Quantitative Analysis for Management

Thirteenth Edition, Global Edition

Chapter 1
Introduction to
Quantitative
Analysis

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Introduction
• Mathematical tools have been used for thousands
of years
• Quantitative analysis can be applied to a wide
variety of problems
– Not enough to just know the
mathematics of a technique
– Must understand the specific applicability
of the technique, its limitations, and
assumptions
– Successful use of quantitative techniques
usually results in a solution that is timely,
accurate, flexible, economical, reliable, and
easy to understand
Copyright ©and useEducation, Ltd. All Rights Reserved
2018 Pearson
Examples of Quantitative Analyses
• Taco Bell saved over $150 million using
forecasting and employee scheduling
quantitative analysis models
• NBC television increased revenues by over $200
million by using quantitative analysis to develop
better sales plans for advertisers
• Continental Airlines saved over $40 million every
year using quantitative analysis models to quickly
recover from weather delays and other disruptions

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

What is Quantitative Analysis? (1 of 4)
Quantitative analysis is a scientific approach to
managerial decision making in which raw data are
processed and manipulated to produce meaningful
information

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

What is Quantitative Analysis? (2 of 4)
• Quantitative factors are data that can be
accurately calculated
– Different investment alternatives
– Interest rates
– Financial ratios
– Cash flows and rates of return
– Flow of materials through a supply chain

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

What is Quantitative Analysis? (3 of 4)
• Qualitative factors are more difficult to quantify but
affect the decision process
– The weather
– State and federal legislation
– Technological breakthroughs
– The outcome of an election

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

What is Quantitative Analysis? (4 of 4)
• Quantitative and qualitative factors may have
different roles
• Decisions based on quantitative data can be
automated
• Generally quantitative analysis will aid the decision-
making process
• Important in many areas of management
– Production/Operations Management
– Supply Chain Management
– Business Analytics

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The Quantitative Analysis Approach
FIGURE 1.1 The
Quantitative Analysis
Approach

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Defining the Problem
• Develop a clear and concise statement of the
problem to provide direction and meaning
– This may be the most important and difficult
step
– Go beyond symptoms and identify true causes
– Concentrate on only a few of the problems –
selecting
the right problems is very important
– Specific and measurable objectives may have
to be developed

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing a Model (1 of 2)
• Models are realistic,
solvable, and
understandable
mathematical
representations of a
situation

• Different types of models

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing a Model (2 of 2)
• Mathematical model – a set of mathematical
relationships
• Models generally contain variables and parameters
– Controllable variables, decision variables, are
generally unknown
 How many items should be ordered for
inventory?
– Parameters are known quantities that are a
part of the model
 What is the cost of placing an order?
• Required input data must be available

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Acquiring Input Data
• Input data must be accurate – GIGO rule
• Data may come from a variety of sources –
company reports, documents, employee
interviews, direct measurement, or statistical
sampling

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing a Solution
• Manipulating the model to arrive at the best
(optimal) solution
• Common techniques are
– Solving equations
– Trial and error – trying various approaches
and picking
the best result
– Complete enumeration – trying all possible
values
– Using an algorithm – a series of repeating
steps to reach a solution

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Testing the Solution
• Both input data and the model should be
tested for accuracy and completeness
before analysis and implementation
– New data can be collected to test the
model
– Results should be logical, consistent, and
represent the real situation

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Analyzing the Results
• Determine the implications of the solution
– Implementing results often requires
change in an organization
– The impact of actions or changes needs to be
studied and understood before implementation
• Sensitivity analysis, postoptimality analysis,
determines how much the results will change if the
model or input data changes
– Sensitive models should be very thoroughly
tested

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Implementing the Results
• Implementation incorporates the solution into the
company
– Implementation can be very difficult
– People may be resistant to changes
– Many quantitative analysis efforts have failed
because a good, workable solution was not
properly implemented
• Changes occur over time, so even
successful implementations must be
monitored to determine if modifications are
necessary

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Modeling in the Real World
• Quantitative analysis models are used extensively
by real organizations to solve real problems
– In the real world, quantitative analysis models
can be complex, expensive, and difficult to
sell
– Following the steps in the process is an
important component of success

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

How to Develop a Quantitative Analysis
Model (1 of 3)
A mathematical model of profit:

Profit = Revenue − Expenses

• Revenue and expenses can be expressed in

different
ways

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

How to Develop a Quantitative Analysis
Model (2 of 3)
Profit = Revenue − (Fixed cost + Variable cost)
Profit = (Selling price per unit)(Number of units
sold) −
[Fixed cost + (Variable costs per unit)
(Number of units sold)]
Profit = sX − [f + vX]
Profit = sX − f − vX

where
s = selling price per unit v = variable
cost per unit
f = fixed cost X=
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
How to Develop a Quantitative Analysis
Model (3 of 3)
Profit = Revenue Fixed cost + Variable cost)
− ( The parameters of this
Profit = (Selling per unit)(Number
model of units
are f, v, and s as
price [Fixed cost sold)
these− are
(Variable costs per
the inputs
+ units inherent in the
unit)(Number of model.
sold)]
The decision variable of
Profit = sX − [f + interest is X.
vX]
Profit where
= sX − f −
vX
s = selling price per unit v = variable cost
per unit
f = fixed cost X = number of
units sold Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Pritchett’s Precious Time Pieces (1 of 3)
• The company buys, sells, and repairs old clocks
– Rebuilt springs sell for $8 per unit
– Fixed cost of equipment to build springs is
$1,000
– Variable cost for spring material is $3 per unit
s=8 f = 1,000 v=3
Number of spring sets sold = X
Profits = $8X − $1,000 − $3X
If sales = 0, profits = − f = − $1,000
If sales = 1,000, profits = [($8)(1,000) − $1,000 −
($3)(1,000)]
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
= $4,000
Pritchett’s Precious Time Pieces (2 of 3)
• Companies are often interested in the break-even
point (BEP), the BEP is the number of units sold
that will result in $0 profit
0 = sX − f − vX, or 0 =
(s − v)X − f
Solving for X, we have
f = (s −
v)X X =
f÷(s − v)
Fixed
BEP
cost
(Selling price per unit)  (Variable cost
=
per unit)
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Pritchett’s Precious Time Pieces (3 of 3)

BEP for Pritchett’s Precious Time

Pieces BEP = $1,000÷($8 − $3) =
200 units
• Sales of less than 200 units of rebuilt
springs will result in a loss
• Sales of over 200 units of rebuilt springs will
result in a profit

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Advantages of Mathematical Modeling
1. Models can accurately represent reality.
2. Models can help a decision maker formulate
problems.
3. Models can give us insight and information.
4. Models can save time and money in decision
making and problem solving.
5. A model may be the only way to solve large or
complex problems in a timely fashion.
6. A model can be used to communicate
problems and solutions to others.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Models Categorized by Risk
• Mathematical models that do not involve risk or
chance are called deterministic models
– All of the values used in the model are
known with complete certainty
• Mathematical models that involve risk or
chance are called
probabilistic models
– Values used in the model are estimates
based on probabilities

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Possible Problems in the Quantitative
Analysis Approach (1 of 2)
• Defining the problem
– Problems may not be easily
identified
– Conflicting viewpoints
– Impact on other departments
– Beginning assumptions
– Solution outdated
• Developing a model
– Fitting the textbook models
– Understanding the model

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Possible Problems in the Quantitative
Analysis Approach (2 of 2)
• Acquiring accurate input data
– Using accounting data
– Validity of the data
• Developing a solution
– Hard-to-understand mathematics
– Only one answer is limiting
• Testing the solution
 Solutions not always intuitively
obvious
• Analyzing the results
 How will it affect the total
organizationCopyright © 2018 Pearson Education, Ltd. All Rights Reserved
Implementation – Not Just the Final Step (1 of
2)

• Lack of commitment and resistance to

change – Fear formal analysis
processes will reduce
management’s decision-making
power
– Fear previous intuitive decisions
exposed as inadequate
– Uncomfortable with new thinking
patterns
– Action-oriented managers may want “quick
and dirty” techniques
– Management support and user involvement
are Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Implementation – Not Just the Final Step (2 of
2)

• Lack of commitment by quantitative analysts

– Analysts should be involved with the problem
and care about the solution
– Analysts should work with users and take their
feelings into account

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Quantitative Analysis for Management
Thirteenth Edition, Global Edition

Chapter 3
Decision
Analysis

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Introduction
• The success or failure that a person experiences
in life depend on the decisions that he or she
makes.
• What is involved in making a good decision?
• Decision theory is an analytic and systematic
approach to
the study of decision making.
• A good decision is one that is based on logic,
considers all available data and possible
alternatives, and the quantitative approach
described here.
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
The Six Steps in Decision Making
1. Clearly define the problem at hand

2. List the possible alternatives

3. Identify the possible outcomes or states of

nature

4. List the payoff (typically profit) of each

combination of alternatives and outcomes

5. Select one of the mathematical decision

theory models

6. Apply the model and make your decision

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Thompson Lumber Company (1 of 3)
• Step 1 – Define the problem
• The company is Considering expanding
by manufacturing and marketing a new
product – backyard storage sheds
• Step 2 – List alternatives
• Construct a large new plant
• Construct a small new plant
• Do not develop the new product line
• Step 3 – Identify possible outcomes, states of
nature
• The market could be favorable or
unfavorable
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Thompson Lumber Company (2 of 3)
• Step 4 – List the payoffs
• Identify conditional values for the
profits for large plant, small plant, and
no development for the two possible
market conditions

• Step 5 – Select the decision model

• Depends on the environment and
amount of
risk and uncertainty

• Step 6 – Apply the model to the data

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Thompson Lumber Company (3 of 3)
TABLE 3.1 Decision Table with Conditional
Values for Thompson Lumber

STATE OF NATURE
FAVORABLE UNFAVORABLE
MARKET MARKET
ALTERNATIVE ($) ($)

Construct a large 200,000 −180,000

plant
Construct a small 100,000 −20,000
plant
Do nothing 0 0
Note: It is important to include all alternatives,
including “do
nothing.”
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Types of Decision-Making Environments
• Decision making under certainty
– The decision maker knows with certainty the
consequences of every alternative or
decision choice

• Decision making under uncertainty

– The decision maker does not know the
probabilities of the various outcomes

• Decision making under risk

– The decision maker knows the probabilities
of the various outcomes

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Decision Making Under Uncertainty
• Criteria for making decisions under
uncertainty

1. Maximax (optimistic)
2. Maximin (pessimistic)
3. Criterion of realism (Hurwicz)
4. Equally likely (Laplace)
5. Minimax regret

