DEPARTMENT OF BUSINESS MANAGEMENT

Master of Business Administration

QUANTITATIVE ANALYSIS FOR

MANAGEMENT DECISIONS
Asamenew E. (Assit. Prof.)
 Unit-Three: Transportation Model

Formulation

Method of finding BFS

North-West corner method

Matrix minima method

Vogel’s approximation method

Towards optimality Modi method

Loops

Unbalanced TPP

Maximization TPP
2
 Formulation
 Transportation problem deals with the distribution of
goods from several points of supplies (sources) to a
number of points of demands (destinations).
 Consider a corporation engaged in the manufacture of
products. Most of such big corporations are of “multiple-
product” and “multi-unit” organizations having
production units situated at different places. Items are
produced for sales.

3
 Formulation
 Sales take place at different markets which are, again
located at different places.
 It is not feasible to co-locate production and market.
 Markets are located away from the manufacturing places.
Hence products are sent to factory warehouses set up near
market outlets. Cost of product consists of production cost
and distribution cost.

4
 Con’t…
 Cost of product = production cost + distribution cost
 Distribution cost consists of mainly the transportation cost
of items from its production (manufacturing) center to the
warehouses.
 Transportation techniques are designed to minimize the
distribution costs. In order to identify products, it is
necessary to workout per unit distribution cost of each
product.
 We also know the production capacity of each product in
each factory is not fixed. 5
 The characteristics of transportation problem
 A limited supply of one commodity is available at certain sources.

 There is a demand for the commodity at several destination.

 The quantities of supply at each source and the demand at each

destination are constant.

 The shipping or transportation costs per unit from each source to each
destination are assumed to be constant.

 No shipments are allowed between sources or between destinations. All

supply and demand quantities are given in whole number or integers.

 The problem is to determine how many units shipped from each source to
each destination so that all demands are satisfied at the minimum total
shipping costs. 6
 Uses of transportation techniques

1. Reduce distribution or transportation cost

2. Improve competitiveness of product

3. Assist proper location of warehouses

4. Assist proper location of new factories or plants being

planned.

5. Close down warehouses which are found costly and

uneconomical.

7
 The objective of transportation problem

 To identify the optimal shipping routes-minimum cost

route

 To identify the maximum amount that can be shipped over

the optimum route

 To determine the total transformation cost or the profit of

transportation

8
 The Transportation Method
 The solution algorithm to a transportation problem may be
summarized into the following steps:

Step 1
 Formulate the problem and set up in the matrix form.
 The formulation of the problem is similar to the linear
programming.
 Here the objective function is the total transportation cost
and the constraints are the supply and demand available at
each source and destination respectively.
9
 Con’t…
Step 2:
 Obtain an initial basic feasible solution
 There are 3 methods to find the initial basic feasible
solution.
1) North-West Corner Method (NWCM)
2) Least Cost Method (LCM)
3) Vogel’s Approximation Method (VAM)
 The initial solution obtained by any of the three methods
must satisfy the following condition:

10
 Con’t…

I. The solution must be feasible

It must satisfy all the supply and demand constraints

II. The number of positive allocations must equal to m+n-1,

where m=the number of rows (or origins or supply
centers) and n= the number of columns(or destination
centers or demand centers)

Example:

m=3 origins and n=4 destinations ==>m+n-1=3+4 -1=6 (i.e.

the transportation model should have 6 occupied cells).
Note: If the number of occupied cells < m+n-1=> degenerate
solution will result in. 11
 Con’t…

Step 3.
 Test the initial solution for optimality
 Testing for optimality can be made using two approaches:
Stepping stone approach
Modified distribution method
 If the current solution is optimal, then stop. Otherwise,
determine the new improved solution.

