr50 - Birr20) = Birr30.
Hence, the range of optimality for the objective function coefficient of x2 is Birr30 to Birr 60.

This can also be done in the same way as change in the constraints by using the concept of change
starting from the final tableau. That is, the range of c j that will maintain the optimal solution can
be determined directly from the optimal simplex tableau.
Cj 60+ 50 0 0 0
Basis x1 x2 s1 s2 s3 Quantity
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

Consider a  change for c1. This will change the c1 value from c1=60 to c1=60+. This new value is
not only included on the top cj row, but also in the left-hand cj column. Since 60+ is in left-hand
column, it becomes a multiple of the column values when the new Zj row values and the
subsequent Cj – Zj row values.

The solution becomes optimal as long as the Cj –Zj row values remain negative. If Cj-Zj becomes
positive, the product mix will change, if it becomes zero, there will be an alternative solution.
Thus, for the solution to remain uniquely optimal,
-10- < 0
and
(-40+)/3 <0
Both of these inequalities must be solved for .
-10- < 0 and (-40+)/3 <0
- < 10 (-40+)<0
 > -10 < 40
Now recall that c1=60+; therefore,  = c1-60. Now substituting c1-60 for  in the above inequalities,
we get:
Summary
 > -10 < 40
 Every linear programming problem can have two forms. The original
C1-60 > -10 c1-60 < 40
formulation of a problem is referred to as its Primal form. The other
C1> 50 C1<100
form is referred to as its dual LP problem or in short dual form.
Therefore, the range of values for C1 over which the solution basis remain optimal (although) the
 The main focus of dual is to find for each resource its best marginal
value of the objective function may change) is:
value or shadow price. This value reflects the scarcity of resources, i.e.,
50<C1<100
the maximum additional prices to be paid to obtain one additional unit of
the resources
? Dear learner, wouldtoyou
maximize profit under
try to determine the the resource
range constraints.
over which coefficient of X 2 in the

objective function change without changing the solution mix in the maximize;
If the primal’ objective is to minimize, the dual’s will be to same way as above?
and the vice versa; the coefficient’s of the primal’s objective function
______________________________________________________________________
become the RHS values for the dual’s constraints; the primal’s RHS
______________________________________________________________________
values become the coefficients of the dual’s objective
______________________________________________________________________ function; the
__ coefficients of the first “row” of the primal’s constraints become the
coefficients of the first “column” of the dual’s constraint …..; the ≤
constraints become ≥ and the vice versa.
 Sensitivity analysis is the study of sensitivity of the optimal solution of
an LP problem due to discrete variations (changes) in its parameters. The
degree of sensitivity of the solution due to these changes can range from
no change to all to a substantial change in the optimal solution of the
given LP problem.
 The purpose of sensitivity analysis purpose is to explore how changes in
ADU- Department of Business Administration Page 75
any of the parameters of a problem, such as the coefficients of the
constraints, coefficients of the objective function, or the right hand side
values; would affect the solution.
Operations Research

Activity
1. ABC Metal crafters company makes brass tray and buckets. The number of trays (x1 )and
buckets (x2) that can be produced daily is constrained by the availability of brass and labor, as
reflected in the following LP model.
Maximize Z = 6x1 + 10x2

Subject to:
x1 + 4x2 90 ( brass, lb)
2x1 + 2x2 960 (labor, hrs)
x1,x2 0
The final optimal simplex table for this model is as follows:

6 10 0 0
Basic variables cj x1 x2 s1 s2 quantity
x2 10 0 1 1/3 -1/6 20
x1 6 1 0 -1/3 2/3 10

Zj 6 10 4/3 7/3 260

Cj –Zj 0 0 -4/3 -7/3

a. Formulate the dual of this problem.

b. Define the dual variables and explain what they mean.
c. What do the dual variable equal.
d. resolve the problem for its dual and see the differences in the solution if any
2. A Manufacturing firm produces electric motors for washing machines and vacuum cleaners.
The firm has resource constraints for production time, steel and wire. The LP model determining
the number of washing machine motors (x1) and vacuum cleaner motors (x1) to produce has been
formulated as follows.
Maximize Z = 70x1 + 80x2
Subject to:
2x1 + x2 19 ( production, hrs)
x1 + x2 14 (steel, lb)
x1 + 2x2 20 (wire, ft)

ADU- Department of Business Administration Page 76

Operations Research

x1,x2 0
The final simplex table for this model is as follows.

70 80 0 0
Basic variables cj x1 x2 s1 s2 s3 quantity
x1 70 1 0 2/3 0 -1/3 6
s2 0 0 0 -1/3 1 -1/3 1
x2 0 0 1 -1/3 0 2/3 7

Zj 70 80 20 0 30 980
Cj –Zj 0 0 -20 0 -30

a. Formulate the dual of this problem.

b. Define the dual variables and explain what they mean.
c. What do the dual variable equal?
d. resolve the problem for its dual and see the differences in the solution if any
e. Interpret the Cj-Zj values in the above table
f. allocate the profit among the resources to show how much each resource contributes to the total
profit.
3. The evergreen products firm produces three types of pressed paneling from pine and spruce.
The three types of paneling are wide(x1), medium (x2) and small(x3). Each sheet must be cut and
pressed. The resource requirements are given in the following LP formulation.
Maximize Z = 4x1 + 10x2 + 8x3
Subject to:
5x1 + 4x2+ 4x3 200 ( pine, lb)
2x1 + 5x2+ 2x3 160 ( spruce, lb)
x1 + x2+ 2x3 50 ( cutting, hrs)
2x1 + 4x2+ 2x3 80 ( pressing, hr)
x1,x2, x3 0

The final simplex table for this model is as follows.

4 10 8 0 0 0
Basic variables cj x1 x2 x3 s1 s2 s3 s4 quantity
s1 0 7/3 0 0 1 0 -4/3 -2/3 80
s2 0 -1/3 0 0 0 1 1/3 -4/3 70
x3 8 1/3 1 0 0 0 2/3 1/6 20
x2 10 1/3 1 0 0 0 -1/3 1/3 10

Zj 6 10 8 0 0 2 2 260
Cj –Zj 0 0 0 0 0 -2 -2

a. What is the marginal value of an additional pound of spruce? Over what range is this value
valid?
b. What is the marginal value of additional hours of cutting? Over what range is this value
valid?
c. Given a choice between securing more hours and or more pressing hours, which should the
management select?
d. If the amount of the spruce available to the firm were decreased from 160 to 100 pounds, would
this reduction affect the solution? Why? If it is what is the new solution?
e. What unit profit would have to be made from wide paneling before management consider
producing it?
f. Management is considering changing the profit of small paneling from Birr 8 to Birr 13. Would

ADU- Department of Business Administration Page 77

Operations Research

this change affect the solution?

3. A manufacturing firm produces four products. Each product requires material and machine
processing. The liner programming model formulated to determine the number of product 1 (x1)
Product 2 (x2) product 3 (x3), and product 4 (x4), to produce is as follows.

Maximize Z = 2x1+8x2+6x4 (profit, Birr)

Subject to:
2x1 + x2 + 4x3 + 2x4 200(material, lb)
x1 +2 x2 +2 x3+x4 160(machine processing, hrs)
x1,x2 , x3, x4 0

The final simplex table for this model is as follows.

2 8 10 6 0 0
Basic variables cj x1 x2 x3 x4 s1 s2 quantity
x3 6 1 0 2 1 2/3 -1/3 80
x2 8 0 1 0 0 -1/3 2/3 40

Zj 6 8 12 6 4/3 10/3 800

Cj –Zj -4 0 -2 0 -4/3 -10/3

a. What is the marginal value of an additional pound of material? Over what range is this value
valid?
b. What is the marginal value of additional hours of processing time? Over what range is this
value valid?
c. How much would the contribution to profit of x1 have to increase before x1 would be
produced?
d. Over what range the contribution of x2 change with out affecting the solution? Taking one of
the values within the range arbitrarily, calculate the value of the optimal solution?
e. Over what range machine processing hours change with out changing the solution mix? Taking
one of the value within this range, calculate the revised optimal solution?

ADU- Department of Business Administration Page 78

Operations Research

Chapter Four
4. Transportation and Assignment Models
 Dear learners, in the previous chapters we have discussed about linear programming,
which is more general. In this chapter we will discuss about special types of linear programming
models called Transportation and Assignment Models
Unit objectives:
Up on completion of this unit, you will be able to:
 Differentiate between linear programming and transportation and assignment models
 Explain advantages of transportation and assignment models
 Identify different techniques to find solution for both transportation and assignment
models.
 Discuss special cases in transportation and assignment models
4.1. Transportation Models
Sub section objectives
Up on completion of this section, the learner will be able to:
 Explain transportation models
 Identify application areas of transportation models
 Formulate LP model for transportation problems
 Describe methods of finding initial feasible solution
 Check for optimality of transportation model using stepping stone and MODI techniques.
 Elucidate special cases in transportation models
Introduction
Dear learner, in the previous chapter we have been thoroughly discussed about LP models and
their applications. In this chapter we will try to see special types of LP models which are
Transportation and Assignment Models. Though it is possible to solve the two problems using
simplex method, the process would result in rather large simplex tableaus and numerous simplex
iterations. Because of the unique characteristics of each problem, however, alternative solutions
methods requiring considerably less mathematical computation than the simplex method have
been developed.

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 both involve
an initial feasible solution that is evaluated to determine if it can be improved. Moreover, both
involve displaying initial and improved solutions in a series of tableaus or tables. However, the
transportation method requires considerably less computational effort. In addition, it is not
unusual to discover that the initial feasible solution in a transportation problem is the optimum.

ADU- Department of Business Administration Page 79

Operations Research

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.

? Discuss similarities and differences between transportation models and simplex

approach?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___

4.1.1. FORMULATING THE MODEL

A transportation problem typically involves a set of sending locations, which are referred to as
origins, and a set of receiving locations, which are referred to as destinations. In order to develop
a model of a transportation problem, it is necessary to have the following information:
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
Let’s consider an example. Harley’s Sand and Gravel Pit has 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.
The next step is to arrange the information into a transportation table. This is shown in the
following table.

Transportation table for Harley’s sand and gravel

To:
From: Project Project Project Supply
From: #1 #2 #3

ADU- Department of Business Administration Page 80

Operations Research

4 2 8
Farm A 100

5 1 9
Farm B 200

7 6 3
Farm C 200

Demand 50 150 300

 Note: It is possible to write this transportation problem in the form of LPM.

Nine ( 3x3) decision variables are there and the objective function is minimization.

LPM for this problem is:

Zmin: 4x11 + 2x12 +8x13 + 5x21 + x22 + 9x23 + 7x31 + 6x32 + 3x33
Subject to:
x11 + x12 +x13 100
x21 + x22 + x23 200 Capacity/ Source constraint
x31 + x32 + x33 200
x11 + x21 + x3 1 50
x12 + x22 +x32 150 Demand/Destination constraint
x13 + x23 + x33 300
This can be rewritten as:
Zmin: 4x11 + 2x12 +8x13 + 5x21 + x22 + 9x23 + 7x31 + 6x32 + 3x33
Subject to:
x11 + x12 + x13 100
x21 + x22 + x23 200
x31 + x32 + x33 200
x11 + x21 + x31 50
x12 + x22 + x32 150
x13 + x23 + x33 300
x11 , x12, x13 ,x21, x22 , x23 , x31, x32 , x33 0
4.1.2. FINDING AND INITIAL FEASIBLE SOLUTION
The starting point of the transportation method is a feasible solution. For an assignment to be
feasible, two conditions must be fulfilled:
 A feasible solution is one in which assignments are made in such a way that all
supply and demand requirements are satisfied.
 The number of nonzero (occupied) cells should equal one less than the sum of the
number of rows and the number of columns in a transportation table. In the case of a
table with 3 rows and 3 columns, the number of occupied cells should be 3 + 3 -1 = 5
in order to be able to use the transportation algorithm. Sometimes, fewer occupied
or completed cells appear in a solution. When that happens, the solution is referred
to as a degenerated solution; such a solution requires modification in order to be
able to determine if it is optimal. This topic will be covered later on.
A number of different approaches can be used to find an initial feasible solution. Three of these
are described here:
The northwest-corner method.
An intuitive approach/Least cost method
Vogel’s / Penalty Method
4.1.2.1.The Northwest-Corner Method

ADU- Department of Business Administration Page 81

Operations Research

The northwest corner method is a systematic approach for developing an initial feasible solution.
Its chief advantages are that it is simple to use and easy to understand. Its chief drawback is that it
does not take transportation costs into account. Consequently, such a solution may require much
additional effort to obtain the optimal solution.

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. For the Harley problem, this
would be the cell that represents the route from Farm A to Project #1. The following set of
principles guides the allocation:
i. 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.
ii. 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).
Initial Feasible Solution for Harley using Northwest-corner method
To:
Project Project Project Supply
From: #1 #2 #3
4 2 8
Farm A 50 50 100
(first) (second)
5 1 9
Farm B 100 100 200
(third) (fourth)
7 6 3
Farm C 200 200
(last)

Demand 50 150 300 500

The total cost is found by multiplying the quantities in “completed” (i.e. nonempty) cells by the
cell’s unit cost and, then, summing those amounts. Thus:
Total cost = 50(4) + 50(2) + 100(1) + 100(9) + 200(3) = $1900

As noted earlier, the main drawback of the northwest-corner method is that it does not consider
cell (route) costs in making the allocation. Consequently, if this allocation is optimal, that can be
attributed to chance rather than the method used.

4.1.2.2. The Intuitive Approach

This approach, also known as the minimum-cost method, uses lowest cell cost as the basis for
selecting routes. The procedure is as follows:

i. 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.
ii. 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.
iii. 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.
iv. Repeat steps (ii) and (iii) until all supply and demand have been exhausted.

ADU- Department of Business Administration Page 82

Operations Research

The initial feasible solution for the Harley problem completed using the above steps is shown
below.

Initial Feasible Solution for the Harley problem using the Intuitive approach
To:
Project Project Project Supply
From: #1 #2 #3
4 2 8
Farm A 50 50 100

5 1 9
Farm B 150 50 200

7 6 3
Farm C 200 200

Demand 50 150 300 500

We can easily verify that this is a feasible solution by checking to see that the row and column
totals of the assigned cell quantities equal the supply and demand totals for the rows and columns.
Now let us compute the total cost of this solution and compare it to that of the northwest corner
solution.
Total cost = 50(4) + 50(8) + 150(1) + 50(9) + 200(3) = $1800

Compared to the plan generated using the Northwest-corner method, this one has a total cost that
is $100 less. This is due to the fact that the previous one did not involve the use of cost
information in allocating units.

4.1.2.3. Vogel’s Approximation Method (VAM)

The third method for determining an initial solution, Vogel’s Approximation Method (also called
VAM), is based on the concept of penalty cost or regret. If a decision maker incorrectly chooses
from several alternative courses of action, a penalty may be suffered (and the decision maker may
regret the decision that was made). In transportation problem, the courses of action are the
alternative routes and a wrong decision is allocating to a cell that does not contain the lowest cost.
This method is preferred over the other two methods because the initial feasible solution obtained
with VAM is either optimal or very close to the optimal. With VAM the basis of allocation is unit
cost penalty i.e. that column or row which has the highest unit cost penalty (difference between
the lowest and the next highest cost) is selected first for allocation and the subsequent allocations
in cells are also done keeping in view the highest unit cost penalty.
Steps in VAM
1. Construct the cost, requirement, and availability matrix i.e. cost matrix with column and
row information.
2. 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.
3. 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

ADU- Department of Business Administration Page 83

Operations Research

a tie for penalty, select one arbitrarily. After allocation, cross that row or column and
disregard it from further consideration.
4. Repeat steps 1 to 3 for the reduced table until the entire capabilities are used to fill the
requirement at different warehouses.
5. From step 4 we will get initial feasible solution. Now for initial feasible solution find the
total cost.
The solution for our problem is as follows

To: Penalty
From: Project Project Project Supply Hc NHC Hc- NHC
#1 #2 #3
4 2 8
Farm A 100
8 4 4
5 1 9
Farm B 200
1 9 5 4 selected
7 6 3
Farm C 200
7 6 1

Demand 50 150 300

NHC 5 2 8
Penalt 2 4 1

HC: Highest cost

NHC: Next Highest cost

Table2 Penalty
To: Hc NHC Hc- NHC
From: Project Project Project #3 Supply
#1 #2 8 4 4
4 2 8
Farm A 100

9 5 4
5 1 9
Farm B 15 200 50
0
7 3 4 selected
7 6 3
Farm C 200
2

Demand 50 150 300 100 Penalty 2 -

1 Second allocation

ADU- Department of Business Administration Page 84

Operations Research

Table 3
To:
Third From: Project Project Project #3 Supply
3#1 #2 allocation
4 2 8
Penalty Farm A 100 50
50
4 selected
5 1 9
Farm B 15 200 50
4
0
7 6 3
Farm C 200 200

Demand 50 150 300 100

Penalty 1 - 1
Table 4
Since there is no penalty for the remaining cells, we allocate for these cells according to their cost.

To:
From: Project Project Project #3 Supply
#1 #2
4 2 4 8
Farm A 50 50 100
50 Fourth allocation
5 1 5 9
Farm B 15 200
0 50
7 6 3
Farm C 200 200

Demand 50 150 300 100 50 Fifth allocation

Therefore the final allocation will
be:
To:
From: Project Project Project #3 Supply
#1 #2
4 2 4 8
Farm A 50 50 100

5 1 5 9
Farm B 15 200
0
7 6 3
Farm C 200 200

Demand 50 150 300

ADU- Department of Business Administration Page 85

Operations Research

Total cost:
1x150 + 3x200+4x50 + 8x50 + 9x50
= Birr 1800
? Dear learners, could you make comparison among costs of the three
approaches? Why do you think cost of North West corner method has the
highest cost?
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________

4.1.3. Evaluating a Solution for Optimality

The test for optimality for a feasible solution involves a cost evaluation of empty cells (i.e., routes
to which no units have been allocated) to see if an improved solution is possible. We shall
consider two methods for cell evaluation:
The Stepping-stone method
The MODI method

The stepping-stone method involves a good deal of more effort than the MODI method. However,
it provides an intuitive understanding of the evaluation process. Moreover, when a solution is not
optimal, the distribution plan must be revised by reallocating units into and out of various cells,
and only the stepping-stone method can be used for the reallocation.

4.1.3.1. The Stepping-stone method

The Stepping-stone method involves tracing a series of closed paths in the transportation table,
using one such path for each empty cell. The path represents a shift of one unit into an empty cell,
and it enables the manager or analyst to answer a “what-if” question: What impact on total cost
would there be if one unit were shifted into an unused route? The result is a cost change per unit
shifted into a cell. If the shift would result in a cost savings, the stepping-stone path also can be
used to determine the maximum number of units that can be shifted into the empty cell, as well as
modifications to other completed cells needed to compensate for the shift into the previously
unused cell.

Reconsider the initial feasible solution we found using the northwest-corner method. Only the
unoccupied cells need to be evaluated because the question at this point is not how many units to
allocate to a particular route but only if converting a cell from zero units to nonzero (a positive
integer) would decrease or increase total costs. The unoccupied cells are A-3, B-1, C-1, and C-2.
They must be evaluated one at a time, but in no particular order.

