Introduction of Operations Research

Operations Research is the systematic application

of quantitative methods, techniques and tools to
the analysis of problems involving the operation of
systems.
Operations Research is the application of
scientific methods, techniques and tools to
problems involving the operations of system so as
to provide those in control of the operations with
optimum solutions to the problems.
Introduction of Operations Research
Operations Research is concerned with
scientifically deciding how to best design &
operate man machine systems that usually
require the allocation of scarce resources.
Operations research has been described as a
method, an approach, a set of techniques, a
team activity, a combination of many
discipline (Mathematics, Engineering &
Economics).
Operations Research approach to problem
solving
Judgement Phase: This phase includes
(i) Identification of real life problem.
(ii) Selection of appropriate objective and the
values of various variables related to
objective.
(iii) Application of appropriate scale of
measurement.
(iv) formulation of an appropriate model.
Operations Research approach to problem
solving
Research Phase: This phase utilizes:
(i) Observations & data collection for a better
understanding of the problem.
(ii) Formulation of hypothesis and model.
(iii) Observation & experimentation to test the
hypothesis.
(iv) Analysis of available information and
verification of the hypothesis using pre-
established measures of desirability.
Operations Research approach to problem
solving
(v) prediction of various results from the
hypothesis.
(vi) generalization of results & consideration
of alternative methods.

Action Phase: This phase consists of making

recommendations for implementing the decision. This
decision is implemented by an individual who is in a
position to implement results.
Phases of Operations Research
(i) Formulating the problem.
(ii) Constructing a mathematical model.
(iii) Deriving the solution from the
model.
(iv) Testing the model and its solution.
(v) Controlling the solution.
(vi) Implementation.
Models in Operations Research
A model in operations research is a
simplified representation of an operation or
is a process in which only the basic aspects
or the most important features of a typical
problem under investigation are considered.
The reliability of a solution obtained from a
model depends on the validity of the model
representing the real system.
Characteristics of a good model
(i) It should be capable of taking into
account new formulation without having

any change in its frame.

(ii) Assumption made in the model should
be as few as possible.
(iii) Variables used in the model must be
less in number.
(iv) It should not take much time in its
construction for any problem.
Models by Structure
Iconic or physical models: These are the
pictorial representation of real systems and
have the appearance of real things. An iconic
model is said to be scale down or scaled up
according to the dimensions of the model,
which may be smaller or greater than that of
real item, e.g city maps, blueprint of houses,
globe and so on. These models are easy to
observe and describe.
Models by Structure
Analogue models: They are more abstract
than the iconic model as there is no
similarity between these models and real life
items. The models in which one set of
properties is used to represent the another
set of properties called analogue models.
Mathematical or symbolic models: They
employ a set of mathematical symbols to
represent components of real system.
Uses of Operations Research
(i) It provides a logical & systematic approach
to the problem.
(ii) It allows modification of mathematical
solutions before they are put to use.
(iii) It suggests all the alternative courses of
action for the same management.
(iv) It helps in finding avenues for new
research and improvement in the system.
Uses of Operations Research
It facilitates improved quality of decision.
It makes the overall structure of the
production problem more comprehensible
& helps in dealing with the problem as a
whole.
It aids in preparation of future managers by
improving their knowledge and skills.
It indicates the scope as well as limitation of
a problem.
Operations Research & Decision making
Operations research is a science of managing
which is concerned with making decisions
most of the times. It is a decision science that
helps the management to make better
decisions. Decision making can be improved
and in fact there is a wide scope for such
improvements. The essentials characteristics
of all decisions are objectives, alternatives &
influencing factors (Constraints).
Operations Research & Decision making
Once these characteristics are known, we can
work towards improving the decisions. Essential
features of decisions namely objectives,
alternatives & influencing factors are expressed in
terms of mathematical equations.
Operations research helps to overcome the
complexity of decision making mode as it
provides the management with the most needed
tools for improving their decisions.
 Operations Research

Introduction of Operations Research

Linear Programming
Transportation Problem
Assignment Problem
Decision Theory
Network Analysis (PERT & CPM)
Decision Theory
 Decision Theory
Decision maker
Acts
Events
Payoff table
Opportunity Loss table
Utilities
 Decision Theory
Decision Maker: Decision maker is a person who is
responsible for making decision.
Acts: They are the alternative courses of action or
strategies that are available for decision making.
Events: They are the occurrences that affect the
achievement of the objectives.
Payoff table: Payoff table represent the profit of a
problem.
Opportunity Loss table: It is a payoff table which
represents the cost or loss incurred because of failure
to take the best possible action.
Utilities: It is the individual’s satisfaction level over a
risky decision and its outcomes.
 Decision Making Situations

Decision making under

uncertainty
Decision making under certainty
Decision making under risk
Decision making under conflict
Decision under uncertainty
Maximax criterion
Maximin criterion
Minimax criterion
Laplace criterion
Hurwicz alpha criterion
Decision making under conditions
of risk
Expected Monetary value (EMV)
criterion
Expected Opportunity Loss (EOL)
criterion
Expected value of Perfect
Information (EVPI) criterion
 Payoff table
C.P = Rs. 20, S.P = Rs. 25, Profit = Rs. 5
Supply /
Demand S1 (25) S2 (26) S3 (27)