Step 4
 Repeat step 3 until an optimal solution is reached
12
 Linear programming formulation of the
transportation problem

 The transportation problem is a special class of LP that often arises in

planning for the distribution of goods and services for several supply
location or origins to several demand locations or destinations.
 The problem has its origins in devising a schedule for shaping goods
from M origins to n destinations where the quantity of the goods
available at each origin and the quantity required at each destination is
known.
 The objective is to transport the goods (products) from the origins to
destinations at minimum total transportation cost. The transportation
problem can be completely described as matrix of the following form.

13
 Con’t…

Destination
Origin 1 2 3 n 𝑆𝑖
1 𝐶11 𝐶12 𝐶13 ……………….. 𝐶1𝑛 𝑆1
2 𝐶21 𝐶22 𝐶23 ……………….. 𝐶2𝑛 𝑆2
. .
. .
. .
. .
. .
M 𝐶𝑚1 𝐶𝑚2 𝐶𝑚3 ……………….. 𝐶𝑚𝑛 𝑆𝑚
𝐷𝑗 𝐷1 𝐷2 𝐷31 ……………….. 𝐷𝑛

Where is the per unit cost of shaping the products from origin i to
destination j.
is supply in units from origin i.
is demand in units at destination j. 14
 Con’t…
 The general linear model of the m-origins and n-
destinations transportation problem is:

 Where is the amount (no. of units) of the product is

shipped from origin i to destination j.

15
 Con’t…
 A transportation problem whose total supply equals to
total demand is said to be a balanced transportation
problem.
 That is if , then the problem is a balanced transportation
problem.
 However, if , then the problem is unbalanced.
 Balanced transportation problem can be solved by a
simplified transportation algorithm.

16
 Con’t…
 Excess Supply: If total supply exceeds total demand, we
can balance a transportation problem by creating a
dummy demand point that has a demand equal to the
amount of excess supply.
 Since shipments to the dummy demand point are not real
shipments, they are assigned a cost of zero. These
shipments indicate unused supply capacity.
 Unmet Demand: If total supply is less than total demand,
actually the problem has no feasible solution.

17
 Con’t…
 To solve the problem it is sometimes desirable to allow the
possibility of leaving some demand unmet. In such a
situation, a penalty is often associated with unmet demand.
This means that a dummy supply point should be
introduced.
 Generally an unbalanced transportation problem whose
total supply exceeds total demand or the reverse can be
balanced by adding a dummy destination/supply whose
requirements would require the excess supply or demand.

18
 Con’t…

Example:

Suppose that a firm has three factories /sources of supply/ &

four warehouses /point of demand/. The firm's production
capacity at the three factories, the demand for the four
distribution centers located at various regions & the cost of
shipping each unit from the factories to the warehouses
through each route is given as follows:

19
Con’t…

Destinations (dd) =j

Origin Factory
W1 W2 W3 W4
(Supply) Capacity =i
7
F1 Br.3 2 6 5000

F2 7 5 2 6000
3
F3 2 5 4 5 2500
Requirements of the
Warehouses 6000 4000 2000 1500 13500
( Units of demand)

20
 Con’t…
Using all the above information

i. Express the following transportation problem as an LPP

Solution

 Let xij =The amount of commodity to be transported form source

i (i =1,2,3) to destination j( j= 1,2,3,4).
 Then the objective function of the problem (minimization of the
total transportation cost) can be formulated as:

MinZ = 3x11 +2x12 + 7x13 +6 x14 +

7x21 +5x22 +2x23 + 3x24 +

2x31+5x32 +4x33+5x34 21
 Con’t…
Subject to the constraints
a. Supply constraints:
x11 +x12 +x13 +x 14 =5000 F1 supply constraint
x21 + x22 + x23 +x24 =6000 F2 supply constraint
x31 +x32 +x33+x34 = 2500 F3 supply constraint
b. Demand constraints:
x11 + x21 + x31 = 6000 W1 demand constraint
x12 + x22 + x32 = 4000 W2 demand constraint
x13 + x23 +x33 = 2000 W3 demand constraint
x14 +x24 + x34 = 1500 W4 demand constraint
xij > 0 for all i& j