Rules for tracing Stepping-stone paths:

i. All unoccupied cells must be evaluated. Evaluate cells one at a time.
ii. Except for the cell being evaluated, only add or subtract in occupied cells. (It is
permissible to skip over unoccupied cells to find an occupied cell from which the path can
continue.)
iii. A path will consist of only horizontal and vertical moves, starting and ending with the
empty cell that is being evaluated.
iv. Alter + and – signs, beginning with a + sign in the cell being evaluated.

ADU- Department of Business Administration Page 86

Operations Research

 Note that it is not necessary to actually alter the quantities in the various cells to reflect the
one-unit change, the + and – signs suffice.

The general implication of the plus and minus signs is that cells with + signs mean one unit would
be added, cells with a – sign indicate one unit would be subtracted. The net impact of such a one-
unit shift can be determined by adding the cell costs with signs attached and noting the resulting
value. Thus, for cell B-1, we have a net change of +2 (i.e., 5+2-4-1) which means that for each
unit shifted into cell B-1, the total cost would increase by $2.

Computed in similar way, the evaluations of cells C-1, A-3, and C-2 result in +10, -2, and +11
respectively. The negative value for cell A-3 indicates an improved solution is possible: For each
unit we can shift into that cell, the total cost will decrease by $2. The following table shows how
empty cell C-1 can be evaluated using the Stepping stone method.

Evaluation path for cell C-1

To:
Project Project Project Supply
From: #1 #2 #3
4 2 8
Farm A 50 50 100
–- +
5 1 9
Farm B 100 100 200
– +
7 6 3
Farm C + – 200 200

Demand 50 150 300 500

4.1.3.2. The MODI method

The MODI (Modified Distribution) method of evaluating a transportation solution for optimality
involves the use of index numbers that are established for the rows and columns. These are based
on the unit costs of the occupied cells. The index numbers can be used to obtain the cell
evaluations for empty cells without the use of stepping-stone paths.

There is one index number for each column and one for each row. These can be conveniently
displayed along the left and upper edges of a matrix. The index numbers are determined in such a
way that for any occupied cell, the sum of the row index and the column index equal the cell’s
unit transportation cost:

Row index + Column index = Cell cost

ri + kj = cij

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.
The method will be illustrated by developing index numbers for the initial feasible solution for the
Harley problem generated by the northwest-corner method. We begin assigning a value of zero for
row 1. Once a row index has been established, it will enable us to compute column index numbers
for all occupied cells in that row. Similarly, once a column index number has been determined,
index numbers for all rows corresponding to occupied cells in that column can be determined. The
complete set of row and column index numbers is shown in the following table.

ADU- Department of Business Administration Page 87

Operations Research

Cell evaluations for Northwest Corner solution for the Harley Problem using the MODI method
k1 k2 k3
+4 +2 +10
To:
Project Project Project Supply
From: #1 #2 #3
4 2 8
r1 0 Farm A 50 50 100
-
5 1 2 9
r2 -1 Farm B 100 100 200

7 6 3
+
r3 -7 Farm C 2 200 200

Demand 50 150 300 500

+10 +11

The cell evaluations (improvement potentials) for each of the unoccupied cells are determined
using the relationship:
Cell evaluation = Cell cost – Row index – Column index
eij = cij – ri – kj

For example, the cell evaluations for A-3 is 8 – 0 – 10 = -2. Similarly, the evaluation for B-1 is
+2, for C-1, +10, and for C-2, it is +11. Note that they agree with the values we computed earlier
using the stepping-stone method.

When cell evaluations are positive or zero, an optimal solution has been found. If one or more is
negative, the cell with the largest negative should be brought into solution because that route has
the largest potential for improvement per unit. In this case, we found that cell A-3 had an
evaluation of –2, which represented an improvement potential of $2 per unit. Hence, an improved
solution is possible.

3.1.5. DEVELOPING AN IMPROVED SOLUTION

Developing an improved solution to a transportation problem requires focusing on the unoccupied
cell that has the largest negative cell evaluation. Improving the solution involves reallocating
quantities in the transportation table. More specifically, we want to take advantage of the
improvement potential of cell A-3 by transferring as many units as possible into that cell. The
stepping-stone path for that cell is necessary for determining how many units can be reallocated
while retaining the balance of supply and demand for the table. The stepping-stone path also
reveals which cells must have quantity changes and both the magnitude and direction of changes.
The + signs in the path indicate units to be added, the – signs indicate units to be subtracted. The
limit on subtraction is the smallest quantity in a negative position along the cell path. With each
iteration (new solution), it is necessary to evaluate the empty cells to see if further improvement is
possible. This requires use of either the MODI or the Stepping-stone method. Both will yield the
same values.

After reallocating the units using the stepping stone method, the empty cells will be A-2, B-1, C-1
and C-2. Suppose we use the MODI method for evaluation. After assigning all the row and
column indices, we find the cell evaluations to be as follows:

Cell A-2: 2 – 0 – 0 = +2
Cell B-1: 5–1–4= 0
Cell C-1: 7-(-5)- 4 = +8

ADU- Department of Business Administration Page 88

Operations Research

Cell C-2: 6-(-5)- 0 = +11

Because none of these numbers is negative, this is an optimal solution. You may recall that this
was the same solution obtained using the intuitive method for the initial feasible solution. At that
point, it was determined that the total cost for the distribution plan was $1800.

Optimal Solution for the Harley problem

+4 0 +8
To:
Project Project Project Supply
From: #1 #2 #3
4 2 8
0 Farm A 50 + 50 100
2

5 1 9
+1 Farm B 150 50 200
0

7 6 3
-5 Farm C +11
200 200
+
8

Demand 50 150 300 500

? Dear learner, which of the two approaches for improvement is lengthy and
difficulty to use?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________

3.1.6. SPECIAL ISSUES

There are a number of special issues in relation to the transportation model. They are:
i. Determining if there are alternate optimal solutions.
ii. Defining and handling degeneracy (too few occupied cells to permit evaluation of a
solution).
iii. Avoiding unacceptable or prohibited route assignments.
iv. Dealing with problems in which supply and demand are not equal.
v. Solving maximization problems.

Alternate Optimal Solutions

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. In fact, you may have noted that cell B-1 had an evaluation
equal to zero in the final solution of the Harley problem. We can find out what that alternate
solution is by reallocating the maximum number of units possible around the stepping-stone path
for that cell. After the cell evaluation of, and reallocating units to cell B-1, we find the following
table to be an alternate optimal solution.

Alternate optimal solution for the Harley problem

ADU- Department of Business Administration Page 89

Operations Research

To:
Project Project Project Supply
From: #1 #2 #3
4 2 8
Farm A 100 100

5 1 9
Farm B 50 150 200

7 6 3
Farm C 200 200

Demand 50 150 300 500

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. In the case of the stepping-stone method, this means that there will be at least one
empty cell for which an evaluation path cannot be constructed. For the MODI method, it means
that it will be impossible to determine all of the row and column index numbers. 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); it is so small that supply and demand for the row and column involved will be unaffected
even without modifying other quantities in the row or column, and so small that total cost will not
change.

The purpose of the delta is to enable evaluation of the remaining empty cells. The choice of
location for the delta can be somewhat tricky: some empty cells may be unsuitable if they do not
enable evaluations of the remaining empty cells. Moreover, the delta cannot be placed in a cell
which later turns out to be in a negative position of a cell path involved in reallocation because
delta will be the “smallest quantity in a negative position” and shifting that minute quantity
around the cell path will leave the solution virtually unchanged. Consequently, a certain amount
of trial and error may be necessary before a satisfactory location can be identified for delta.

The technique can be demonstrated for the degenerate alternate solution of the Harley problem.
Suppose that after some experimentation, cell A-1 has been selected for the location of delta. The
resulting index numbers generated using MODI and the improvement potential for empty cells
based on delta in cell A-1 are shown in the following table. This confirms that the solution is
optimal

Harley Alternate Solution Modified for Degeneracy

+4 0 +8
To:
Project Project Project Supply
From: #1 #2 #3
4 2 8
0 Farm A Δ + 100 100
2

5 1 9
0

ADU- Department of Business Administration Page 90

Operations Research

+1 Farm B 50 150 200

7 6 3
-5 Farm C 200 200
+ +11
8

Demand 50 150 300 500

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).

Suppose that in the Harley problem route A-3 was suddenly unavailable because of recent
flooding. In order to prevent that route from appearing in the final solution (as it originally did),
the manager could assign a unit cost to that cell that was large enough to make that route
uneconomical and, hence, prohibit its occurrence. One rule of thumb would be to assign a cost
that is 10 times the largest cost in the table (or a very big +M). Then, this revised problem could
be solved using either of the methods we have discussed earlier. Note that the prohibited route
may appear in a non-optimal solution, but it will be eliminated by the time the optimal solution is
reached.
Dear learner, would you find the optimal solution if route A-3 is not available? How do you
compare the cost with the original cost?

Unequal Supply and Demand

Up to this point, examples have involved cases in which supply and demand were equal. As you
might guess, there are situations in which the two are not equal. When such a situation is
encountered, it is necessary to modify the original problem so that supply and demand are equal.
This is accomplished by adding either a dummy column or a dummy row; a dummy row is added
if supply is less than demand and a dummy column is added if demand is less than supply. The
dummy is assigned unit costs of zero for each cell, and it is given a supply (if a row) or a demand
(if a column) equal to the difference between supply and demand. Quantities in dummy routes in
the optimal solution are not shipped. Rather, they serve to indicate which supplier will hold the
excess supply, and how much, or which destination will not receive its total demand, and how
much it will be short.

Let’s consider an 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. Therefore, total supply will be 80 units less than total demand. This will require adding a
dummy origin with a supply of 80 units. The final solution is shown in the following table. We
interpret the solution indicating that Project #3 will be short by 80 units per week until the
equipment is repaired. Note, though, that this analysis has considered only transportation costs,
and that other factors, such are shortage costs or schedules of the projects, may dictate some other
course of action.

If the intuitive approach is used to obtain the initial feasible solution when a dummy is involved,
make assignments to the dummy last. Hence, begin by assigning units to the cell with the lowest
nonzero cost, then the next lowest nonzero cost, and so on. For the Harley problem this would
mean that units would be assigned first to cell B-2 because its cost of $1 is the lowest nonzero cell
cost.

Solution using the Dummy Origin

To:

ADU- Department of Business Administration Page 91

Operations Research

Project Project Project Supply

From: #1 #2 #3
4 2 8
Farm A 50 50 100

5 1 9
Farm B 150 50 200

7 6 3
Farm C 120 120

0 0 0
Dummy 80 80

Demand 50 150 300 500

Dear learner, would you complete the above case by evaluating the assignments? What would
assignments in the dummy row or column in the optimal solution indicate?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

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: 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. These values
reflect the opportunity costs that would be incurred by using routes with unit profits that are less
than the largest unit profit. Replace the original unit profits with these opportunity cost solution.
This will be identical to maximizing the total profit. For example, suppose in the Harley problem,
the cell values had been unit profits instead of unit costs. Cell B-3 had the largest dollar value: $9.
Hence, each cell’s dollar amount would be subtracted from 9. For cell A-1, the resulting
opportunity cost would have been 9-4 = 5 and so on. Cell B-3 would have an opportunity cost of 0
making it the most desirable route.

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.
? Dear learner, would you complete the above case by evaluating the assignments?
Which one would you consider the original price or opportunity cost of each cell to
calculate the total profit in the optimal solution?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

ACTIVITY
1. A transportation problem involves the following costs, supply, and demand.

ADU- Department of Business Administration Page 92

Operations Research

To
From 1 2 3 4 Supply
1 $5 750 300 450 12
2 00 800
65 400 600 17
0
40
3 700 500 550 11
0
Demand 10 10 10 10

a. Find the initial solution using the northwest corner method, the minimum cell cost
method, and Vogel's Approximation Method. Compute total cost for each.
a. Using the VAM initial solution, find the optimal solution using the modified distribution
method (MODI).

2. 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.
c. Are there multiple optimum solutions? Explain. If so, identify them.
d. Formulate this problem as a linear programming model.

3. Steel mills in three cities produce the following amounts of steel:

Location Weekly Demand (tones)
Bethlehem 130
Birmingham 210
Gary 320
620
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

ADU- Department of Business Administration Page 93

Operations Research

To
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.

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

4.2. ASSIGNMENT PROBLEMS

In the previous chapter, we discussed about the transportation problem. Now we consider
another type of special linear programming problem, called the assignment problem.

Section objectives:
Up on completion of this section, the learner will be able to:
 Define assignment model
 Formulate LP model for assignment problems
 Identify areas of application
 Find optimal allocation or solution to the model
 Deal with special cases of the model
? Dear learner, can you make any difference between assignment and transportation
problems?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

ADU- Department of Business Administration Page 94

Operations Research

There are many situations where the assignment of people or machines and so on, may be called
for. Assignment of workers to machines, clerks to various counters, salesmen to different sales
areas, service crews to different districts, are typical examples of these. The assignment is a
problem because people posses varying abilities fro performing different jobs and, therefore, the
costs of performing the jobs by different people are different. Obviously, if all persons could do a
job in the same time or at the same cost then it would not matter who of them is assigned the job.
Thus, 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).

A typical assignment problem follows:

Example
A production supervisor is considering how he should assign the four jobs that are
performed, to four of the workers working under him. He want to assign the jobs to the
workers such that the aggregate time to perform the job in the least. Based on the previous
experience, he has the information on the time taken by the four workers in performing these
jobs, as given in below.

Job
Worker A B C D
1 45 40 51 67
2 57 42 63 55
3 49 52 48 64
4 41 45 60 55
Example
A computer centre has got four Expert Programmers. Centre needs four application
programmers to be developed. The head of dept., estimate the computer required by the
respective experts to develop the application programs as follows. Make appropriate
selection of experts.

Progra
m A B C D
Expert
1 120 100 80 90
2 80 90 110 70
3 110 140 120 100
4 90 90 80 90

4.2.1. THE ASSIGNMENT PROBLEM (A.P) definition:

1. The Assignment Problem (A.P) is a special case of Transportation Problem (T.P) under the
condition that the number of origins is equal to the number of destinations,
i.e. m=n
Hence assignment is made on the basis of 1:1
Number of jobs equal to number of machines or persons.
Each man or machine is loaded with one and only one job.
Each man or machine is independently capable of handling any of the jobs
being presented.

ADU- Department of Business Administration Page 95

Operations Research

Loading criteria must be clearly specified such as “ minimizing operating time

or “ maximizing profit”, or “ minimizing production cost” or minimizing
production cycle time e.t.c
2.
A.P
The Assignment Problem (A.P.) is a special case of Transportation Problem
(T.P.) in which the number of sources and destinations are the same, and the
objective is to assign the given job (task) to most appropriate machine (person)
so as to optimize the objective like minimizing cost.
Cost Vector (Cij)
Cost vector (Cij) is the cost of assigning ith job (Task) to jth machine (person),

Assignment Vector (Xij) is defined as follows

Xij = 0; If ith job (Task) is not assigned by jth machine (person) or
Xij = 1; If ith job (Task) is assigned to jth machine (person).
Cost Matrix (Cij)
Assignment problem is stated in the form of (n*n) matrix. This is called cost
matrix. This is illustrated as given below.
Cij = cost of assigning ith job to jth machine
(Symbols j = Job (Task) M = Machine (person)

General Assignment Problem Table

.
M 1 2 3 … k … n
J
1 C11 C12 C13 … C1k … C1n
2 C21 C22 C23 … C2k … C2n
3 C31 C32 C33 … C3k … C3k
… … … … … … … …
k Ck1 Ck2 Ck3 … Ckk … Ckn
… … … … … … … …
n Cn1 Cn2 Cn3 … Cnk … Cnn

Effective Matrix
A cost Matrix in A.P. is called an “Effectiveness Matrix” when there is at least
one zero in each row and column. Following is an example of Effectiveness
Matrix.

1 2 3 4
1 0 1 3 4
2 5 0 6 0
3 7 8 0 9
4 0 4 3 8
3. Mathematical Modeling of an A.P.
Let there be ‘n’ jobs in a manufacturing plant. Let there be ‘n’ machines to process the
product. A job i (i = 1, 2,…, n) when processed in a machine j (j = 1,2,…, n), it is assumed
to incur a cost of Cij.
The assignment is made in such a way that one job is associated with one machine (see
assumption). Hence we have the following:

ADU- Department of Business Administration Page 96

Operations Research

Where: - xij is the assignment- vector discussed earlier

Cij is the cost vector associated with the assignment vector xij.
Total assignment cost (Z) is, therefore, given by the following:
Z=

Thus the mathematical formulation of assignment Problem is given as follows:

Minimize
Z=
Subject to

i = 1, 2, 3… n

j = 1, 2, 3…, n

This special structure of A.P. makes solution much easy compared to the conventional T.P.

Remark:
1. It may be noted that assignment problem is a variation of transportation problem with two
characteristics (i) the cost matrix is square matrix, and (ii) the optimum solution fro the problem
would always be such that there would be only one assignment in a given row or column of the
cost matrix.

2. In assignment problem if a constant is added or subtracted from every element of any row or
column in the given cost matrix then an assignment that minimizes the total cost in one matrix
also minimizes the total cost in the other matrix.

4.2.3. HUNGARIAN ASSIGNEMNT 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.

ADU- Department of Business Administration Page 97

Operations Research

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, whish 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.
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.

Example
Solve the assignment problem given in Illustrative Example 1 for optimal solution using HAM.
The information is reproduced in the following table.

Time Taken (in minutes) by 4 workers

Job
Worker A B C D
1 45 40 51 67
2 57 42 63 55
3 49 52 48 64
4 41 45 60 55

The solution to this problem is given here in a step-wise manner.

Step 1: The minimum value of each row is subtracted from all elements in the row. It is shown in
the reduced cost table, also called opportunity cost table, given as follows.

Reduced Cost Table 1

Job
Worker A B C D
1 5 0 11 27
2 15 0 21 13
3 1 4 0 16
4 0 4 19 14

ADU- Department of Business Administration Page 98

Operations Research

Step 2: For each column of this table, the minimum value is subtracted from all the other values.
Obviously, the columns that contain a zero would remain unaffected by this operation. Here only
the fourth column values would change. The table below shows this.

Reduced Cost Table 2

Job
Worker A B C D
1 5 0 11 14
2 15 0 21 0
3 1 4 0 3
4 0 4 19 1

Step 3: Draw the minimum number of lines covering all zeros. As a general rule, we should first
cover those rows/columns which contain larger number of zeros. The above table is reproduced in
the next table and the lines are drawn.

Reduced Cost Table3

Job
Worker A B C D
1 5 0 11 14
2 15 0 21 0
3 1 4 0 3
4 0 4 19 1

Step 4: Since the number of lines drawn is equal to 4(=n), the optimal solution is obtained. The
assignments are made after scanning the rows and columns for unit zeros. Assignments made are
shown with squares, as shown in the following table.