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Optimistic
• Used to find the alternative that maximizes the
maximum payoff – maximax criterion
– Locate the maximum payoff for each
alternative
– Select the alternative with the maximum
number
STATE OF NATURE
TABLE 3.2 Thompson’s Maximax
FAVORABLE Decision
UNFAVORABLE MAXIMUM IN
MARKET MARKET A ROW
ALTERNATIVE ($) ($) ($)
Construct a large 200,000 −180,000 200,000
plant
Maximax
Construct a small 100,000 −20,000 100,000
plant
Do nothing 0 © 2018 Pearson Education,
Copyright 0 0
Ltd. All Rights Reserved
Pessimistic
• Used to find the alternative that maximizes the
minimum payoff – maximin criterion
– Locate the minimum payoff for each
alternative
– Select the alternative with the maximum
number
STATE OF NATURE
TABLE 3.3 Thompson’s Maximin
FAVORABLE Decision
UNFAVORABLE MAXIMUM IN
MARKET MARKET A ROW
ALTERNATIVE ($) ($) ($)
Construct a large 200,000 −180,000 −180,000
plant
Construct a small 100,000 −20,000 −20,000
plant
Do nothing 0 0 0
Maximi
n
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Criterion of Realism (Hurwicz) (1 of 2)
• Often called weighted average
– Compromise between optimism and
pessimism
– Select a coefficient of realism α, with 0 ≤ α ≤
1
α = 1 is
perfectly optimistic
α = 0 is
Weighted perfectly pessimistic
α(best in row)
–average
Compute = the weighted averages for each
+ (1−α)(worst in
alternative
row)
– Select the alternative with the highest value
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Criterion of Realism (Hurwicz) (2 of 2)
For the large plant alternative using α = 0.8
(0.8)(200,000) + (1−0.8)(−180,000) =
124,000
For the small plant alternative using α = 0.8
(0.8)(100,000) + (1−0.8)(−20,000) = 76,000
TABLE 3.4 Thompson’s Criterion
STATE OF NATUREof Realism
Decision FAVORABLE UNFAVORABLE CRITERION OF REALISM
MARKET MARKET OR WEIGHTED AVERAGE
ALTERNATIVE ($) ($) (α = 0.8) ($)
Construct a large 200,000 −180,000 124,000
plant
Realism
Construct a small 100,000 −20,000 76,000
plant
Do nothing 0
Copyright 0 Education, Ltd. All Rights Reserved
© 2018 Pearson 0
Equally Likely (Laplace)
• Considers all the payoffs for each
alternative
– Find the average payoff for each
alternative
– Select the alternative with the highest
average
STATE OF NATURE
TABLE 3.5 Thompson’s
FAVORABLE Equally Likely
UNFAVORABLE

Decision MARKET MARKET ROW AVERAGE

ALTERNATIVE ($) ($) ($)
Construct a large 200,000 −180,000 10,000
plant
Construct a small 100,000 −20,000 40,000
plant
Equally likely
Do nothing 0
Copyright 0 Education, Ltd. All Rights Reserved
© 2018 Pearson 0
Minimax Regret (1 of 4)
• Based on opportunity loss or regret
– The difference between the optimal profit
and actual payoff for a decision
1. Create an opportunity loss table by
determining the opportunity loss from not
choosing the best alternative
2. Calculate opportunity loss by subtracting
each payoff in the column from the best
payoff in the column
3. Find the maximum opportunity loss
for each alternative and pick the
alternative with the minimum number
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Minimax Regret (2 of 4)
TABLE 3.6 Determining Opportunity Losses for
Thompson Lumber

STATE OF NATURE
FAVORABLE UNFAVORABLE
MARKET MARKET
($) ($)
200,000 − 0−
200,000 (−180,000)
200,000 − 0−
100,000 (−20,000)
200,000 − 0Copyright © 2018 Pearson
0 Education,
− 0 Ltd. All Rights Reserved
Minimax Regret (3 of 4)
TABLE 3.7 Opportunity Loss Table for Thompson
Lumber

STATE OF UNFAVORABLE
FAVORABLE NATURE
MARKET MARKET
ALTERNATIVE ($) ($)
Construct a large 0 180,000
plant
Construct a small 100,000 20,000
plant
Do nothing 200,000 0
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Minimax Regret (4 of 4)
TABLE 3.8 Thompson’s Minimax Decision
Using Opportunity Loss

STATE OF NATURE
FAVORABLE UNFAVORABLE MAXIMUM IN
MARKET MARKET A ROW
ALTERNATIVE ($) ($) ($)
Construct a large 0 180,000 180,000
plant
Construct a small 100,000 20,000 100,000
plant
Minimax
Do nothing 200,000 0 200,000

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Decision Making Under Risk (1 of 2)
• When there are several possible states of nature
and the probabilities associated with each
possible state are known
– Most popular method – choose the alternative
with the highest expected monetary value
(EMV)
EMV  alternative

 =i
X



 i 
PX
where
Xi = payoff for the alternative in state of nature i
P(Xi) = probability of achieving payoff Xi (i.e.,
probability of
state of nature i)
∑ = summation symbol
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Decision Making Under Risk (2 of 2)
• Expanding the
equation

EMV (alternative (payoff of first state of nature)

i) = ×(probability of first state of
nature)
+ (payoff of second state of
nature)
×(probability of second state of
nature)
+ … + (payoff of last state of
nature)
×(probability
Copyright of last
© 2018 Pearson Education, Ltd. Allstate of
Rights Reserved
EMV for Thompson Lumber (1 of 2)
• Each market outcome has a probability of
occurrence of 0.50
• Which alternative would give the highest EMV?

EMV (large plant) = ($200,000)(0.5) + (−

$180,000)(0.5)
= $10,000
EMV (small plant) = ($100,000)(0.5) + (−
$20,000)(0.5)
= $40,000
EMV (do nothing) = ($0)(0.5) + ($0)
(0.5)
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
= $0
EMV for Thompson Lumber (2 of 2)
TABLE 3.9 Decision Table with Probabilities and
EMVs for Thompson Lumber

STATE OF NATURE
FAVORABLE UNFAVORABLE
MARKET MARKET
ALTERNATIVE ($) ($) EMV ($)
Construct a large 200,000 −180,000 10,000
plant
Construct a small 100,000 −20,000 40,000
plant
Best EMV
Do nothing 0 0 0
Probabilities 0.50 0.50

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Expected Value of Perfect Information
(EVPI) (1 of 6)
• EVPI places an upper bound on what you should
pay for additional information
• EVwPI is the long run average return if we have
perfect
information before a decision is made
EVwPI = ∑(best payoff in state of nature i)
(probability of state of nature i)

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Expected Value of Perfect Information
(EVPI) (2 of 6)
• Expanded EVwPI becomes
EVwPI = (best payoff for first state of nature)
× (probability of first state of
nature)
+ (best payoff for second state of
nature)
× (probability of second state of
nature)
+ … + (best payoff for last state of
nature)
× (probability of last state of nature)

And Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Expected Value of Perfect Information
(EVPI) (3 of 6)
• Scientific Marketing, Inc. offers analysis that
will provide certainty about market conditions
(favorable)
• Additional information will cost $65,000
• Should Thompson Lumber purchase the
information?

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Expected Value of Perfect Information
(EVPI) (4 of 6)
TABLE 3.10 Decision Table with Perfect
Information

STATE OF NATURE
FAVORABLE UNFAVORABLE
MARKET MARKET
ALTERNATIVE ($) ($) EMV ($)
Construct a large 200,000 −180,000 10,000
plant
Construct a small 100,000 −20,000 40,000
plant
Do nothing 0 0 0
With perfect 200,000 0 100,000
information
EVwPI
Probabilities 0.50 0.50

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Expected Value of Perfect Information
(EVPI) (5 of 6)
• The maximum EMV without additional
information is
$40,000
– Therefore

EVPI = EVwPI − Maximum EMV

= $100,000 − $40,000
= $60,000

So the maximum Thompson should pay for the

additional information is $60,000

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Expected Value of Perfect Information
(EVPI) (6 of 6)
• The maximum EMV without additional
$40,000
information is
– Thompson should not pay
Therefore $65,000 for this information

EVPI = EVwPI − Maximum

EMV
= $100,000 − $40,000
= $60,000
So the maximum Thompson should pay for the
additional information is $60,000

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Expected Opportunity Loss (1 of 2)
• Expected opportunity loss (EOL) is the cost of not
picking the best solution
– Construct an opportunity loss table
– For each alternative, multiply the opportunity
loss by the probability of that loss for
each possible outcome and add these
together
– Minimum EOL will always result in the same
decision as maximum EMV
– Minimum EOL will always equal EVPI

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Expected Opportunity Loss (2 of 2)
EOL (large plant) = (0.50)($0) + (0.50)($180,000) =
$90,000
EOL (small plant) = (0.50)($100,000) + (0.50)($20,000)
= $60,000 EOL (do nothing) = (0.50)($200,000) +
(0.50)($0) = $100,000
STATE OF NATURE

TABLE 3.11 EOL Table for Thompson

FAVORABLE UNFAVORABLE
Lumber
MARKET MARKET
ALTERNATIVE ($) ($) EOL ($)
Construct a large 0 180,000 90,000
plant
Construct a small 100,000 20,000 60,000
plant
Best EOL
Do nothing 200,000 0 100,000
Probabilities 0.50 0.50
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Sensitivity Analysis (1 of 4)
Define P = probability of a favorable market
EMV(large plant) = $200,000P − $180,000)
(1 − P)
= $200,000P − $180,000 +
$180,000P
= $380,000P − $180,000
EMV(small plant) = $100,000P − $20,000)(1
− P)
= $100,000P − $20,000 +
$20,000P
= $120,000P − $20,000
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Sensitivity Analysis (2 of 4)
FIGURE 3.1 Sensitivity
Analysis

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Sensitivity Analysis (3 of 4)
Point 1: EMV(do nothing) = EMV(small
plant)

0  $120,000P  20,000
P 120,00 
$20,000 0.167
0

Point 2: EMV(small plant) = EMV(large plant)

$120,000P $20,000 $380,000P
$180,000

P 160,000
0.615
260,000 Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Sensitivity Analysis (4 of 4)
FIGURE 3.1 Sensitivity
Analysis

BEST ALTERNATIVE RANGE OF P VALUES

Do nothing Less than 0.167
Construct a small 0.167 − 0.615
plant Construct a Greater than
0.615
large plant Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
A Minimization Example (1 of 8)
• Three year lease for a copy machine
– Which machine should be selected?

TABLE 3.12 Payoff Table with Monthly Copy

Costs for
Business Analytics Department
10,000 20,000 30,000
COPIES PER COPIES PER COPIES PER
MONTH MONTH MONTH
Machine A 950 1,050 1,150
Machine B 850 1,100 1,350
Machine C 700 1,000 1,300

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

A Minimization Example (2 of 8)
• Three year lease for a copy machine
– Which machine should be selected?