22
 Con’t…
 The network representation of the transportation LPP is called
Net work flow
Origin Destination centers
(Sources of Supply) (Point of demand centers)

3
F1 50000 W1 6000
2
6 7
7

F2 6000 5 W2 4000
2
3

5
W3 2000
2
4
F3 2500 5 W4 1500

 This LPP has 12 shipping routes. The objective is to identify the

minimum cost route (Least cost route). 23
 NORTH- WEST CORNER METHOD (NWCM)

 This method does not take into account the cost of

transportation on any route of transportation.
 The NWCM gets its name because the starting point for
the allocation process is the Upper Left-hand (Northwest)
corner of the transportation table. Therefore, allocate to the
Northwest corner as many units as possible.
 Northwest corner rule
 The following set of principles guides the allocation:

24
 Con’t…

1) Begin with the upper left hand cell (Left, upper most in
the table), & allocate as many units as possible to that
cell. This will be the smaller amount of either the row
supply or the column demand. Adjust the row & column
quantities to reflect the allocation.

2) Subtract from the row supply & from the column demand
the amount allocated

3) If the column demand is now zero, move to the cell next

to the right, if the row supply is zero, move down to the
cell in the next row.
25
 Con’t…
 If both are zero, move first to the next cell on the right
then down one cell.

4) Once a cell is identified as per step (3), it becomes a

northwest cell. Allocate to it an amount as per step (1)

5) Repeat, the above steps (1) - (4) until all the remaining
supply and demand is gone.

26
 Con’t…
Example:
 Consider the following transportation problem:

Store Store Store Store

Supply
1To 2 3 4
From
Plant 1 19 30 50 10 7

Plant 2 70 30 40 60 9

Plant 3 40 8 70 20 18

8 7 14 34
Demand 5

a. Develop an initial feasible solution using the NWCM

b. Compute the total cost for this solution.
27
 Con’t…
Solution
a. The Initial feasible solution

Store 1 Store 2 Store 3 Store 4 Supply

Plant 1 19 30 50 10
7
5 2
70 30 40 60
Plant 2 9
6 3
40 8 70 20
Plant 3 18
4 14

Demand 8 7 14 34
5

 Check that the solution is feasible or not:

 ==>m + n-1; m=3 and n=4  3+4-1= 6 cells occupied
(Feasible solution) 28
 Con’t…
 The total transportation cost of the initial feasible solution
derived by the NWCM is:
Route Unit Per unit Total
From To Shipped X cost ( $) = Cost ( $)
Plant 1 Store 1 5 19 95
plant 1 Store 2 2 30 60
Plant 2 Store 3 6 30 180
Plant 2 Store 4 3 40 120
Plant 3 Store 4 4 70 280
Plant 3 Store 4 14 20 280
Total Cost= $ 1015

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 THE LEAST- COST METHOD (LCM) or
(LARGEST- PROFIT) METHOD

 LCM is the method used a minimum cost in the allocation.

 It begins a solution by sequentially assigning to the ratios
or cells with the minimum cost as many units as possible.
The first allocation be made to the cell with the lowest cost
(the highest profit in a maximization case)
 The Least- Cost Method yields not only an initial feasible
solution but also one that is close to optimal in small
problems.
30
 Con’t…

Example: Develop the initial feasible solution for the

following TP using the least-cost method (LCM)
D E F G Supply
Source
A Destination 1 5 3 4 100
B 4 2 2 5 60
C 3 1 2 4 120
demand 70 50 100 60 280

Solution: The 1st allocation should be made to the cell with the
least-cost. Cells AD & CE both have the lowest cost f $1. Cell AD
is selected 1st because more units can be allocated to it (70) than to
cell CE (50). 31
 Con’t…