Assignment of Jobs
Job
Worker A B C D
1 5 0 11 14
2 15 0 X 21 0
3 1 4 0 3
4 0 4 19 1
Assignments are made in the following order. Rows 1, 3, and 4 contain only one zero each. So
assign 1-B, 3-C and 4-A. Since worker 1 has been assigned job B, only worker 2 and job E are left
for assignment. The final pattern of assignments is 1-B, 2-D, 3-C, and 4-A, involving a total time
of 40+55+48+41=184 minutes. This is the optimal solution to the problem-the same as obtained
by enumeration and transportation methods.

Example
Using the following cost matrix, determine (a) optimal assignment, and (b) the cost of
assignments.
Reduced Cost Table 1
Job
Machinist 1 2 3 4 5
A 10 3 3 2 8
B 9 7 8 2 7

ADU- Department of Business Administration Page 99

Operations Research

C 7 5 6 2 4
D 3 5 8 2 4
E 9 10 9 6 10

Iteration 1: Obtain row reductions.

Reduced Cost Table 1
Job
Machinist 1 2 3 4 5
A 8 1 1 0 6
B 7 5 6 0 5
C 5 3 4 0 2
D 1 3 6 0 2
E 3 4 3 0 4

Iteration 2: Obtain column reductions and draw the minimum number of lines to cover all
zeros.
Reduced Cost Table2
Job
Machinist 1 2 3 4 5
A 7 0 0 0 4
B 6 4 5 0 3
C 4 2 3 0 0
D 0 2 5 0 0
E 2 3 2 0 2

Since the number of lines covering all zeros is less than the number of columns/rows, we modify
the Table 6.13. The least of the uncovered cell values is 2. This value would be subtracted from
each of the uncovered values and added to each value lying at the intersection of lines
(corresponding to cells A-4, D-4, A-5 and D-5). Accordingly, the new table would appear as
shown as follows.
Iteration 3

Job
Machinist 1 2 3 4 5
A 7 0 0 X 2 6
B 4 2 3 0 3
C 2 0 X 1 0 X 0
D 0 2 5 2 2
E 0 X 1 0 0 X 2

The optimal assignments can be made as the least number of lines covering all zeros in Table 6.14
equals 5. Considering rows and columns, the assignments can be made in the following order:
i. Select the second row. Assign machinist B to job 4. Cross out zeros at cells C-4 and E-4.
ii. Consider row 4, Assign machinist D to job 1. Cancel the zero at cell E-1.
iii. Since there is a single zero in the row, put machinist E to job 3 and cross out the zero at A-
3.
iv. There being only a single left in each of the first and third rows, we assign job 2 to
machinist A and job 5 to C.
The total cost associated with the optimal machinist-job assignment pattern A-2, B-4, C-5, D-1
and E-3 is 3+2+4+3+9 = 21

ADU- Department of Business Administration Page 100

Operations Research

4.2.5.Special Issues
When we solve assignment problems, there are cases which are treated differently from the usual
way.
Unbalanced Assignment Problems
The Hungarian Method of solving an assignment problem requires that the number of columns
should be equal to the number of rows. They are equal, the problem is balanced problem, and
when not, it is called an unbalanced problem. Thus, where there are 5 workers and 4
machines, or when there are 4 workers and 6 machines, for instance, we have unbalanced
situations in which one-to-one match is not possible. In case the machines are in excess, the
excess machine(s) would remain idle and so is the case when men are in excess- the number of
excess people would get an assignment.

In such situations, dummy column(s)/row(s), whichever is smaller in number, are inserted

with zeros as the cost elements. For example, when the given cost matrix is of the dimension
4*5, a dummy row would be included. In each column in respect of this row, a ‘zero’ would
be placed. After this operation of introducing dummy columns/rows, the problem is solved in
the usual manner.

Example:
A company has 4 machines to do 3 jobs. Each job can be assigned to one and only one
machine. The cost of each job on each machine is given below. Determine the job assignments
which will minimize the total cost.

Machine
W X Y Z
A 18 24 28 32
Job
B 8 13 17 18
C 10 15 19 22

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). Then the solution to the assignment
problem proceeds in the manner discussed earlier. The effect of assigning prohibitive cost to
such person-job combinations is that they do not figure in the final solution.

Example:
You are given the information about the cost of performing different jobs by different persons.
The job-person marking X indicates that the individual involved cannot perform the particular
job. Using this information, state (i) the optimal assignment of jobs, and (ii) the cost of such
assignment,

Job
person

J1 J2 J3 J4 J5
P1 27 18 X 20 21
P2 31 24 21 12 17

ADU- Department of Business Administration Page 101

Operations Research

P3 20 17 20 X 16
P4 22 28 20 16 27

Solution: - Balancing the problem not assigning a high cost to the pairings P1-J3 and P3-J4,
we have the cost given in the table below.

Job
J1 J2 J3 J4 J5
P1 27 18 M 20 21
person

P2 31 24 21 12 17
P3 20 17 20 M 16
P4 22 28 20 16 27
P5 0 0 0 0 0
dummy

Now we can derive the reduced cost table as shown in table shown below. Note that the cells
with prohibited assignments continue to be shown with the cost element M, since M is defined
to be extremely large so that subtraction or addition of value does not practically affect it. To
test optimality, lines are drawn to cover all zeros. Since the number of lines covering all zeros
is less than n, we select the lowest uncovered cell, which equals 4. With this value, we can
obtain the revised reduced cost table, shown in the final table.

Reduced Matrix
Job
J1 J2 J3 J4 J5
P1 9 0 M 2 3
person

P2 19 12 9 0 5
P3 4 1 44 M 0
P4 6 12 4 0 11
P5 0 0 0 0 0
dummy

Reduced Matrix
Job
J1 J2 J3 J4 J5
P1 9 0 M 2 3
person

P2 19 12 9 0 5
P3 4 1 4 M 0
P4 6 12 4 0 11
P5 0 0 0 0 0
dummy

Assignment of Job
Job
perso

J1 J2 J3 J4 J5
P1 9 0 M 2 3

ADU- Department of Business Administration Page 102

Operations Research

P2 15 8 9 0 1
P3 4 1 4 M 0
P4 2 8 0 0 X 7

n
P5 0 0X 0X 0 0 X
dummy

The number of lines covering zeros is equal to 5(=n), hence the optimal assignment can be
made. The assignment is: P1-J2, P2-J4, P3-J5, P4-J3, while job J1 would remain unassigned.
This assignment pattern would cost 18+12+16+20=66 in the aggregate.
Unique Vs 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. In such cases, we
get multiple optimal solutions to the given problem. In any of the problems discussed so far,
we have not experienced such a situation. Hence, each one of them has had a unique optimal
solution. When a problem has a unique optimal solution, it means that no other solution to the
problem exists which yields the same objective function value (cost, time, profit e.t.c) as the
one obtained from the optimal solution derived. On the other hand in a problem with multiple
optimal solutions, there exists more than one solution which all is optimal and equally
attractive. Consider the following example.

Example:
Solve the following assignment problem and obtain the minimum cost at which all the jobs
can be performed.

Job (cost in ’00 Br.)

Worker 1 2 3 4 5
A 25 18 32 20 21
B 34 25 21 12 17
C 20 17 20 32 16
D 20 28 20 16 27

Solution: This problem is unbalanced since number of jobs is 5 while the number of workers
is 4. We first balance it by introducing a dummy worker E, as shown in table below.

Balancing the Assignment Problem

Job (cost in ’00 Br.)
Worker 1 2 3 4 5
A 25 18 32 20 21
B 34 25 21 12 17
C 20 17 20 32 16
D 20 28 20 16 27
E 0 0 0 0 0

Step 1: Obtain reduced cost values by subtracting the minimum value in each row from every
cell in the row. This is given in Table below.

Reduced Cost 1
Job (cost in ’00 Br.)

ADU- Department of Business Administration Page 103

Operations Research

Worker 1 2 3 4 5
A 7 0 14 2 3
B 22 13 9 0 5
C 4 1 4 16 0
D 4 12 4 0 11
E 0 0 0 0 0

Since there is at least one zero in each row and column, we test it for optimality. Accordingly,
lines are drawn. All zeros are covered by 4 lines, which is less than 5 (the order of the given
matrix). Hence, we proceed to improve the solution. The least uncovered value is 4.
Subtracting from every uncovered value and adding it to every value lying at the intersection
of lines, we get the revised values as shown below.

Reduce cost 2 and Assignment

Job (cost in ’00 Br.)
Worker 1 2 3 4 5
A 7 0 14 6 3
B 18 9 5 0 1
C 4 1 4 20 0
D 0 8 0 0 X 7
E 0 X 0 X 0 4 0 X

The solution given in the reduced cist 2 table is optimal since the number of lines covering
zeros matches with the order of the matrix. We can, therefore, proceed to make assignments.
To begin with, since each of the columns has multiple zeros, we cannot start making
assignments considering columns and have, therefore, to look through rows. The first row has
a single zero. Thus, we make assignment A-2 and cross out zero at E-2. Further, the second
and the third rows have one zero each. We make assignments B-4 and C-5, and cross out zeros
at D-4 and E-5. Now, both the rows left two zeros each and so have both the columns. This
indicates existence of multiple optimal solutions. To obtain the solutions, we select zeros
arbitrarily and proceed as discussed below.

i. Select the zero at D-1, make assignment and cross out zeros at D-3 and E-1 (as both,
worker D and job 1, are not available any more). Next, assign worker E to job 3,
corresponding to the only zero left. Evidently, selecting the zero at E-3 initially would have
the effect of making same assignments.
ii. Select the zero at D-3, make assignment and cross at D-1 and E-3. Next, make
assignment at the only zero left at E-1. Obviously, selecting the zero at E-1 making
assignment in the first place would lead to the same assignments.
To conclude, the problem has two optimal solutions as given below.

Solution 1 (’00 Br.) Solution 2 (’00 Br.) cost

Worker Job cost Worker Job cost
A 2 18 A 2 18
B 4 12 B 4 12
C 5 16 C 5 16
D 1 20 D 3 20
Job left 3 Job left 1
Total 66 Total 66

ADU- Department of Business Administration Page 104

Operations Research

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 example, we may be faced with the problem of assignment of
salesmen in different regions in which they can display different qualities in making sales
(reflected in amounts of sales executed by them). Obviously, assignment would be made in
such a way that the total expected revenue is maximized.
For dealing with a maximization problem, we first change it into an equivalent minimization
problem. This is achieved by subtraction each of the elements of the given pay-off matrix
from a constant (value) k. Thus, we may simply put a negative sign before each of the pay-off
values (which is equivalent to subtracting each value from zero). Usually, the largest value of
all values in the given matrix is located and then each one of the values is subtract 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.

Example:
A company plans to assign 5 salesmen to 5 districts in which it operates. Estimates of sales
revenue in thousands of birr for each salesman in different districts are given in the following
table. In your opinion, what should be the placement of the salesmen if the objective is to
maximize the expected sales revenue?

District
Salesman D1 D2 D3 D4 D5
S1 40 46 48 36 48
S2 48 32 36 29 44
S3 49 35 41 38 45
S4 30 46 49 44 44
S5 37 41 48 43 47
Solution: Since it is a maximization problem, we would first subtract each of the entries in the
table from the largest one, which equals 49 here. The resultant data are given in Table below.

Opportunity Loss Matrix

District
Salesman D1 D2 D3 D4 D5
S1 9 3 1 13 1
S2 1 17 13 20 5
S3 0 14 8 11 4
S4 19 3 0 5 5
S5 12 8 1 6 2

Now, we will proceed as usual.

Step 1: Subtract value in each row from every value in the row. The resulting values are given
in table below.
Reduced cost Table 1
District
Salesman D1 D2 D3 D4 D5
S1 8 2 0 12 0
S2 0 16 12 19 4

ADU- Department of Business Administration Page 105

Operations Research

S3 0 14 8 11 4
S4 19 3 0 5 5
S5 11 7 0 5 1
Step 2: Subtract minimum value in each column in reduced cost table 1 from each value in the
column. Test for optimality by drawing lines to cover zeros. These are shown in table below
(in the Reduced cost Table 2)

Reduced cost Table 2

District
Salesman D1 D2 D3 D4 D5
S1 8 0 0 7 0
S2 0 14 12 14 4
S3 0 12 8 6 4
S4 19 1 0 0 5
S5 11 5 0 0 1
Since the number of lines covering all zeros is fewer than n, we select uncovered cell value,
which equals 4. With this, we can modify the table as given in the Reduced Cost Table 3.

Steps 4, 5, 6: Find improved solution. Test for optimality and make assignments.

Reduced cost Table 3

District
Salesman D1 D2 D3 D4 D5
S1 12 0 0 X 7 0 X
S2 0 10 8 10 0 X
S3 0 X 8 4 2 0
S4 23 1 0 0 X 5
S5 15 5 0 X 0 1

More than one optimal assignment is possible in this case because of the existence of multiple
zeros in different rows and columns. The possible assignments are:
S1-D2, S2-D5, S3-D1, S4-D3, S5-D4; or
S1-D2, S2-D1, S3-D5, S4-D3, S5-D5; or
S1-D2, S2-D1, S3-D1, S4-D4, S5-D3; or
S1-D2, S2-D1, S3-D5, S4-D4, S5-D
Each of these assignment patterns would lead to expected aggregated sales equal to 231 thousand
birr.

ADU- Department of Business Administration Page 106

Operations Research

STAR
T

Write the problem in

tabular form

Is it a No Add dummy
balanced row(s)/column(s)
problem?
Yes

Convert it into a maximization

problem, either by changeling
Is it a Yes the signs of the elements of the
maximu signs of the elements of the
m table; or by subtracting all the
problem? values from the largest value.
No
Obtain reduced cost tables.
i. Subtract from all
entries in each row the least
value in the row.
ii. From this table,
subtract from all entries column
the least value in the column.

Improve the solution. For this:

i. Select the minimum of the uncovered
Can all (by lines) cell values.
zeros be Yes ii. Subtract this value from all uncovered
covered by cell values.
less than n iii. Add this value to the cells lying on the
ADU- Department of Business Administration
lines? intersection of any pair of lines. Page 107
iv. Leave the cell values covered by only
Make assignmentsNoon one undisturbed.
one-to-one match basis
considering
STOzeros in
rows/columns
P
Operations Research

Fig. Schematic Presentation of Hungarian Assignment Method.

Summary
 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
 A transportation problem typically involves a set of sending locations, which are
referred to as origins, and a set of receiving locations, which are referred to as
destinations.
 For allocation to be feasible, two conditions must be fulfilled:
 A feasible solution is one in which assignments are made in such a way that all
supply and demand requirements are satisfied.
 The number of nonzero (occupied) cells should equal one less than the sum of
the number of rows and the number of columns in a transportation table
 A number of different approaches can be used to find an initial feasible solution.
Which include:
The northwest-corner method.
An intuitive approach/Least cost method
Vogel’s / Penalty Method
 The test for optimality for a feasible solution involves a cost evaluation of empty
cells (i.e., routes to which no units have been allocated) to see if an improved
solution is possible. Two methods for cell evaluation:
The Stepping-stone method
The MODI method
 The Assignment Problem (A.P.) is a special case of Transportation Problem (T.P.)
in which the number of sources and destinations are the same, and the objective is to
assign the given job (task) to most appropriate machine (person) so as to optimize
the objective like minimizing cost.

ADU- Department of Business Administration Page 108

Operations Research

Activity
1. An electronics firm produces electronic components, which it supplies to
various electrical manufacturers. Quality control records indicate that
different employees produce different numbers of defective items. The
average number of defects produced by each employee for each of six
components is given in the following table.

Component
Employee A B C D E F
2
1 30 24 16 26 30
2
1
2 22 28 14 30 20
3
2
3 18 16 25 14 12
2
3
4 14 22 18 23 21
0
2
5 25 18 14 16 16
8
6 32 14 10 14 18 2

Determine the optimal assignment that will minimize the total average
number of defects per month.
2. The Bunker manufacturing firm has five employees and six machines, and wants to
assign the employees to the machines so as to minimize cost. A cost table showing the
cost incurred by each employee on each machine is given below.
Machine
Employe A B C 0 E F
1 $12 7 20 14 8 10
2 10 14 13 20 9 11
3 5 3 6 9 7 10
4 9 11 7 16 9 10

5 10 6 14 8 10 12

Because of union rules regarding departmental transfers, employee 3 cannot be assigned

to machine E and employee 4 cannot be assigned to machine B. Solve this problem,
indicate the optimal assignment, and compute total minimum cost.
3. A university department head has five instructors to be assigned to four different courses.
All of the instructors have taught the courses in the past and have been evaluated by the
students. The rating for each instructor for each course is given in the following table (a
perfect score is 100).

ADU- Department of Business Administration Page 109

Operations Research

Course
Instructor A B C D
1 80 75 90 85
2 95 90 90 97
3 85 95 88 91
4 93 91 80 84
5 91 92 93 88

The department head wants to know the optimal assignment of instructors to courses that
will maximize the overall average evaluation. The instructor who is not assigned to teach a
course will be assigned to grade exams. Solve this problem using the assignment method.

UNIT Five
5. DECISION THEORY/ANALYSIS
Unit objective:
After completing this unit, the learner should be able to:

 Describe the basic characteristics of decision theory problems

 Differentiate between decision analysis under certainty and uncertainty.
 Describe the different approaches (criteria) to decision making under complete
uncertainty.
1. Maximamax
2. Maximix
3. Minimax regret
4. Hurwicz
 Use decision tree as decision making tools.

? Dear learner, from your previous courses, can you define decision making? What
steps are involved in it? Can you mention conditions in which decision at different
levels are made?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

Dear learner, in the previous units dealing with LP, models were formulated and solved in order to
aid the manager in making decision. The solutions to the models were represented by values for
the decision variables. However, these LP models are formulated under the assumption that
certainty existed. In actual practice, however, many decision making situations occur under

ADU- Department of Business Administration Page 110

Operations Research

conditions of uncertainty. For example, the demand for a product may be not 100 units next
week, but 50 or 200 units, depending on the market (which is uncertain).

5.1. Characteristics of Decision Theory

Decision theory problems are characterized by the following:
1. List of alternatives: are a set of mutually exclusive and collectively exhaustive decisions
that are available to the decision maker (some times, 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.

5.2. 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 can not 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.

5.3. 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

ADU- Department of Business Administration Page 111

Operations Research

attention of the decision maker is focused on the column in the payoff table 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
A3 -1 4 15

5.4. DECISION MAKING UNDER COMPLETE UNCERTAINTY (With out

probabilities)
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.

5.4.1. MAXIMAX
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). Tha 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.
For the previous problem:
S1 S2 S3 Row Maximum
A1 4 16 12 16*maximum
A2 5 6 10 10
A3 -1 4 15 15

Note: 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.

? Dear learner, how would the decision in the above example change if the
values in the table stand for costs instead of
profit?-----------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------

ADU- Department of Business Administration Page 112

Operations Research

5.4.2. Maximin Criteria

This approach is the opposite of the previous one, i.e. it is pessimistic. This strategy is a
conservative one; it consists of identifying the worst (minimum) payoff for each alternative,
and, then, 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 not be less than this amount. It involves selecting best of the
worst.