TABLE 3.13 Best and Worst Payoffs (Costs) for

Business Analytics Department

10,000 20,000 30,000 BEST WORST

COPIES PER COPIES PER COPIES PER PAYOFF PAYOFF
MONTH MONTH MONTH (MINIMUM) (MAXIMUM)
Machine A 950 1,050 1,150 950 1,150

Machine B 850 1,100 1,350 850 1,350

Machine C 700 1,000 1,300 700 1,300

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

A Minimization Example (3 of 8)
• Using Hurwicz criteria with 70% coefficient

Weighted average = 0.7(best payoff)

+ (1 − 0.7)(worst payoff)

For each machine

Machine A: 0.7(950) + 0.3(1,150) =
1,010
Machine B:
C: 0.7(850)
0.7(700) + 0.3(1,350)
0.3(1,300) =
1,000
880

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

A Minimization Example (4 of 8)
• For equally likely criteria

For each machine

Machine A: (950 + 1,050 + 1,150)÷3
= 1,050
Machine
Machine B:
C: (850
(700 +
+ 1,100
1,0ç00+
+ 1,350)÷3
1,300)÷3
=
= 1,100
1,000

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

A Minimization Example (5 of 8)
• For EMV
criteria

USAGE PROBABILITY
10,000 0.40
20,000 0.30
30,000 0.30

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

A Minimization Example (6 of 8)
• For EMV criteria

TABLE 3.14 Expected Monetary Values and

Expected Values with Perfect Information for
Business Analytics Department
10,000 20,000 30,000
COPIES PER COPIES PER COPIES PER
MONTH MONTH MONTH EMV
Machine A 950 1,050 1,150 1,040

Machine B 850 1,100 1,350 1,075

Machine C 700 1,000 1,300 970

With perfect 700 1,000 1,150 925

information

Probability 0.4 0.3 0.3

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

A Minimization Example (7 of 8)
• For EVPI

TABLE 3.14 Expected Monetary Values and ected

Exp EVwPI = $925 lytics
Values
Bestwith Perfectperfect
EMV without Information for = $970
information
Business Ana
Department EVPI = 970 − 925 = $45
EMV
Machine A 10,000 950 1,050 20,000
1,150 1,040
30,000
Machine B 850
COPIES PER 1,100 1,350 PER
COPIES 1,075
COPIES PER
Machine C 700 1,000 1,300 970
MONTH MONTH
With perfect information 700 MONTH
1,000 1,150 925

Probability 0.4 0.3 0.3

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

A Minimization Example (8 of 8)
• Opportunity loss criteria

TABLE 3.15 Opportunity Loss Table for Business

Analytics Department

20,000 30,000
10,000 COPIES
COPIES PER COPIES PER
PER MONTH
MONTH MONTH MAXIMUM EOL
Machine A 250 50 0 250 115

Machine B 150 100 200 200 150

Machine C 0 0 150 150 45

Probability 0.4 0.3 0.3

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Decision Trees
• Any problem that can be presented in a decision
table can be graphically represented in a decision
tree
– Most beneficial when a sequence of decisions
must be
made
– All decision trees contain decision points/nodes
and
state-of-nature points/nodes
– At decision nodes one of several alternatives
may be chosen
– At state-of-nature nodes one state of nature
will occur Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Five Steps of Decision Tree Analysis
1. Define the problem
2. Structure or draw the decision tree
3. Assign probabilities to the states of nature
4. Estimate payoffs for each possible
combination of alternatives and states of
nature
5. Solve the problem by computing expected
monetary
values (EMVs) for each state of nature node

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Structure of Decision Trees
• Trees start from left to right
• Trees represent decisions and outcomes in
sequential order
• Squares represent decision nodes
• Circles represent states of nature nodes
• Lines or branches connect the decisions nodes
and the
states of nature

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Thompson’s Decision Tree (1 of 2)
FIGURE 3.2 Thompson’s Decision
Tree

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Thompson’s Decision Tree (2 of 2)
FIGURE 3.3 Completed and Solved Decision
Tree for Thompson Lumber

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Thompson’s Complex Decision Tree (1 of 5)
FIGURE 3.4 Larger Decision Tree with Payoffs
and Probabilities for Thompson Lumber

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Thompson’s Complex Decision Tree (2 of 5)
1. Given favorable survey
results
EMV(node = EMV(large plant | positive
2) survey)
= (0.78)($190,000) + (0.22)(−
EMV(node $190,000)
3) = $106,400
= EMV(small plant | positive
survey)
EMV for no plant = −
= (0.78)($90,000) + (0.22)(−
$10,000
$30,000)
= $63,600
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Thompson’s Complex Decision Tree (3 of 5)
2. Given negative survey
results
EMV(node = EMV(large plant | negative
4) survey)
= (0.27)($190,000) + (0.73)(−
EMV(node $190,000)
5) = −$87,400
= EMV(small plant | negative
survey)
EMV for no plant = −
= (0.27)($90,000) + (0.73)(−
$10,000
$30,000)
= $2,400
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
 Copyright © 2012 Pearson
Education

Thompson’s Complex Decision Tree

3. Compute the expected value of the market

survey,
EMV(node 1) = EMV(conduct survey)
= (0.45)($106,400) + (0.55)($2,400)
= $47,880 + $1,320 = $49,200
4. If the market survey is not conducted,
EMV(node 6) = EMV(large plant)
= (0.50)($200,000) + (0.50)(–$180,000) =
$10,000
EMV(node 7) = EMV(small plant)
= (0.50)($100,000) + (0.50)(–$20,000) =
$40,000
EMV for no plant = $0
3-
50
5. The best choiceCopyright
is to©seek marketing
2018 Pearson Education, Ltd. All Rights Reserved
 Copyright © 2012 Pearson
Education

Thompson’s Complex Decision Tree

First Decision Second Decision Payoffs
Point Point
$106,400 Favorable Market (0.78)
$190,000
Unfavorable Market (0.22)
–$190,000

$106,40
$63,600 Favorable Market (0.78)
Small $90,000
Unfavorable Market (0.22)
Plant –$30,000
No Plant

0
–$10,000
–$87,400 Favorable Market (0.27)
$190,000
Unfavorable Market (0.73)
–$190,000
$2,400 Favorable Market (0.27)
$2,40
Small $90,000
Unfavorable Market (0.73)
Plant –$30,000
0

No Plant
–$10,000
$49,20

$10,000 Favorable Market (0.50)

$200,000
0

Unfavorable Market (0.50)

–$180,000
$40,000
$40,00

Favorable Market (0.50)

Small $100,000
Unfavorable Market (0.50)
Plant –$20,000
Figure 3.5
0

No Plant
3-51 $0
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
 3-
52

Expected Value of Sample Information

• Suppose Thompson wants to know the
actual value of doing the survey.
Expected value Expected
with sample value of best
EVSI = information, – decision
assuming no cost without
to gather it sample
= information
(EV with sample information + cost)
– (EV without sample information)

EVSI = ($49,200 + $10,000) – $40,000 = $19,200

Copyright © 2012 Pearson

Education
Quantitative Analysis for
Management
Thirteenth Edition, Global
Edition

Chapter
5
Forecasting

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

What is Forecasting?

◆ Process of predicting
a future event
◆ Underlying basis
?
of all business
decisions ?
◆ Production
◆ Inventory
◆ Personnel
◆ Facilities
 Principles of
Forecasting
Many types of forecasting models that
differ
in complexity and amount of data
they use, and the way they generate
forecasts:
1. Forecasts are rarely perfect

2. Forecasts are more accurate for

groups or family of items than for
individual items
3. Forecast are more accurate for 3
 Types of Forecasting
■ Models
Qualitative methods often called-judgmental
methods
■ Are methods in which the forecast is made

subjectively by the forecaster

■ They are educated guesses by forecasters or

experts based on intuition, knowledge, and

experience.
■ Quantitative methods – based on mathematical
modeling:
■ Are methods in which the forecast is

based on mathematical modeling

4
 Quantitative
■
Methods
Quantitative methods can be divided into two
categories:
■ Time Series Models:
■ Assumes information needed to generate a forecast is

contained in a time series of data

■ Time series: is a series of observations taken at a regular

intervals over a specified period of time

■ Assumes the future will follow same patterns as the past

■ Causal Models or Associative Models

■ Explores cause-and-effect relationships

■ Sales volume and advertising

5
 Introduction
■ Managers are always trying to reduce
uncertainty and make better estimates of what
will happen in the future.
■ This is the main purpose of forecasting.
■ Some firms use subjective methods: intuition,
experience, guessing.
■ There are also several quantitative techniques,
including:
■ Moving averages
■ Exponential smoothing
■ Trend projections
■ Least squares regression analysis

Copyright © 2012 Pearson 5-6

Education
 Introduction
■ Eight steps to forecasting:
1. Determine the use of the forecast—what
objective are we trying to obtain?
2. Select the items or quantities that are to
be forecasted.
3. Determine the time horizon of the forecast.
4. Select the forecasting model or models.
5. Gather the data needed to make the
forecast.
6. Validate the forecasting model.
7. Make the forecast.
8. Implement the results.

Copyright © 2012 Pearson 5-7

Education
 Forecasting Models
Forecasting
Techniques

Qualitative Time-Series Causal

Models Methods Methods

Delphi Moving Regression

Methods Average Analysis

Jury of Executive Exponential Multiple

Opinion Smoothing Regression

Sales Force Trend

Composite Projections
Figure
Consumer 5.1
Decomposition
Market Survey

Copyright © 2012 Pearson 5-8

Education
 Qualitative Models
■ Qualitative models incorporate
judgmental or subjective factors.
■ These are useful when subjective factors
are thought to be important or when
accurate quantitative data is difficult to
obtain.
■ Common qualitative techniques are:
■ Delphi method.
■ Jury of executive opinion.
■ Sales force composite (estimates).
■ Consumer market surveys.

Copyright © 2012 Pearson 5-9

Education
 Qualitative Models
■ Delphi Method – This is an iterative (correlated)
group process where (possibly geographically
dispersed) respondents provide input to
decision makers.
■ Jury of Executive Opinion – This method
collects opinions of a small group of high-level
managers, possibly using statistical models for
analysis.
■ Sales Force Composite (estimates) – This allows
individual salespersons estimate the sales in
their region and the data is compiled at a district
or national level.
■ Consumer Market Survey – Input is solicited
from customers or potential customers
Copyright © 2012 Pearson 5-10
Education
 Quantitative Models
■ Time-series models attempt to predict
the future based on the past.
■ Common time-series models are:
■ Moving average.
■ Exponential smoothing.
■ Trend projections.
■ Decomposition (dividing).
■ Regression analysis is used in trend
projections and one type of
decomposition model.

Copyright © 2012 Pearson 5-11

Education
 Quantitative Models
■ Causal models use variables or factors
that might influence the quantity
being forecasted.
■ The objective is to build a model with
the best statistical relationship between
the variable being forecast and the
independent variables.
■ Regression analysis is the most
common technique used in causal
modeling.

