Chapter One

Introduction to operations research

 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.
 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.
Conti…
 Conti…

 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.
 Cont…

 “Operations 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 solution to
the problems. CHURCHMAN

 OR is a scientific method of providing executive departments with

a quantitative basis for decisions under their control. P.M. MORSE &
G.E. KIMBAIL
 Conti…

 OR is the art of winning wars without actually fighting

them. AUTHER CLARK
 OR is the systematic application of quantitative methods,
techniques and tools to the analysis of problems involving the
operation of systems. DAELLENBACK & GEORGE
 Thus, we can conclude by saying OR arrives at optimal or near
optimal solutions to complex decision making problems.
 History of Operations Research

 Many experts consider the start of OR in the III century B.C, during
the II Punie War, with analysis and solution that Archimedes
named for the defense of the city of Syracuse, besieged by the
Romans.

 In1503, Leonardo Da Vinci took part in the war against

Prisa because he knew the techniques to accomplish bombardments,
to construct ships, armored vehicles, cannons, catapults, and another
warlike machines.
 Conti…

 In 1885 Ferderick W. Taylor emphasized the application of scientific analysis to

methods of production.
 In 1917, A. K. Erlang, a Danish mathematician, published his work on
the problem of congestion of telephone traffic.
 In 1930, H.C. Levinson, an American astronomer, applied scientific
analysis to the problem of merchandising.
 However, the development of OR started during the Second World War.
 The name was also derived from its use for research on Military Operations
during the war.
 Conti…

 Since strategic and tactical decisions during the war are very complicated with time
horizon for such decisions being comparatively small, the necessity for group
analysis and use of mathematical, economic and statistical theories along with
engineering, behavioral and Physical Sciences was felt and utilized.

 The job of OR is to examine, formulate, analyze, treat, solve the problems of

management in a scientific way.

OR study is always rooted in mathematical analysis.

American and British groups worked on various research projects.

 Conti…

 Success and usefulness of these projects led to the development of various

techniques for decision making and later the results prompted their uses in business
applications and civilian problems.

Hence, when the war ended, an effort was made to apply the OR techniques to
other areas of business and industry.
 Nature and significance of operations research

 OR is also an interdisciplinary mathematical sciences. Employing

techniques from other mathematical sciences - such as mathematical
modeling, statistical analysis and mathematical optimization - OR arrives at
optimal or near- optimal solutions to complex decision making problem.

 OR has overlap with other disciplines, notably industrial engineering,

management science, psychology and economics.

 Some of the tools used in OR are statistics, optimization, probability theory,

game theory, decision analysis, mathematical modeling and simulation.

 Because of the computational nature of these fields, OR has also strong ties to computer
science and analytics.
 The principal phases for implementing OR

a) Definition of the problem:

 It involves defining the scope of the problem under investigation
which is carried out by the entire OR team.
 The end result of the investigation is to identify three principal elements
of the problem:
1) Description of decision alternatives.
2) Determination of the objective of the study and
3) Specification of thelimitations under which the modeled system
operates.
 Conti…

b) Model Construction:
 Here the problem is translated into mathematical relationship.
c) Model Solution:
 Model is solved using various mathematical and statistical tools. Using the
input data.

d) Implementation of the solution of a model:

 It involves the translation of the results into operating instructions.
 Features of operations research approach

 Inter-disciplinary team approach - The optimum solution is found by

a team of scientists selected from various disciplines.

 Methodological Approach – It 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.

 Holistic approach to the system - OR takes into account all significant

factors and finds the best optimum solution to the total organization.
 Conti…

 Objectivistic Approach - It 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.

 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
 Conti…

 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.
 Use of scientific research - OR uses scientific research to reach optimum
solution.
 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.
 Optimize the total output - It tries to optimize by maximizing the profit
and minimizing the loss.
 Model 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.
 Models can be constructed in various forms by establishing relationships among
specified variables and parameters of the system, is called a model.
 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.
 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.
 Classification of OR Model

 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.

Based on Based on function or Based Based on Degree of Based

structure purpose on time certainty on method of solution

Physical Descriptive models Static Deterministic Heuristic

models models models
Symbolic Predictive models Dynamic Probabilistic Analytical
models models models
Normative Simulation
(Optimization)
 Classification based on structure

Physical models Symbolic models

 These models provide a physical These models use symbols
appearance of the real object under study (letters, numbers) and functions to
either reduced in size or scaled up. represent variables and their
 Physical models are useful only in relationships to describe the
design problems because they are easy properties of the system.
to observe, build, and describe.

 Problems such as portfolio analysis

selection, media selection, production
scheduling, etc. cannot be analyzed by
physical models.
 Classification based on function or purpose

Descriptive models Predictive Models Normative

(Optimization) models
 It describe some aspects  It indicate “If this occurs, These models provide the “best”
of a situation. then that follow”. or “Optimal” solution to problems
 It is based on  They relate dependent and subject to certain limitations on
observation, survey, independent variables and the use of resources.
questionnaire results or permit trying out, “what if”  It provide recommended
other available data. questions. courses of action. For
 Example:  These models are used to example, in mathematical
Organizational chart, predict outcomes due to a programming
plant layout diagram, given set of alternatives for
etc. the problem.
 Classification Based on Time Reference
Static Models Dynamic models
Static models represent a system at  In dynamic models, time is considered
some specified time and do not as one of the variables and allows
account for changes over time. the impact of changes due to change in
time.

For example, an inventory model can  Thus, sequences of interrelated

be developed to determine an decisions over a period of time are
economic order quantity for the next made to select the optimal course of
period assuming that the demand in action to optimize the given
planning period would remain the objective.
same as that for today.

 Dynamic programming is an example

of a dynamic model.
 Classification based on Degree of certainty
Deterministic Models Probabilistic (Stochastic) models
If all the parameters, constants and Models in which at least one
functional relationships are assumed to parameter or decision variable is a
be known with certainty when the random variable are called
decision is made, the model is said to probabilistic (or stochastic).
be deterministic.

Thus, in such a case, the outcome

associated with a particular course of
action is known.
The results of the models assume
single value. Linear programming
models are examples of deterministic
models.
 Classification Based on Method of solution

Heuristic Model Analytical Models Simulation Models

These models employ some sets  These models have a specific  A mathematical
of rules which, though mathematical structure and structure but are not
perhaps not optimal, do thus can be solved by solved by mathematical
facilitate solutions of problems known analytical techniques. techniques to get a
when applied in a consistent  An optimal solution with solution.
manner. maximization or  Computer-assisted
minimization of an objective experimentation on a
function is an analytical mathematical structure of
model. a real- life problem
 Assignment 1(Individual assignment)

 Define the meaning of Operations Research and discuss the origin and
development of it. And, state the major application areas of OR models.

 N.B. Minimum requirement is not less than 2 pages. (10 marks)

 Last submission date: Nov 25, 2017.