Cell AD is filled in 1st since a larger quantity (70) can be

placed there. Then, the remaining requirement of 30 for
column F is allocated to cell BF & source B's supply is
reduced to 30.
The initial solution by the least -cost method
D E F G Supply
Source
Destination
A 1 5 3 30 4 100
70
B 4 2 2 5 60
30 30
C 3 1 2 4 120
50 70
deman
70 50 100 60 280
d

32
 Con’t…
m=3, n=4 ==> 3+4-1 = 6 occupied cells (feasible)

Routes Units Unit Total

From To Shipped Cost =Cost
A D 70 1 $ 70
A G 30 4 120
B F 30 2 60
B G 30 5 150
C E 50 1 50
C F 70 2 140
Total transportation cost =$640

33
 Con’t…
Example: Suppose that a firm has three factories / sources of
supply /& four warehouses/point of demand/ .The firm's
production capacity at the three factories, the demand for the four
destination centers located at various regions & the cost of
shipping each unit from the factories to the warehouses through
each route is given as follows:
Destinations
Factory
W1 W2 W3 W4 Capacity
F1 3 2 7 6 5000
F2 7 5 2 3 6000
F3 2 5 4 5 2500
Demand 6000 4000 2000 1500 13500

34
 Con’t…
a) Develop an initial feasible solution using NWCM & Compute the
total cost

b) Develop an initial feasible solution using least-cost method &

compute the total cost.
Initial feasible solution
Solution: Factory
W1 W2 W3 W4 Capacity
F1 3 2 7 6
5000
Factory 5000
7 5 2 3
F2 6000
1000 4000 1000
2 5 4 5
F3 2500
1000 1500
Demand 6000 4000 2000 1500 13500

m= 3, n =4 ==> 3+4 -1 =6 occupied cells (Feasible)

35
Con’t…
Routes Units Unit Total
From To Shipped X Cost =Cost
F1 W1 5000 3 $ 15000
F2 W1 1000 7 7000
F2 W2 4000 5 20000
F2 W3 1000 2 2000
F3 W3 1000 4 4000
F3 W4 1500 5 7500
Total transportation cost =$55,500
b.
Factory
W1 W2 W3 W4 Capacity
3 2 7 6
F1 5000
1000 4000
F2 7 5 2 3 6000
2500 2000 1500
2 5 4 5
F3 2500
2500
Demand 6000 4000 2000 1500 13500
36
 Con’t…

Routes Units Unit Total

From To Shipped X Cost =Cost
F1 W1 1000 3 $ 3000
F1 W2 4000 2 8000
F2 W1 2500 7 17500
F2 W3 2000 2 4000
F2 W4 1500 3 45000
F3 W1 2500 2 5000
Total transportation cost =$42,000

m= 3, n=4 ==> 3+4-1 =6 occupied calls (Feasible)

Least- Cost method is better than the NWCM because it

considers least cost factories. 37

 VOGEL'S APPROXIMATION METHOD (VAM)

 VAM is preferred to the other two methods described above.

 In this method each allocation is made on the basis of the
opportunity (or penalty or extra) cost that would have
incurred if allocation in certain cells with minimum unit
transportation cost were missed.
 In this method allocation are made so that the penalty cost is
minimized.
 The advantage of this method is that it gives an initial
solution which is nearer to an optimal solution or is the
optimal solution itself.
38
 Con’t…
 VAM determines the penalty for not using the minimum
cost routes, where the objective is to avoid large penalties
so that the penalty from not using the routes is minimized.

The steps in VAM are as follows:

1. Calculate penalties for each row (column) by taking the

smallest & the next smallest unit transportation cost in the
same row (column). This difference indicates the penalty or
extra cost which has to be paid if one fails to allocate to the
cell with the minimum unit transportation cost

39
 Con’t…

2. Select the row or column with the largest penalty &

allocate as much unit as possible in the cell having the
least cost in the selected row or column satisfying the
conditions.