Copyright © 2012 Pearson 5-12

Education
 Scatter Diagrams
Wacker Distributors wants to forecast sales for
three different products (annual sales in the
table, in units):
YEAR TELEVISION RADIOS COMPACT DISC
SETS PLAYERS
1 250 300 110
2 250 310 100
3 250 320 120
4 250 330 140
5 250 340 170
6 250 350 150
7 250 360 160
8 250 370 190
Table 5.1 9 250 380 200
10 250 390 190
Copyright © 2012 Pearson 5-13
Education
 Scatter Diagram for TVs

(a
) 330 ■ Sales appear to be
Annual Sales of Televisions

– constant over time

● ● ● ● ● ● ● ● ● ●
250
Sales = 250
■ A good estimate of
–
sales in year 11 is
200 250 televisions
–

150 | | | |
| | | | | |
–0 1 2 3 4
5 6 7 Tim8e
100 (Y9ears1)0
Figure
5.2a –
Copyright © 2012 Pearson
5-
14
 Scatter Diagram for Radios

(b
420
) ■ Sales appear to be
–
increasing at a
400 ●
● constant rate of 10
– ●
● radios per year
Annual Sales of

380 ●
– ●
● Sales = 290 +
●
360 ● 10(Year)
●
Radios

– ■ A reasonable
34 0
| | | |
estimate of sales
| –|
| | | | in year 11 is 400
0 1 2 3 4
3206 7 Time
8 (Years)
9 10
radios.
5
–
Figure
5.2b 300
–
Copyright © 2012 Pearson 5-
Education 15
 Scatter Diagram for CD Players
■ This trend line may
(c 200 not be perfectly
)
–
● ● accurate because
●
of variation from
180
year to year
Annual Sales of CD

●
●
– ● ■ Sales appear to be
●
160 increasing
● ■ A forecast would
Players

–●
● probably be a
140
| | | |
larger figure each
|

–| 0
|
1
|
2
|
3
|
4
year
7 Tim8e
5 1206 (Y9ears1)0
Figure –
5.2c
100
Copyright © 2012 Pearson 5-
Education 16
 Measures of Forecast Accuracy

■ We compare forecasted values with actual values

to see how well one model works or to compare
models.
Forecast error = Actual value – Forecast
value
■ One measure of accuracy is the mean absolute
deviation ( M A D ) :

Copyright © 2012 Pearson 5-17

Education
 Measures of Forecast Accuracy
Using a naïve forecasting model we can compute the MAD:
ACTUAL
SALES OF
ABSOLUTE VALUE OF
CD FORECAST ERRORS (DEVIATION),
YEAR PLAYERS SALES (ACTUAL – FORECAST)
1 110 — —
2 100 110 |100 – 110| = 10
3 120 100 |120 – 110| = 20
4 140 120 |140 – 120| = 20
5 170 140 |170 – 140| = 30
6 150 170 |150 – 170| = 20
7 160 150 |160 – 150| = 10
8 190 160 |190 – 160| = 30
9 200 190 |200 – 190| = 10
10 190 200 |190 – 200| = 10
Table 5.2
11 — 190 —
Sum of |errors| = 160

MAD = 160/9 = 17.8

Copyright © 2012 Pearson 5-18
Education
 Measures of Forecast Accuracy
Using a naïve forecasting model we can compute the MAD:
ACTUAL ABSOLUTE VALUE OF
SALES OF CD FORECAST ERRORS (DEVIATION),
YEAR PLAYERS SALES (ACTUAL – FORECAST)
1 110 — —
2 100 110 |100 – 110| = 10
3 120 100 |120 – 110| = 20
4 140 120 |140 – 120| = 20
5 170 140 |170 – 140| = 30
6 150 170 |150 – 170| = 20
7 160 150 |160 – 150| = 10
– 160| = 30
8 190 160 |190
9 200 190 |200 – 190| = 10

10 190 200 |190 – 200| = 10

11 — 190 —
Sum of |errors| = 160

MAD = 160/9 = 17.8

Copyright © 2012 Pearson 5-
Education Table 5.2 19
 Measures of Forecast Accuracy
■ There are other popular measures of forecast
accuracy.
■ The mean squared error:

■ The mean absolute percent error:

■ And bias is the average error.

Copyright © 2012 Pearson 5-20

Education
 Time-Series Forecasting Models

■ A time series is a sequence of evenly

spaced events.
■ Time-series forecasts predict the future
based solely on the past values of the
variable, and other variables are
ignored.

Copyright © 2012 Pearson 5-21

Education
 Components of a Time-Series

A time series typically has four components:

1. Trend (T) is the gradual upward or
downward movement of the data over time.
2. Seasonality (S) is a pattern of demand
fluctuations above or below the trend line
that repeats at regular intervals.
3. Cycles (C) are patterns in annual data
that occur every several years.
4. Random variations (R) are “blips” in the
data caused by chance or unusual
situations, and follow no discernible
pattern.

Copyright © 2012 Pearson 5-22

Education
 Decomposition of a Time-Series
Product Demand Charted over 4 Years, with Trend
and Seasonality Indicated

Trend
Component
Demand for Product or

Seasonal
Peaks
Service

Actual
Demand
Line
Average Demand
over 4 Years

| | | |

Figure Year Year Year

5.3 Year
1 2 3 4 Tim
Copyright © 2012 Pearson e 5-
Education 23
 Moving Averages

■ Moving averages can be used when

demand is relatively steady over time.
■ The next forecast is the average of the
most recent n data values from the
time series.
■ This methods tends to smooth out short-
term irregularities in the data series.

Copyright © 2012 Pearson 5-24

Education
 Moving Averages
■ Mathematically:

Where:
= forecast for time period t + 1
= actual value in time period t
n = number of periods to
average

Copyright © 2012 Pearson 5-25

Education
 Wallace Garden Supply

■ Wallace Garden Supply wants to

forecast demand for its Storage Shed.
■ They have collected data for the past
year.
■ They are using a three-month moving
average to forecast demand (n = 3).

Copyright © 2012 Pearson 5-26

Education
 Wallace Garden Supply

MONTH ACTUAL SHED SALES THREE-MONTH MOVING AVERAGE

January 10
February 12
March 13
(10 + 12 + 13)/3 = 11.67
April 16
(12 + 13 + 16)/3 = 13.67
May 19
(13 + 16 + 19)/3 = 16.00
June 23 (16 + 19 + 23)/3 = 19.33
July 26 (19 + 23 + 26)/3 = 22.67
August 30 (23 + 26 + 30)/3 = 26.33
(26 + 30 + 28)/3 = 28.00
September 28
(30 + 28 + 18)/3 = 25.33
October 18
(28 + 18 + 16)/3 = 20.67
November 16 (18 + 16 + 14)/3 = 16.00
December 14
Table 5.3
Copyright ©
— 5-
27
 Weighted Moving Averages
■ Weighted moving averages use weights to put
more emphasis on previous periods.
■ This is often used when a trend or other pattern
is emerging.

■ Mathematically:

where
wi = weight for the i t h
Copyright © 2012 Pearson
observation 5-28
Education
 Wallace Garden Supply

■ Wallace Garden Supply decides to try a

weighted moving average model to forecast
demand for its Storage Shed.
■ They decide on the following weighting
scheme:
WEIGHTS APPLIED
3 Last month
PERIOD
2 Two months ago
1

Three months
3 x Sales last month + 2 x Sales two months ago + 1 XaSgaoles three months
ago 6 Sum of the
weights
Copyright © 2012 Pearson 5-29
Education
 Wallace Garden Supply
THREE-MONTH WEIGHTED
MONTH ACTUAL SHED SALES MOVING AVERAGE
January 10
February 12
March 13
[(3 X 13) + (2 X 12) + (10)]/6 = 12.17
April 16
[(3 X 16) + (2 X 13) + (12)]/6 = 14.33
May 19
[(3 X 19) + (2 X 16) + (13)]/6 = 17.00
June 23 [(3 X 23) + (2 X 19) + (16)]/6 = 20.50
July 26 [(3 X 26) + (2 X 23) + (19)]/6 = 23.83
August 30 [(3 X 30) + (2 X 26) + (23)]/6 = 27.50
[(3 X 28) + (2 X 30) + (26)]/6 = 28.33
September 28
[(3 X 18) + (2 X 28) + (30)]/6 = 23.33
October 18
[(3 X 16) + (2 X 18) + (28)]/6 = 18.67
November 16 [(3 X 14) + (2 X 16) + (18)]/6 = 15.33
14
DeTcaebml
— 5-
30
 Exponential Smoothing
■ Exponential smoothing is a type of moving
average that is easy to use and requires little
record keeping of data.

New forecast = Last period’s forecast

+ α(Last period’s actual demand
– Last period’s forecast)

Here α is a weight (or smoothing constant)

in which 0≤α≤1.

Copyright © 2012 Pearson 5-31

Education
 Exponential Smoothing
Mathematically:

Where:
F t + 1 = new forecast (for time period t +
1) F t = pervious forecast (for time
period t) α = smoothing constant (0 ≤ α
≤ 1)
Yt = pervious period’s actual
demand

The idea is simple – the new estimate is the

old estimate plus some fraction of the error in
the last period.
Copyright © 2012 Pearson
Education
5-32
 Exponential Smoothing Example
■ In January, February’s demand for a certain
car model was predicted to be 142.
■ Actual February demand was 153 autos
■ Using a smoothing constant of α = 0.20, what
is the forecast for March?

New forecast (for March demand) = 142 + 0.2(153 – 142)

= 144.2 or 144 autos

■ If actual demand in March was 136 autos, the

April forecast would be:
New forecast (for April demand) = 144.2 + 0.2(136 –
144.2)
= 142.6 or 143 autos
Copyright © 2012 Pearson 5-33
Education
 Selecting the Smoothing Constant

■ Selecting the appropriate value for α is

key to obtaining a good forecast.
■ The objective is always to generate an
accurate forecast.
■ The general approach is to develop trial
forecasts with different values of α and
select the α that results in the lowest
MAD.

Copyright © 2012 Pearson 5-34

Education
 Exponential Smoothing
Port of Baltimore Exponential Smoothing Forecast
for α=0.1 and α=0.5.
ACTUAL
TONNAGE FORECAST FORECAST
QUARTER UNLOADED USING α =0.10 USING α =0.50
1 180 175 175
2 168 175.5 = 175.00 + 0.10(180 – 175) 177.5
3 159 174.75 = 175.50 + 0.10(168 – 175.50) 172.75
4 175 173.18 = 174.75 + 0.10(159 – 174.75) 165.88
5 190 173.36 = 173.18 + 0.10(175 – 173.18) 170.44
6 205 175.02 = 173.36 + 0.10(190 – 173.36) 180.22
7 180 178.02 = 175.02 + 0.10(205 – 175.02) 192.61
8 182 178.22 = 178.02 + 0.10(180 – 178.02) 186.30
9 ? 178.60 = 178.22 + 0.10(182 – 178.22) 184.15
Copyright © 2012 Pearson 5-
Education Table 5.5 35
 Exponential Smoothing
Absolute Deviations and MADs for the Port of
Baltimore Example
ABSOLUTE
ACTUAL FORECAST DEVIATIONS ABSOLUTE
TONNAGE WITH α = FOR α = DEVIATIONS
QUARTE 0.10 FOR α = 0.50
R FORECAS
1 180 175 T 175
5 0.10 5
UNLOADE
2 D 168 175.5
WITH α 177.5
7.5 9.5
= 0.50
3 159 174.75 172.75
15.75 13.75

4 175 173.18 165.88

1.82 9.12

5 190 173.36 170.44

16.64 19.56

6 205 175.02 180.22

29.98 24.78

7 180 178.02 192.61

Table 5.6 1.98 12.61
Copyright © 2012 Pear 8son Education 182 Best 178.22 186.30 5-
3.78 4.3 36
 Correlation