End of Chapter
1
 Chapter Two

LINEAR PROGRAMMING

Time allotted: 15hrs

 Definition of Linear Programming

 A linear programming is a mathematical technique for an optimal allocation of

scarce resources such as materials, time, money, etc. subject to a set of constraints.
 It is a model that seeks to either maximize or minimize a linear objective
function subject to a set of linear constraints.
 In linear programming the objectives to be maximized may be profit or
revenue, market share, return on investment, etc. and the objects to be
minimized may be cost, time, distance, etc.
 Characteristics of Linear programming model

 The characteristics are grouped into two:

1. Components 2. Assumptions
 The components relate to the structure of the models and the assumptions revealed the
condition under which the model is valid.
 OR is a problem solving and a decision making science.
 Whenever we have conflicts, uncertainty and complexity in any situation, OR can
help in the end to reduce costs and improve profits.
 So, it is very important that the problem at hand be clearly defined. The problem
may be set out explicitly by the consumer, the sponsoring organization or
may be formulated by the OR team.
 Components of Linear programming model

 The Environment: OR team must study the environment involving men,

machines, materials, suppliers, consumers, the government and the public.
 The decision maker and a set of decision variables: Decision maker is the
person who is actually responsible to take the final decision. OR team must
study the decision maker and his relationship to the problem at hand
and decision variables represent the unknown quantities to be solved for.
 The Objectives function: It is a mathematical statement of the problem. In
LPM, a single quantifiable objective must be specified by a decision maker.
 The set of constraints: The constraints are the mathematical expressions of the
limiting factors.
 Assumptions of linear programming
 Linearity: the linearity requirement is that each decision variables has a
linear impact on the objective function and in each constraint in which it
appears.

 Divisibility: this assumption pertains to the potential values of the decision

variables. Non-integer values are acceptable.

 Certainty: assert that all parameters of the problem are fixed known
constants.

 Non-negativity: the decision variables can assume either zero or positive

values.
 Applications of Linear Programming

 Personnel Assignment Problem

 Transportation Problem
 Efficiency on Operation of system of Dams
 Optimum Estimation of Executive Compensation
 Agriculture Applications
 Military Applications
 Production Management
 Marketing Management
 Manpower Management
 Physical distribution
 Advantages of Linear Programming Techniques

 It helps us in making the optimum utilization of productive resources.

 The quality of decisions may also be improved by linear programming
techniques.
 Provides practically solutions.
 In production processes, high lighting of bottlenecks is the most significant
advantage of this technique.
 Formulating a Linear programming model

 The formulation of LPM involves the following steps:

Step 1: Define the problem. It involves the determination of our specific objective.
Example: To determine the quantity of P1 and P2 to be produced/month so as to
maximize profit subject to the set of limiting factors.
Step 2: Identify the decision variables. It involves the representation of
the unknown quantities by letters. Example: Let X1 and X2 represent the
number of units of products P1 and P2 to be produced/month respectively.
Step 3: Formulate the objective function. In formulating the objective function,
make sure that
A. All the decision variables are represented in the objective function.
B. All terms in the objective function must include a variable.
C. The unit of measurement of all the coefficients in the objective
function must be the same.
 Conti…

 Step 4: Formulate the constraints and writing the completed LPM.

Z = c1X1 + c2X2 + c3X3 + ………+ cnXn
Subject to the following constraints:

Where aij, bi, and cj are given constants

 Maximization Example 1

Assume that Philips corporation produces 2 types of Tv sets Model A and Model B.
The profit realized from model A and B are Br 300 and 250 respectively. The
company wants to produce and sell 1000 TV sets daily but this is not possible due
to some limitation. This limitations are:
1. There are only 40 hours of labor each day in the
production department.
2. There are only 45 hours of machine time each day.

3. The maximum that can be sold of model A to be sets is 12.

 Conti…

It is known that each set of model A being higher in quality requires 2

hours of labour and each set of model B requires only 1 hour of labour.
The machine processing time for 1 unit of model A and model B are 1 hr
and 3 hrs respectively. If the companies objective is to maximize profit.

Q. Describe the mathematical model of the situation.

 Conti…

Step 1: Problem definition. To determine the number of Model A and

Model B TV sets to be produced daily in order to maximize profit
under the restrictions.

Step 2: Write the decision variables.

X1 = The number of Model A TV sets to be produced daily X2 = The
number of Model B TV sets to be produced daily Z = Total profit
Step 3: Formulate the objective function.
Max Z = 300x1 + 250 x2
 Conti…

Step 4: Formulate the constraints.

Labour: 2x1 + x2 ≤ 40
Machine: x1 + 3x2 ≤ 45
Marketing: x1 ≤ 12
Non-negativity: X1, x2 ≥ 0
Therefore, the complete LPM is: Max Z = 300x1 + 250 x2
Subject to:
Labour: 2x1 + x2 ≤ 40
Machine: x1 + 3x2 ≤ 45
Marketing: x1 ≤ 12
 Example 2

A firm that assembles computers and computer equipment is about to start production
of two new micro-computers (Type 1 and Type 2). Each type of micro-
computer will require assembly time, inspection time and storage space. The
amounts of each of this resources that can be devoted to the production of
microcomputers is limited.

The manager of the firm would like to determine the quantity of each micro-
computer to produce in order to maximize the profit generated by sales of this
Micro-computers. In order to develop 2 suitable model of the problem, the
manager has met with the design and manufacturing personnel. As a result of these
meetings, the manager has obtained the following information:
 Conti…

Type 1 Type 2
Profit 60 50
Assembly time 4 10
Inspection time 2 1
Storage space/unit 3 3

The manager has also acquired information on the availability of the company
of resources. This daily amount are
Resource Amounts available
Assembly time 100 hours
Inspection time 22 hours
Storage space 39 cubic feet
 Conti…

The manager also met with the firms marketing manager and learn that the demand
for Micro-computer was such that whatever combination of these two types of
Micro-computers produced all of the outputs can be sold.
Q:Formulate the Linear Programming Model.
Step 1: Problem definition:
 To determine the quantity of type I and type II micro-computers to be
produced per day so as to maximize profit given the restrictions.
Step 2: Identify the decision variables.
X1 = The quantity of type I micro-computer to be produced and sold per day.

X2= The quantity of type II micro-computer to be produced and sold per day.
Z = Total profit
 Conti…

Step 3: Formulate the objective function.