For the previous problem:

S1 S2 S3 Row minimum
A1 4 16 12 4
A2 5 6 10 5*maximum
A3 -1 4 15 -1

Note: If it were cost, the conservative approach would be to select the maximum cost for
each decision and select the minimum of these costs.

? Dear learner, how would the decision in the above example change if the
values in the table stand for costs instead of profit?
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
5.4.3. 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.
For example, consider this payoff table:
S1 S2 S3 Row Max.
A1 -5 16 -10 16*max
A2 15 15 15 15
A3 15 15 15 15

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.

EXAMPLE:
S1 S2 S3
A1 4 16 12
A2 5 6 10
A3 -1 4 15

S1 S2 S3
A1 5-4=1 16-16=0 15-12=3
A2 5-5=0 16-6=10 15-10=5
5-(-1)=6 16-4=12 15-15=0

ADU- Department of Business Administration Page 113

Operations Research

A3

S1 S2 S3 Max. Loss
A1 5-4=1 16-16=0 15-12=3 3*minimum
A2 5-5=0 16-6=10 15-10=5 10
A3 5-(-1)=6 16-4=12 15-15=0 12

Decision: A1 will be chosen.

? Dear learner, how would the decision in the above example change if the
values in the table stand for costs instead of profit?
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------

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.
EXAMPLE:
Opportunity loss table
S1 S2 S3 S4 Max. Loss
A1 0 0 0 24 24
A2 15 15 15 0 15*minimum
A3 15 15 15 0 15*minimum

5.4.4. 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.
EXAMPLE
S1 S2 S3 S4 S5 Row Average
A1 28 28 28 28 4 23.2*maximum
A2 5 5 5 5 28 9.6
A3 5 5 5 5 28 9.6

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.
? Dear learner, how would the decision in the above example change if the values in the
table stand for costs instead of profit?
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
ADU- Department of Business Administration Page 114
Operations Research

5.4.5.The Hurwicz Criterion

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

The Hurwicz criterion requires that for each alternative, the maximum payoff is multiplied by 
and the minimum payoff be multiplied by 1-.
Example: If  = 0.4 for the above example,

A1 = (0.4x16) + (0.6x4)
= 8.8
A2 = (0.4x10) + (0.6x5)
=7
A3 = (0.4x15) – (0.6x1)
= 5.4
Decision: A1 is selected

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.

? Dear learner, can you mention conditions under which Hurwicz criterion criteria can be
considered as maximin or minimax
criterion?--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------

5.5. DECISION MAKING UNDER RISK (WITH PROBABILITIES)

Dear learner, the decision making criteria just presented were based on the assumption that no
information regarding the likelihood of the states of the nature was available. Thus, no
probabilities of occurrence were assigned to the states of nature, except in the case of the equal
likely hood criterion.

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.

5.5.1. 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:

ADU- Department of Business Administration Page 115

Operations Research

k
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.

EXAMPLE:

Probability 0.20 0.50 0.30

S1 S2 S3 Expected payoff
A1 4 16 12 12.40*maximum
A2 5 6 10 7
A3 -1 4 15 6.30
Decision: A1 will be chosen.

Note that 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.

5.5.2.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.
EOL (A1) = 0.20(1) + 0.50(0) + 0.30(3) = 1.10 *minimum
EOL (A2) = 0.20(0) + 0.50(10) + 0.30(5) = 6.50
EOL (A3) = 0.20(6) + 0.50(12) + 0.30(0) = 7.20

Note: The EOL approach resulted in the same alternative as the EMV approach
(Maximizing the payoffs is equivalent to minimizing the opportunity losses).

5.5.3.EXPECTED VALUE OF PERFECT INFORMATION (EVPI)

It can some times 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 the difference
between the certain payoffs that could be realized under a condition involving risk.
If the decision maker knows that S1 will occur, A2 would be chosen with a payoff of $5.
Similarly for S2 $16 (for A1) and for S3, $15 (with A3) would be chosen.
Hence, the expected payoff under certainty (EPC) would be:
EPC = 0.20(5) + 0.50(16) + 0.30(15) = 13.50
The difference between this figure and the expected payoff under risk (i.e., the EMV) is the
expected value of perfect information. Thus:
EVPI = EPC – EMV
= 13.50 – 12.40 = 1.10
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.

ADU- Department of Business Administration Page 116

Operations Research

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.

??? Dear learner, can you make differences between decision making situations under
uncertainty and
risk?-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------

5.6. DECISION TREES

Decision trees some times are used by decision makers to obtain a visual portrayal of decision
alternatives and their possible consequences. The term gets its name from the tree-like appearance
of the diagram.
Decision tree format:

Decision tree, like probably tree is composed of squares, circles, and lines:
 The squares indicate decision points
 Circles represent chance events( circles and squares are called nodes)
o The lines (branches) emanating from squares represent alternatives.
o The lines from circles represent states of nature
 The tree is read from right to left.

It should be noted that although decision trees represent an alternative approach to payoff tables,
they are not commonly used for problems that involve a single decision. Rather, their greatest
benefit lies in portraying sequential decisions (i.e., a series of chronological decisions). In the case
of a single decision, constructing a decision tree can be cumbersome and time consuming.

Example
Pay off table for Real Estate investment
State of Nature
Good economic $50,000
Good economic conditions (0.6 Good economic
Decision conditions conditions
(Purchase)
Apartment 0.6 0.4
2
building Poor economic
Apartment building 50,000 conditions (0.4) 30,000
Office building 100,000 Good economic
-40,000
$100,000
Warehouse 30,000 conditions (0.60 10,000
Office building
1 3
The decision tree for the above example will be:
$30,000
Poor economic -$40,000
conditions (0.4)
Warehouse Good economic
conditions (0.60 $30,000
ADU- Department of Business Administration
4 Page 117

Purchase Poor economic $10,000

conditions
Operations Research

The circles ( ) and squares (  ) in the above figure are referred to as nodes. The
squares are decision nodes, and the branches emanating from a decision node reflect the
alternative decisions possible at that point. For example, in the above figure, node 1
signifies a decision to purchase an apartment building. Office building, or ware house. The
circles are probability nodes, and the branches emanating from them indicate the state of
nature that can occur: good economic conditions or poor economic conditions. The decision
tree represents the sequence of events in a decision situation. First, one of the three decision
choices is selected at node 1. Depending on the branch selected, the decision maker arrives
at probability node 2, 3, or 4, where one of the states of nature will prevail, resulting in one
of six possible payoffs.

Determining the best decision using a decision tree involves computing the expected value
at each probability node. This is accomplished by starting with the final outcomes (payoffs)
and working backward through the decision tree toward node 1. First, the expected value of
the payoffs is computed at each probability node.
EV(node 2) = .60($ 50,000) + .40($ 30,000) = $42,000
EV(node 3) = .60($100,000) + .40($-40,000) = $44,000
EV(node 4) = .60($ 30,000) + .40($ 10,000) = $22,000
These values are now shown as the expected payoffs from each of the three branches
emanating from node 1 in figure below. Each of these three expected values at nodes 2, 3,
and 4 is the outcome of a possible decision that can occur at node 1. Moving toward node 1,
we select the branch that$42,000
comes from the probability node with the highest expected payoff.
In figure below, the branch corresponding to the highest payoff, $44,000 is from node 1 to
node 3. This branch represents the decision to purchase the office building. The decision to
purchase the office building, with an expected payoff of $44,000, is the same result we
achieved earlier using the2expected value criterion. In fact, when only one decision is to be
made (i.e., there is not a series of decisions), the decision tree will always yield the same
decision and expected payoff as the expected value criterion. As a result, in these decision
situations the decision tree is not very useful. However, when a sequence or series of
decisions is required, the $44,000
decision tree can be very useful.

3
1

Good economic
Conditions (0.6)

$22,000
ADU- Department of Business Administration Page 118

4
Operations Research

$50,000

Apartment
building
Poor economic
Conditions(0.4) $30,000

Good economic
Office building Conditions (0.6)
$100,000
Purchase
Poor economic
Conditions -$40,000

Good economic
Warehouse Conditions (0.6)
$30,000

Poor economic
Conditions(0.4) $10,000

5.6.1. Sequential Decision Trees

As noted above, when a decision situation requires only a single decision, an expected value
payoff table will yield the same result as a decision tree. However, a payoff table is usually
limited to a single decision situation like our real estate investment example. If a decision
situation requires a series of decisions, then a payoff table cannot be created and a decision
tree becomes the best method for decision analysis.

In order to demonstrate the use of a decision tree for a sequence of decisions, we will alter
our real estate investment example to encompass a ten-year period during which several
decisions must be made. In this new example, the first decision facing the investor is whether to
purchase an apartment building or land. If the investor purchases the apartment building, two
states of nature are possible. Either the population of the town will grow (with a probability
of 0.60), or the population will not grow (with a probability of 0.40). Either state of nature
will result in a payoff. On the other hand, if the investor chooses to purchase land, three years
in the future another decision will have to be made regarding the development of the land.
The decision tree for this example, shown in figure below, contains all the pertinent data,
including decisions, states of nature, probabilities, and payoffs.

At decision node 1 in figure below, the decision choices are to purchase an apartment
building and to purchase land. Notice that the cost of each venture ($800,000 and $200,000,
respectively) is shown in parentheses. If the apartment building is purchased, two states of
nature are possible at probability node 2. The town may exhibit population growth, with a
probability of .60, or there may be no population growth or a decline, with a probability of
.40. If the population grows, the investor will achieve a payoff of $2,000,000 over a ten-year
period. (Note that this whole decision situation encompasses a ten-year time span.) However,
if no population growth occurs, a payoff of only $225,000 will result.

If the decision is to purchase land, two states of nature are possible at probability node 3.
These two states of nature and their probabilities are identical to those at node 2; however,
the payoffs are different. If population growth occurs for a three-year period, no payoff will occur,
but the investor will make another decision at node 4 regarding development of the land. At that
point either apartment will be built at a cost of $800,000 or the land will be sold with a payoff of
$450,000. Notice that the decision situation at node 4 can occur only if population growth occurs
first. If no population growth occurs at node 3, there is no payoff and another decision situation
ADU- Department of Business Administration Page 119
 Operations Research

becomes necessary at node 5: the land can be developed commercially at a cost of $600,000 or the
land can be sold for $210,000. (Notice that the sale of the land results in less profit if there is no
population growth than if there is population growth.)

If the decision at decision node 4 is to build apartments, two states of nature are possible. The
population may grow, with a conditional probability of .80, or there may be no population
growth, with a conditional probability of .20. The probability of population growth is higher (and
the probability of no growth is lower) than before because there has already been population
growth for the first three years, as shown by the branch from node 3 to node 4. The payoffs for
these two states of nature at the end of the ten-year period are $3,000,000 and $700,000,
respectively, as shown in figure below.

If the investor decides to develop the land commercially at node 0. 5, then two states of nature can
occur. Population growth can occur, with a probability of .30 and an eventual payoff of
$2,300,000, or no population growth can occur, with a probability of .70 and a payoff of
$1,000,000. The probability of population growth is low (i.e., .30) because there has already been
no population growth, as shown by the branch from node 3 to node 5.

Sequential Decision Tree

$ 2,000,000

.60
$ 225,000
2 $ 3,000,000
.40
.80
6
6
.20
,00
1 0,0 $ 700,000
4 00
$ 450,000
Sell land

.60 .30
3 .40 ,00
$ 2,000,000
7 0,0
00
.70
,00
0,0
5 00 $ 1,000,000
Sell land
$ 210,000
ADU- Department of Business Administration Page 120
Operations Research

This decision situation encompasses several sequential decisions that can be analyzed using the
decision tree approach outlined in our earlier (simpler) example. As before, we start at the end of
the decision tree and work backward toward a decision at node 1.
First we must compute the expected values at nodes 6 and 7.
EV (node 6) = .80($3,000,000) + .20($ 700,000) = $2,540,000
EV (node 7) = .30($2,300,000) + .70($1,000,000) = $1,390,000
Both of these expected values (as well as all other nodal values) are shown in boxes in Figure 4.4.
At decision nodes 4 and 5, we must make a decision. As with a normal payoff table, we make the
decision that results in the greatest expected value. At node 4 we have a choice between two
values: $1,740,000, the value derived by subtracting the cost of building an apartment building
($800,000) from the expected payoff of $2,540,000, or $450,000, the expected value of selling the
land computed with a probability of 1.0. The decision is to build the apartment building, and the
value at node 4 is $1,740,000.

This same process is repeated at node 5. The decisions at node 5 result in payoffs of $790,000
(i.e., $1,390,000 - 600,000 = $790,000) and $210,000. Since the value $790,000 is higher, the
decision is to develop the land commercially.

Sequential Decision Tree with Nodal Expected Values

$ 2,000,000

$1,290,000
.60
Purchase 2 $ 225,000 $ 7540,000
$ 3,000,000
Apartment .40 .80
Building 6
6
.20
.20
$1,740,000 ,00
1 0,0
$1,160,000 $ 700,000
4 00
$ 450,000
Sell land

$1,390,000
.60 .30
.40 ,00 $ 2,300,000
3
7 0,0
00
$1,360,000 $790,000 .70
,00
0,0
5 00 $ 1,000,000
Sell land
$ 210,000

Next we must compute the expected values at nodes 2 and 3.

EV (node 2) = .60($2,000,000) + .40($225,000) = $1,290,000

EV (node 3) = .60($1,740,000) + .40($790,000) = $1,360,000

ADU- Department of Business Administration Page 121

Operations Research

(Note that the expected value for node 3 is computed from the decision values
previously determined at nodes 4 and 5.)
Now we must make the final decision for node 1. As before, we select the decision
with the greatest expected value after the cost of each decision is subtracted.

Apartment building: $1,290,000 - 800,000 = $ 490,000

Land: $1,360,000 - 200,000 = $1,160,000
Since the highest net expected value is $1,160,000, the decision is to purchase land and
the payoff of the decision is $1,160,000.
This example demonstrates the usefulness of decision trees for decision analysis.
The decision tree allows the decision maker to see the logic of decision making,
because it provides a picture of the decision process. Decision trees can be used for decision
problems more complex than the example above without too much difficulty.

5.6.2. DECISION ANALYSIS WITH ADDITIONAL INFORMATION

Earlier in this unit we discussed the concept of the expected value of perfect information. We
noted that if perfect information could be obtained regarding which states of nature would
occur in the future the decision maker could obviously make better decisions. Although
perfect information about the future is rare, it is often possible to gain some amount of
additional (imperfect) information that will improve decisions.
In this section we will present a process for using additional information m the decision-
making process by applying Bayesian analysis, a probabilistic technique. This process will be
demonstrated using the real estate investment example employed throughout this chapter. To
briefly review this example, a real estate investor is considering three alternative in-
vestments, which will occur under one of two possible economic conditions (states of
nature) shown in table above.
Expected values at nodes 6 and 7
2 540 IPopulation
. .000growth
G .80
.20
Population growth
Purchase apartment building (-$800,000)

Build _--- apartments

I $1,740,000 I(-$800,000)
Population II
growth (3 years. '
$0 payoff)
No population growth
• $450,000
Purchase land (-$200,000)
I $1.360.000 I

Decision (Purchase)
S 50,000 100,000 30,000

ADU- Department of Business Administration Page 122

Operations Research

Payoff Table for the Real Estate Investment Example

States of Nature
Decision Good Economic Conditions Poor Economic Conditions
(purchase) .60 .40

Apartment building $ 50,000 $ 30,000

Office building 100,000 - 40,000
Warehouse 30,000 10,000
Recall that using the expected value criterion, we found the best decision to be the purchase of the
office building, with an expected value of $44,000. We also computed the expected value of
perfect information to be $28,000. Therefore, the investor would be willing to pay up to $28,000
for information about the states of nature, depending on how close to perfect the information was.

Now suppose that the investor has decided to hire a professional economic analyst who will
provide additional information about future economic conditions. The analyst is constantly
researching the economy, and the results of this research are what the investor will be purchasing.
The economic analyst will provide the investor with a report predicting one of two outcomes. The
report will be either positive, indicating that good economic condition are most likely to prevail in
the future, or negative, indicating that poor economic conditions will probably occur. Based on
the analyst's past record in forecasting future economic conditions, the investor has determined
conditional probabilities of the different report outcomes given the occurrence of each state of
nature in the future. We will use the following notations to express these conditional
probabilities:
g = good economic conditions
p = poor economic conditions
P = positive economic report
N = negative economic report
The conditional probability of each report outcome given the occurrence of each state of nature is
shown below.
P(P/g) = .80
P(N/g) = .20
P(P/p) = .10
P(N/p) = .90

For example, if future economic conditions are in fact good (g), the probability that a positive
report (P) will have been given by the analyst, P(P/g), is .80. The other three conditional
probabilities can be interpreted similarly. Notice that these probabilities indicate that the analyst is
a relatively accurate forecaster of future economic conditions.
The investor now has quite a bit of probabilistic information available - not only the conditional
probabilities of the report, but also the prior probabilities that each state of nature will occur. These
prior probabilities that good or poor economic conditions will occur in the future are
P(g) = .60
P(p) = .40
Given the conditional probabilities, the prior probabilities can be revised to form posterior
probabilities by means of Bayes's rule. If we know the conditional probability that a positive report
was presented given that good economic conditions prevail, P(P / g), the posterior probability of
good economic conditions given a positive report, P(g/P), can be determined using Bayes's rule,
as follows.
P(g /P) = P(P / g)P(g)
P(P/g)P(g) + P(P/p)P(p)
(.80) (.60)
(.80) (.60) + (.10) (.40)
= .923

ADU- Department of Business Administration Page 123

Operations Research

The prior probability that good economic conditions will occur in the future is .60. However,
by obtaining the additional information of a positive report from the analyst, the investor can
revise the prior probability of good conditions to a .923 probability that good economic conditions
will occur. The remaining posterior (revised) probabilities are
P(g/N) = .250
P(p /P) = .077
P(p/N) = .750

5.6.3. Decision Trees with Posterior Probabilities

The original decision tree analysis of the real estate investment example is shown in Figures 4.1
and 4.2. Using these decision trees, we determined that the appropriate decision was the purchase
of an office building, with an expected value of $44OOO. However, if the investor hires an
economic analyst, the decision regarding which piece of real estate to invest in will not be made
until after the analyst presents the report. This creates an additional stage in the decision-making
process, which is shown in the decision tree in Figure 4.5.
The decision tree shown in Figure 4.5 differs in two respects from the decision trees in Figures 4.1
and 4.2. The first difference is that there are two new branches at the beginning of the decision
tree that represent the two report outcomes. Notice, however, that given either report outcome, the
decision alternatives, the possible states of nature, and the payoffs are the same as those in the
first two figures.

The second difference is that the probabilities of each state of nature are no longer the prior
probabilities given in Figure 4.1; instead they are the revised posterior probabilities computed in
the previous section using Bayes's rule. If the economic analyst issues a positive report, then the
upper branch in figure below (from node 1 to node 2) will be taken.