◆ How strong is the linear

relationship between the
variables?
◆ Correlation does not necessarily
imply causality!
◆ Coefficient of correlation,r ,
measures degree of association
◆ Values range from -1 to +1
Correlation
Coefficient

n Σxy - Σx Σy
r
[n Σx 2
- (Σx )2][n
=
Σy 2 -
(yΣ
)2]
 Correlation
Coefficient
y y

(b) x
(a) Perfect x Positive
positive correlation:
correlation: 0<r<1
y
r = +1 y

(d) Perfect x
(c) No correlation: x negative
r=0 correlation:
r = -1
 Correlation

◆ Coefficient of Determination, r
2
,
measures the percent of
change iny predicted by the
change inx
◆ Values range from 0 to 1
◆ Easy to interpret
For the Nodel
Construction example:
Common Measures of
Error
Mean Absolute
Deviation
(MAD) ∑ |Actual
MA -
D
= nForecast|
Mean Squared
Error
(MSE ∑
)
(Forecast
MSE
nErrors)2
=
Comparison of Forecast
ErrorRounded Absolute
Absolute Actual Forecast
Rounded
Deviation
Forecast Deviation Tonnage with for
with
Quarter Unloaded for= .10 α = .10 α = .50 α
α
= .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
Comparison of st
∑
Foreca
MA | Error
Absolute
Deviation
= Rounded Absolute
D deviations| = .50
For α
Rounded Actual Forecast
Deviation Forecast Tonnage
= with forn with for
Quarter Unloaded α = .10 α = .10 α
.10
= .50 = 82.45/8
α
For
1 α = = 180 175 5.00 175
.5
10.31 = 98.62/8
5.00
02 168 175.5
12.33
= 7.50
177.50 9.50 186.30 4.30
8 182 178.22 3.78
3 159 174.75 15.75
82.45 98.62
172.75 13.75
4 175 173.18 1.82
165.88 9.12
5 190 173.36 16.64
Quantitative
Analysis for
TMh rateenntah Egdeitiomn,
Gelonbatl Edition

Chapter 7
Linear Programming
Models: Graphical and
Computer Methods

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Introduction
• Many management decisions involve making
the most effective use of limited resources
• Linear programming (LP)
– Widely used mathematical modeling
technique
– Planning and decision making relative to
resource allocation
• Broader field of mathematical programming
– Here programming refers to modeling and
solving a problem mathematically

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

 Requirements of a
Linear
Programming
• LP has been applied in many areas over the
past 50 Problem
years
• All LP problems have 4 properties in common
1. All problems seek to maximize or minimize some
quantity (the objective function)
2. The presence of restrictions or constraints that
limit the degree to which we can pursue our
objective
3. There must be alternative courses of action to
choose from
4. The objective and constraints in problems
must be expressed in terms of linear equations
or inequalities
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
 Basic Assumptions of LP
• We assume conditions of certainty exist and
numbers in the objective and constraints are
known with certainty and do not change
during the period being studied
• We assume proportionality exists in the objective
and constraints
• We assume additivity in that the total of all
activities equals the sum of the individual
activities
• We assume divisibility in that solutions need
not be whole numbers
• All answers or variables are nonnegative
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
LP Properties and
Assumptions
PROPERTIES OF LINEAR PROGRAMS
1. One objective function
2. One or more constraints
3. Alternative courses of action
4.Objective function and constraints are
linear ASSUMPTIONS OF LP
5. Certainty
6. Proportionality
7. Additivity
8. Divisibility
9. Nonnegative variables
Table 7.1
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Formulating LP Problems (1 of 2)

• Developing a mathematical model to

represent the managerial problem
• Steps in formulating a LP problem
1. Completely understand the managerial
problem being faced
2. Identify the objective and the constraints
3. Define the decision variables
4. Use the decision variables to write
mathematical expressions for the
objective function and the constraints

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Formulating LP Problems (2 of 2)

• Common LP application – product mix problem

• Two or more products are produced using
limited resources
• Maximize profit based on the profit contribution
per unit of each product
• Determine how many units of each product to
produce

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Flair Furniture Company (1 of 6)

• Flair Furniture produces inexpensive tables and

chairs
• Processes are similar, both require carpentry
work and painting and varnishing
– Each table takes 4 hours of carpentry and 2
hours of painting and varnishing
– Each chair requires 3 of carpentry and 1
hour of painting and varnishing
– There are 240 hours of carpentry time
available and 100 hours of painting and
varnishing
– Each table yields a profit of $70 and each chair
a profit of $50 Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Flair Furniture Company (2 of 6)

• The company wants to determine the best

combination of tables and chairs to produce to
reach the maximum profit

TABLE 7.2 Flair Furniture Company Data

HOURS REQUIRED TO PRODUCE 1
UNIT
TABLES CHAIRS AVAILABLE HOURS
DEPARTMENT (T) (C) THIS WEEK
Carpentry 4 3 240

Painting and 2 1 100

varnishing
Profit per unit $70 $50

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Flair Furniture Company (3 of 6)

• The objective is
Maximize profit
• The constraints are
1. The hours of carpentry time used cannot
exceed 240 hours per week
2. The hours of painting and varnishing
time used cannot exceed 100 hours per
week
• The decision variables are
T = number of tables to be produced per
week
C = number of chairs to be produced per
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
week
Flair Furniture Company (4 of 6)

• Create objective function in terms of T and C

Maximize profit = $70T + $50C
• Develop mathematical relationships for the two
constraints – For carpentry, total time used is
(4 hours per table)(Number of tables
produced)
+ (3 hours per chair)(Number of chairs
produced) – First constraint is
Carpentry time used ≤ Carpentry time
available 4T + 3C ≤ 240 (hours of
carpentry time)
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Flair Furniture Company (5 of 6)

• Similarly
Painting and varnishing time used
≤ Painting and varnishing time
available
2 T + 1C ≤ 100 (hours of painting and
varnishing time)

This means that each table produced

requires two hours of painting and
varnishing time
– Both of these constraints restrict production
capacity and affect total profit
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Flair Furniture Company (6 of 6)

• The values for T and C must be nonnegative

T ≥ 0 (number of tables produced is greater than or
equal to 0)
C ≥ 0 (number of chairs produced is greater than or
equal to 0)

The complete problem stated mathematically

subject to
4T + 3CMaximize(carpentry
profit = $70T + $50C
constraint)
(painting and varnishing
≤ 240 constraint)
T, C ≥ 0 (nonnegativity
2T + 1C
constraint)
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
 Graphical Solution to an LP
•Problem
Easiest way to solve a small LP problems is
graphically
• Only works when there are just two decision
variables – Not possible to plot a
solution for more than two
variables
• Provides valuable insight into how other
approaches work
• Nonnegativity constraints mean that we are
always working in the first (or northeast)
quadrant of a graph
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Graphical Representation of
Constraints (1 of 11)
FIGURE 7.1 Quadrant Containing All Positive
Values

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Graphical Representation of
Constraints (2 of 11)
• The first step is to identify a set or region of
feasible solutions
• Plot each constraint equation on a graph
• Graph the equality portion of the constraint
equations

4T + 3C = 240
• Solve for the axis intercepts and draw the
line

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Graphical Representation of
Constraints (3 of 11)
• When Flair produces no tables, the carpentry
constraint is:
4(0) + 3C = 240
3C = 240
C = 80
• Similarly for no chairs:
4T + 3(0) = 240
4T = 240
T = 60
– This line is shown on the following
graph
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Graphical Representation of
Constraints (4 of 11)
FIGURE 7.2 Graph of Carpentry
Constraint Equation 4T + 3C
= 240

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Graphical Representation of
Constraints (5 of 11)
FIGURE 7.3 Region
• Any point on or below
that Satisfies the
Carpentry Constraint the constraint plot will
not violate the
restriction
• Any point above the plot
will violate the
restriction

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Graphical Representation of
Constraints (6 of 11)
• The point (30, 20) lies below the line and
satisfies the constraint
4(30) + 3(20) = 180
• The point (70, 40) lies above the line and does
not satisfy the constraint
4(70) + 3(40) = 400

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Graphical Representation of
Constraints (7 of 11)
FIGURE 7.4 Region that Satisfies the Painting
and Varnishing Constraint

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Graphical Representation of
Constraints (8 of 11)
• To produce tables and chairs, both departments
must be used
• Find a solution that satisfies both constraints
simultaneously
• A new graph shows both constraint plots
• The feasible region is where all constraints are
satisfied
– Any point inside this region is a feasible
solution
– Any point outside the region is an infeasible
solution
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Graphical Representation of
Constraints (9 of 11)
FIGURE 7.5 Feasible Solution Region for the Flair
Furniture Company Problem

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Graphical Representation of
Constraints (10 of 11)
• For the point (30,
20)
Carpentry 4T + 3C ≤ 240 hours
constraint available (4)(30) + (3)(20) = ✔
180 hours used
Painting
constraint 2T + 1C ≤ 100 hours
✔
available (2)(30) + (1)(20) =
• For the point (70,
80 hours used
40)
Carpentry 4T + 3C ≤ 240 hours
constraint available (4)(70) + (3)(40) = ✔
400 hours used
Painting
constraint 2T + 1C ≤ 100 hours
✔
available (2)(70) + (1)(40) =
180 Copyright
hours © used
2018 Pearson Education, Ltd. All Rights Reserved
Graphical Representation of
Constraints (11 of 11)
• For the point (50,
5)
Carpentry 4T + 3C ≤ 240 hours
constraint available (4)(50) + (3)(5) = ✔
215 hours used
Painting
constraint 2T + 1C ≤ 100 hours □
available (2)(50) + (1)(5) =
105 hours used

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Isoprofit Line Solution Method
(1 of 7)
• Find the optimal solution from the many possible
solutions
• Speediest method is to use the isoprofit line
• Starting with a small possible profit value,
graph the objective function
• Move the objective function line in the
direction of increasing profit while
maintaining the slope
• The last point it touches in the feasible
region is the optimal solution

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Isoprofit Line Solution Method
(2 of 7)
• Choose a profit of $2,100
• The objective function is
$2,100 = 70T + 50C
• Solving for the axis intercepts, draw the graph
• Obviously not the best possible solution
• Further graphs can be created using larger
profits
– The further we move from the origin, the
larger the profit
• The highest profit ($4,100) will be generated
when the isoprofit line passes through the
point (30, 40) Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Isoprofit Line Solution
Method (3 of 7)
FIGURE 7.6 Profit line of $2,100 Plotted for the
Flair Furniture Company

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Isoprofit Line Solution Method
(4 of 7)
FIGURE 7.7 Four
Isoprofit Lines
Plotted for the
Flair Furniture
Company

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Isoprofit Line Solution Method
(5 of 7)
FIGURE 7.7 Four
Isoprofit Lines
Plotted for the
Flair Furniture
Company

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Isoprofit Line Solution Method
(6 of 7)
FIGURE 7.7 Four
Isoprofit Lines
Plotted for the
Flair Furniture
Company

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Isoprofit Line Solution
Method (7 of 7)
FIGURE 7.8 Optimal Solution to the Flair Furniture
Problem

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Corner Point Solution Method
(1 of 4)
• The corner point method for solving LP problems
• Look at the profit at every corner point of the
feasible region
• Mathematical theory is that an optimal solution
must lie at one of the corner points or extreme
points

