MBA-H2040 Quantitative Techniques for Managers

1.1 Introduction

A special class of linear programming problem is Transportation Problem, where the objective is to
minimize the cost of distributing a product from a number of sources (e.g. factories) to a number of
destinations (e.g. warehouses) while satisfying both the supply limits and the demand requirement.
Because of the special structure of the Transportation Problem the Simplex Method of solving is
unsuitable for the Transportation Problem. The model assumes that the distributing cost on a given rout
is directly proportional to the number of units distributed on that route. Generally, the transportation
model can be extended to areas other than the direct transportation of a commodity, including among
others, inventory control, employment scheduling, and personnel assignment.

The transportation problem special feature is illustrated here with the help of following Example 1.1.

Example 1.1:

Suppose a manufacturing company owns three factories (sources) and distribute his products to five
different retail agencies (destinations). The following table shows the capacities of the three factories,
the quantity of products required by the various retail agencies and the cost of shipping one unit of the
product from each of the three factories to each of the five retail agencies.

Retail Agency
Factories 1 2 3 4 5 Capacity
1 1 9 13 36 51 50
2 24 12 16 20 1 100
3 14 33 1 23 26 150

Requirement 100 60 50 50 40 300

Usually the above table is referred as Transportation Table, which provides the basic information
regarding the transportation problem. The quantities inside the table are known as transportation cost per
unit of product. The capacity of the factories 1, 2, 3 is 50, 100 and 150 respectively. The requirement of
the retail agency 1, 2, 3, 4, 5 is 100,60,50,50, and 40 respectively.

In this case, the transportation cost of one unit

from factory 1 to retail agency 1 is 1,
from factory 1 to retail agency 2 is 9,
from factory 1 to retail agency 3 is 13, and so on.

A transportation problem can be formulated as linear programming problem using variables with
two subscripts.
Let
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x11=Amount to be transported from factory 1 to retail agency 1
x12= Amount to be transported from factory 1 to retail agency 2
……..
……..
……..
……..
x35= Amount to be transported from factory 3 to retail agency 5.

Let the transportation cost per unit be represented by C11, C12, …..C35 that is C11=1, C12=9, and so on.
Let the capacities of the three factories be represented by a1=50, a2=100, a3=150.
Let the requirement of the retail agencies are b1=100, b2=60, b3=50, b4=50, and b5=40.

Thus, the problem can be formulated as

Minimize
C11x11+C12x12+……………+C35x35

Subject to:
x11 + x12 + x13 + x14 + x15 = a1
x21 + x22 + x23 + x24 + x25 = a2
x31 + x32 + x33 + x34 + x35 = a3

x11 + x21 + x31 = b1

x12 + x22 + x32 = b2
x13 + x23 + x33 = b3
x14 + x24 + x34 = b4
x15 + x25 + x35 = b5

x11, x12, ……, x35

Thus, the problem has 8 constraints and 15 variables. So, it is not possible to solve such a
problem using simplex method. This is the reason for the need of special computational procedure to
solve transportation problem. There are varieties of procedures, which are described in the next section.
1.2 Transportation Algorithm

The steps of the transportation algorithm are exact parallels of the simplex algorithm, they are:
Step 1: Determine a starting basic feasible solution, using any one of the following three methods
1. North West Corner Method
2. Least Cost Method
3. Vogel Approximation Method

Step 2: Determine the optimal solution using the following method

1. MODI (Modified Distribution Method) or UV Method.

1.3 Basic Feasible Solution of a Transportation Problem

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The computation of an initial feasible solution is illustrated in this section with the help of the
example1.1 discussed in the previous section. The problem in the example 1.1 has 8 constraints and 15
variables we can eliminate one of the constraints since a1 + a2 + a3 = b1 + b2 + b3 + b4 +b5. Thus now the
problem contains 7 constraints and 15 variables. Note that any initial (basic) feasible solution has at
most 7 non-zero Xij. Generally, any basic feasible solution with m sources (such as factories) and n
destination (such as retail agency) has at most m + n -1 non-zero Xij.
The special structure of the transportation problem allows securing a non artificial basic feasible
solution using one the following three methods.

4. North West Corner Method

5. Least Cost Method
6. Vogel Approximation Method

The difference among these three methods is the quality of the initial basic feasible solution they
produce, in the sense that a better that a better initial solution yields a smaller objective value. Generally
the Vogel Approximation Method produces the best initial basic feasible solution, and the North West
Corner Method produces the worst, but the North West Corner Method involves least computations.