Max Z = 60x1 + 50 x2
Step 4: List the constraints.
Assembly time: 4x1 + 10x2 ≤ 100
Inspection time: 2x1 + x2 ≤ 22
Storage space: 3x1 + 3x2 ≤ 39
Non-negativity: X1, x2 ≥ 0
 Therefore, the complete LPM is: Max Z = 60x1 + 50 x2
Subject to:
Assembly time: 4x1 + 10x2 ≤ 100
Inspection time: 2x1 + x2 ≤ 22
Storage space: 3x1 + 3x2 ≤ 39
 Example 3

A firm produces products, A & B, each of which requires two resources,

namely raw materials and labour. Each unit of product A requires 2 &
4 units and each unit of product B requires 3 & 3 units respectively of
raw materials and labour. Every day at least 60 units of raw materials and
at most 96 units of labour must be used. If the unit profit contribution of
product A is Br. 40/unit, product B is Br. 35/unit determine the number of
units of each of the products that should be made each day to maximize the
total profit contribution.
Question 1: Describe the mathematical model of the situation.
 Conti…

Step 1: Problem definition. To determine the number of products A and B to

be produced in order to maximize profit under the restrictions.
Step 2: Write the decision variables.

X1 = The number of units of Product A to be produced daily

X2 = The number of units of Product B to be produced daily.

Z = Total profit
Step 3: Formulate the objective function.

Max Z = 40x1 + 35x2

 Conti…

Step 4: Formulate the constraints.

Raw material: 2x1 + 3x2 ≥ 60

Labour: 4x1 + 3x2 ≤ 96

Non-negativity: X1, x2 ≥ 0
Therefore, the complete LPM is:
Max Z = 40x1 + 35 x2
Subject to:
Raw material: 2x1 + 3x2 ≥ 60
Labour: 4x1 + 3x2 ≤ 96
 Minimization case

General format
Min.C = c1 x1+c2x2+ … + Cn xn
Subject to:
a11 x1 + a12 x2+ … + a1n xn ≥ b1

a21 x1 + a22 x2+ … + a2n xn ≥ b2

. . . .
. . . .
am1 x1+am2 x2+ …+amn xn ≥ bn
x1, x2 …., xn ≥ 0
 Minimization Example 1

A dietician is preparing a diet consisting of 2 foods A and B. each unit of food

A contains 20 grams of proteins, 12 grams of fat and 15 grams of carbohydrates
and costs Br 4. Each unit of food B, 30 grams of protein, 6 grams of fat and 15
grams of carbohydrates and costs Br 3. The diet being prepared must contain the
following minimum requirements of at least 60 grams of protein, at least 24
grams of fat and at least 30 grams of carbohydrates. How many units of each
food should be used in the diet so that all the minimum requirement
satisfied and we have a diet whose cost is minimal?
 Conti…

Step 1: Problem definition. To determine the number of units of each food to be

used in the diet to minimize cost satisfying the requirements.
Step 2: Represent the decision variables.

X1 = The number of units of Food A

X2 = The number of units of Food B
C = Total cost
Step 3: Develop the objective function.

Min C = 4x1 + 3x2

 Conti…

Step 4: List the constraints.

Protein: 20x1 + 30x2 ≥ 60
Fat: 12x1 + 6x2 ≥ 24
Carbohydrate: 15x1 + 15X2 ≥ 30
Non-negativity: X1, x2 ≥ 0
 Therefore, the complete LPM is:
Min C = 4x1 + 3x2
Subject to:
Protein: 20x1 + 30x2 ≥ 60
Fat: 12x1 + 6x2 ≥ 24
Carbohydrate: 15x1 + 15X2 ≥ 30
 Example 2

Two machines (1 and 2) produces two grades of tyres A and B. In 1 hr of

operation, machine I produces 20 units of grade A and 40 units of grade B tyres.
Whereas, machine 2 produces, 30 units of grade A and 40 unis of grade
B tyres. The machines are required to meet the production schedule. At least
1400 grade A and 1200 units of grade B tyres. The cost of operating machine I
is Br 50/hr and the cost of operating machine 2 is Br 80/hr.

Q. Formulate the linear programming model if the objective is to minimize the

cost of operating the machine.
 Conti…

Step 1: Problem definition. To determine the number of hours machine I and

machine II operate in order to minimize cost satisfying the production
requirement.

Step 2: Represent the decision variables.

X1 = The number of hours machine I operates X2 = The
number of hours machine II operates

C = Total cost
Step 3: Develop the objective function.

Min C = 50x1 + 80x2

 Conti…

Step 4: List down the constraints.

Grade A : 20x1 + 30x2 ≥ 1400
Grade B : 40x1 + 40x2 ≥ 1200
Non-negativity: X1, x2 ≥ 0
 Therefore, the complete LPM is:

Min C = 50x1 + 80x2

Subject to:
Grade A : 20x1 + 30x2 ≥ 1400
Grade B : 40x1 + 40x2 ≥ 1200
 Solutions to linear programming problems

 There are two methods for solving linear programming problems:

A. The geometric approach - Graphic method
B. The simplex approach - Algebric method
 Geometric approach is applied when there are only two decision
variables.
Steps in the graphic method
Step 1: Form a mathematical model of the problem. This step deals with the
expression of the completed LPM.
Step 2: Graph each of the constraints and identify its region. Here it is the
conversion of the inequalities into equalities.
 Conti…

Step 3: Determine the region or area that contains all the points that satisfy the entire
set of constraints. Then,
 Determine the values of the decision variables at each of the corner points.
This can be done either by observation or by solving 2 equations
simultaneously.
 Substitute the values of the decision variables at each corner point into the
objective function to compute its value.
Step 4: select the one with the highest or lowest value of the objective function
depending on the optimization case and make an interpretation.
 If the objective function is maximization, we can select the highest
value. When it is minimization, we may select the lowest value.
 Methods of finding graphical solutions

 There are basically two methods that can be applied widely to find the optimal
solution through graphical method
1. Objective function approach
2. Extreme point approach
 Steps in the Objective function approach
1. Graph the constraint
2. Identify the feasible solution space
3. Set the objective function equal to some amount divisible by each of the
objective function co-efficient. This will yield integer values for X1 and
X2 and thus, simplify plotting the line. Now, determine the optimal point
by moving away from the origin (for a maximum problem or moving
towards the origin (for a minimization problem parallel to the objective
 Conti…

4. After identifying the optimal point, determine which 2 constraints

intersect there. Solve their equations simultaneously to obtain
the mix of X1 and X2 at the optimum.
5. Substitute the values obtained in the previous step into the objective function to
determine the value of the objective function at the optimum.

