EM 543:

Production and Operations Management

 
 Unit 1:
Lecture 1:- Introduction to Operations Research
 
 The methodology of operations research
 Successful applications of Operations Research
 The nature of Operations Research
 Overview of the Operations Research modelling approach.
 1.1 The Methodology & Applications of
Operations Research
 Advent of industrial revolution saw growth in the size and
complexity of organizations.
 Old artisans’ small shops have evolved into billion-dollar
corporations of today, with increase in division of labour and
segmentation of management responsibilities (Hillier &
Liebermann, 2001).
 As complexity and specialization increase, it becomes difficult
to allocate resources to various activities in a way that is most
effective for the organization as a whole.
 These problems and need to find a better way to solve them
provided the environment for the emergence of operations
research (commonly referred to as OR).
 OR is attributed to military services early in World War II.
Because of war effort, there was an urgent need to allocate
scarce resources to various military operations and to activities
within each operation in an effective manner.
 British and U.S. military management called upon scientists to
apply a scientific approach to dealing with this and other
strategic and tactical problems. In effect, they were asked to do
research on (military) operations.
 By developing effective methods of using the new tool of radar,
and through their research on how to better manage convoy and
antisubmarine operations, OR teams were instrumental in
winning battles then.
 When war ended, success of OR was used in solving problems
associated with complexity and specialization of organizations
during industrial revolution.
 Two other factors played key role in rapid growth of OR during
this period: (1) substantial progress that was made early in
improving the techniques of OR. After the war, many of the
scientists who had participated on OR teams were motivated to
pursue research relevant to the field, eg simplex method for
solving linear programming problems, developed by George
Dantzig in 1947.
 standard tools of OR, eg linear programming, dynamic
programming, queueing theory, and inventory theory, were
developed before the end of the 1950s.
(2) computer revolution. Large amount of
computation is required to deal with the complex
problems typically considered by OR.
1.2 Nature and Overview of Operations Research (OR)
 
 OR is applied to problems that concern how to conduct and
coordinate the operations (i.e., the activities) within an
organization.
 Nature of organization is immaterial since OR has been applied
extensively in areas such as manufacturing, transportation,
construction, telecommunications, financial planning, health
care, military, public services, etc.
 The research part of OR means that operations research uses an
approach that resembles the way research is conducted in
established scientific fields. A scientific method is used to
investigate the problem of concern (management science is
used as a synonym for operations research).
 The process begins by carefully observing and formulating the
problem, including gathering all relevant data.
 The next step is to construct a mathematical model that attempts
to abstract the essence of the real problem.
 It is then hypothesized that this model is a sufficiently precise
representation of the essential features of the situation that the
conclusions (solutions) obtained from the model are also valid for
the real problem.
 Next, suitable experiments are conducted to test this hypothesis,
modify it as needed, and eventually verify some form of the
hypothesis. (This step is frequently referred to as model
validation.) Thus, in a certain sense, operations research involves
creative scientific research into the fundamental properties of
operations.
 OR is concerned with practical management of the organization.
OR must also provide positive, understandable conclusions to the
decision maker(s).
 Another characteristic of OR is its broad viewpoint due to
adopting an organizational point of view.
 OR attempts to resolve the conflicts of interest among
components of the organization in a way that is best for the
organization as a whole.
 OR attempts to find a best solution (referred to as an optimal
solution) for the problem under consideration.
 OR uses a team approach with teams comprising of
mathematicians, statisticians, economists, business
administrators, computer scientists, engineers, physical
scientists, behavioral scientists, and special techniques of OR.
 The team needs to have necessary experience and variety of
skills to address the problem (Hillier & Liebermann, 2001).
1.3 Operations Research Modelling Approach.
 
 Phases of an OR study include:
1. Define the problem of interest and gather relevant data.
2. Formulate a mathematical model to represent the
problem.
3. Develop a computer-based procedure for deriving
solutions to the problem from the model.
4. Test the model and refine it as needed.
5. Prepare for the on-going application of the model as
prescribed by management.
6. Implement.
 Formulate problem

Construct mathematical
model

Conduct
experiments/validate model

Develop computer-based
procedure for deriving
solutions Refine

Test model

Apply model

Implement
Defining the problem of interest and gathering relevant data.