If an apartment building is purchased (the branch from node 2 to node 4), the probability of good
economic conditions is .923, whereas the probability of poor conditions is .077. These are the
revised posterior probabilities of the economic conditions given a positive report. However,
before we can perform an expected value analysis using this decision tree, one more piece of
probabilistic information must be determined-the initial branch probabilities of a positive and a
negative economic report.

The probability of a positive report, P(P), and of a negative report, P(N), can be determined
according to the following logic. Recall from Chapter 10 that the probability that two dependent
events, A and B, will both occur is

P(AB) = P(A/B) P(B)

Decision Tree with Posterior Probabilities

ADU- Department of Business Administration Page 124

Operations Research

$50,000
Pig p1=.923
Apartment
building 4
P/P/p) = 077 $30,000
Office building PigP)= 923
2 $100,00
Positive 5
report P(P/P)=077 -$ 40,000
Warehouse P(g/p)= 923
$ 30,000
6

1 P(p/p)= 077 $ 10,00

P(g/N)= 250
$ 50,00
Apartment
Building 7
Negative $30,000
report Office building P(p/N) = 750
8 P(g/N) +250 $100,000
3 -$40,000
P(g/N)= . 750
Warehouse P(g/N)= .250 $ 30,000
9
$ 10,000
P(p/N)= 750

If event A is a positive report and event B is good economic conditions, then according to the
above formula,
P(Pg) = pcp / g)P(g)
We can also determine the probability of a positive report and poor economic conditions the same
way.
P(Pp) = P(P/p)P(p)
Next consider the two probabilities P(Pg) and P(Pp). These are, respectively, the probability of a
positive report and good economic conditions and the probability of a positive report and poor
economic conditions. These two sets of occurrences are mutually exclusive, since both good and
poor economic conditions cannot occur simultaneously in the immediate future. Conditions will
be either good or poor, but not both. To determine the probability of a positive report, we add the
mutually exclusive probabilities of a positive report with good economic conditions and a
positive report with poor economic conditions, as follows.
P(P) = P(Pg) + P(Pp)
Now, if we substitute into this formula the relationships for P(Pg) and P(Pp) determined
earlier, we have
P(P) = P(P/g)P(g) + P(P/p)P(p)
You might notice that the right-hand side of this equation is the denominator of the Bayesian
formula we used to compute P(g/P) in the previous section. Using the conditional and prior
probabilities that have already been established, we can determine that the probability of a
positive report is
P(P) = P(P/g)P(g) + P(P/p)P(p) = (.80) (.60) + (.10) (.40)
= .52
Similarly, the probability of a negative report is
P(N) = P(N/g)P(g) + P(N/p)P(p)
= (.20) (.60) + (.90) (.40)

ADU- Department of Business Administration Page 125

Operations Research

= .48
Now we have all the information needed to perform a
decision tree analysis. The decision tree analysis for our
example is shown in Figure 11.6. To see how the decision
tree analysis is conducted, consider the result at node 4
first. The value $48,460 is the expected value of the
purchase of an apartment building given both states of
nature. This expected value is computed as follows.
EV (Apartment building) = $50,000(.923) + 30,000(.077)
= $48,460
The expected values at nodes 5, 6, 7, 8, and 9 are
computed similarly.
The investor will actually make the decision as to
which investment to make at nodes 2 and 3. It is assumed
that the investor will make the best decision in each case.
Thus, the decision at node 2 will be to purchase an office
building, with an expected value of $89,212; the decision at node 3
will be to purchase an apartment building, with an expected value of
$35,000. These two results at nodes 2 and 3 are referred to as decision
strategies. They represent a plan of decisions to be made given either a
positive or a negative report from the economic analyst.
The final step in the decision tree analysis is to compute the expected value of the decision
strategy given that an economic analysis is performed. This expected value, shown as $63,190 at
node 1 in Figure 11.6, is computed as follows.
EV (strategy) = $89,212(.52) + 35,000(.48) = $63,190

Decision Tree Analysis

$50,000

$30,000

$100,000

-$40,000

$30,000

$10,000

$50,000

$30,000

$100,000

-$40,000

$30,000

$10,000
$15,000

ADU- Department of Business Administration Page 126

Operations Research

P (p/N) =.750
This amount, $63,190, is the expected value of the investor's decision strategy given that a report
forecasting future economic condition is generated by the economic analyst.
5.6.4. Computing Posterior Probabilities with Tables
One of the difficulties that can occur with this type of decision analysis with additional
information is that as the size of the problem increases (i.e., as we add more decision alternatives
and states of nature) the application of Bayes's rule to compute the posterior probabilities
becomes more complex. In such cases, the posterior probabilities can be computed using tables.
This tabular approach will be demonstrated with our real estate investment example. The table for
computing posterior probabilities for a positive report and P(P) is initially set up as shown in table
below.
The posterior probabilities for either state of nature (good or poor economic conditions) given a
negative report are computed similarly.
(1) (2) (3) (4) (4)
States Prior Conditional Prior Posterior
Of Nature Probabilities Probabilities Probability x Probabilities:
Conditional (4) (4)
Probability:
(2) x (3)
Good P(g) = .6 P(P/g) = 80 P(Pg) = .48
P(g/P) =
Conditions
Proof P(P) = .4 P(P/g) = 40
Pp/P)=
Conditions
No matter how large the decision analysis, the steps of this tabular approach can be followed
the same way as in this relatively small problem. This approach is more systematic than the
direct application of Bayes's rule, making it easier to compute the posterior probabilities for
larger problems.

5.6.5.The Expected Value of Sample Information

Recall that we computed the expected value of our real estate investment example to be
$44,000 when we did not have any additional information. After obtaining the additional
information provided by the economic analyst, we computed an expected value of $63,190
using the decision tree in Figure 4.6. The difference between these two expected values is
called the expected value of sample information (EVSI), and it is computed as follows.
EVSI = EV with information - EV with out information
For our example, the expected value of sample information is
EVSI = $63,190 - 44,000
= $19,190
This means that the real estate investor would be willing to pay the economic analyst up to
$19,190 for an economic report that forecasted future economic conditions.
After we computed the expected value of the investment without additional information, we
computed the expected value of perfect information, which equaled $28,000. However, the
expected value of the sample information was only $19,190. This is a logical result, since it
is rare than absolutely perfect information can be determined. Since the additional
information that is obtained is less than perfect, it will be worth less to the decision maker.
We can determine how close to perfect our sample information is by computing the
efficiency of sample information as follows.

EVSI
Efficiency = EVPI

= $ 19,190

ADU- Department of Business Administration Page 127

Operations Research

28,000
=.68
Thus, the analyst's economic report is viewed by the investor to be 68% as efficient as
perfect information. In general, a high efficiency rating indicates that the information is
very good, or close to being perfect information, and a low rating indicates that the addi-
tional information is not very good. For our example, the efficiency of .68 is relatively high;
thus it is doubtful that the investor would seek additional information from an alternative
source. (However, this is usually dependent on how much money the decision maker has
available to purchase information.) If the efficiency had been lower, however, the investor
might seek additional information elsewhere.

ADU- Department of Business Administration Page 128

Operations Research

Activity
1. The owner of the Burger Doodle Restaurant is considering two ways to expand operations:
opening a drive-up window or serving breakfast. The increase in profits resulting from these
proposed expansions depends on whether a competitor opens a franchise down the street. The
possible Profits from each expansion in operations given both future competitive situations are
shown in the following payoff table.

Competitor
Decision open Not Open
Drive-up window $-6,000 $20,000
Breakfast 4,000 8,000
Select the best decision using the following decision criteria.
a) Maximax
b) Maximin
c) Equally likely
d) Minimax regret
2. Consider the following payoff table for three alternatives, A,B, and C, under two future states
of the economy, good and bad.

Economic Conditions
Investment Good Bad
A $ 70,000 $ 25,000
B 120,000 -60,000
C 40, 000 40,000

Determine the decision using the following decision criteria.

a) Maximax
b) Maximin
c) Minimax regret
d) Hurwicz (α = 0.3)
e) Equal liklihoode
3. An investor is considering investing in stock, real estate, or bonds under uncertain economic

ADU- Department of Business Administration Page 129

Operations Research

conditions. The payoff table of returns for the investor’s decision situation is shown below.

Economic Conditions
Investment Good Stable Poor
Stocks $ 5,000 $ 7,000 $ 3,000
Real estate -2,000 10,000 6,000
Bonds 4,000 4,000 4,000
Determine the best investment using the following decision criteria.
a) Equal likelihood
b) Maximin
c) Maximax
d) Hurwicz ( α = 0.3)
e) Minimax regret

ADU- Department of Business Administration Page 130

Operations Research

Chapter Six
Project Management

Chapter Objectives

After completing this chapter you should be able to:

 Define what a project is.
 Describe the different types of networks
 Use CPM to evaluate project’s time
 Discuss the use of PERT in solving problems of project
 Describe the concept of crashing

6.1 INTRODUCTION
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.

? Dear learner, can you define the word project from your previous experiences and what you
heard about
it?--------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
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.
Network analysis involves the breaking down of a project into its constituent activities, and the
presentation of these activities in diagrammatic form.

ADU- Department of Business Administration Page 131

Operations Research

Networks are one of the important tools of management science which easily solve problem by
presenting in visual formats. The shortest route problem, minimum spanning tree and maximal
flow models are useful for solving problems associated with allocation of scarce resources, time,
cost, and material consumption. Moreover, CPM and PERT, which we will discuss later on also
contributed a lot for complex projects management under different situations.
PLANNING AND SCHEDULING WITH GANTT CHART

? Dear learner, do you know what a Gant chart is? Have you ever used it for any
purpose?----------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------

It is a popular tool for planning and scheduling simple projects. It enables a manager to initially
schedule project activities and, then, to monitor progress over time by comparing planned
progress to actual progress.
In order to prepare the chart, first identify the major activities that would be required. Next, time
estimates for each activity were made, and the sequence of activities was determined. Once they
were to occur.
The obvious advantage of Gantt chart is its simplicity, and this accounts for its popularity.
However, it fails to reveal certain relationships among activities that can be crucial to effective
project management.
Consequently, Gantt charts are most useful for simple projects; say where activities are
simultaneous or where a string of sequential activities is involved. On more complex projects,
Gantt charts can be useful for initial project planning, which then gives way to the use of network
diagrams.

PERT AND CPM

PERT (Program Evaluation and Review Technique) and CPM (Critical Path Method) are two of
the most widely used techniques for planning and coordinating large scale projects. By using
PERT or CPM, managers are able to obtain:
- A graphical display of project activities.
- An estimate of how long the project will take.
- An indication of which activities are the most critical to timely completion of the project.
- An indication of how long any activity can be delayed without lengthening the project.
6.2 NETWORK DIAGRAMS

? Dear learner, could you discuss about importance of network diagrams with your
colleagues?-----------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
--

ADU- Department of Business Administration Page 132

Operations Research

Drawing a logic diagram is a skill requiring practice and ingenuity, and for major projects may
require two or three attempts before a satisfactory network or diagram is completed correctly.
Computer packages are often used to carry out this process, cutting drastically the time taken.

6.2.1. Basic Components of Network Diagram

i) 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.
ii) 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

Here A is called an activity.

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.
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.
Activity

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

iii) Preceding, succeeding and concurrent activities

ADU- Department of Business Administration Page 133

Operations Research

Activities, which must be accomplished before a given event can occur, are termed as preceding
activities. 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.

? Dear learner, can you define the following terms?

a) Preceding activity-----------------------------------------------------------------------
b) Succeeding activities-------------------------------------------------------------------
c) Concurrent activities-------------------------------------------------------------------

iv) 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:
 To maintain uniqueness in the numbering system as every activity may have
distinct set of events by which the activity can be identified.
 To maintain a proper logic in the network.

D
A B
Dummy
types

v) 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:
i. Event numbers should be unique.
ii) Event numbering should be carried out a sequential basis from
left to right.
iii) The initial event, which has all outgoing arrows with no incoming arrow, is
numbered 0 or 1.

ADU- Department of Business Administration Page 134

Operations Research

iv) The head of an arrow should always bear a number higher than the one
assigned at the tail of the arrow.
v) Gaps should be left in the sequence of event numbering to accommodate
subsequent inclusion of activities, if necessary.
6.2.2. Rules for drawing a network
 A complete network should have only one point of entry -the start event, and one point of
exit -the finish event.
 Every activity must have one preceding event -the tail, and one following event - each
activity has one head.

 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.
 Time flows from left to right.
 An activity must be completed in order to reach the end-event.
 Dummy activities should only be introduced if absolutely necessary.

6.2.3. Convention for Drawing Networks (AOA,AON)

In addition to the rules described above, certain conventions are followed for the sake of clarity
and conformity.

 Networks proceed from left to right -the start event is at the left hand side of the diagram
and the end event at the right hand side

 Networks are not drawn to scale

 Arrows representing activities should have their head to the right of their tail unless it is
impossible to draw the network in that way.
 Events or nodes should be numbered so that an activity always moves from a lower
numbered event to a higher one. This convention is relatively easy to accomplish in a
simple network but in a complex network it may be necessary to number in tens to allow
for extra activities to be added without the need for a complete renumbering of the whole
diagram
 Lines that cross should be avoided if possible
 The start event may be represented as a line instead of a circle, particularly when several
activities may begin at the start point.
6.2.4. 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)

ADU- Department of Business Administration Page 135

Operations Research

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
A

b) Dangling: No activity should end without being joined to 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 must contribute to the progression of the network or be
discarded as irrelevant.

B
A E

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

Dummy D F

A
C
? Dear learner, can you mention and discuss on the common mistakes made
B
E in drawing net
work
diagrams.------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------

ADU- Department of Business Administration Page 136

Operations Research

6.3. TYPES OF NETWORK MODELS

6.3.1. The Shortest Route Problem

The objective of this network model is to obtain the shortest path in which one can minimize
distance, time or costs involved form the origin to destination.

If we have “n” location in the network, the total steps required to solve the shortest route problem
will be n-1. The determination of shortest route involves labeling procedure in which each node is
assigned with two numbers where by the 1st label represent distance from the original (source)
node and the 2nd number refers the node that immediately precede the labeled node. The labeling
procedure begins with the original node where the label will be (O, S) to indicate the distance is
zero and it is starting point.

In the shortest route algorithm nodes are labeled either permanently to indicate the final labeling
or temporary labeling to indicate that the labeling might be revised. Labels remain temporary until
it can be ascertained that no shorter route to a node exists.

The Shortest Route Algorithm

Step 1: Start at node 1 and find the distance from node 1 to other nodes that can be directly
reached form node 1. Temporarily label each of these nodes with their distance from node 1
followed by a comma and a number 1. Then select the node that has smallest distance from node
1, and make its label permanent. This can be done by shading the node.
Step 2: Find the distance from the new permanent node to each non permanent nodes that can
reached directly form this node. Temporarily label each of these nodes with the cumulative
distance from node 1 if a node has no label. Or, change the earlier assigned temporary label of a
node if its cumulative distance from node 1 through the new permanent node is less than the
previous temporary label. Then permanently label (shade) the node that has the smallest
cumulative distance form node 1.
Step 3: Repeat the preceding steps until all nodes have permanent labels.
Step 4: Identify the shortest route to each node from node 1 by working backward through the
tree according to the nodes label specified on the node.

Example :

ADU- Department of Business Administration Page 137

 Operations Research

Find the shortest route of the following network starting form node one. Travel between nodes can
be in either direction.

13
2

5
4 5
7
8 6
3
1

7
1

16 6
4

1st step

Shade node 1 and temporarily label node 2, 3 and 4, which can be directly reached from node 1.
The label should show the distance from node 1.
(5.1

2 13
5 4
(O,
( S) (8,
8 7
3 5 6
1
7
1
(7,
16 6
4
2nd Step

Select the node, which has the smallest distance from node 1, and label it permanent and shade the
node (i.e. node 2), then temporarily label nodes that can be directly reached from node 2.
Therefore node 5 is labeled as 18, 2.

(5, 1)

2
13
5
(O, S) 4 (18,2)
(8,1
8
3 5
7 7 6
7.1
1
ADU- Department of Business Administration Page 138
 Operations Research

1 16
6
3rd Step

Identify the smallest distance from node 1 i.e. from node 3, 4, and 5, which have values of 8, 1,
7,1 and 18,2 respectively. Permanently label and shade node 4, which has the smallest distance of
7. Identify non-permanent labels; directly reached from this node and temporarily label it by the
distance from node 1.

(5,1

2 13
5 (18, 2)
4
(8,
(O,
8 7 5
3
1
6
7
(23, 4)
(7,1 1

4 16 6
4th Step
The node with the smallest temporary label is node 3. Thus, its label becomes permanent and the
node is shaded. Node 3 can be reached directly from node 1 through node 4 with the same
distance of 8 (i.e. tie exists). Next, find each non-Permanent label that can be reached directly
from node 3. Node 5 is the only node with a value of (18, 2). However, the cumulative distance
of node 5 from node 1 through node 3 is 15 (i.e. 8+7=15). Because the route through node 3 is
shorter, we update the temporary label of node 5 to reflect this shorter route.

(5,1

2
13
5 (15, 3)
(O,
(18,2)
S) (8,1 tie
7
1 8 5
3
7 1 6
(7,1
(23,4)
4 16
6
5th Step

ADU- Department of Business Administration Page 139

 Operations Research

Identify the node, which have smallest label from the un-shaded nodes or temporary labels. Node
5 with a distance of 15,3 is selected and becomes permanent label.

(5,1

2
13
5 4 (15,3)
(8,1) 18,2
(O,S) tie
8 3 7 5
1 6
7 (7,1 1 (23,4
16
4 6
6th Step

The only node which is not shaded and can be reached directly from the new permanent node is
node 6. Using this route, its cumulative distance from node 1 would be 15+6=21. Because this is
less than its current table update label to 21, 5 and make permanent & shade it

2
4
13 (15, 3)
5 18,2

8, 1 tie
(O,
8 7 5
1 3 6
(21,5
7 )
(7,1
1 (23,4
16 6
4

Per
manent label of the final network indicates the shortest distance of each node from node 1 (the
starting node). In order to identify the route that yields the shortest distance to a particular node, it

ADU- Department of Business Administration Page 140

Operations Research

is necessary to work backtracking. The shortest route of the nodes from node 1 to each node is
summarized below.

Node Distance Shortest Route Alternative Route

2 5 1-2 -
3 8 1-3 1-4-3
4 7 1-4 -
5 15 1-3-5 1-4-3-5
6 21 1-3-5-6 1-4-3-5-6

6.3.2. Minimum Spanning Tree Model

The minimum spanning tree problem involves in connecting all of the nodes of a network using as
little of the connecting material as possible. For example, the nodes might represent oil storage
tanks, and lines represent pipeline that are used to carry the oil between tanks. The cost of the
pipeline would be proportional to the length of the pipeline used. Hence, the objective would be to
connect all of the tanks using as little pipeline as possible. Similar activities include designing
communication systems by using minimum amount of wiring, designing highway networks by
using minimal amounts of materials etc.
Algorithm of Minimum Spanning Tree
Step 1. Start at any node, (usually, node 1 is used as the starting point), identify the node that
has shortest distance from node 1 and connect it to the node 1 using a line. If a tie occurs, break it
arbitrarily
Step 2. Find the shortest distance form the existing portion of the tree (i.e. the connected nodes) to
a node that is not yet connected. Make the connecting line from previously connected tree to the
new node which has shortest distance.
Step 3. Continue until all nodes have been connected to the tree.
Step 4. To find the total (minimal) length of the connecting distance, sum up their values.