 Extreme point approach

 Is based on the truth that the optimal solution occurs at the corner points.
 Definitions of some terms

 Solution- any specification of the values for decision variable among

(x1, x2… xn) is called a solution.
 Feasible solution- is a solution for which all constraints are satisfied.
 Infeasible solution - is a solution for which at least one constraint is
not satisfied.
 Feasible region - is a collection of all feasible solutions.
 Optimal solution - is a feasible solution that has the most favorable value of
the objective function.
 Conti…

 Most favorable value - is the largest value if the objective function is to be

maximized, whereas it is the smallest value if the objective function is to be
minimized.
 Multiple optimal solution - More than one solution with the same optimal value
of the objective function.
 Unbounded solution - If the value of the objective function can be increased or
decreased indefinitely such solutions are called unbounded solution.
 Corner point feasible solution - is a solution that lies at the corner of the feasible
region.
 Example problems

Example 1 Solve 3x + 5y >15 using graphical method

Solution
Write the given constraint in the form of equation i.e. 3x + 5y = 15,
Put x = 0, then y = 3 and Put y = 0, then x = 5
So the coordinates are (0, 3) and (5, 0)
Put x = 0, y = 0 in the given constraint, the condition turns out to be false i.e. 0 >
15 is false. So the region does not contain (0, 0) as solution. The feasible region
lies on the outer part of the line as shown in the graph.
Conti…
 Conti…

Example 2 Solve 3x + 5y < 15 graphically

Solution
• Write the given constraint in the form of equation i.e. 3x + 5y = 15, Put x =
0 then the value y = 3 and Put y = 0 then the value x = 5
• Therefore the coordinates are (0, 3) and (5, 0). Thus these points are joined
to form a straight line as shown in the graph.
• Put x=0, y=0 in the given constraint then 0<15, the condition is true. (0, 0)
is solution nearer to origin. So shade the region below the line, which is the
feasible region.
Conti…
 Conti…

Example 3 Solve the equations through Step 1: Write the completed LPM
graphical method Max Z = 80x1 + 55x2

Max Z = 80x1 + 55x2 Subject to 4x1+ 2x2 ≤ 40

Subject to 4x1+ 2x2 ≤ 40 2x1 + 4x2 ≤ 32

x1 ≥ 0 , x2 ≥ 0
2x1 + 4x2 ≤ 32

x1 ≥ 0 , x2 ≥ 0
 Conti…

Step 2: Graph the constraints

• The first constraint 4x1+ 2 x2 ≤ 40, written in a form of equation 4x1+ 2 x2
= 40
 Let x1 =0, then x2 = 20, Let x2 =0, then x1 = 10
 The coordinates are (0, 20) and (10, 0)

• The second constraint 2x1 + 4x2 ≤ 32, written in a form of equation 2x1 +
4x2 =32
 Let x1 =0, then x2 = 8, Let x2 =0, then x1 = 16
 The coordinates are (0, 8) and (16, 0)
 Conti…

The graphical representation is:

 Conti…

Step 3: Identify the common regions

Extreme Coordinates How Value of the objective

point determined function
X1 X2 Max Z = 80x1 + 55x2

A 0 8 Observation 440
B 8 4 Simultaneous 860
C 10 0 Observation 800

Step 4: Select the optimal

The maximum value is obtained at the point B. Therefore Max Z = 860 and
x1 = 8, x2 = 4
 Conti…

Example 4: Solve the equations Step 1: Write the completed LPM

through graphical method Minimize Z = 10x1 +
4x2
Minimize C = 10x1 + 4x2
Subject to:
Subject to:
3x1 + 2x2 ≥ 60
3x1 + 2x2 ≥ 60
7x1 + 2x2 ≥ 84
7x1 + 2x2 ≥ 84
3x1 +6x2 ≥ 72
3x1 +6x2 ≥ 72
x1 ≥ 0 , x2 ≥ 0
x1 ≥ 0 , x2 ≥ 0
 Conti…

Step 2: Graph the constraints

• The first constraint 3x1 + 2x2 ≥ 60, written in a form of equation 3x1 + 2x2 =
60
 Let x1 =0, then x2 = 30, let x2 =0, then x1 = 20 and the coordinates are
(0, 30) and (20, 0)
• The second constraint 7x1 + 2x2 ≥ 84, written in the equation 7x1 + 2x2 = 84
 Let x1 =0, then x2 = 42, let x2 =0, then x1 = 12 and the coordinates are
(0, 42) and (12, 0)
• The third constraint 3x1 +6x2 ≥ 72, written in a form of equation 3x1 +6x2 =
72
 Put x1 =0, then x2 = 12 and let x2 =0, then x1 = 24 and the coordinates
 Conti…

• The graphical representation is

 Conti…

Step 3: Identify the common regions

Extreme Coordinates How determined Value of the objective
point function
X1 X2 Min C = 10x1 + 4x2

A 0 42 Observation 168
B 6 21 Simultaneous 144
C 18 3 Simultaneous 192
Step
D 4: Select the
24 optimal
0 Observation 240

• The minimum value is obtained at the point B. Therefore Min Z = 144 and
x1 = 6, x2 = 21
 Conti…

Example 5:
A manufacturer of furniture makes two products: chairs and tables. Processing of
this product is done on two machines A and B. A chair requires 2 hours on
machine A and 6 hours on machine B. A table requires 5 hours on machine A and
no time on machine B. There are 16 hours of time per day available on machine
A and 30 hours on machine B. Profit gained by the manufacturer from a
chair and a table is Br 2 and Br 10 respectively. What should be the daily
production of each of two products? And find the optimal value through
extreme point method.
 Conti…

Step 1: Problem definition. To determine the number of chairs and tables

to be produced daily in order to maximize profit under the restrictions.
Step 2: Write the decision variables.
X1 = The number of chairs to be produced daily.

X2 = The number of tables to be produced daily

Z = Total profit
Step 3: Formulate the objective function.

Max Z = 2x1 + 10 x2
 Conti…

Step 4: Formulate the constraints.

Machine A: 2x1 + 5x2 ≤ 16
Machine B: 6x1 + 0x2 ≤ 30
Non-negativity: x1, x2 ≥ 0
Step 5: Write the completed LPM model.
Max Z = 2x1 + 10 x2
Subject to:
Machine A: 2x1 + 5x2 ≤ 16

Machine B: 6x1 + 0x2 ≤ 30

 To find solution through extreme point approach

Step 1: Write the completed LPM

Max Z = 2x1 + 10 x2
Subject to:
Machine A: 2x1 + 5x2 ≤ 16
Machine B: 6x1 + 0x2 ≤ 30
Non-negativity: x1, x2 ≥ 0
 Conti…

Step 2: Graph the constraints

• The first constraint 2x1+ 5x2 ≤ 16, written in a form of equation 2x1+
5x2 = 16
 Let x1 = 0, then x2 = 16/5 = 3.2, let x2 = 0, then x1 = 8
 The coordinates are (0, 3.2) and (8, 0)

• The second constraint 6x1 + 0x2 ≤ 30, written in a form of equation

and 6x1 = 30 → x1 =5
Conti…
 Conti…

Step 3: Identify the common regions

Extreme Coordinates How Value of the objective function
point determined Max Z = 2x1 + 10x2
X1 X2

A 0 3.2 Observation 32
B 5 1.2 Simultaneous 22
C 5 0 Observation 10
Step 4: Select the optimal
Max Z = 32 and x1 = 0, x2 = 3.2
Step 5: Make an interpretation
 The manufacturer should produce approximately 3 tables and no chairs to
get the max profit.
 Special cases in graphical method