 If there is a tie in the values of penalties, it can be broken

by selecting the cell where maximum allocation can be
made.

3. Adjust the supply & demand & cross out the satisfied
row or column
40
 Con’t…
 If a row or column is satisfied simultaneously, only one of them
is crossed out & the remaining row (column) is assigned a zero
supply (demand) .Any row or column with zero supply or
demand should not be used in computing future penalties.

4. Repeat step 1 to 3 until the entire available supply at various

sources & demand at various destinations are satisfied.

Example:

1. Determine an initial basic feasible solution to the following

transportation problem using VAM.

41
 Con’t…
Warehouse
Factory A B C D Supply
Row difference or Row penalty
2 2 0 4
F1 25 or opportunity cost
(5) (20) 2 0 - - -
F2 5 9 8 3
25
(15) (5) (5) 3 2 2 2 5
F3 6 4 3 2
10
10
1 2 2 - -
Demand 20 15 20 5 60

Column difference 3 2 3 1
or Column penalty
or opportunity cost 3 2 - 1

1 5 - 1

5 9 - -
5 - - -
42
 Con’t…

 m= 3, n=4 ==> 3+4-1 =6 Occupied cells (feasible)

 The transportation cost associated with this solution is:
 Total cost= 5x2 + 20x0+15x5x9 =+95x3+10x4= $185

43
 OPTIMALITY TESTS
 Once an initial solution is available, the next step is to
check its optimality.
 An optimal solution is one in which there is no opportunity
cost.
 That is, there is no other set of transportation routes
(allocations) that will reduce the total opportunity cost.
Thus we have to evaluate each unoccupied cell (represents
unused route) in the transportation table in terms of
opportunity cost.

44
 Con’t…
 The purpose of the optimality test is to see if the proposed
solution just generated can be improved or not. The
solution to be checked for optimality must be non-
degenerate i.e the no of occupied cells must be m+n-1.
 The Procedure for testing optimality is analogous to that of
the simplex method. A distinction is made between basic
variables, those associated with occupied cells & non-
basic variables, those associated with the empty cells.

45
 Con’t…
 For each empty cell, the effect of changing it to an occupied
cell is examined. If any of these changes are favorable, the
solution is not optimal & a new solution must be designed.

 A favorable change means an increase in the value of the

objective function in maximization problems or a decrease
in minimization problems.

46
 Con’t…
 The MODI method allows us to compute improvement
indices quickly for each unused cell without drawing all
of the closed paths. Because of this, it can often provide
considerable time savings over the stepping-stone method
for solving transportation problems.
 MODI provides a new means of finding the unused route
with the largest negative improvement index.

47
 Con’t…
Steps in the MODI Method
The steps to evaluate unoccupied calls are as follows:
1. For an initial basic feasible solution, calculate Ui and
Vj ; for rows and columns and set

Cij = Ui + Vj for all occupied calls (i , j)

i.e: Cell cost= Raw Index +Column Index

2. For unoccupied cells, calculate opportunity cost by

using the relation:
Kij = Cij– (Ui + Vj); for all j and j.
Where Kij is the cell evaluator or opportunity
cost

48
 Con’t…

3. Examine the sign of each Kij

 If Kij > 0, then current basic feasible solution is optimal.

 If Kij = 0, then the current basic feasible solution will

remain be unaffected but an alternative solution exists.

 If one or more Kij < 0, then an improved solution be

obtained entering unoccupied cell (i, j), in the basis. An

unoccupied cell having the largest negative value of Kij
is chosen for entering into the solution mix (new
transportation schedule)
49
 Con’t…

4. construct a closed path (or loop) for the unoccupied cell

with largest negative opportunity cost. Start the close
path with the selected unoccupied cell and mark a plus
sign (+) and in this cell, trace a path along the rows (or
columns) to an occupied cell, mark the corner with minus
sign (-) and continue down the column (or row) to an
occupied cell and mark the corner with plus sign (+) and
minus sign (-) alternatively. Close the path back to the
selected unoccupied call.