Example:
Consider the following network where the nodes represent fuel storage tanks and the connecting
lines represent possible pipeline connections. The numbers on the lines represent the distance in
meters for a particular pipeline connection. Determine the spanning tree for the network storage
tanks and the amount of pipe that will be needed to make the connections.

26
ADU- Department of Business Administration Page 141
Operations Research

22 6
2 4
24
13 18

27 33
5
1 20 30
32
18

49 7
3

Arbitrarily choose node 1 as a starting node consider all branches incident on it. They are 1-2 and
1-3 with distance of 13 and 18 respectively. Since 1-2 is the shortest, select this line and connect
it. Now node 1 and 2 are connected.
Next consider all arcs incident either on node 1 or node 2 that connect to other nodes. Such lines
are 1-3, 2-3 and 2-4 with a distance of 18, 20 and 22 respectively. Node 1-3 with a distance of 18
of selected. Now the connected nodes are 1, 2, and 3.
Next consider all braches incident to Node 1, 2 and 3. These are 2-4, 3-4, 3-5 and 3-7 with
distance of 22, 27, 30 and 49. The shortest distance is 22 i.e. 2-4. Make 2-4 part of the network
The next step will be to identify the shortest line that is incident to node 3 and 4. These are 3-5, 3-
7, 4-5 and 4-6 with a distance of 30, 49, 18 and 26. Since 4-5 is the shortest distance, include it in
the network.
Continue in this manner until all nodes are connected with their shortest distance. The network
solution for the above problem is shown on the following figure
The length of pipe that will be needed for this system can be found by summing the line lengths
(distance): i.e. 18+13+22+18+24+32= 127 meters.

ADU- Department of Business Administration Page 142

 Operations Research

2 2
2 4 6 13 2

1
5 18 2
1
7 3 2
3

A B

22
22
13 2 4
2 4 6
13
6 18
1

1 5 5 7
18
3
3 7
18

C D

22
2 22
13 4
6 2 4
18 13
18 6
1
5 24 1 5 24
18
3
7 32 7
18 3
E
F

6.3.3. The Maximal Flow Problem

The objective of maximal flow problem is to find the maximum amount of flow of fluid, traffic,
information; etc that can be transported through a capacity limited network. The network is
composed of a source, a sink and connecting arcs of nodes. Flow in each arc is measured by the

ADU- Department of Business Administration Page 143

Operations Research

amount that can be transported during a unit of time. Flow can be one way only but it is possible
to have two direct arcs between nodes.

Assumption of maximal flow problem

 It is assumed that there is a single input node (called a source) and a single output node
(called a sink).
 There is flow conservation, i.e. the flow out of any node is equal to the flow into that
node.
 Junctions or nodes cannot serve as a store, i.e. any flow arriving at a node is transferred
immediately to another location.
Algorithm of Maximal flow model
Rule for Maximal Flow

1. Arbitrarily select a continuous path from the source node to the sink node that has
a positive flow capacity. Flow capacity of a path is determined by the smallest branch
capacity along the path chosen in the direction of flow.
2. In this continuous path determine the arc with the minimum flow capacity.
3. Reduce all the quantities along this path by the amount transported (i.e. minimum
of the path)
4. Repeat step 1- step 3 until all paths are used.
5. To get the maximum flow of the network, add all flows of the path.
Example :
Determine the maximum flow through the system of pipeline. The flow is from node 1 to node 4.

10 2 6

2
1 4

3 6

Step 1. Choose any path that will allow a positive flow from the source (node 1) to the sink (node
4). The possible paths are 1-2-4, 1-2-3-4, 1-3-4 and 1-3-2-4. Suppose arbitrary select path
1-2-4.

ADU- Department of Business Administration Page 144

 Operations Research

The maximum flow of 10 (Node 1-2) is limited by the 6 capacity of node 2-4. Therefore adjust the
capacity of the total path of 1-2-4 by flow of 6. (i.e. reduce by 6)

4 2 6
2
1 4 6
6 6
3

Here, branch 2-4 is fully loaded and no additional flow to this path. But, path 1-2 still accept
additional flow of 4. Therefore, we can use path 1-2-3-4 to pass 2 units through path 1-2-3-4.

2
2 0

0
2+6 1
4 6+2
3
4

The flow capacity of 1-2-3-4 is fully utilized. i.e. no further positive flow is allowed through this
path. But there is a positive flow through path 1-3-4. Therefore a flow of 3 can be assigned to this
path. The resulting network will be as shown below.

2 0
2

2
3+2+6 4 6+2+3
1

0 1

ADU- Department of Business Administration Page 145

 Operations Research

At this point, no additional flow is possible because no path has a positive flow capacity. Hence
the situation is optimal and maximal flow rate is 11 (6+2+3 = 11).

? Dear learner, please discuss on the different type of network models and their application
areas.-----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
---------

6.4. PROJECT MANAGEMTN AN OVERVIEW

Being able to create an effective specification, supported by the analysis, design and
implementation stages of the project development, and to deliver a system to the required
standards and within the time and cost constraints imposed depends on the effective management
of the entire development process.

Effectiveness and Efficiency

The primary objectives underlying any process of project management -whether related to
investments in information systems or to some other capital expenditure project -may be
encapsulated under two headings:

Effectiveness: ensuring that the project:

 Meets the required needs of the users or the other objectives that have been established
 Is produced to specified quality standards to satisfy user needs
 Can be integrated within existing organizational information systems, structures and
processes
 Is sufficiently flexible to respond to changes in the environment in which the system will
operate, or to the changing requirements of users -which may only become articulated and
refined during the development process itself
 Provides appropriate support to decision makers at all levels: operational, tactical and
strategic.

Efficiency: ensuring that the development of the project -including development, delivery,
installation and final implementation -is

 Undertaken within the manpower resources, costs and time targets or constraints specified
at the outset

ADU- Department of Business Administration Page 146

Operations Research

 Efficient in exploiting the resources of the project team members' and the users' time as
fully as possible, avoiding unnecessary idle time, delays or time wasted in undertaking
unnecessary tasks or activities
 Effective in integrating the activities of those within the project team, and also those
interactions and dependencies with other parties outside the project team, including users,
suppliers, consultants, or managers
 Capable of delivering the resources on time -neither too late nor too early to cause
problems of storage, loss of value due to deterioration, unexpected fluctuations in planned
cash flows, or loss of benefits from training due to excessive time required for the user to
apply the knowledge or skills acquired.

In practice, the project management process may involve the management of either a small team
of one or two internal systems staff, to cover all aspects of the project development, or, at the
other extreme, a large group of both internal and external staff, many of whom will be specialists
in limited features of the system during its development. Irrespective of the scale or complexity of
the project, the issues concerned are broadly similar and the practices used to ensure improved
effectiveness and efficiency may be applied equally well in all situations.
6.4.1. Project Management Elements

The terms effectiveness and efficiency, as defined above, may be expressed in terms of the key
elements of any project, namely:

 Time
 Resources
 Costs
 Quality.

The term 'efficiency' relates primarily to the elements of time, resource utilization and costs
(measuring the value of the output produced against the costs and time taken to produce the
system).

'Effectiveness' is concerned more with the quality of the system in terms of the required
performance standards and objectives. Let us look at these project elements in detail.
6.4.1.1. Time

The time factor represents a key parameter in the project management process: Typically, the
objectives of the project will stipulate either a target time for completing the development of the
project, or the date by which the system should be fully operational. Other intermediate dates or
targets may also be specified for completing particular component elements or phases in the

ADU- Department of Business Administration Page 147

Operations Research

development process. Failure to meet these prescribed target completion dates may have both
direct and indirect consequences if the organization, some of which may be highly significant. For
example:

 Losses of potential financial returns reduced operational efficiency and lost competitive
advantage from the system operation itself.
 Reduced benefits and potential opportunities if other organizational development is tied to
the project -for example, the launch of a new product involving (expensive promotional
campaign).
 Resources remaining idle: specific staff recruited and not utilized, and environment
facilities all arriving ahead of requirement and increasing the organization’s risk of loss,
damage or deterioration.
 Delays that may require either the extension of contracts negotiated with specific
programmers or analysts hired only for the duration of the project (possibly increased
rates), or the use of overtime working to recover lost time (at higher rates)
 The retention of existing computing equipment beyond the anticipated time necessitating
the extension of maintenance contracts and often incurring high maintenance costs than
the new equipment. This may also apply to staffing costs particularly if significant
reductions are anticipated as a result of the developments.
 Unplanned cash flow effects from either early or delayed purchasing or delivery).
 The impact on other project developments, either concurrent with the delayed project or
utilizing part of the current system project or the staff employed in its development.

6.4.1.2. Resources

For these purposes, the term resources relates to both material and human resources. Material
resources will include consumable materials and support services. Although the acquisition and
management of material resources improve demanding, the management of human resources is
usually the key element. The staffs involved are likely to differ in terms of their specialization
skills and experience (There will also be differences in personality and attitudes. Generally, the
management of resources involves:

 evaluating alternative suppliers of tangible products and services; negotiating prices

(economy), quality standards and delivery times; and progressing orders placed
 recruiting and training the staff for the project
 Planning workloads for individual staff, scheduling and co-coordinating the work, the
project team, establishing performance targets, and regular monitoring and appraisal of
individual staff performance.

ADU- Department of Business Administration Page 148

Operations Research

6.4.1.3. Costs

Management priorities for both the time and resource elements will be reflected in the project
costs. A key performance indicator used by senior management to assess the project during its
development phase is the level of expenditure incurred relative to the budgeted expenditure.
Managing the costs of a project involves the following:
 Forecasting and estimating the costs of the project in total so that the level of anticipated
expenditure can be established for each month or quarter. These costs will normally be
subdivided into a variety of sub-headings relating to capital and revenue expenditures, and
costs associated with staff, materials and overheads. (Total expenditure approach )—
Engineers estimates.

 Monitoring the actual expenditure in total and under each of the sub-headings within the
budget. This will allow the project team to assess the degree to which actual expenditure
matches budgeted expenditure. In cases where there are significant variances, the project
team will be required to establish the cause and the consequences for the total project
costs.-- Variance Analysis

 Significant overspending on a project may require the project manager and the
organization to review either the subsequent stages of the development process or the
initial system objectives and performance standards, with the intention of modifying the
more expendable elements to meet budget limits.—Feedback and feed forward
decisions.
6.4.1.4. Quality

The task of managing quality differs from that of managing the elements of time, resources and
costs, which are concerned primarily with the inputs, processes and activities involved in
developing a system. Quality management is primarily focused on the output of the development
process as an operational system. It may be more difficult to measure quality than the three other
elements, because it may be assessed against more subjective criteria. Thus, the perception of
quality may differ, depending on the position or role of the individual in relation to the project.
While different perceptions of quality exist, the important assessment of quality relates to the
project’s ability to meet the users' requirements and expectations. Generally, the management of
quality Incorporates

 Establishing quality and performance standards for the project at the outset and developing
methods for measuring these less tangible elements

ADU- Department of Business Administration Page 149

Operations Research

 Establishing procedures and methods of working which will assist in assuring the
achievement of the standards in the final system
 Monitoring the project regularly against the desired standards and ensuring that the
necessary procedures are being observed.

? Dear learner, can you discuss how quality, cost, time and, resource determine the
effectiveness and efficiency of the
project?--------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------

6.4.2. Project Initiation Document

The Project Initiation Document (PID), sometimes called a 'statement of work' or ‘project
charter', is a formal document listing the goals, constraints and success criteria for the project -the
rules of the game. The PID, once written, is subject to negotiation and modification by the various
stakeholders of the project. Once they formally agree its content, it becomes the document that is
referred to in the case of any disagreement later as to precisely what the project was intended to
achieve.

According to Eric Verzuh, a PID should contain at least the following sections:

Purpose statement: This explains why the project is being undertaken.

Scope statement: This puts boundaries to the project by outlining the major activities of
the project. It is important to include this section in order to prevent 'scope creep', where
additional activities are added during the project, and making achievement of the cost and
time objectives totally impossible.

Deliverables: What are the main outcomes expected from the project? The focus on what
makes the success of the project easier to measure. Deliverables tend to be tangible
elements of the project, such as reports, assets and other outputs.

Cost and time estimates: Even at this early stage, it is a good idea for the project team to
have some feel for the organization’s expectations in terms of the project budget. These
estimates will necessarily be modified later in the project, but are necessary to give a
starting point for planning.

ADU- Department of Business Administration Page 150

Operations Research

Objectives: A clear statement of the mission, critical success factors and milestones of the
project

Stakeholders: A list of the major stakeholders in the project and their interest in the
project.

Chain of command: A statement (and diagram) of the project organization structure

? Dear learner, what are the basic sections of project initiation

documents?------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------

6.4.3. Levels of Managing the Project

1) Strategic. This level involves taking a broad view of the total project and of all the major
stages involved. The aim is to integrate and co-ordinate the contributions, both direct and indirect,
from each area of the organization and from outside it. While the decision making is inevitably
concerned with the issues of time, resources, costs and quality, the perspective adopted is to view
these issues in aggregate terms -say, the total capital expenditure or staffing costs incurred on the
project to date in relation to the budgeted levels. Reporting at this level will generally be directed
towards the organization’s senior management, and in addition to being in a summarized form, it
is also likely to be on a monthly or quarterly timescale to allow the planning, monitoring and
control activities to focus on broad issues of performance, timescales or costs.

2) Tactical This level is concerned with viewing and managing the project on a short- to medium-
term timescale. The actual time horizon of planning, decision making and control will depend on
the total scale of the project in terms of resources and time, but it would be usual to review both
the work in hand and the work to be undertaken in each of the main activity areas of the project
over the coming one or two months. In larger projects, separate teams of development staff may
be given specific responsibility for monitoring and controlling the main activity areas. While still
concerned with the four basic elements of time, resources, costs and quality, the information used
for this purpose is likely to be more detailed and the reporting period will probably be shorter. For
example, the performance of a particular team of staff during the previous week may be evaluated
to measure the progress made and to identify any problems and the appropriate corrective action.

3) Operational Management: activities at this level are concerned with the more detailed aspect
of supervising and controlling the ongoing operations of the development. This will tend to focus

ADU- Department of Business Administration Page 151

Operations Research

on the problems associated with a particular activity and on the direct supervision of staff. The
main tasks are resolving any
Specific technical difficulties encountered, ensuring the maintenance of: appropriate standards,
motivating the staff and trouble-shooting. While the priority remains the maintenance of
effectiveness and efficiency, this is now directly related to specific activities and to individual
members of the project team. One of the more important consequences is that the management
process at this level will involve less formalized reporting systems; the style usually depends upon
a more direct and frequent method of monitoring performance and greater emphasis on
interpersonal relationships.

6.4.4. Duties of Project manager

The project manager may be required to interface with all three levels (strategic, tactical and
operational) at different times, although, in the larger projects, the team or group leaders would be
responsible for the operational level management of the activities and personnel within their team.
The project manager's primary responsibility is to ensure effectiveness and efficiency across the
complete project, which involves the following action at each level:
1) Strategic: At this level, the manager should:

 evaluate and analyze strategic impact of each proposed system on the organization’s
operations, in promoting competitive advantage, and on the other existing or proposed
information systems within the organization
 report to senior management on the results of the strategic evaluation and quantify the
potential costs and benefits that may be derived from each system development
 contribute to the strategic decision-making process of the organization in terms of the
information resource
 review and evaluate the strategic consequences of the progress achieved in developing
the system at regular intervals.

2) Tactical: At this level, the manager's responsibility is to

 convert the objectives, targets and performance standards agreed for the project into
operational plans
 develop the outline and detailed plans for the project, identifying the time, resource and
cost parameters, and producing a schedule of activities for the project staff

ADU- Department of Business Administration Page 152

Operations Research

 monitor the performance of the project against the agreed plans, budgets and quality
performance standards, and report progress to both the steering committee and the
management sponsor
 liaise with management and staff in the user departments, to ensure an effective interface
in terms of integration and co-operation between the users and the project development
staff
 facilitate a similar level of co-operation with project staff and outside agencies - either
with suppliers or distributors for the company's main business, or with the specialist
agencies supporting the system development project itself
 analyze deviations from planned performance, evaluating alternative solutions and
recommending appropriate control changes to future plans or targets
 develop appropriate information systems to provide the necessary Information to monitor
and control the project.

3) Operational: At this level, the manager should:

 manage and control the daily activities of the project team members, either directly or
through the project team leaders
 conduct regular progress meetings with the project staff and team leaders to identify and
resolve existing and potential difficulties
 appraise the performance of individual members of the project development staff and seek
to assure the achievement of the required quality standards throughout the project
development.

The project manager plays a key role in the effective management of system development and
(although other participants may contribute significantly to this process) fulfils the major role of
integrating all the various contributions.

6.4.5. Problem Areas and Project slippage

All projects include some risk: cost overrun, missed deadlines, poor outcome, disappointed
customers, and business disruption. Identification and management of risks is therefore important
as they will cause project deadlines to be missed resulting in overage slippage of the project
timetable.

Risk management

Risk management consists of the following steps:

1. Identification of the risks.

ADU- Department of Business Administration Page 153

Operations Research

2. Estimate of their downside effects i.e., the implications of what could go wrong.
3. Estimation of the probabilities of the events occurring. It will be difficult to establish precise
probabilities, but it will be necessary to establish some type of prioritization: some risks will
be much more likely than others. Attention must first be paid to the more important threats.
4. Decide how the risks will be handled. Risks can be handled as follows:

 Do nothing. This is appropriate where the effect is small or the chance of occurrence very
remote

 Insure against the risk

 Off-load the risk, for example by arranging for third parties to complete part of the project

 Investigate the risk further and try to protect against it. For example arrange to have
additional staff available in case of project overrun.

Thereat Identification and slippage reduction

a) Possible threats:
The following can threaten the success of a project. Suggestions are included as to how minimize
the slippage involved with those threats.
Poor management
Many project leaders will be from technical backgrounds and they may not have the proper
management skills for controlling large projects.

Project leaders should be properly trained so that they have managerial skills as well as technical
skills. They should not be given large critically important projects until they have proved
themselves on smaller exercises.

Poor planning

Managers have not made use of the various planning methods available: network analysis, Gantt
charts. They have not broken the project down into its various activities and estimated a time and
cost for each.

Lack of control mechanisms

It is essential to be able to monitor the progress of projects otherwise it is impossible to decide

whether they will meet cost and time budgets. Reporting mechanisms and review dates should be
set out in advance.

Unrealistic deadlines

There is often pressure from users for projects to be completed quickly. Project teams, particularly
if they have had to win the job competitively, may have suggested times that are unrealistic.
ADU- Department of Business Administration Page 154
Operations Research

Project managers must look critically at the deadlines. They should identify the critical activities
of the project and ensure that these do not slip.