1. Multiple optimal solution Step 1: Write the completed LPM

Example 1: Solve by using graphical Max Z = 4x1 + 3x2
method
Subject to:
Max Z = 4x1 + 3x2
4x1+ 3x2 ≤ 24
Subject to:
x1 ≤ 4.5
4x1+ 3x2 ≤ 24

x1 ≤ 4.5 x2 ≤ 6

x2 ≤ 6 x1 ≥ 0 , x2 ≥ 0
 Conti…

Step 2: Graph the constraints

• The first constraint 4x1+ 3x2 ≤ 24, written in a form of

equation which is 4x1+ 3x2 = 24 and Let x1 =0, then x2 = 8, and let
x2 = 0, then x1 = 6 The coordinates are (0, 8) and (6, 0)

• The second constraint x1 ≤ 4.5, written in a form of equation x1 = 4.5

• The third constraint x2 ≤ 6, written in a form of equation x2 = 6

Conti…
 Conti…
Step 3: Identify the common regions
Extreme Coordinates How determined Value of the objective function
point Max Z = 4x1 + 3x2
X1 X2

A 0 6 Observation 18
B 1.5 6 Simultaneous 24
C 4.5 2 Simultaneous 24
Step
D 4: Select
4.5 the optimal
0 solution
Observation 18

Max Z = 24, which is achieved at both B and C corner points. It can be

achieved not only at B and C but every point between B and C. Hence the
given problem has multiple optimal solutions.
2. No optimal solution

Example 1: Solve graphically Step 1: Write the completed LPM

Max Z = 3x1 + 2x2 Max Z = 3x1 + 2x2

Subject to: Subject to:
x1+ x2 ≤ 1 x1+ x2 ≤ 1
x1+ x2 ≥ 3 x1+ x2 ≥ 3
x1 ≥ 0 , x2 ≥ 0 x1 ≥ 0 , x2 ≥
 Conti…

Step 2: Graph the constraints

• The first constraint x1+ x2 ≤ 1, written in a form of equation x1+ x2 = 1
 Let x1 =0, then x2 = 1, let x2 =0, then x1 = 1
 The coordinates are (0, 1) and (1, 0)

• The first constraint x1+ x2 ≥ 3, written in a form of equation x1+ x2 = 3

 Let x1 =0, then x2 = 3, let x2 =0, then x1 = 3
 The coordinates are (0, 3) and (3, 0)
 Conti…

N.B. There is no common feasible region

generated by two constraints together i.e. we cannot
identify even a single point satisfying the
constraints. Hence there is no optimal solution.
 3. Unbounded Solution

Example1: Solve by graphical method Step 1: Write the completed LPM

Max Z = 3x1 + 5x2 Max Z = 3x1 + 5x2
Subject to: Subject to
2x1+ x2 ≥ 7 2x1+ x2 ≥ 7
x1+ x2 ≥ 6 x1+ x2 ≥ 6
x1+ 3x2 ≥ 9 x1+ 3x2 ≥ 9
x1 ≥ 0 , x2 ≥ 0 x1 ≥ 0 , x2 ≥ 0
 Conti…

Step 2: Graph the constraints

 The first constraint 2x1+ x2 ≥ 7, written in a form of equation 2x1+ x2 = 7,

Let x1 =0, then x2 = 7, let x2 =0, then x1 = 3.5 and the coordinates are (0, 7)
and (3.5, 0)
 The second constraint x1+ x2 ≥ 6, written in a form of equation x1+ x2 = 6 Let

x1 =0, then x2 = 6, let x2 =0, then x1 = 6 and the coordinates are (0, 6) and
(6, 0)
 The third constraint x1+ 3x2 ≥ 9, written in a form of equation x1+ 3x2 = 9,

Let x1 =0, then x2 = 3, let x2 =0, then x1 = 9 and the coordinates are (0, 3)
Conti…
 Conti…

Step 3: Identify the common regions

Extreme Coordinate How determined Value of the objective
point s function Max Z = 3x1 +
X1 X2 5x2

A 0 7 Observation 35
B 1 5 Simultaneous 28
C 4.5 1.5 Simultaneous 21
9 objective
DThe values of 0 function at corner points are 35, 28, 21 and 27
Observation 27. But there exists
infinite number of points in the feasible region which is unbounded. The value of
objective function will be more than the value of these four corner points i.e. the maximum
value of the objective function occurs at a point at ∞. Hence the given problem has
The simplex method

 Is an iterative (repetitive) algebraic process that moves automatically

from one basic feasible solution to another, improving the situation each
time until an optimal solution is reached.
 It is applicable for maximization problems with all less than or equal to
constraints.
 We use an algebraic method called the simplex method, which was
developed by George B. DANTZIG (1914-2005) in 1947 while on
assignment with the U.S. Department of the air force.
 Conti…

 The simplex method examines the extreme points in a systematic manner,

repeating the same set of steps of the algorithm until the optimal solution is
reached. It is for this reason that it is also called the iterative method.

 Slack Variables
 “A mathematical representation of surplus resources.” In real life problems, it’s
unlikely that all resources will be used completely, so there usually are unused
resources. Slack variables represent the unused resources between the left- hand
side and right-hand side of each inequality.
 Basic and Non-basic Variables

 Basic variables are selected arbitrarily with the restriction that there be as
many basic variables as there are equations. The remaining variables are
non-basic variables.

x 1  2 x 2  s1  32

3 x1  4 x 2  s2  84

 This system has two equations, we can select any two of the four variables as
basic variables. The remaining two variables are then non-basic variables. A
solution found by setting the two non-basic variables equal to 0 and solving for
the two basic variables is a basic solution. If a basic solution has no
negative values, it is a basic feasible solution.
 Use the following steps to solve the linear programming

 Step 1: Convert each inequality in the set of constraints to an equation by

adding slack variables.
 Step 2: Create the initial simplex tableau.
 Step 3: Select the pivot column. (The column with the “most negative
value” element in the last row.)
 Step 4: Select the pivot row. (The row with the smallest non- negative
result when the last element in the row is divided by the corresponding in
the pivot column.)
 Conti…

 Step 5: Use elementary row operations calculate new values for the pivot
row so that the pivot is 1 (Divide every number in the row by the pivot
number.)
 Step 6: Use elementary row operations to make all numbers in the pivot
column equal to 0 except for the pivot number. If all entries in the bottom
row are zero or positive, this the final tableau. If not, go back to step 3.
 Step 7: If you obtain a final tableau, then the linear
programming problem has a maximum solution, which is given by the
entry in the lower-right corner of the tableau.
 Pivot

 Pivot Column: The column of the tableau representing the

variable to be entered into the solution mix.
 Pivot Row: The row of the tableau representing the variable to be
replaced in the solution mix.
 Pivot Number: The element in both the pivot column and the pivot row.
 Simplex Tableau

 Most real-world problems are too complex to solve graphically.