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Corner Point Solution
Method (2 of 4)
FIGURE 7.9 Four Corner Points of the Feasible
Region

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Corner Point Solution Method
(3 of 4)
• Solve for the intersection of the two constraint
lines
• Using the elimination method to solve
simultaneous equations method, select a
variable to be eliminated
• Eliminate T by multiplying the second equation by
−2 and add it to the first equation
−2(2T + 1C = 100) = −4T −2C = −200
4T + 3C = 240 (carpentry)
−4T − 2C = −200 (painting)
C= 40
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Corner Point Solution Method
(4 of 4)
• Substitute C = 40 into either equation to
solve
4T +for T =
3(40) Thus the
4T + 120 = corner point
240
4T = is (30, 40)
120
T = 30 Highest profit – Optimal Solution
TABLE 7.3 Feasible Corner Points and Profits for Flair
Furniture
NUMBER OF TABLES (T) NUMBER OF CHAIRS (C) PROFIT = $70T + $50C
0 0 $0
50 0 $3,500
0 80 $4,000
30 40 $4,100

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Slack and Surplus (1 of 3)

• Slack is the amount of a resource that is

not used
– For a less-than-or-equal constraint
Slack = (Amount of resource
available)
– (Amount of resource used)
– Flair decides to produce 20 tables and 25
4(20) + 3(25) = 155 (carpentry time
chairs
used) 240 = (carpentry time

240 − 155 = available) (Slack time

85 in carpentry)

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

 At the optimal
Slack and of 3)
solution, slack is 0

•Surplus (2 as all 240 hours are

Slack is the amount of a urce that is not
used
reso
– For a less-than-or-equalused
constraint
Slack = (Amount of resource
available)
– (Amount of resource used)
– Flair decides to produce 20 tables and 25
4(20) + 3(25) = 155 (carpentry time
chairs
used) 240 = (carpentry time

240 − 155 = available) (Slack time

85 in carpentry)

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Slack and Surplus (3 of 3)

• Surplus is used with a greater-than-or-equal-to

constraint to indicate the amount by which the
right-hand side of the constraint is exceeded
Surplus = (Actual amount) − (Minimum
amount)

– New constraint

T + C ≥ 42
– If T = 20 and C = 25, then

20 + 25 = 45
Surplus = 45 − 42 = 3
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Summaries of Graphical
Solution Methods
TABLE 7.4 Summaries of Graphical Solution
Methods
ISOPROFIT METHOD
1. Graph all constraints and find the feasible region.
2. Select a specific profit (or cost) line and graph it to find the
slope.
3. Move the objective function line in the direction of
increasing profit (or decreasing cost) while maintaining the
slope. The last point it touches in the feasible region is the
optimal solution.
4. Find the values of the decision variables at this last point
and compute the profit (or cost).
CORNER POINT METHOD
5. Graph all constraints and find the feasible region.
6. Find the corner points of the feasible region.
7. Compute the profit (or cost)
Copyright at each
© 2018 ofEducation,
Pearson the feasible corner
Ltd. All Rights Reserved
 Solving Flair Furniture’s LP
•Problem
Most organizations have access to software to
solve big LP problems
• There are differences between software
implementations, the approach is basically the
same
• With experience with computerized LP
algorithms, it is easy to adjust to minor
changes

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Solving Minimization Problems
• Many LP problems involve minimizing an
objective such as cost
• Minimization problems can be solved graphically
– Set up the feasible solution region
– Use either the corner point method or an
isocost line approach
– Find the values of the decision variables
(e.g., X1 and
X2) that yield the minimum cost

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Holiday Meal Turkey Ranch (1 of
10)
• The Holiday Meal Turkey Ranch is considering
buying two different brands of turkey feed and
blending them to provide a good, low-cost diet for
its turkeys
TABLE 7.5 Holiday Meal Turkey Ranch data
COMPOSITION OF
EACH POUND OF
FEED (OZ.)
MINIMUM MONTHLY
INGREDIENT BRAND 1 FEED BRAND 2 FEED REQUIREMENT PER
TURKEY (OZ.)
A 5 10 90
B 4 3 48
C 0.5 0 1.5
Cost per pound 2 cents 3 cents
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Holiday Meal Turkey Ranch (2 of
10)
Let
X1 = number of pounds of brand 1 feed
purchased
X2 = number of pounds of brand 2 feed
purchased

Minimize cost (in cents) = 2X1

+ 3X2 subject to:
5X1 + 10X2 ≥ 90 ounces (ingredient A
X1 ≥ 4X1 + 3X2 (nonnegativity
constraint) ≥ 48 ounces
0
(ingredient constraint)
B constraint)
≥1.5 ounces(nonnegativity
0.5XX12 ≥ (ingredient C
0
constraint) constraint)
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Holiday Meal Turkey Ranch (3 of
10)
FIGURE 7.10
Feasible
Region for the
Holiday Meal
Turkey Ranch
Problem

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Holiday Meal Turkey Ranch (4 of
10)
• Solve for the values of the three corner points
– Point a is the intersection of ingredient
constraints C and B
4X1 + 3X2 = 48
X1 = 3
– Substituting 3 in the first equation, we find X2
= 12
– Solving for point b we find X1 = 8.4 and X2 =
4.8
– Solving for point c we find X1 = 18 and X2
=0
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Holiday Meal Turkey Ranch (5 of
10)
• Substituting these values back into the objective
function we find
Cost = 2X1 + 3X2
Cost at point a = 2(3) + 3(12) = 42
Cost at point b = 2(8.4) + 3(4.8) =
31.2
Cost at point c = 2(18) + 3(0) = 36

– The lowest cost solution is to purchase 8.4

pounds of brand 1 feed and 4.8 pounds of
brand 2 feed for a total cost of 31.2 cents per
turkey
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Holiday Meal Turkey Ranch (6 of
10)
• Solving using an isocost line
• Move the isocost line toward the lower left
• The last point touched in the feasible region
will be the optimal solution

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Holiday Meal Turkey Ranch (7 of
10)
FIGURE 7.11
Graphical
Solution to the
Holiday Meal
Turkey Ranch
Problem Using
the Isocost Line

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Four Special Cases in LP
• Four special cases and difficulties arise at
times when using the graphical approach
1. No feasible solution
2. Unboundedness
3. Redundancy
4. Alternate Optimal Solutions

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

No Feasible Solution (1 of 2)

• No solution to the problem that satisfies all the

constraint equations
• No feasible solution region exists
• A common occurrence in the real world
• Generally one or more constraints are relaxed
until a solution is found
• Consider the following three constraints

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

No Feasible Solution (2 of 2)

FIGURE 7.12 A
problem with
no feasible
solution

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Unboundedness (1 of 2)

• Sometimes a linear program will not have a finite

solution
• In a maximization problem
– One or more solution variables, and the profit,
can be made infinitely large without violating
any constraints
• In a graphical solution, the feasible region will
be open ended
• Usually means the problem has been
formulated improperly

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Unboundedness (2 of 2)

FIGURE 7.13 A Feasible Maximize profit = +

$3X1 subject to $5X2 ≥ 5
Region That Is
Unbounded to the Right X1 X2 ≤ 10
X1 + 2X2 ≥
10
X1, X2 ≥ 0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Redundancy (1 of 2)

• A redundant constraint is one that does not

affect the feasible solution region
• One or more constraints may be binding
• This is a very common occurrence in the real
world
• Causes no particular problems, but eliminating
redundant Maximize
constraints simplifies
profit the
$1X1 + $2X2
model
=
subject to X1 + X2 ≤
20
2X1 + X2 ≤
X1 30
Copyright © 2018 Pearson Education,≤
Ltd. All Rights Reserved
25
Redundancy ) Maximize $1X1 + $2X2
(2 of 2 profit = X1 + X2
FIGURE 7.14 subject to ≤ 20
Problem with 2X1 + X2 ≤
a Redundantonstrai 30 1 2
C nt X1
≤ 25
X,X

≥0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Alternate Optimal Solutions (1
of 2)
• Occasionally two or more optimal solutions may
exist
• Graphically this occurs when the objective
function’s isoprofit or isocost line runs perfectly
parallel to one of the constraints
• Allows management great flexibility in deciding
which combination to select as the profit is the
same at each alternate solution
Maximize profit $3X1 + $2X2
=
subject to 6X1 + 4X2 ≤
24
X1 ≤3
X1, X2 ≥
Copyright © 2018 Pearson Education, Ltd.0All Rights Reserved
Alternate Optimal Solutions (2
of 2)
FIGURE 7.15 Example Maximize $3X1 + $2X2
of Alternate Optimal profit = 6X1 + 4X2 ≤
Solutions subject to 24
X1 X1, X2 ≤ 3
≥0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Quantitative
Analysis for
TMh rateenntah Egdeitiomn,
Gelonbatl Edition

Module 7
Linear Programming:
The Simplex Method

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Introduction
• Most real-life LP problems have more than two
variables and cannot be solved using the
graphical procedure
• The simplex method
• Examines the corner points in a systematic
fashion
– An iterative process
– Each iteration improves the value of the
objective function
– Yields optimal solution and other valuable
economic information

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

How to Set Up the Initial
Simplex Solution
• Flair Furniture Company problem
T = number of tables
produced
C = number of chairs
Maximize profit produced
= $70T + (objective
$50C function)
subject 2T + 1C ≤ 100 (painting hours
to
4T + 3C ≤ constraint) (carpentry
240
hours constraint)
T, C ≥
(nonnegativity
constraints)
0
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Converting the Constraints to
Equations (1 of 3)
• Convert inequality constraints into an equation
• Add a slack variable to less-than-or-equal-to
constraints
S1 = slack variable representing unused
hours in the painting department
S2 = slack variable representing unused
hours in the carpentry department
2T + 1C + S1 = 100
4T + 3C + S2 = 240

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Converting the Constraints to
Equations (2 of 3)
• If Flair produces T = 40 and C = 10

2T + 1C + S1 = 100
2(40) + 1(10) + S1 = 100
S1 = 10

• Adding all variables into all

equations,
2T + 1C + 1S1 +
0S2 = 100
4T + 3C + 0S1 +
1S2 = 240
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
T, C, S1,
Converting the Constraints to
Equations (3 of 3)
• If Flair produces T = 40 and C
= 10
Objective function becomes
Maximize profit = $70T + $50C + $0S1 +
$0S2
• Adding all variables into all
equations,
2T + 1C + 1S1 + 0S2 =
100
4T + 3C + 0S1 + 1S2 =
240
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
T, C, S1, S2 ≥ 0
Finding an Initial Solution
Algebraically (1 of 2)
FIGURE M7.1 Corner Points of the Flair Furniture
Company Problem

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Finding an Initial Solution
Algebraically (2 of 2)
FIGURE M7.1 Corner Points of the Flair Furniture
Proble
Company
m Find a basic
feasible solution by
setting all real
variables to 0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The First Simplex Tableau (1 of
10)
• Constraint equations
– Place all of the coefficients into tabular
form, the first
simplex tableau
QUANTITY
SOLUTION T C S1 S2 (RIGHT-HAND SIDE
MIX [RHS])
S1 2 1 1 0 100
S2 4 3 0 1 240