North West Corner Method:

The method starts at the North West (upper left) corner cell of the tableau (variable x11).

Step -1: Allocate as much as possible to the selected cell, and adjust the associated amounts of capacity
(supply) and requirement (demand) by subtracting the allocated amount.

Step -2: Cross out the row (column) with zero supply or demand to indicate that no further assignments
can be made in that row (column). If both the row and column becomes zero simultaneously, cross out
one of them only, and leave a zero supply or demand in the uncrossed out row (column).

Step -3: If exactly one row (column) is left uncrossed out, then stop. Otherwise, move to the cell to the
right if a column has just been crossed or the one below if a row has been crossed out. Go to step -1.

Example 1.2:

Consider the problem discussed in Example 1.1 to illustrate the North West Corner Method of
determining basic feasible solution.
Retail Agency
Factories 1 2 3 4 5 Capacity
1 1 9 13 36 51 50
2 24 12 16 20 1 100
3 14 33 1 23 26 150

Requirement 100 60 50 50 40 300

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The allocation is shown in the following tableau:

Capacity
1 9 13 36 51 50
50
24 12 16 20 1 100 50
50 50
14 33 1 23 26
10 50 50 40 150 140 90 40

Requirement 100 60 50 50 40
50 10
The arrows show the order in which the allocated (bolded) amounts are generated. The starting
basic solution is given as
x11 = 50,
x21 = 50, x22 = 50
x32 = 10, x33 = 50, x34 = 50, x35 = 40

The corresponding transportation cost is

50 * 1 + 50 * 24 + 50 * 12 + 10 * 33 + 50 * 1 + 50 * 23 + 40 * 26 = 4420

It is clear that as soon as a value of Xij is determined, a row (column) is eliminated from further
consideration. The last value of Xij eliminates both a row and column. Hence a feasible solution
computed by North West Corner Method can have at most m + n – 1 positive Xij if the transportation
problem has m sources and n destinations.

Least Cost Method

The least cost method is also known as matrix minimum method in the sense we look for the row and
the column corresponding to which Cij is minimum. This method finds a better initial basic feasible
solution by concentrating on the cheapest routes. Instead of starting the allocation with the northwest
cell as in the North West Corner Method, we start by allocating as much as possible to the cell with the
smallest unit cost. If there are two or more minimum costs then we should select the row and the column
corresponding to the lower numbered row. If they appear in the same row we should select the lower
numbered column. We then cross out the satisfied row or column, and adjust the amounts of capacity
and requirement accordingly. If both a row and a column is satisfied simultaneously, only one is crossed
out. Next, we look for the uncrossed-out cell with the smallest unit cost and repeat the process until we
are left at the end with exactly one uncrossed-out row or column.

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Example 1.3:
The least cost method of determining initial basic feasible solution is illustrated with the help of problem
presented in the section 1.1.

Capacity
1 9 13 36 51 50
50
24 12 16 20 1 100 60
60 40
14 33 1 23 26
50 50 50 150 100 50

Requirement 100 60 50 50 40
50

The Least Cost method is applied in the following manner:

We observe that C11=1 is the minimum unit cost in the table. Hence X11=50 and the first row is
crossed out since the row has no more capacity. Then the minimum unit cost in the uncrossed-out row
and column is C25=1, hence X25=40 and the fifth column is crossed out. Next C33=1is the minimum unit
cost, hence X33=50 and the third column is crossed out. Next C22=12 is the minimum unit cost, hence
X22=60 and the second column is crossed out. Next we look for the uncrossed-out row and column now
C31=14 is the minimum unit cost, hence X31=50 and crossed out the first column since it was satisfied.
Finally C34=23 is the minimum unit cost, hence X34=50 and the fourth column is crossed out.

So that the basic feasible solution developed by the Least Cost Method has transportation cost is

1 * 50 + 12 * 60 + 1 * 40 + 14 * 50 + 1 * 50 + 23 * 50 = 2710

Note that the minimum transportation cost obtained by the least cost method is much lower than
the corresponding cost of the solution developed by using the north-west corner method.

Vogel Approximation Method (VAM):

VAM is an improved version of the least cost method that generally produces better solutions. The steps
involved in this method are:

Step 1: For each row (column) with strictly positive capacity (requirement), determine a penalty by
subtracting the smallest unit cost element in the row (column) from the next smallest unit cost element
in the same row (column).