 They have too many corners to evaluate, and the algebraic solutions are
lengthy. A simplex tableau is a way to systematically evaluate
variable mixes in order to find the best one.

 Initial Simplex Tableau

All variables Solution

Basic variables coefficients

0
 EXAMPLE

 3F furniture Company produces tables and chairs. Each table takes four
hours of labor from the carpentry department and two hours of labor from
the finishing department. Each chair requires three hours of carpentry and
one hour of finishing. During the current week, 240 hours of carpentry
time are available and 100 hours of finishing time. Each table
produced gives a profit of $70 and each chair a profit of $50. How
many chairs and tables should be made?
Step 1

P = 70x1 + 50x2

4x1 + 3x2 < 240

2x1 + 1x2 < 100

x 1, x 2 > 0
 Conti…

 The first step of the simplex method requires that each inequality
be converted into an equation. ”less than or equal to” inequalities
are converted to equations by including slack variables.
 Suppose carpentry hours and finishing hours remain unused in a week. The
constraints become;
4x1 + 3x2 + s1 = 240 4x1 + 3x2 + s1 + 0s2 = 240
2x1 + x2 + s2 = 100 2x1 + x2 + 0s1 + s2 = 100

 As unused hours result in no profit, the slack variables can be included

in the objective function with zero coefficients:
 Conti…

P = 70x1 + 50x2 + 0s1 + 0s2

P - 70x1 - 50x2 - 0s1 - 0s2 = 0

 The problem can now be considered as solving a system of 3 linear

equations involving the 5 variables x1, x2 , s1, s2 , P in such a way that P has
the maximum value;

4x1 + 3x2 + s1 + 0s2 = 240

2x1 + x2 + 0s1 + s2 = 100

P - 70x1 - 50x2 - 0s1 - 0s2 = 0

Now, the system of linear equations can be written in matrix form or as a 3 x 6
 Step 2

 The tableau represents the initial solution;

x1 = 0, x2 = 0,s1 = 240, s2 = 100, P=0

 The slack variables S1 and S2 form the initial solution mix. The initial
solution assumes that all available hours are unused. i.e. The slack variables
take the largest possible values.
 Conti…

 Variables in the solution mix are called basic variables. Each basic
variables has a column consisting of all 0’s except for a single 1. All
variables not in the solution mix take the value 0.
 The simplex process, a basic variable in the solution mix is replaced by
another variable previously not in the solution mix. The value of the
replaced variable is set to 0.
Step 3

 Select the pivot column (determine which variable to enter into the
solution mix). Choose the column with the “most negative” element in the
objective function row.

 x1 should enter into the solution mix because each unit of x1 (a table)

contributes a profit of $70 compared with only $50 for each unit of x2
(a chair)
Step 4

 No, There aren’t any positive elements in the pivot column above the
dashed line.

We can go on step 5
Step 5

 Select the pivot row (determine which variable to replace in the solution
mix). Divide the last element in each row by the corresponding
element in the pivot column. The pivot row is the row with the smallest
non-negative result.
Conti…

 Should be replaced by x1 in the solution mix. 60 tables can be made with

240 unused carpentry hours but only 50 tables can be made with 100
finishing hours. Therefore we decide to make 50 tables. Now calculate new
values for the pivot row. Divide every number in the row by the pivot
number.

R2
2
Conti…

 Use row operations to make all numbers in the pivot

column equal to 0 except for the pivot number which remains as 1.

 If 50 tables are made, then the unused carpentry hours are reduced by
200 hours (4 h/table multiplied by 50 tables); the value changes from
240 hours to 40 hours. Making 50 tables results in the profit being
increased by $3500; the value changes from $0 to $3500.
Conti…

 In this case, x1 = 50, x2 = 0, s1= 40, s2 = 0 , P = 3500. Now repeat the steps
until there are no negative numbers in the last row.
 Select the new pivot column. x2 should enter into the solution mix. Select the

new pivot row. S1 should be replaced by x2 in the solution mix.

Conti…
Conti…

 Calculate new values for the pivot row. As the pivot number is already
1, there is no need to calculate new values for the pivot row. Use row
operations to make all numbers in the pivot column equal to except for the
pivot number.
Conti…

 If 40 chairs are made, then the number of tables are reduced by

20 tables (1/2 table/chair multiplied by 40 chairs); the value changes
from 50 tables to 30 tables. The replacement of 20 tables by 40 chairs
results in the profit being increased by $600; the value changes from
$3500 to $4100.

 As the last row contains no negative numbers, this solution gives the
maximum value of P.
Conti…

 This simplex tableau represents the optimal solution to the LP problem and is
interpreted as:
x1 = 30, x2 = 40, s1 = 0, s2 = 0 and profit or P = $4100
 The optimal solution (maximum profit to be made) is to company 30
tables and 40 chairs for a profit of $4100.
 N.B. Is this solution true through graphical method? This should be
your homework.
 Chapter Three
TRANSPORTATION AND ASSIGNMENT PROBLEMS

 The purpose of using an LP model for transportation problems is to

minimize transportation costs, taking into account the origin of 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.
 Conti…

 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.

 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.
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:
• Supply quantity (capacity) of each origin.

• Demand quantity of each destination.

• 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.
• The total quantity available is equal to the total demand.
Example

 Harley’s Sand and Gravel Pit has contracted to provide topsoil for
three residential housing developments. Top soil can be supplied from
three different “farms” as follows:

Farm Weekly capacity (cubic yards)

A 100
B 200
C 200
Conti…

 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:
Conti…

 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.
Conti…

Transportation table for Harley’s sand and gravel

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

5 1 9
Farm B 200

7 6 3
Farm C 200

Demand 50 150 300

It is possible to write this transportation problem in LPM

 LPM for this problem is:

Z min: 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+x31≤ 50
x12+x22+x32≤150 Demand/ Destination constraint
x13+x23+x33≤300
Conti…

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
Finding an 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:
1. A feasible solution is one in which assignments are made in
such a way that all supply and demand requirements are
satisfied.
Conti…

2. The number of non-zero(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.
Conti…

 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
 The Northwest-Corner Method

 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.
Conti…

 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:
 Conti…

 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.
 Remain in a row or column until its supply or demand is completely
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).
Conti…

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

Conti…

 The total cost is found by multiplying the quantities in

“completed” (i.e. non-empty) 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

Conti…

Example1: Find the initial basic feasible solution by using

North-West Corner Rule and the total cost.
Solution

 Initial Basic Feasible Solution

x11=21, x12=13, x22=12, x23=3, x33=12, x43=2, x44=17
 21(1)+13(5)+12(3)+3(1)+12(2)+2(2)+17(4) = 221 (transportation cost)
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:
1. 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.
2. 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.
Conti…

3. 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.