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The First Simplex Tableau (2 of
10)
TABLE M7.1 Flair Furniture’s Initial Simplex
Tableau

ns
um
ol
sc
ix

s
le
t

m
ni

le

b
b
n ru

ns ria
n

ia

n t
n o

m n
m e

m a
ar
m ti

lu ta
lu t p

lu k v
lu uc

lv

co ons
co rofi

co lac
co od

a
Re
Pr

C
P

Cj SOLUTION $70 $50 $0 S $0

MIX T C S1 S2 QUANTITY Profit per unit row
$0 S1 2 1 1 0 100 Constraint
equation rows
$0 S2 4 3 0 1 240
Gross profit
Zj $0 $0 $0 $0 $0 row
Cj − Zj $70 $50 $0 $0 $0 Net profit
row

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The First Simplex Tableau (3 of
10)
• Begin the initial solution
procedure at the origin
• Slack variables are nonzero
and are the initial solution mix
• Values in the quantity column
• Initial solution is the basic
feasible solution
• Variables in the solution mix, the basis, are called
basic variables
• Those not in the basis are called nonbasic variables

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The First Simplex Tableau (4 of
10)
• Optimal solution in vector form
• T and C are the final basic
variables
• S1 and S2 are nonbasic
variables

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The First Simplex Tableau (5 of
10)
• Substitution
rates

– For every unit of T introduced into the

current solution, 2 units of S1 and 4 units
of S2 must be removed

For any variable ever to appear in the

solution mix column, it must have the
number 1 someplace in its column and 0s in
every other place in that column
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
The First Simplex Tableau (6 of
10)
For three less-than-or-equal-to
constraints
SOLUTION MIX S1 S2 S3
S1 1 0 0
S2 0 1 0
S3 0 0 1

For any variable ever to appear in the

solution mix column, it must have the
number 1 someplace in its column and 0s in
every other place
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
The First Simplex Tableau (7 of
10)
• Adding the Objective
Function

Cj $70 $50 $0 $0
SOLUTION
MIX T C S1 S2 QUANTITY
$0 S1 2 1 1 0 100
$0 S2 4 3 0 1 240

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The First Simplex Tableau (8 of
10)
• The Zj and Cj − Cj SOLUTION $70 $50 $0 $0
MIX T C S1 S2 QUANTITY
Zj
$0 S1 2 1 1 0 100
Rows $0 S2 4 3 0 1 240
Zj $0 $0 $0 $0 $0
Cj − Zj $70 $50 $0 $0 $0

– Compute the Zj value for each column of the initial

solution by multiplying the 0 contribution value of
each number in the Cj column by each number in that
row and the jth column and summing
Zj (for gross profit) = (Profit per unit of S1) × (Number of units
of S1)
+ (Profit per unit of S2) × (Number of units of S2)
= $0 × 100 units + $0 × 240 units
= $0 profit
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
The First Simplex Tableau (9 of
10)
• The Zj and Cj Cj SOLUTION $70 $50 $0 $0
MIX T C S1 S2 QUANTITY
Zj
− $0 S1 2 1 1 0 100
Rows $0 S2 4 3 0 1 240
Zj $0 $0 $0 $0 $0
Cj − Zj $70 $50 $0 $0 $0

Zj (for column T) = ($0)(2) + ($0)(4) =

$0
Zj (for column C) = ($0)(1) + ($0)
(3) = $0 Zj (for column S1) = ($0)(1)
+ ($0)(0) = $0 Zj (for column S2) =
($0)(0) + ($0)(1) = $0
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
The First Simplex Tableau (10 of
10)
• The Zj and Cj Cj SOLUTION $70 $50 $0 $0
MIX T C S1 S2 QUANTITY
Zj
− $0 S1 2 1 1 0 100
Rows $0 S2 4 3 0 1 240
Zj $0 $0 $0 $0 $0
Cj − Zj $70 $50 $0 $0 $0

COLUMN
T C S1 S2
Cj for column $70 $50 $0 $0
Zj for column 0 0 0 0
Cj − Zj for column $70 $50 $0 $0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Simplex Solution Procedures (1
of 2)
1. Determine which variable to enter into the solution mix
next. One way of doing this is by identifying the column,
and hence the variable, with the largest positive number
in the Cj − Zj row of the preceding tableau. The column
identified in this step is called the pivot column.

2. Determine which variable to replace. Decide which basic

variable currently in the solution will have to leave to make
room for the new variable. Divide each amount in the
quantity column by the corresponding number in the
column selected in step 1. The row with the smallest
nonnegative number calculated in this fashion will be
replaced in the next tableau. This row is often referred to
as the pivot row. The number at the intersection of the
pivot row and pivot column is referred to as the pivot
number. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Simplex Solution Procedures (2
of 2)
3. Compute new values for the pivot row by dividing every
number in the row by the pivot number.
4. Compute the new values for each remaining row. All
remaining row(s) are calculated as follows:

5. Compute the Zj and Cj − Zj rows, as demonstrated in the

initial tableau. If all numbers in the Cj − Zj row are 0 or
negative, an optimal solution has been reached. If this is
not the case, return to step 1.
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
The Second Simplex Tableau (1
of 10)
• Step 1 – Select variable to enter, T
TABLE M7.2 Pivot Column Identified in the Initial
Simplex Tableau

Cj SOLUTION $70 $50 $0 $0 QUANTITY

MIX T C S1 S2 (RHS)
$0 S1 2 1 1 0 100
$0 S2 4 3 0 1 240
Zj $0 $0 $0 $0 $0
Cj − $70 $50 $0 $ Total
Zj Pivot 0 profit
column

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The Second Simplex Tableau (2
of 10)
• Step 2 – Select the variable to be
replaced, S1

For S1,

For S2,

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The Second Simplex Tableau (3
of 10)
• Step 2 – Select the variable to be replaced, S1

TABLE M7.3 Pivot Row and Pivot Number Identified

in the Initial Simplex Tableau
Cj SOLUTION $70 $50 $0 $0 QUANTITY
MIX T C S1 S2 (RHS)
$0 S1 2 1 1 0 100 Pivot
row
$0 S2 4 3 0 1 240
Pivot number

Zj $0 $0 $0 $0 $0
Cj − Zj $70 $50 $0 $0
Pivot
column

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The Second Simplex Tableau (4
of 10)
FIGURE M7.2
Graph
of the Flair
Furniture
Company
Problem

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The Second Simplex Tableau (5
of 10)
• Step 3 – Compute the replacement for the
pivot row

• The entire pivot

row
Cj SOLUTION MIX T C S1 S2 QUANTITY

$70 T 1 0.5 0.5 0 50

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The Second Simplex Tableau (6
of 10)
• Step 4 – Compute new values for the
S2 row

Number in = Number in − Number Below × Corresponding Number

New S2 Row Old S2 Row Pivot Number in the New T Row

0 = 4 – (4) × (1)

1 = 3 – (4) × (0.5)

−2 = 0 – (4) × (0.5)

1 = 1 – (4) × (0)

40 = 240 – (4) × (50)

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The Second Simplex Tableau (7
of 10)

• The second
tableau
Cj SOLUTION MIX T C S1 S2 QUANTITY

$70 T 1 0.5 0.5 0 50

$0 S2 0 1 −2 1 40

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The Second Simplex Tableau (8
of 10)
• Step 5 – Introduce the effect of the objective
function

Zj (for T column) = ($70)(1) + ($0)(0)= $70

Zj (for C column) = ($70)(0.5) + ($0)(1) = $35
Zj (for S1 column) = ($70)(0.5) + ($0)(−2) =
$35
Zj (for S2 column) = ($70)(0) + ($0)(1) = $0
Zj (for total profit) = ($70)(50) + ($0)(40) =
$3,500

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The Second Simplex Tableau (9
of 10)
• Step 5 – Introduce the effect of the objective
function

TABLE M7.4 Completed Second Simplex Tableau for

Flair Furniture
Cj $70 $50 $0 $0
SOLUTION
MIX T C S1 S2 QUANTITY
$70 T 1 0.5 0.5 0 50
$0 S2 0 1 −2 1 40
Zj $70 $35 $35 $0 $3,500
Cj − Zj $0 $15 −$35 $0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

The Second Simplex Tableau (10
of 10)

• Cj − Zj numbers represent net profit at present

production mix

T COLUMN
C S1 S2
Cj for column $70 $50 $0 $0
Zj for column $70 $35 $35 $0
Cj − Zj for column $0 $15 −$35 $0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

 Interpreting the Second
•Tableau
Current solution and resources
– Production of 50 tables (T) and 0 chairs (C)
– Profit = $3,500
– T is a basic variable, C nonbasic
– Slack variable S2 = 40, S1 nonbasic
• Substitution rates
– Marginal rates of substitution
– Negative substitution rate
▪ If 1 unit of a column variable is added to the
solution, the value of the corresponding solution
(or row) variable will increase
– Positive substitution rate
▪ If 1 unit of the column variable is added to the
solution, the row variable will decrease
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Developing the Third Tableau
(1 of 8)
• Not all numbers in the Cj − Zj row are 0 or
negative
– Previous solution is not optimal
– Repeat the five simplex steps

• Step 1 – Variable C will enter the

solution – Largest Cj − Zj value of
15

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing the Third Tableau
(2 of 8)
• Step 2 – Identifying the pivot
row

TABLE M7.5 Pivot Row, Pivot Column, and Pivot Number

Identified in the Second Simplex Tableau
Cj $70 $50 $0 $0
SOLUTION
MIX T C S1 S2 QUANTITY
$70 T 1 0.5 0.5 0 50
$0 S2 0 1 −2 1 40 Pivot
Pivot row
number
Zj $70 $35 $35 $3,50
$0 0
Cj −
$0 $15 −$35
colum
$0
Zj
Pivot n Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Developing the Third Tableau
(3 of 8)
• Step 3 – The pivot row is
replaced

• The new C
row
Cj SOLUTION MIX T C S1 S2 QUANTITY

$5 C 0 1 − 1 4
0 2 0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing the Third Tableau
(4 of 8)
• Step 4 – New values for the T
row
Number in = Number in − Number above × Corresponding number
new T row old T row pivot number in new C row

1 = 1 – (0.5) × (0)
0 = 0.5 – (0.5) × (1)
1.5 = 0.5 – (0.5) × (−2)
−0.5 = 0 – (0.5) × (1)
30 = 50 – (0.5) × (40)

Cj SOLUTION MIX T C S1 S2 QUANTITY

$70 T 1 0 1.5 −0.5 30

$50 C 0 1 −2 1 40

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing the Third Tableau
(5 of 8)
• Step 5 – Calculate the Zj and Cj − Zj
rows
Zj (for T column) = ($70)(1) + =
($50)(0) $70
(for SC column) = ($70)(0) + =
ZZj j(for 1 column) = ($70)(1.5) + = $5
($50)(1)
($50)(−2) $50
= $15
Zj (for S2 column) = ($70)(−0.5) +
= $4,100
($50)(1)
Zj (for total profit) = ($70)(30) +
($50)(40)
COLUMN
T C S1 S2
Cj for column $70 $50 $0 $0
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Zj for column $70 $50 $5 $15
Developing the Third Tableau
(6 of 8)
• Step 5 – Calculate the Zj and Cj − Zj rows