Insufficient budget

Too few people are employed on the project, inadequate materials is bought, the cheapest (not the
best) solutions are always sought. Of course, organizations cannot ignore costs and should try to
get good value for money. However, it is important to be objective about what a given cost budget
can produce by way of project outcomes. If money is tight, it might be better to do a smaller
project thoroughly than a larger one poorly.

Moving targets

The project specification keeps changing as the project progresses. This will certainly add costs
and delay to the project. User’s requirements should be thoroughly examined and the analyst
should check understanding before the project is started. Techniques such as structured
walkthroughs and prototyping will help here.
b) Project change procedure
One of the most effective methods of dealing with the need to amend projects is to have a project
change procedure. Although this procedure will not remove some of the risks discussed above, It
will enable some changes to be made to the project with minimal disruption and slippage
occurring.

The main issue to be aware of in changing a project is that the later into a project that a change is
made, then the more difficult it will be to accommodate that change and the greater will be the
expense of that change. A change management procedure for a project will normally involve the
following activities:
Identifying the need for change

This may arise from many sources including user input, technical difficulties with implementing
part of the project, time or cost efficiencies identified by the project team etc. Any change will be
discussed with the Project Manager initially.

Make change, Change recommendation

A more formal explanation of the change is produced, stating clearly the need for the change,
what the change will be and the costs and benefits associated with the change.

Feasibility of change

The project manager and senior members of the project team will check that the change is actually
possible in terms of technical and social feasibility

ADU- Department of Business Administration Page 155

Operations Research

Steering committee approval

When the case for a change has been checked, the change document will be placed before the
Steering committee for discussion, and approval if the change is accepted

Project sponsor approval

Major changes will also require the authorization of the project sponsor and possibly the Board or
similar decision-making body of the organization

Amending project plan

The project plan will be amended to take account of the change. Deadlines and costs will be
revised.

Make change

The change is actually carried out and, where necessary, tested to ensure that there are no conflicts
with other sections of the project.

? Dear learner, assume you are a project manager in your organization. What do you think
of your major duties? Discuss it with your
friends.------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------

6.4.6. PROJECT MANAGEMENT TOOLS

The key elements of project management are planning and control. Deciding and specifying what
to do is the function of a project plan. Making sure it is done right is the function of project
control.

Planning is vital if control is required later. Planning is necessary to avoid wasting time,
resources and effort. It should also be flexible to take into consideration any change that may
occur through unforeseen circumstances during the development of the project.

The main steps in planning a project are:

 Identify purpose of project

 Set objectives -define deliverables
 Gather information on resources, timescales
 Construct a plan -list tasks, timescales and dependencies, allocate tasks, decide on the
tools to be used and identify control systems

ADU- Department of Business Administration Page 156

Operations Research

Control systems must be capable of measuring progress, reporting deviations and taking
corrective action.
The criterion for a good control system includes the following:
 The plan and its control should be viable

 Good control relies on good monitoring -keep it simple (KIS)

 Control depends on having measurable objectives and milestones or benchmarks.
In conclusion, three things occur in the planning and control process:
 A plan is prepared specifying the project requirements, work tasks, responsibilities,
schedules and budgets.

 The plan is compared to actual project performance, time and cost.

 Corrective action taken if there are any discrepancies and the requirements, schedules and
budgets are updated.

Planning and control is very important as it enables people to understand what is needed to meet
the goals and reduces uncertainty of outcomes.
6.4.6.1. Advantage of project management tools

The following are the main advantages afforded by using critical path methods:
1. Easier visualization of relationships. The network diagram that is produced shows how the
different tasks and activities relate together, making it easier to understand a project intuitively,
improving planning and making it easier to communicate details of the project plan to interested
parties.

2. More effective planning. CPM forces management to think a project through thoroughly. It
requires careful and detailed planning, and the discipline imposed often justifies its use even
without the other benefits.

3. Better focusing on problem areas. The technique enables the manager to pinpoint likely
bottlenecks and problem areas before they occur

4. Improved resource allocations. Manpower and other resources can be directed to those parts
of the project where they will have the most effect in reducing cost and speeding up the
completion of the project. Overtime can be eliminated, or confined to those jobs where it will do
the most good.

5. Studying alternative options. Management can simulate the effect of alternative courses of
action. They can also gauge the effect of problems in carrying out particular tasks and can,
therefore, make contingency plans.

ADU- Department of Business Administration Page 157

Operations Research

6. Management by exception. CPM identifies those actions whose timely completion is critical
to the overall timetable, and enables the leeway on other actions to be calculated. This makes it
possible for management to focus their attention on the important areas of the project.

7. Improved project monitoring. By comparing the actual performance of each task with the
schedule, a manager can immediately recognize when problems are occurring, can identify when
those problems are important and can take the appropriate action in time to rescue the project.

One of the most significant benefits of network analysis is that it enhances management's ability
to monitor the project as it is being carried out. After the project has been analyzed a series of
charts, diagrams, graphs, narratives and tables are drawn up. These can be used as a reporting
system that will identify immediately a critical activity that is out of control, or a non-critical
activity that has used up its float.

Once problems have been identified, extra resources can be brought in or transferred between
activities. Managers are thus in a better position to correct the situation before the problems
become insoluble.

6.4.6.2. Types of Project management tools

A project manager has a range of project management tools available to assist with the planning
and control of individual systems projects. These tools have been refined and developed over the
years, but they are all designed to improve the effectiveness of the project management process.

The project management tools available include:

 Work Breakdown Structure

 Gantt chart

 Critical path analysis

 Resource Histogram

 Budget.

6.4.6.2.1. Work Breakdown Structure (WBS)

A Work Breakdown Structure is a results-oriented family tree that captures all the work of a
project in an organized way. It is often portrayed graphically as a hierarchical tree, however, it

ADU- Department of Business Administration Page 158

Operations Research

can also be a tabular list of "element" categories and tasks or the indented task list that appears in
the Gantt chart schedule. One of the main methods of breaking down work into manageable units,
and then allocating those units to members of the project team, is to use a work breakdown
structure. The basic idea of creating a WBS is to take the work involved in the project and break
it down into smaller and smaller parts, until the project consists of a series of work packages.
These can then be put into the project plan as activities.

Illustrative example of a practical work break down structure (WBS) is given

PRACTICAL APPLICATION OF WBS

Example one:

WORK BREAKDOWN STRUCTURE: THE CASE OF CBE’S BPR UPGRADING

PROJECT

The CBE has started a project to upgrade the BPR performed on its functional units. To manage
this project, the Bank has established three teams each team consisting of four members. The
project was expected to be finalized by the end of July, 2007. In this case, the Bank can apply the
concept of Work Breakdown Structure as follows.

1. Top-level WBS
This breaks the project down into stages, often using the project life cycle stages as major sub-
divisions of the project. Mostly, BPR has five stages:

BPR

Recommendation Implementation
Documentation Analysis Problem
Identification

2. Second level WBS

This breaks each stage down into groups of tasks.

2.1 Documentation

ADU- Department of Business Administration Page 159

Operations Research

Documentation

AS IS (existing) workflow of the core AS IS (existing) workflow of the

functions support functions

2.2 Analysis

Analysis

Collect Stakeholders opinions Collect customers’ Search for best

through designing a opinions practices
questionnaire (benchmarking)

2.3 Problem Identification

ADU- Department of Business Administration Page 160

Operations Research

Problem Identification

Compare what is with what should be Identify the causes, effects and
impact of the problem

2.4. Recommendation

Recommendation

Specific Recommendations General Recommendations

2.5. Implementation

Implementation

Change Management Implementation Plan

3. Third level WBS

This breaks the groups of tasks into individual work packages.

ADU- Department of Business Administration Page 161

Operations Research

AS IS (existing) workflow of the core functions

Domestic
Credit Services Foreign Banking
Banking

AS IS (existing) workflow of the support functions.

AS IS (existing) workflow of the support functions

Internal Audit Human Resources Central services and others

 The process is repeated in a similar manner for tasks under Analysis, Problem
Identification, Recommendation and Implementation.
 By so doing the work can be allocated to members of the project team in
accordance with their skill and ability.

Example Two:

Practical Application of WBS: A Case of Addis Ababa University REGISRAR SYSTEM

PRINCE -Product Breakdown Structure

It is derived from the earlier PRINCE technique, which was initially developed in 1989 by the
Central Computer and Telecommunications Agency (CCTA) as a UK Government standard for
information technology (IT) project management; however, it soon became regularly applied
outside the purely IT environment. PRINCE was released in 1996 as a generic project
management method. PRINCE has become increasingly popular and is now the de facto standard
for project management in the UK. Its use has spread beyond the UK to more than 50 other
countries.

The PRINCE methodology uses a different approach to analyzing the work to be done. The
assumption made with PRINCE is that it is easier to see, in a complex project, what is to be

ADU- Department of Business Administration Page 162

Operations Research

produced than it is to know how that will happen. PRINCE therefore uses a system of product
breakdown structures (PBS) to analyze the project.

Management products are those products associated with the planning and control of the project.
They include, for example, the project initiation document (PID), the project plan, etc.

Technical products are those things the project has been set up to create.

Quality products are things associated with the definition and control of quality.

PLANNING TOOLS

Having completed the work breakdown structure, it will be possible to construct a project
network.
6.4.6.2.2. Gantt chart

The Gantt chart is a timeline chart. It clearly shows when each task is to begin, the time it will
take to complete each task, and which tasks will be going on simultaneously. You may want to
use more than one level of Gantt chart.

A Gantt chart, named after its inventor, shows the activities of a project, However, these
activities are presented as a bar chart with the start and finishing times clearly identified.

ADU- Department of Business Administration Page 163

Operations Research

6.4.6.2.3. Critical Path Method

This is a diagrammatic representation which shows the various activities in a project. The aim of
the CPA is to identify how those activities link together and 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 = tij.
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.
Example:
A small maintenance project consists of the following jobs whose precedence relationship is given
below.

ADU- Department of Business Administration Page 164

Operations Research

Job 1-2 1-3 2-3 2-5 3-4 3-6 4-5 4-6 5-6 6-7
Duration 15 15 3 5 8 12 1 14 3 14
( days)

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.
Solution:
i) The network diagram that represents the project is as follows

5 5
15
2

1 1 3
3 4 7
14
15 14
8
3 12
6

ii) The total float for each activity

To determine the total float first the earliest start and finish; late start and finish are computed.
Forward pass calculation
In this we estimate the earliest start and the earliest finish time.
ESj given by:
ESj= Max (ESj, tij)
Where Esi is the earliest time and tij is the normal time for the activity (i,j).
ES1=0
ES2= ES1 + t15= 0 + 15=15
ES3= Max ( ES 2 + t23, Es1 + 13)
= Max ( 15 +3, 0+15) = 18
ES4= ES3+ t34 = 18+8 = 26
ES5 = Max ( ES 2 + 25, ES4 + t45)
= Max ( 15 +5, 26+1) = 27
ES6 = Max ( ES3+t36, ES4+ t46, ES5+t56)
= Max ( 18+12, 26+24, 27+3)

ADU- Department of Business Administration Page 165

Operations Research

= 40
ES7 = ES6 + t67 = 40 +14 = 54
Backward pass Calculation
In this we calculate the earliest finish and latest start time Lfi, given by LFi = Min ( LFj-tij) where
LFj is the latest finish time for the event j.
LF7 = 54
LF6= LF7 = t67 = 54-14 = 40
LF5= LS 6-t56= 40-3 = 37
LF4 = Min ( LS5-t45, LS6-t46)
= Min ( 37-1, 40-14) = 26
LF3 = Min ( LF4-t34, LF6-t35)
= Min ( 26-8, 40-12) = 18
LF2 = Min ( LF5 - t25, LF3-t23)
= Min ( 37-5, 18-3) = 15
LF 1 = Min ( LF3-t13, LF2-t12)
= Min ( 18-15, 15-150=0

The following table given the calculation for critical path and total float.

Earliest Latest
Normal Total float LFj-
Activity Start Finisgh Start Finish
time ESj or LFi-ESi
ESi ESj LFi LFj
1-2 15 0 15 0 15 0
1-3 15 0 15 3 18 3
2-3 3 15 18 15 18 0
2-5 5 15 20 32 37 17
3-4 8 18 26 18 26 0
3-6 12 18 30 28 40 10
4-5 1 26 40 26 40 0
5-6 3 27 30 37 40 10
6-7 14 40 54 40 54 0

iii)The critical path

From the above table we observe that the activities 1-2, 2-3, 3-4, 4-6, 6-7 are the critical
activities.
The critical path is given by, 1-2-3-4-6-7
The total projection is given by 54 days.

Project Evaluation and Review Technique (PERT)

ADU- Department of Business Administration Page 166

Operations Research

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/cost

PERT/cost 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. The additional costs may arise from the hiring of additional systems
staff or the overtime worked by existing staff. However, the additional costs do not always
relate to human resources and may, for example, involve additional payments to secure
faster methods of delivering the supplies required. Further, not all activities are capable of
being reduced in terms of time, and for those where reductions may be achieved, the costs
may rise more steeply as successively more time is saved on the activity. In this, the
reductions usually plateau at a lower limit in terms of duration and it proves impossible to
secure further reductions.
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. Starting with the activity that costs least to save a
week, and moving down the list in terms of the ranking, produces an assessment of the
time that it is possible to save on the total project time and the consequent increase in total
costs for each incremental week saved. The process is complicated by the fact that initial
changes in the duration of activities on the critical path may result in a change in the
direction of the critical path requiring the consideration of the time/cost trade-off of other
activities.
4. The project managers assessing the potential benefits of saving time on the project against
the incremental costs of doing so. The application of the time/cost trade-off is not only
useful before the start of a project, but can become a useful aid to the project manager in
controlling the project, as it will indicate the costs associated with proposed changes in
future activities and the time that may be saved.

Formulation of PERT Network

ADU- Department of Business Administration Page 167

Operations Research

The project under consideration can be presented graphically as a network. Such a

presentation is based on the following assumptions: Turban (1991: 520-521)
1. The project can be subdivided into a set of predictable, independent activities, each of
which has a clear beginning and an end.
2. Each activity can be sequenced on to its predecessors or successors. An activity cannot
start until all its predecessors are completed.
3. The network is not cyclical, that is, each activity is executed one and only once during
the life of the project. Any repeating activity is considered a different activity.
4. Activity times may be estimated, either as a single- point estimate (CPM) or as a three-
point estimate (PERT).
5. The duration of the activities is independent of each other.

Computing Algorithm for PERT (Network and Activity Slack Time, Earliest and Latest
Activity Times)
In managing the activities of a project, it is some times useful to know how soon or how late an
individual activity can be started or finished without affecting the scheduled completion date of
the total project.
Four symbols are commonly used to designate the earliest and latest activity times.
ES= The earliest start time for an activity. The assumption is that all predecessor activities are
started at their earliest starting time.
EF= The earliest Finish the time for an activity. The assumption is that the activity starts on its ES
and takes its expected time, T.
Therefore,
EF= Es + t
LF= The latest finish in time for an activity without delaying the project. The assumption is that
successive activities take their expected time.
LS= The latest start time for an activity without delaying the project.
LS= LF - t
The process of calculating ES and EF times involves calculations in sequence from left to right
( in the network) and is some times referred to as a forward pass of calculations. Thus, the ES of
an activity can be determined by summing the times of all preceding activities where two paths
converge at node the, longest path (time wise) govern.

The process of calculating ES and EF times involves calculations in sequence from left to right (in
the network) and is some times referred to as a forward pass of calculations. Thus, the ES of an

ADU- Department of Business Administration Page 168

 Operations Research

activity can be determined by summing the times of all preceding activities where two paths
converge at node, the longest path (time wise) governs.

Example 1: Computation of earliest start and latest start times for the activities in the net work
model for 2 simple data collection project.

Sequence Activity
1-2 Design questionnaire
2-3 Prepare questionnaire
3-4 Prepare Time Table
3-5 Select interviewers
3-6 Select target respondents
4-5 Arrange facilities
4-6 Notify the respondents
5-6 Train the interviewers
6-7 Undertake the interview
7-8 Organize the collected data

Computation of Activity Slack Time

Example:
Time estimates for the activities are shown in days on the diagram.

6 6 5
7
7 8
5 8 4
1 2 3 4
4

6
5
Required:
a) Determine the critical path
b) How much slack time is available in the path containing notifying the respondents?

Solution Time

ADU- Department of Business Administration Page 169

Operations Research

a. 1-2 -3-5-6-7-8 36 days

b. 1-2-3-4-5-6-7-8 38 days
c. 1-2-3-4-6-7-8 32 days
d. 1-2-3-6-7-8 31 days

The length of any path can be determined by summing the expected times of the activities on that
path. The path with the longest time is of particular interest because it determines the projects
completion time. If there are any delays along the longest path, here will be corresponding delays
in project completion time. So to shorten the project completion time one must focus on the
longest path. This longest path is so called the critical path and its activities are referred to as
critical activities.
Thus, one the above example, the critical path corresponds to path B with a time requirement of
38 days.
A path slack is the difference between the length of a given path and the length of the critical path.
Thus, the slack corresponding to path C is;
Slack = Time for critical path - Time for = 38 - 32 = 6 days
Thus, slacks for the paths can be:

Path Slack
A 38-36 2
B 38-38 0
C 38-32 6
D 38-31 7

In conclusion, the expected length of the project is 44 days.

With regard to identification of the earliest start, earliest finish, latest start and latest finish times,
observing the following diagram is instrumental.

Activity ES EF LS LF Activity Slack ( LS-ES)

ADU- Department of Business Administration Page 170

Operations Research

1-2 0 5 0 5 0-0=0
2-3 5 13 5 13 5-5=0
3-4 13 17 13 17 13-13=0
3-5 13 19 15 21 15-13=2
3-6 13 19 20 26 20-13=7
4-5 17 21 17 21 17-17=0
4-6 17 20 23 26 23-17=6
5-6 21 26 21 26 21-21=0
7-8 31 38 31 38 31-31=0

The computation of earliest times involves "forward pass" through the network and the
computation of the latest times involves a "back-ward pass" through the network. Hence for
finding the LS and LF, we must begin with the earliest finish time of the last activities (i.e. the
project length) and use that time as latest finish time for the last activity.

PERT Under 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
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

ADU- Department of Business Administration Page 171

Operations Research

Variance = 2= ( tp - to)2

36
Example: Estimated duration:
Activity Optimistic Most likely Pessimistic
1-2 3 5 7
2-3 4 8 12
3-4 2 4 6
3-5 3 6 9
3-6 3 6 9
4-5 2 4 6
4-6 1 3 6
5-6 2 5 8
6-7 2 5 14
7-8 4 7 10

Having been provided with this information, let us try to find the following facts;
a) Find the expected duration and variance of each activity
b) Find the expected duration of the project.
c) Calculate the variance and standard deviation of project length and what is the probability
that the project will be completed:
1. at least 4 days earlier than expected?
2. no more than 4 days later than expected?
d) If the project due date is 41 days what is the probability of meeting the due date.