4. Repeat steps (ii) and (iii) until all supply and demand have been
exhausted.
Conti…

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

Total cost = 50(4) + 50(8) + 150(1) + 50(9) + 200(3) = $1800

Conti…

 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.
 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.
Conti…

 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 highest cost and the next highest cost element in that
particular row or column.
 Conti…

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 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.
Conti…
Conti…
Conti…
Since there is no penalty for the remaining cells, we allocate
for these cells according to their cost.
Conti…

Therefore the final allocation will be:

 Total cost: 1x150+ 3x200+4x50 + 8x50 + 9x50 = Birr 1800

 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

 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?
Conti…

 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.
Conti…

 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:

 All unoccupied cells must be evaluated. Evaluate cells one at a time.

 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.)
 A path will consist of only horizontal and vertical moves, starting
and ending with the empty cell that is being evaluated.
 Alter + and – signs, beginning with a + sign in the cell being
evaluated.
Conti…

 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.
Conti…

 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.

Conti…
 Conti…

 Unoccupied cells are:

🞑 A-3 = 8-9+1-2= -2 , C-1= 7-3+9-1+2-4= +10
🞑 C-2= 6-3+9-1 = +11, B-1= 5-1+2-4= +2
 If we assign to A-3, the cost of assigned units decrease by 2. If we assign to
cell C-1, the cost of assigned units increases by 10. If we assign to cell C-2,
the cost of assigned units will increase by 11. If we assign to cell B-1, the
cost will increase by 2. Therefore, it is better to assign to cell number A-
3. Assign and test for optimality.
 TC= 50(4) +50(8) +50(9) +200(3) +150(1) = $1800
 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.
Conti…

 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:

 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.
 Conti…

 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.
Cell evaluations for Northwest corner solution using MODI
Conti…

 The cell evaluations (improvement potentials) for each of the

unoccupied cells are determined using the relationship:

 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.
Conti…

 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.
 Conti…

 Unoccupied cells are:

🞑 A-3 = 8-0-10= -2 , C-1= 7-(-7)-4= +2
🞑 C-2= 6-(-7)-2 = +11, B-1= 5-(-1)- 4= +2
 If we assign to A-3, the cost of assigned units decrease by 2. If we assign to cell
C-1, the cost of assigned units increases by 10. If we assign to cell C-2, the cost
of assigned units will increase by 11. If we assign to cell B-1, the cost will
increase by 2. Therefore, it is better to assign to cell number A-3. Assign and
test for optimality.
 TC= 50(4) +50(8) +50(9) +200(3) +150(1)
=$1800
 SPECIAL ISSUES

 Determining if there are alternate optimal solutions.

 Dealing with problems in which supply and demand are not equal.
 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.
Conti…

 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 steppingstone
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
 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.
Conti…

 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.
Conti…

 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.
Conti…

 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.
Conti…

Solution using the Dummy Origin

 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.
 Conti…

 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.
Conti…

 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. The payoff Table is shown below
To:
Project #1 Project #2 Project #3 Supply
From:

5 7 1 100
Farm A
4 8 0
Farm B 200
2 3 6
Farm C 200

De m a nd 50 150 300 500

 ASSIGNMENT PROBLEMS

 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

for performing different jobs and, therefore, the costs of performing
the jobs by different people are different.
Conti…

 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).
Example 1

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.
Example 2

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.
 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.
• Loading criteria must be clearly specified such as “ minimizing
operating time or “ maximizing profit”, or “ minimizing production cost” or
minimizing production cycle time etc.
 Conti…

2. 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).
 Conti…

 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)
 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.
Conti…
 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.

 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:
 Conti…

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).
 Conti…

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.
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.
 Conti…

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 is 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, which is
indicative of the fact that the particular job and person are no more
available.
Conti…

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.
Conti…

d) Repeat steps (a) through (c) until all assignments are made.

e) Determine the total cost with reference to the original cost table.
Conti…

 Example 1: Solve the assignment problem given in Illustrative

Example 1 for optimal solution using HAM. The information is
reproduced in the following table
Solution

 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.
Conti…

 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.
Conti…

 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.
 Conti…

 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.
Conti…

 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.
Conti…

 Example 2: Using the following cost matrix, determine (a)

optimal assignment, and (b) the cost of assignments.
Conti…

Iteration 1: Obtain row reductions.

Conti…

 Iteration 2: Obtain column reductions minimum and draw the number

of lines to cover all zeros.
 Conti…

 Since the number of lines covering all zeros is less than the number of
columns/rows, we modify the Table 3. 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.
Conti…
Conti…

 The optimal assignments can be made as the least number of lines

covering all zeros in Iteration 3 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.
Conti…

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
 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.
 Conti…

 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.
 Conti…

 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.

Conti…

 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.
 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.
 Conti…

 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 an assignment,
Conti…

 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.
Conti…

 Now we can derive the reduced cost table as shown in table in the next
power point.
 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
Conti…

Job
J1 J2 J3 J4 J5
P1 9 0 M 6 3
P2 15 8 9 0 1
P3 4 1 4 M 0
person

P4 2 8 0 0X
P5 0 0X 0X 07 0
dummy X
 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
 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.
Conti…

 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.
Conti…

 Example: Solve the following assignment problem and obtain

the minimum cost at which all the jobs can be performed.

 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.
Conti…

 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.
Conti…
 Conti…
 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.
Conti…

 The solution given in the reduced 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.
Conti…

 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.
 Conti…

 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.
Conti…
 To conclude, the problem has two optimal solutions as given below.
 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.
Conti…

 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).
Conti…
 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?
Conti…

 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.
Conti…

 Step 1: Subtract value in each row from every value in the row. The
resulting values are given in table below.
Conti…

 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)

 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.
Conti…

Steps 3, 4, 5: Find improved solution. Test for optimality and make

assignments.
 Conti…

 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-D4; or

S1-D2, S2-D5, S3-D1, S4-D4, S5-D3; or

S1-D2, S2-D1, S3-D5, S4-D4, S5-D4

 Each of these assignment patterns would lead to expected aggregated
sales equal to 231thousand birr.
 Chapter Four
Decision Theory

 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 conditions of uncertainty.
Conti…

 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).
 Characteristics of Decision Theory

1. List of alternatives: are a set of mutually exclusive and

collectively exhaustive decisions that are available to the decision
maker.
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.
3. Payoffs: the payoffs might be profits, revenues, costs, or other
measures of value.
Conti…

4. Degree of certainty: the approach often used by a decision maker

depends on the degree of certainty that exists.

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.
 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:

 Conti…

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 making under certainty

 When a decision is made under conditions of complete certainty,

the 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.
Conti…

Example:
 The following payoff table provides data about profits of the
various states of nature/alternative combination.

 If we know that S2 will occur, the decision maker then can focus on
the first raw of the payoff table.
 Decision: A1 has the largest profit (16), it would be selected.
 Decision-Making under Uncertainty

 No information is available on how likely the various states of nature

are under those conditions.
 Five possible decision criteria are

1) Maximax,

2) Maximin,

3) Laplace,

4) Minimax regret and

5) Hurwicz
Conti…
 Maximax: the decision maker selects the decision that will result in
the maximum of the maximum payoffs. It is an optimistic
approach.