50
 Con’t…
 Locate the smallest quantity allocated to a cell marked
with a minus sign. Allocate this value to the selected
unoccupied cell and add it to other occupied cells marked
with plus signs and subtract it from the occupied cells
marked with minus signs.

5. Obtain a new improved solution by allocating units to the

unoccupied call and calculate the new transportation
cost.

6. Test the revised solution for optimality.

51
 Con’t…

Example: Obtain an optimal solution to the transportation

problem by MODI method given below:

Project No 1 Project No 2 Project No 3 Supply

Farm 1 4 2 8 100

Farm 2 5 1 9 200

Farm 3 7 6 3 200

Demand 50 150 300 500

52
 Con’t…

Solution: Consider the initial feasible solution of the given

example by NWCM as shown below:
Initial solution, NWCM

Project No 1 Project No 2 Project No 3 Supply Ui

4 50 2 8 100
Farm 1 U1=0
50
5 1 9 200
Farm 2 U2=1
100 100
7 6 3 200
Farm 3 U3=-7
200
50 500
Demand 150 300

Vj V1=4 V2=2 V3=10

53
 Con’t…

Remark: Conventionally, we begin by assigning a value of

zero as the index for row 1 (U1=0). Once row index has been
established, it will enable us to compute column index
numbers for all occupied cells in that row.
determine Cij , use the occupied cells.
For instance, C11=4, C12=2, C22=1, C23=9, and C33=3
Cij= Ui + Vj
==>C11= U1 +V1==>4=0+ V1==> V1=4 , U1=0 by convention
==>C12= U1 +V2==>2=0 +V2==> V1=2
==>C22= U2 +V2==>1= U2+ 0==> U2=-1
==>C23= U2 +V3==>9= -1+V3==> V3=10
==>C33= U3 +V3==>3= U3+10 ==> U3= -7 54
 Con’t…

Table: Test of optimality

Unoccupied cells Cell evaluators

Kij = Cij– (Ui + Vj)
(1,3) C13 – (U1 +V3)=8-(0+10)= -2
(2,1) C21 – (U2 +V1)=5-(-1+4)=+2
(3,1) C31– (U3 +V1)=7-(-7+4)=10
(3,2) C32– (U3 +V2)=6-(-7+2)=+11

In this case, we found hat cell (1, 3) had an evaluation of -2,

which represented an improvement potential of and $ 2 per
unit. Hence, an improved solution is possible.
55
Con’t…

Proje Projec Projec

Supply Ui
ct t t
No 14 No 2 2 No 3 8 100
Farm 1 U1=0
50 - 50 +
5 1 9 200
Farm 2 U2=1
+ 100 100 -

Farm 3 7 6 3 200 U3=-5

200
Dema 150 300 500
nd 50

Vj V1=4 V2=0 V3=8

56
 Con’t…
Cij= Ui + Vj
==>C11= U1 +V1==>4=0+ V1==> V1=4 , U1=0 by convention
==>C13= U1 +V3==>8=0 +V3==> V3 =8
==>C23= U2 +V3==>1= U2+ 0==> U2 =1
==>C22= U2 +V2==>1= 1+V2==> V2 = 0
==>C33= U3 +V3==>3= U3+8Table:
==>Test
U3=of-5
optimality

Unoccupied cells Cell evaluators

Kij = Cij– (Ui + Vj)
(1,2) C12– (U1 +V2)=2-(0+0)= 2
(2,1) C21 – (U2 +V1)=5-(1+4)=0
(3,1) C31– (U3 +V1)=7-(-5+4)=8
(3,2) C32– (U3 +V2)=6-(-5+0)=+11

 Because none of the cell evaluators is negative, this is an

optimal solution. Thus, the total cost for the distribution plan
=$1800 57