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Step 2: Identify the row or column with the largest penalty among all the rows and columns. If the
penalties corresponding to two or more rows or columns are equal we select the topmost row and the
extreme left column.

Step 3: We select Xij as a basic variable if Cij is the minimum cost in the row or column with largest
penalty. We choose the numerical value of Xij as high as possible subject to the row and the column
constraints. Depending upon whether ai or bj is the smaller of the two ith row or jth column is crossed out.

Step 4: The Step 2 is now performed on the uncrossed-out rows and columns until all the basic variables
have been satisfied.

Example 1.4:

Consider the following transportation problem

Destination
Origin 1 2 3 4 ai
1 20 22 17 4 120
2 24 37 9 7 70
3 32 37 20 15 50
bj 60 40 30 110 240

Note: ai=capacity (supply)

bj=requirement (demand)

Now, compute the penalty for various rows and columns which is shown in the following table:

Destination
Origin 1 2 3 4 ai Column
Penalty
1 20 22 17 4 120 13
2 24 37 9 7 70 2
3 32 37 20 15 50 5
bj 60 40 30 110 240

Row Penalty 4 15 8 3

Look for the highest penalty in the row or column, the highest penalty occurs in the second column and
the minimum unit cost i.e. cij in this column is c12=22. Hence assign 40 to this cell i.e. x12=40 and cross
out the second column (since second column was satisfied. This is shown in the following table:
Destination
Origin 1 2 3 4 ai Column
Penalty
1 20 22 40 17 4 80 13
2 24 37 9 7 70 2
3 32 37 20 15 50 5
bj 60 40 30 110 240
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Row Penalty 4 15 8 3

The next highest penalty in the uncrossed-out rows and columns is 13 which occur in the first row and
the minimum unit cost in this row is c14=4, hence x14=80 and cross out the first row. The modified table
is as follows:

Destination
Origin 1 2 3 4 ai Column
Penalty
1 20 22 17 4 0 13
40 80
2 24 37 9 7 70 2
3 32 37 20 15 50 5
bj 60 40 30 110 240

Row Penalty 4 15 8 3

The next highest penalty in the uncrossed-out rows and columns is 8 which occurs in the third column
and the minimum cost in this column is c23=9, hence x23=30 and cross out the third column with
adjusted capacity, requirement and penalty values. The modified table is as follows:

Destination
Origin 1 2 3 4 ai Column
Penalty
1 20 22 17 4 0 13
40 80
2 24 37 9 7 40 17
30
3 32 37 20 15 50 17
bj 60 40 30 110 240

Row Penalty 8 15 8 8

The next highest penalty in the uncrossed-out rows and columns is 17 which occurs in the second row
and the smallest cost in this row is c24=15, hence x24=30 and cross out the fourth column with the
adjusted capacity, requirement and penalty values. The modified table is as follows:

Destination
Origin 1 2 3 4 ai Column
Penalty
1 20 22 17 4 0 13
40 80
2 24 37 9 7 10 17
30 30
3 32 37 20 15 50 17
bj 60 40 30 110 240
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Row Penalty 8 15 8 8

The next highest penalty in the uncrossed-out rows and columns is 17 which occurs in the second row
and the smallest cost in this row is c21=24, hence xi21=10 and cross out the second row with the adjusted
capacity, requirement and penalty values. The modified table is as follows:

Destination
Origin 1 2 3 4 ai Column
Penalty
1 20 22 17 4 0 13
40 80
2 24 37 9 7 0 17
10 30 30
3 32 37 20 15 50 17
bj 60 40 30 110 240

Row Penalty 8 15 8 8

The next highest penalty in the uncrossed-out rows and columns is 17 which occurs in the third row and
the smallest cost in this row is c31=32, hence xi31=50 and cross out the third row or first column. The
modified table is as follows:

Destination
Origin 1 2 3 4 ai Column
Penalty
1 20 22 17 4 0 13
40 80
2 24 37 9 7 0 17
10 30 30
3 32 37 20 15 0 17
50
bj 60 40 30 110 240

Row Penalty 8 15 8 8

The transportation cost corresponding to this choice of basic variables is

22 * 40 + 4 * 80 + 9 * 30 + 7 * 30 + 24 * 10 + 32 * 50 = 3520

1.4 Modified Distribution Method

The Modified Distribution Method, also known as MODI method or u-v method, which provides a
minimum cost solution (optimal solution) to the transportation problem. The following are the steps
involved in this method.

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