D1 (25) 125 105 85

D2 (26) 125 130 110

D3 (27) 125 130 135

Hurwicz alpha 125x0.7 + 125x0.3 130x0.7 + 105x0.3 135x0.7 + 85x0.3

α= 0.7, β= 0.3 =125 = 122.5 = 120
 Loss Table
C.P = Rs. 20, S.P = Rs. 25, Profit = Rs. 5
Supply /
Demand S1 (25) S2 (26) S3 (27)

D1 (25) 0 20 40

D2 (26) 5 0 20

D3 (27) 10 5 0
Max
Minimax = 10 20 40
10
A Newspaper boy has the following probability of selling a magazine. Cost of a copy is
30 paise and selling price is 50 paise. He cannot return unsold copies. How many
copies should he order?
No. of copies sold: 10 11 12 13 14
probability: 0.1 0.15 0.2 0.25 0.3
Possible stocks
Demand
No. of 10 copies 11 copies 12 copies 13 copies 14 copies
Probability
copies

10 0.1 200 170 140 110 80

11 0.15 200 220 190 160 130
12 0.2 200 220 240 210 180
13 0.25 200 220 240 260 230
14 0.3 200 220 240 260 280
 Expected Monetary Value
Possible stocks
Possible
demand Probability 10 copies 11 copies 12 copies 13 copies 14 copies

10 0.1 20 17 14 11 8
11 0.15 30 33 28.5 24 19.5
12 0.2 40 44 48 42 36
13 0.25 50 55 60 65 57.5
14 0.3 60 66 72 78 84
EMV 200 215 222.5 220 205
Expected Opportunity Loss Table
Possible stocks

Demand Probability 10 copies 11 copies 12 copies 13 copies 14 copies

10 0.1 0 30 60 90 120
11 0.15 20 0 30 60 90
12 0.2 40 20 0 30 60
13 0.25 60 40 20 0 30
14 0.3 80 60 40 20 0
 Expected Opportunity Loss
Possible stocks
Demand Probability 10 copies 11 copies 12 copies 13 copies 14 copies

10 0.1 0 3 6 9 12

11 0.15 3 0 4.5 9 13.5

12 0.2 8 4 0 6 12

13 0.25 15 10 5 0 7.5

14 0.3 24 18 12 6 0

Total Loss 50 35 27.5 30 45

Expected Profit with Perfect Information
Demand Profit Probability EPPI
10 200 0.1 20
11 220 0.15 33
12 240 0.2 48
13 260 0.25 65
14 280 0.3 84
250
 Decision Tree analysis
Identify the decision points and
alternatives at each point systematically.
At each decision point, determine the
probability & associated payoff with
each course of action
Compute the expected payoff for each
course of action. Start from extreme
right & move towards left.
 Decision Tree analysis
Choose the course of action that yields
the best payoff for each of decision.
Proceed backward to the next stage of
decision points.
Repeat the above steps till the first
decision point is reached.
Identify the best course of action to be
adopted from beginning to the end, under
various possible outcomes as a whole.
 Steps for drawing a decision tree
Identify the decision nodes, chance nodes and alternative
courses of action.
Place them systematically in an appropriate order/sequence.
Keep the decision node first followed by alternative actions
and chance nodes.
Assign probabilities to each course of action and find out the
payoff associated with them.
Starting from extreme right end, Calculate expected payoff
(EMV) for each course of action.
Choose the course of action having Max EMV, then move
backward to next stage.
Repeat the same method till the first decision point is reached.
Mark the sequence of action of courses adopted from
beginning to end.
 Problem 1
Let us take a problem. A person on a cloudy day,
is leaving his house for office. He has two
options whether to take an umbrella with him or
to move without it. If it rains on the way to office
he will be satisfied and relieved that he is
carrying an umbrella to save himself from rain.
If there is no rain he will be annoyed that
uselessly he carried an extra weight with him. If
it doesn’t rain, but sun shines brightly, he can
still use the umbrella although the purpose will
be totally different from the one for which the
umbrella was carried.
 Problem 2
A manager has a choice between (i) A
risky contract promising Rs. 7 lakh with
probability 0.6 and Rs. 4 lakh with
probability 0.4 (ii) A diversified portfolio
consisting of two contracts with
independent outcomes each promising
Rs. 3.5 lakh with probability of 0.6 and Rs.
2 lakh with probability of 0.4. Construct a
decision tree using EMV criterion.
 Problem 3
The management of a company has to make a decision
regarding company’s upliftment. It has 3 alternatives
A1, A2 and A3. The decision nodes leads to the events
such that there occurs 3 results. Results are R1,R2 &
R3.Probability of occurrences of these results as
follows.
R1 = 0.2, R2 = 0.3 and R3 = 0.5
Matrix payoffs between decisions & results are given as

R1 R2 R3
A1 10 14 8
A2 6 10 7
A3 8 5 6
Sales per day: 15 16 17 18
Probability 0.2 0.4 0.3 0.1
C.P = Rs. 2 S.P = Rs. 2.50
 Sales per day

Demand Prob 15 16 17 18
15 0.2 7.5 5.5 3.5 1.5
16 0.4 7.5 8 6 4
17 0.3 7.5 8 8.5 6.5
18 0.1 7.5 8 8.5 9
 Expected Monetary Value
Demand Probability 15 16 17 18

15 0.2 1.50 1.1 0.7 0.3

16 0.4 3 3.2 2.4 1.6

17 0.3 2.25 2.4 2.55 1.95

18 0.1 0.75 0.8 0.85 0.9

EMV 7.5 7.5 6.5 4.75