 Study the relevant system and develop a well-defined statement

of the problem to be considered. This includes determining such
things as appropriate objectives, constraints on what can be
done, interrelationships between the area to be studied and other
areas of the organization, possible alternative courses of action,
time limits for making a decision, etc.
 Problem definition is crucial because it greatly affects how
relevant the conclusions of the study will be.
 OR team normally works in an advisory capacity.
 OR team performs detailed analysis of problem and presents
recommendations to management.
 Report to management will identify a number of alternatives
that can be evaluated only by management (e.g., the tradeoff
between cost and benefits).
 Management evaluates study and its recommendations, takes
into account a variety of intangible factors, and makes final
decision based on its best judgment.
 OR team should be on same wavelength as management,
including identifying the “right” problem from management’s
viewpoint, and to build the support of management for the
course that the study is taking.
 Ascertaining the appropriate objectives is a very important
aspect of problem definition. To do this, it is necessary first to
identify the member (or members) of management who
actually will be making the decisions concerning the system
under study and then to probe into this individual’s thinking
regarding the pertinent objectives.
 By its nature, OR is concerned with the welfare of the entire
organization rather than that of only certain of its components.
 However, objectives used in the study should be as specific as
they can be while still encompassing the main goals of the
decision maker and maintaining a reasonable degree of
consistency with the higher-level objectives of the organization.
 For profit-making organizations, one possible approach is to
use long-run profit maximization (considering the time value of
money) as the sole objective.
 This means that this objective provides the flexibility to
consider activities that do not translate into profits immediately
(e.g., research and development projects) but need to do so
eventually in order to be worthwhile.
 A business firm located in a single country affects:
(1) the owners (stockholders, etc.), who desire profits
(dividends, stock appreciation, and so on);
(2) the employees, who desire steady employment at
reasonable wages;
(3) the customers, who desire a reliable product at a
reasonable price;
(4) the suppliers, who desire integrity and a reasonable
selling price for their goods; and
(5) the government and hence the nation, which desire
payment of fair taxes and consideration of the national
interest.
 All five parties make essential contributions to the firm, and the
firm should not be viewed as the exclusive servant of any one
party for the exploitation of others.
 International corporations want to make profit but have
additional obligations to follow socially responsible practices.
 OR teams typically spend a surprisingly large amount
of time gathering relevant data about the problem.
 Data gives understanding of problem and provides
input for mathematical model being formulated in the
next phase of study.
 Frequently, much of the needed data will not be
available when the study begins, either because
information is not there, outdated or in wrong form.
 Computer-based management information system is
necessary (Hillier & Liebermann, 2001).
Formulating a mathematical model to represent the problem.
 
 Models, or idealized representations, are an integral part of
everyday life. Common examples include model airplanes,
portraits, globes, models of the atom, models of genetic structure,
mathematical equations describing physical laws of motion or
chemical reactions, graphs, organizational charts, industrial
accounting systems, etc.
 Models are used for abstracting essence of subject of inquiry,
showing interrelationships, and facilitating analysis.
 Mathematical model of a business problem is the system of
equations and related mathematical expressions that describe the
essence of the problem.
 If there are n related quantifiable decisions to be made, they are
represented as decision variables (say, x1, x2, . . . , xn) whose
respective values are to be determined.
 The appropriate measure of performance (e.g., profit) is then
expressed as a mathematical function of these decision variables
(for example, P = 3x1 + 2x2 + ……..+ 5xn).
 Function above is called the objective function. Any restrictions
on the values that can be assigned to these decision variables are
also expressed mathematically, typically by means of inequalities
or equations (for example, x1 + 3x1x2 + 2x2 < 10).
 Such mathematical expressions for the restrictions are called
constraints. The constants (namely, the coefficients and right-
hand sides) in the constraints and the objective function are
called the parameters of the model.
 The aim of a mathematical model is to choose the values of the
decision variables so as to maximize the objective function,
subject to the specified constraints.
 Determining the appropriate values to assign to the parameters of
the model (one value per parameter) is both a critical and a
challenging part of the model-building process.
 Determining parameter values for real problems requires
gathering relevant data which is frequently
difficult. Thus, value assigned to a parameter often is
only a rough estimate.
 Because of the uncertainty about the true value of the parameter,
it is important to analyze how the solution derived from the
model would change if the value assigned to the parameter were
changed to other plausible values. This process is referred to as
sensitivity analysis.
 Construction of objective function requires developing a
quantitative measure of performance relative to each of the
decision maker’s ultimate objectives.
 Multiple objectives are transformed and combined into a
composite measure, called the overall measure of performance.
This overall measure might be something tangible (e.g., profit)
corresponding to a higher goal of the organization, or it might be
abstract (e.g., utility).
 In latter case, the task of developing this measure is complex and
requires a careful comparison of the objectives and their relative
importance.
 After the overall measure of performance is developed, the
objective function is then obtained by expressing this measure as
a mathematical function of the decision variables or considering
multiple objectives simultaneously, eg goal programming (Hillier
& Liebermann, 2001).
Developing a Computer-based Procedure for Deriving Solutions
to the Problem from the Model.
 