Solution
Ze Expected path
Paths Activity to tm tp To+4tm+tp length ( E the S2
6 path)
4
1-2-3-5-6-7-8 1-2 3 5 7 5 37 /9
16/9
2-3 4 8 12 8
3-5 3 6 9 6 1
5-6 2 5 8 5 1
6-7 2 5 14 6 4
7-8 4 7 10 7 1
4
1-2-3-4-5-6-7-8 1-2 3 5 7 5 39 /9
2-3 4 8 12 8 Critical path 16
/9
4
3-4 2 4 6 4 /9
4
4-5 2 4 6 4 /9
5-6 2 5 8 5 1

ADU- Department of Business Administration Page 172

Operations Research

Path Activity (2 path)  Path

1-2-3-5-6-7-8 1-2
83
2-3 /9
3-5
5-6
6-7
7-8
1-2-3-4-5-6-7-8 1-2
2-3
3-4
82
4-5 /9
5-6 Project variance
6-7
7-8
1-2-3-4-6-7-8 1-2
2-3
285/
3-4 36

4-6
6-7
7-8
1-2-3-6-7-8 1-2 74/9

2-3
3-6
6-7
7-8

Thus, project variance is 82/9 and standard deviation of . To assist our calculations, let us
approximate the values as: Variance = 9 and standard deviation as 3.

To respond to last questions the application of Poisson probability distribution is mandatory.

Thus;
The Poisson formula: Z = x-µ where X = specified time
δ

µ = expected time
δ = standard time

ADU- Department of Business Administration Page 173

Operations Research

Therefore, to find the probability that the project will be completed at least 4 days earlier than
expected;

Z= X-N = Z= 35-39 = -1.33

δ 3

So, p (Z<-1.33)
= p(X< 35)
= 0.0918
= 9.18%
Z -1.33 0

And the probability that the project will be completed at a no more than 4 days later than expected
is ;

Z= 43-39 = 4/3 = 1.33

3

P= ( X<43) = P(Z<1.33)
= 0.9082
= 90.82%
N 1.33

In responding to requirement E, the probability of meeting the due date is;

Z= 41-39 = 2/3 = 0.67

3
p ( X< 41) = p (Z< 0.67)
= 0.7486
= 74.86%
N 0.67

6.4.6.2.4. Budget
The project budget shows for each month of the project, the proposed expenditure. This will be
updated as the project progresses with the actual expenditure and the reason for any variances.

Almost all of these tools can be in some form of computer software, For example, a budget or
Gantt chart can be presented on a spreadsheet. However, there is also. Specialist project
management software available to produce critical path analysis and Gantt charts directly from the
data entered into the software.

ADU- Department of Business Administration Page 174

Operations Research

The information analysis syllabus requires detailed knowledge of the project networks (network
analysis) and Gantt charts.
6.4.6.2.5. Resource Histogram (Resource allocation)

This is a stacked bar chart showing the number and mix of staff required over the duration of a
project. The network diagram gives the logical sequence of activities in a project. The analysis we
have discussed so far takes no account of any limitations imposed by availability of resources.
The initial activity schedule was drawn up on the implied assumption that all of the resources
which are called for will be available. This is not necessarily so, and even if it is, using the
resources as required by this first schedule may be uneconomic.

The way in which activities are scheduled when resource considerations are taken into account,
depends on the objectives of the project controllers. It may be of greatest importance that the
project is finished in a certain time irrespective of the resource implications - a time-constrained
network is finished in a certain time irrespective of the time taken - a resource - constrained
network. In this context resources include manpower, machinery, materials, money, space, etc.

At the outset of the project, the project manager should determine the objective for the allocation
of resources. The objective may be:
1. To maximize the utilization of the resources. The utilization can be assessed in terms of a
utilization factor:

Utilization factor = Total resource employed

Total resource provided
2. To minimize the peak resource requirements.
3. To minimize the maximum change in resource requirements

There are also many possible methods of solving the resource allocation problem, for example,
heuristic methods, linear programming or other forms of mathematical programming. We will
look at one simple method which uses resource profiles and 'trial and error'.

Resource Profiles
If the total requirement for a particular resource is determined at regular intervals, for example on
a daily or weekly basis, then a resource profile may be assembled. The resources specified for

ADU- Department of Business Administration Page 175

 Operations Research

each job are totaled for all concurrent jobs, assuming that each job is begun at its earliest start
time. A separate profile is required for each resource the following figure illustrates a possible
manpower resource profile. At times the required manpower exceeds the number of men
available, but the total number of man-hours needed does not exceed the total number available.

Manpower resource profile

Manpower
required
Available

5 10 15 20
Time, weeks
Whenever a resource limit is exceeded, either more resources must be put into the project, or
activities must be re-scheduled in some way. It may even be necessary to delay the project
completion. Some activities, although they do not have a logical sequential relationship in the
project, cannot go on at the same time, because of resource limitations. This restriction can be
allowed for in the resource profile by limiting the resource available. This prevents these activities
being scheduled for the same time periods.

Example: Resource allocation

SUR Construction Share Co. have been awarded a contract to re-surface a car park. The project
Manager has identified eight essential activities in this work. The details are listed below

ADU- Department of Business Administration Page 176

 Operations Research

Activity table, times and manpower needs for example :

Number of men
Preceding Time Required for the
Activity Activities Days activity

A - 3 1
B - 6 1
C - 7 2
D A 8 2
E C 4 1
F B,E 3 2
G C 10 2
H F,G 3 1
Unfortunately, due to the pressure of work on other jobs, SUR can spare only 4 men for the car
park job. We will determine how long the job will takes and how the men should be allocated.
Assume that all of the men can do all of the activities.
Solution: We will build up a resource profile, starting all activities at the earliest times. We can
then re-schedule the activities in order to meet the limitations on the number of men available. We
first draw the network and identify the critical path.
FIGURE Arrow diagram for Example above in the table.

3 12

A 4 D
3
14
11
B 8 H
0 20
1 3 5 6
6 3
0 20 7
7
C G
17
17
7 10
2

The overall completion time, without resource considerations, is 20 days. The critical path is C-G-
H.

ADU- Department of Business Administration Page 177

 Operations Research

We will construct a Gantt chart and build up a resource profile, assuming that all jobs are started
as soon as possible. The chart shows the float allocated at the end of each activity. This diagram
helps us to identify which activities are concurrent and which activities it is possible to re-
schedule, without causing an overall delay in the project.

Gantt chart for the example given above

( ) Manning

A D
(2)
3 11
Activities
B

(1) 6
F

12
11
C G H

(2) 7 (2) 17 (1) 20

5 10 15
20

ADU- Department of Business Administration Page 178

 Operations Research

Resource profile for earliest start times for the example given

5 -- 4 Men available

4
D
D D
+
3 + +
A
B C E
+ F
+ +
B +
C G
2 + G
C
H G
1

5 10 15 20
Days

We can see from the resource profile that the limit of 4 men available is exceeded when activity D
is in progress between days 3 and 11. It is not possible to re-schedule activities in order to
accommodate D entirely. The critical activities C and G both require 2 men, so that D cannot be
started during days 0-17, unless no other non-critical jobs are being carried out. If D is moved to
its latest start time of 12 days, there will still be days 12 to 14, when we require more than 4 men.
G(2 men), F(2 men) and D(2 men) would be in progress during these 2 days. We either hire one
more man for this period, or we must start activity D when F has finished in day 14. This will
delay the project by 2 days, extending the duration from 20 to 22 days.

6.4.6.3. Management Software

There are many project management software tools available. We will look at a sample of
products that are available. These product descriptions are intended as a basic introduction. Due to
the ever changing software products, it might be useful to visit the Web sites of the individual
software manufacturers to get up-to-date product information. Many sites provide downloads and
free trial usage of their products.

Microsoft

Microsoft Project (MS Project) dominates project management software systems. It must be
installed on every user's computer and is compatible with Microsoft Office. This allows team
members to save to the database documents created in any Office application. Users become
familiarized more quickly due to the same tool bars being used in MS Office. There are no limits
as to the number of tasks it can handle.

ADU- Department of Business Administration Page 179

Operations Research

One very good feature of MS Project is that it allows multiple projects to share a common
resource pool; use existing e-mail infrastructure to communicate with other team members; "flag"
certain tasks as reminders; split tasks; analyze project using "worst" and "most-likely" cases and
many more.

Most project management software packages will generate Critical Path networks, Gantt Charts,
Resource histograms, billing information, cost estimates, actual times and costs incurred, reports
for project managers and the Steering Committee. As with most packages, it achieves what
traditional, human, project management has always achieved, but with greater efficiency and
speed, and with the ability to handle much greater complexity.

ADU- Department of Business Administration Page 180

Operation Research

Advantage of project mgt software

 The use of project management software allows the manager to achieve the more tedious,
clerical tasks quickly and efficiently. The challenge for the project manager is not to draw
the diagrams, but to identify dependencies, and manage the resources available
 The software is able to perform the calculations for deriving critical paths and floats
available much faster than humans can
 The software can help to track resources used across multiple projects
 Having the plans available on software makes maintenance and adjustments easier.
 Billing complications, arising from cross-project allocation, can be handled more simply
by the software

 project management software should also handle the configuration management (version
control) of all project documentation

 Document management: all documents produced for the project can be stored, and their
quality criteria set and checked, using the software.

 The software is able to generate reports on the progress of the project, and automatically
flag any delays to the critical path, with recommended action.

6.4.6.4. Time – cost Trade Offs – Crashing

Section objectives:
 Define crashing
 Describe purpose of crashing
 Explain basic concepts in crashing
 Elucidate the limitations of crashing
 Illustrate the crashing process

Estimates of activity times for projects are usually made for some given level of resources. In
many situations it is possible to reduce the length of a project by injecting additional resources.
The impetus to shorten projects may reflect effects to avoid late penalties, to take advantage of
monetary incentives for timely completion of project, or to free resources for use on other
projects. In many cases however, the desire to shorten the length of a project merely reflects an
attempt to reduce the indirect costs associated with running the project, such as facilities and
equipment costs, supervision, and labor and presumed costs. Managers often have certain options
at their disposal that allow them to shorten, or crash, certain options at their disposal that options
are using additional personnel or more efficient equipment and relaxing work specifications.
Hence, a project manager may be able to shorten a project, there by realizing a savings on indirect

ADU- Department of Business Administration Page 181 of 190

Operation Research

project costs by increasing direct expenses to speed up the project. The goal in evaluating time-
and trade-offs is to identify a plan that will minimize the sum of the indirect and direct project
costs.
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.

Project completion time can be shortened only by crashing critical activities, which follows that
not all project activities should be crashed. However, when activities are crashed, the critical path
may change, requiring further crashing of previously non-critical activates in order to further
reduce the project completion time. In a nutshell, 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 activates 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.

ADU- Department of Business Administration Page 182 of 190

Operation Research

 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.

Normal Crash Cost/day

Activity
time time 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

10
6 b 2 End
Start a f
5 9 e
C 4
d

ADU- Department of Business Administration Page 183 of 190

Operation Research

Solution

Step 1. Determine activities on critical path and non critical path and their lengths.

Path Length
1-2-5-6 18
1-3-4-5-6 20 Critical path

2. Rank the critical path activates in order of lowest crashing cost and determine the no of
days each can be crashed.

Activity Cost/day to crash Available crash day

c 300 1
e 600 2
d 700 3
f 800 1

3. Begin shortening the project, one day at a time, and check after each reduction to see
which path is critical.
4. 1. Shorten activity C by one day – length becomes 19 days
2. Shorten e by one day since shortening c is not possible. – length 18 days.
3. Since there are two critical paths, further improvement will necessitate
shortening one activity on each.

SUMMARY

Path Activity Crash cost per day)

No reduction possible
1-2-5-6 a
(6-6) = 0
b 500*
f 800
No further reduction
1-3-4-5 c
possible
d 700
e 600*
f 800
Path Length after Crashing “n” days
n =0 1 2 3

18 18 18 17
1-2-5-6

20 19 18 17
1-3-4-5-6
Activity to be
- c d f
crashed
Cost of crashing 300 600 800
ADU- Department of Business Administration Page 184 of 190
Operation Research
Saving 700 400 200

 Note: The next activities to be crashed were ‘e’ and‘d’. However, if the two activities were
crashed, the total cost will be greater than (600+ 700 = 1300) the benefit (i.e., 1000/day).
Therefore, we stop the crashing at this point.
Total cost of crashing will be the normal cost of the activities plus the crash cost.

? Dear learner, can you compute the total cost of the above problem?
__________________________________________________________
__________________________________________________________
_

Advantage and limitation of PERT

PERT and similar scheduling techniques can provide important services for the project manager.
Among the most useful features are:
 Use of these techniques forces the manager to organize and quantify available information
and to recognize where additional information is needed.
 The techniques provide a graphical display of the project and its major activities.
 The techniques identify (a) activities that should be closely watched because of the
potential for delaying the project and (b) other activities that have slack time and, therefore
can be delayed without affecting the project completion time. This rises the possibility of
reallocating resources in order to shorten the project completion.

No analytical technique is without limitations. Among the more important limitations of PERT
are:
 In developing the project net work, one or more important activities may be omitted.
 Precedence relationships may not all be correct as shown.
 Time estimates usually include a fudge factor: managers feel uncomfortable about time
estimates because they appear to commit themselves to completion within a certain
time period.
 The use of a computer is essential for large projects.

ADU- Department of Business Administration Page 185 of 190

Operation Research

Summary
 Projects are composed of a unique set of activities established to realize a given set
of objectives during a limited life span. The non routine nature of project activities
places a set of demands on the project manager, which are different in many
respects than those required for the manager of more traditional operations
activities, both in planning and coordination the work.
 PERT and CPM are the two commonly used techniques for developing and
monitoring projects. Although each technique is developed independently and
expressly different purposes, time and practice has erased most of the original
differences so that now little distinction can be made between the two. Either one
provides the manager with a rational approach to project planning along with a
graphical display of project activities. Both depict the sequential relationships that
exist among activities and reveal to managers which activity must be completed on
time in order to achieve timely completion of the project. Managers can use that
information to direct their attention towards the most critical activities.
 In some cases it may be possible to shorten the length of a project by shortening one
or more of the project activities. Typically such gains are achieved by the use of
additional resources, although in some cases it may be possible to transfer resources
among project activities. Generally, projects are shortened either to the point where
the cost of additional reduction would exceed the benefit of additional reduction or
to the point where further improvements, although desirable, would be physically
impossible.

ADU- Department of Business Administration Page 186 of 190

Operation Research

Activity:

1. Given the following information:

Activity Description Immediate Tim

predecessor
e
Select office site - 3
A
B Create organizational and financial - 5
plan
C Determine personnel requirement 3
B
D Design facility A and C 5
E Construct interior material 6
D
F Select personnel to move C 3
G Hire new employees F 2
H Move records, key personnel F 1
I Make financial arrangements with B 4
institution & selected sight
J Train new personnel H,E,G 2

Determine:
a)Critical path and Critical activities
b) Duration of the project
c) Slack time of activities

2.Given the following information,

Estimat
(months
Activit a m b
y
1--->2 4 8 12
1--->3 6 10 15
1--->4 2 10 14
2--->5 3 6 9
2--->6 1 4 13
3--->5 3 6 18
4--->5 0 0 0
4--->7 2 8 12
5--->8 9 15 22
5--->7 5 12 21
7--->8 5 6 12
6--->9 7 20 25
8--->9 3 8 20

Determine the following:

a. Expected activity times
b. Earliest event times
c. Latest event times
d. Activity slack
e. Critical path

ADU- Department of Business Administration Page 187 of 190

Operation Research
f. Expected project duration and variance

3. The Stone River Textile Mill was inspected by OSHA and was found to be in violation of a
number of safety regulations. The OSHA inspectors ordered the mill to alter some existing
machinery to make it safer (Le., add safety guards, etc.); purchase some new machinery to replace
older, dangerous machinery; and relocate some machinery to make safer passages and
unobstructed entrances and exits. OSHA gave the mill only 35 weeks to make the changes; if the
changes w re not made by then, the mill would be fined $300,000. The mill determined the
activities in a PERT network that would have to be completed and then estimated the indicated
activity times, as shown below. Construct the PERT network for this
project and determine the following:

a. Expected activity times

b. Earliest and latest event times and activity slack
c. Critical path
d. Expected project duration and variance
e. The probability that the mill will be fined $300,000

Time
Estimates
1.
4.The following table provides the information necessary to construct a
project network and project crash (weeks)
Activity
data. Description a m b
1-->2 Activity
Order new machinery Time 1 2 3
(weeks) Activity Cost ($)
Activit
1-->3 (i,j) PlanPredecessor Normal
new physical layoutCrash Normal 2 5 8 Crash
ya (1. 2) - 16 8 $2,00 $4,400
1-->4 Determine safety changes in 1 3 5
b (1,3) - 14 9 1,0000 1.800
c (2.4)existing
a machinery 8 6 500 700
d (2,5) a 5 4 600 1,300
e
2-->6 (3,5)
Receivebequipment 4 2 1,500 4 10 25 3.000
f (3.6) b 6 4 800 1,600
g
2-->5 (4,6)
Hire newc employees10 7 3,000 3 7 12 4.500
h (5,6) d.e 15 10 5,000 8.000
3-->7 Make plant alterations 10 15 25
4-->8 5 9 14 a. Construct
Make changes in existing the
machinery project
network.
5-->6 Dummy 0 0 0 b. Manually
6-->7 Dummy 0 0 0 crash the
network
7-->8 Dummy 0 0 0
to 28
6-->9 Train new employees 2 3 7 weeks.
7-->9 Install new machinery 1 4 6 c. Formulate
the
8-->9 Relocate old machinery 2 5 10 general
linear
9-->10 Conduct employee safety orientation 2 2 2 program
ming
model for this network.
d. Formulate the linear programming crashing model that would crash this model by the
maximum amount

5. Indirect costs for a project are $12,000 per week for as long as the project lasts. The
project manager has supplied the cost and time information shown below.

ADU- Department of Business Administration Page 188 of 190

Operation Research
a) Determine the optimum crashing plan
b) Graph the total costs plan

Activity Crashing potential ( weeks) cost per week to crash

a 3 11,000
b 3 3,000 first week, 4000 others
c 2 6000
d 1 1000
e 3 6000
f 1 2000

10 14
a b
13 6
d
15 c
e 8
f

6. The following table provides the information necessary to construct a project network and project crash data.
Activity Time Activity Cost ($)
(weeks)
Activit
(i,j) Predecessor Normal Crash Normal Crash
y
a (1,2) 20 8 $1,000 $1,480
b (1,4) - 24 1,400
20 1,200
c
(1,3) - 14 7 700 1,190
d
(2,4) a 10 6 500 820

e (3.4) c 11 5 550 730

a. Construct the project network.
b. Compute the total allowable crash time per activity and the crash cost
per week for each activity.
c. Determine the maximum possible crash time for. the network and
manually crash the net work the maximum amount
7. Given the following network with the indicated distances between nodes (in miles), determine
the shortest route from node 1 to each of the other four nodes (2, 3, 4, and 5).

ADU- Department of Business Administration Page 189 of 190

Operation Research

8. Given the following network with the indicated distances between nodes (in miles), determine
the shortest route from node 1 to each of the other four nodes (2, 3, 4, and

ADU- Department of Business Administration Page 190 of 190