 Maximin: 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. It is a pessimistic
approach.
Conti…

 Laplace: Determine the average pay-off for each alternative, and

choose the alternative with the best average. The Laplace
approach treats the states of nature as equally likely.

 Minimax regret: Determine the worst regret for

alternative, and choose the alternative with worst.”
each the

“best
 Conti…

Example1: Referring to the pay-off table, determinewhich alternative would

be chosen under each of these strategies:
(a) Maximax, (c) Laplace
(b) Maximin, (d) Minimax regret
Possible future profit
Alternatives S1 S2 S3
A1 4 16 12
A2 5 6 10
A3 -1 4 15
1. Maximax criteria

 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.
2. Maximin Criteria

 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.
3. For the Laplace criterion

 First find the row totals, and then divide each of those amounts
by the number of states of nature (three in this case). Then
Raw total Raw average

A1 32 10.67

A2 21 7

A3 18 6
 The A1 has the highest average and therefore choose A1.
 4. Minimax regret

 First step to prepare a table of opportunity losses, or regrets. To do this, subtract

every pay-off in each column from the best pay-off in that column.
 For instance, in the first column, the best pay-off is 5, so each of the three
numbers in that column must be subtracted from 5. Going down the column,
the regrets will be 5 – 4 =1, 5 – 5 = 0, and 5 – (– 1) = 6.
 In the second column, the best pay-off is 16. Subtracting each pay-off from 16
yields 0, 10, and 12.
 In the third column, 15 is the best pay-off. The regrets are 3, 5, and 0.
Conti…

 The second step is to identify the worst regret for each alternative. For the first
alternative, the worst is 3; for the second, the worst is 10; and for the third,
the worst is 12. The best of these worst regrets would be chosen using
Minimax regret. The lowest regret is 3.
 Decision: A1 is the best and selected.
5. The Hurwitz Criterion

 The Hurwitz 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 Hurwitz criterion, the decision payoffs are weighted by a coefficient
of optimism, a measure of a decision maker’s optimism.
Conti…

 The coefficient of optimism, which is defined as α, is between

zero and one (0< α<1). If α = 1, then the decision maker is said to
be completely optimistic, if α= 0, then the decision maker is
completely pessimistic. Given this definition, if α is coefficient of
optimism, 1- α is coefficient of pessimism.
 The Hurwitz criterion requires that for each alternative, the
maximum payoff is multiplied by α and the minimum payoff
be multiplied by 1- α.
 Conti…

 Example: If α = 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 this criterion is the fact that α must be determined by the
decision maker. Regardless of how the decision maker determines α, it is
still a completely a subjective measure of the decision maker’s degree of
optimism. Therefore, this criterion is a completely subjective decision making
criterion.
 DECISION MAKING UNDER RISK (WITH PROBABILITIES)

 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.
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.
 Example:
 Conti…

Solution: For each state of nature by the pay-off for that state of nature

and summing them:

 EV A1 = 0.20 (4) + 0.50 (16) + 0.30 (12) = 12.4

 EV A2 = 0.20 (5) + 0.50 (6) + 0.30 (10) = 7

 EV A3 = 0.20 (–1) + 0.50 (4) + 0.30 (15) = 6.3

Decision: A1 will be chosen

 Expected Opportunity Loss (EOL)

 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
Expected value of perfect information (EVPI)

 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
Conti…

 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.
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
 Conti…

 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)
• The lines (branches) emanating from squares represent
alternatives.
• The lines from circles represent states of nature.
 The tree is read from right to left.
 Conti…

 In solving decision tree problems, we work from the end of the tree
backward to the start of the tree.
 As we work back, we calculate the expected values at each step. In
calculating the expected value, the time value of money is important.
 Once the calculations are made, we prune the tree by eliminating
from each decision point all branches except the one with the highest
payoff. This process continues to the first decision point, and the
decision problem is thereby solved.
 Procedure for drawing a Decision Tree

 Draw a decision tree from left to right. Use squares to indicate

decisions and circles to indicate chance events.
 Write the probability of each chance event in parentheses.
 Write out the outcome for each alternative in the right margin.
 The procedure for solving a decision tree is:
• To solve a decision tree, work from right to left. At each circle
representing chance events, compute the expected value (EV).
• Write the EV’s below each circle.
• Select the alternative with the highest EV.
 Example 1

 A glass factory specializing in crystal is experiencing a substantial

backlog, and the firm's management is considering three courses of
action:
A) Arrange for subcontracting
B) Construct new facilities
C) Do nothing (no change)

 The correct choice depends largely upon demand, which may be low,
medium, or high. By consensus, management estimates the respective
 Conti…

 The management also estimates the profits when choosing from the three
alternatives (A, B, and C) under the differing probable levels of
demand. These profits, in thousands of birr are presented in the table
below:
0.1 0.5 0.4
Low Medium High
A 10 50 90
B -120 25 200
C 20 40 60
Step 1. We start by drawing the three decisions

A
B

C
Step 2. Add our possible states of nature, probabilities, and
payoffs

High demand (0.4) Br 90

Medium demand (0.5) Br 50
Low demand (0.1) Br 10

A High demand (0.4) Br 200

B Medium demand (0.5) Br 25
Low demand (0.1) -Br120
C
High demand (0.4) Br 60
Medium demand (0.5) Br 40
Low demand (0.1) Br 20
Step 3. Determine the expected value of each decision
Conti…
Conti…
Step 4. Make decision
Example 2
Step 1. We start by drawing the three decisions
Step 2. Add our possible states of nature, probabilities, and payoffs
Step 3. Determine the expected value of each decision

Good economic conditions (0.6) Br 50,000

Br 42,000
Poor economic conditions (0.4) Br 30,000
A
EVA=0.6(50,000)+0.4(30,000)=Br
42,000
Conti…

Good economic conditions (0.6) Br 100,000

Br 44,000
Poor economic conditions (0.4) Br -40,000
O
EVO = 0.6(100,000) + 0.4(-40,000) = Br 44,000
Conti…

Good economic conditions (0.6) Br 30,000

Br 22,000

Poor economic conditions (0.4) Br 10,000

W
EVW=0.6(30,000)+0.4(10,000)=Br 22,000
 Step 4. Make decision

Good economic conditions (0.6) Br 50,000

Br 42,000 Poor economic conditions (0.4) Br 30,000

A

Br 44,000 Good economic conditions (0.6) Br 100,000

O
Poor economic conditions (0.4) -Br 40,000
W
Good economic conditions (0.6) Br 30,000
Br 22,000
Poor economic conditions (0.4) Br 10,000

Alternative O that is office building generates the greatest expected

profit, so our choice is to purchase office building
END OF CHAPTER
FOUR