 After mathematical model is formulated, next phase in OR is to
develop a procedure (usually a computer-based procedure) for
deriving solutions to the problem from this model.
 Here, one of the standard algorithms (systematic solution
procedures) of OR is applied on a computer by using one of a
number of readily available software packages.
 For experienced OR practitioners, finding a solution is the fun
part, whereas the real work comes in the preceding and following
steps, including the postoptimality analysis.
 Postoptimality (or what-if) analysis is a very important part of
most OR studies.
 It involves addressing some questions about what would happen
to the optimal solution if different assumptions are made about
future conditions.
 These questions often are raised by the managers who will be
making the ultimate decisions rather than by the OR team.
 Spreadsheet software plays a central role in conducting
postoptimality analysis.
 The process of experimenting with changes in the model can be
very helpful in providing understanding of the behaviour of the
model and increasing confidence in its validity.
 Postoptimality analysis involves conducting sensitivity analysis
to determine which parameters of the model are most critical (the
“sensitive parameters”) in determining the solution
Testing The Model
 
o The first version of a large mathematical model contains many
flaws.
o Some relevant factors or interrelationships may not have been
incorporated into the model, and some parameters undoubtedly
have not been estimated correctly.
o This is inevitable, given the difficulty of communicating and
understanding all the aspects and subtleties of a complex
operational problem as well as the difficulty of collecting
reliable data.
o Hence, before you use the model, it must be thoroughly tested to
try to identify and correct as many flaws as possible. This is
commonly referred to as model validation.
Preparing to Apply The Model
 
o If the model is to be used repeatedly, next step is to install a well
documented system for applying the model as prescribed by
management.
o This system will include the model, solution procedure (including
postoptimality analysis), and operating procedures for
implementation.
o Databases and management information systems may provide up-
to-date input for the model each time it is used, in which case
interface programs are needed.
o An interactive computer-based system called a decision support
system is installed to help managers use data and models to
support (rather than replace) their decision making as needed.
o Managerial reports may be generated in order to interpret the
output of the model and its implications for application (Hillier &
Liebermann, 2001).
Implementation
 
 After a system is developed for applying the model, the last
phase of an OR study is to implement this system as prescribed
by management.
 This phase is a critical one because it is here that the benefits of
the study are reaped.
 Therefore, it is important for the OR team to participate in
launching this phase, both to make sure that model solutions are
accurately translated to an operating procedure and to rectify any
flaws in the solutions that are then uncovered.
 The success of the implementation phase depends a great deal
upon the support of both top management and operating
management.
 The OR team gains this support if it has kept management well
informed throughout the course of the study.
Good communications help to ensure that the study accomplishes
what management wanted and so deserves implementation. They
 Good communications help to ensure that the study accomplishes
what management wanted and so deserves implementation.
 They also give management a greater sense of ownership of the
study, which encourages their support for implementation.
 Implementation steps include;
– giving operating management careful explanation of
new system to be adopted and how it relates to operating
realities
- The two parties (OR team & mgt) share responsibility for
developing procedures required to put system into operation.
- Operating management sees that detailed indoctrination is given
to the personnel involved, and the new course of action is
initiated.
- At end of study, OR team documents methodology for
reproducibity purposes (Hillier & Liebermann, 2001).
References:

Hillier, F.S. and G.J. Liebermann, (2001),

Introduction To
Operations Research, 7th Edition, McGraw Hill.