TABLE M7.6 Final Simplex Tableau for the Flair

Furniture Problem

Cj $70 $50 $0 $0
SOLUTION
MIX T C S1 S2 QUANTITY
$70 T 1 0 1.5 −0.5 30
$50 C 0 1 −2 1 40
Zj $70 $50 $5 $15 $4,100
Cj − Zj $0 $0 −$5 −$15

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing the Third Tableau
(7 of 8)

Since every number in the tableau’s Cj − Zj row

is 0 or negative, an optimal solution has been
reached
TABLE M7.6 Final Simplex Tableau for the Flair
Furniture Problem
Cj $70 $50 $0 $0
SOLUTION
MIX T C S1 S2 QUANTITY
$70 T 1 0 1.5 −0.5 30
$0 C 0 1 −2 1 40
Zj $70 $50 $5 $15 $4,100
Cj − Zj $0 $0 −$5 −$15

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing the Third Tableau
(8 of 8)
• Verifying the solution,

First constraint: 2T + 1C ≤ 100 painting

dept hours 2(30) + 1(40) ≤ 100
100 ≤ 100 ✓
Second constraint: 4T + 3C ≤ 240 carpentry
dept hours 4(30) + 3(40) ≤ 240
240 ≤ 240 ✓
Objective function profit = $70T + $50C
= $70(30) + $50(40)
= $4,100
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
 Review of Procedures (1 of 3)

I. Formulate the LP problem’s objective

function and constraints.
II. Add slack variables to each less-than-or-
equal-to constraint and to the problem’s
III objective function.
. Develop an initial simplex tableau with slack
variables in the basis and the decision variables
set equal to 0.
Compute the Zj and Cj − Zj values for this
tableau.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Review of Procedures (2 of 3)

IV. Follow these five steps until an optimal

solution has been reached:
1. Choose the variable with the greatest
positive Cj − Zj
to enter the solution. This is the pivot
column.
2. Determine the solution mix variable to be
replaced and the pivot row by selecting the
row with the smallest (nonnegative) ratio of
the quantity-to-pivot column substitution
rate. This row is the pivot row.
3. Calculate the new values for the pivot row.
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Review of Procedures (3 of 3)

4. Calculate the new values for the other row(s).

5. Calculate the Zj and Cj − Zj values for this
tableau. If there are any Cj − Zj numbers
greater than 0, return to step 1. If there are no
Cj − Zj numbers that are greater than 0, an
optimal solution has been reached.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

 Surplus and Artificial
•Variables (1 of 3)
Conversions are made for ≥ and =
constraints
• For Surplus Variables,
Constraint 1: 5X1 + 10X2 + ≥ 210
8X3 Rewritten: 5X1 + 10X2 + =
8X3 − S1 210

For X1 = 20, X2 = 8, and X3 = = 210

5, 5(20) + 10(8) + = 210 − 220
= 10 surplus
8(5) − S1
units
– S1
S1
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Surplus and Artificial
Variables (2 of 3)

• If X1 and X2 = 0, then the S1 variable is

negative, which violates the nonnegative
condition
• An artificial variable A1 is added to resolve
this problem

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

 Surplus and Artificial
•Variables (3 of 3)
Conversions are made for ≥ and =
constraints
• For equalities, add only an artificial
variable

Constraint 2: 25X1 + 30X2 = 900

Constraint 2 completed: 25X1+ 30X2 + A2 =
900
Artificial variables have no physical
meaning and drop out of the solution
mix before the final tableau if a
feasible solution exists

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

 Surplus and Artificial
Variables in the Objective
•Function
Assign a very high-cost $M to artificial
variables in the objective function to force
them out before the final solution is reached

Minimize cost = $5X1 + $9X2 + $7X3

Minimize cost = $5X1 + $9X2 + $7X3 + $0S1 + $MA1

+ $MA2
subject 5X1 + 10X2 + 8X3 − 1S1 + 1A1 +0A2 = 210
to 25X1 + 30X2 + 0X3 + 0S1 + 0A1 + 1A2
= 900

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Solving Minimization Problems
• The Muddy River Chemical Company

Minimize cost = $5X1 +

$6X2 subject to X1 + X2 =
1,000 lb
X1 ≤ 300 lb
X2 ≥ 150 lb
X1, X2 ≥ 0

where
X1 = number of
pounds of
phosphate
X2 =Copyright
number ofPearson Education, Ltd. All Rights Reserved
© 2018
Graphical Analysis
FIGURE M7.3 Muddy River Chemical
Corporation’s Feasible Region Graph

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Converting the Constraints
and Objective Function

Minimize cost = $5X1 + $6X2 + $0S1 + $0S2 + $MA1 + $MA2

subject to 1X1 + 1X2 + 0S1 + 0S2 + 1A1 + 0A2 =
1,000
1X1 + 0X2 + 1S1 + 0S2 + 0A1 + 0A2 = 300
0X1 + 1X2 + 0S1 – 1S2 + 0A + 1A = 150
X1, X2, S11, S2, A1, A22 ≥
0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Rules of the Simplex Method
for Minimization Problems
1. Choose the variable with a negative Cj − Zj that
indicates the largest decrease in cost to enter the
solution. The corresponding column is the pivot
column.
2. Determine the row to be replaced by selecting
the one with the smallest (nonnegative)
quantity-to-pivot column substitution rate ratio.
This is the pivot row.
3. Calculate new values for the pivot row.
4. Calculate new values for the other rows.
5. Calculate the Zj and Cj − Zj values for this
tableau. If there are any Cj − Zj numbers less
than 0, return toCopyright
step©1. 2018 Pearson Education, Ltd. All Rights Reserved
First Simplex Tableau (1 of 4)

Cj SOLUTION MIX X1 X2 S1 S2 A1 A2 QUANTITY

$M A1 1 1 0 0 1 0 1,000

$0 S1 1 0 1 0 0 0 300

$M A2 0 1 0 − 0 1 150
1

Zj (for X1 = $ M(1) + $0(1) + $ M(0) =$M

column)
Zj (for X2 = $ M(1) + $0(0) + $ M(1) = $2M
column)
Zj (for S1 = $ M(0) + $0(1) + $ M(0) = $0
column)
Zj (for S2 = $ M(0) + $0(0) + $ M(−1) = −$ M
column)
Zj (for A1 = $ M(1) + $0(0) + $ M(0) =$M
column)
Zj (for A2 = $ M(0) + $0(0) + $ M(1) =$M
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
column)
First Simplex Tableau (2 of 4)

COLUMN
X1 X2 S1 S2 A1 A2

Cj for column $5 $6 $0 $0 $M $M

Zj for column $M $2M $0 −$M $M $M

Cj − Zj for column −$M + $5 −$2M + $6 $0 $M $0 $0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

First Simplex Tableau (3 of 4)

TABLE M7.7 Initial Simplex Tableau for the Muddy

River Chemical Corporation Problem
Cj $5 $6 $0 $0 $M $M

SOLUTION
MIX X1 X2 S1 S2 A1 A2 QUANTITY
$M A1 1 1 0 0 1 0 1,000

$0 S1 1 0 1 0 0 0 300

$M A2 0 1 0 −1 0 1 150 Pivot
row
Pivot number
Zj $M $2M 0 −$ $M $M $1,150M
Cj − −$M + −$2M + M
$M $0
Zj $5 $0
P$6ivot$0
column
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
First Simplex Tableau (4 of 4)

In vector format

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing a Second Tableau (1
of 3)

A1 Row S1 Row
1 = 1 − (1) 1 = 1 − (0)
(0) (0)
0 = 1 − (1) 0 = 0 − (0)
1 = 0 − (1) (1) 0 = 0 − (0)
(1)
1 =1
0(−1)0 − (1)(0)
(1) 10 =
=(−1)
10 −
− (0)
(0)(0)
(0)−1 = 0 − (1)(1)
(0) 0= 0−
(0)(1)
850 = 1,000 − (1) 300 = 300 − (0)
(150) (150)
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Developing a Second Tableau (2
of 3)
Zj (for X1) = $ M(1) + $0(1) + $6(0) =$M
Zj (for X2) = $ M(0) + $0(0) + $6(1) = $6
Zj (for S1) = $ M(0) + $0(1) + $6(0) = $0
Zj (for S2) = $ M(1) + $0(0) + $6(−1) =$M−6
Zj (for A1) = $ M(1) + $0(0) + $6(0) =$M
Zj (for A2) =$ + $0(0) + $6(1) = −$ M + 6
M(−1)
Zj (for total cost) =$ + $0(300) + $6(150) = $850M + 900
M(850)
COLUMN
X1 X2 S1 S2 A1 A2

Cj for column $ $ $0 $0 $M $M
5 6
Zj for column $M $ $0 $M − $M −$M + 6
6 6
Cj − Zj for column −$M +Copyright
$5 $0© 2018 Pearson
$0 Education,
−$M + $0 $2M − 6
Ltd. All Rights Reserved
6
Developing a Second Tableau (3
of 3)
TABLE M7.8 Second Simplex Tableau for the Muddy
River Chemical Corporation Problem
Cj $5 $6 $0 $0 $M $M

SOLUTION
MIX X1 X2 S1 S2 A1 A2 QUANTITY
$M A1 1 0 0 1 1 −1 850

$0 S1 1 0 1 0 0 0 300 Pivot
row
Pivot number
$6 X2 0 1 0 −1 0 1 150

Zj $M $6 $0 $M − 6 $M −$M + 6 $850M +
$900
Cj − Zj Pivot
−$M + $5 $0 $0 −$M + 6 $0 $2M − 6
column

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing a Third Tableau (1 of
3)

A1 Row X2 Row
0 = 1 − (1)(1) 0 = 0 − (0)(1)
0 = 0 − (1)(0) 1 = 1 − (0)(0)
−1 0 − (1)(1) 0 = 0 − (0)(1)
=
1 = 1 − (1)(0) −1 = −1 − (0)
(0)
550 1==850
1−− (1)(0)
(1) 0150
= 0=−150
(0)(0)
− (0)
(150)−1 −1 − (1) 1(300)
= 1 − (0)(0)
= (0)
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Developing a Third Tableau (2 of
3)
Zj (for X1) = $ M(0) + $5(1) + $6(0) = $5
Zj (for X2) = $ M(0) + $5(0) + $6(1) = $6
Zj (for S1) = $ M(−1) + $5(1) + $6(0) = −$ M + 5
Zj (for S2) = $ M(1) + $5(0) + $6(−1) =$M−6
Zj (for A1) = $ M(1) + $5(0) + $6(0) =$M
Zj (for A2) = $ M(−1) + $5(0) + $6(1) = −$ M + 6
Zj (for total cost) =$ + + $6(150) = $550M + 2,400
M(550) $5(300)
COLUMN

X1 X2 S1 S2 A1 A2

Cj for column $5 $6 $0 $0 $M $M

Zj for column $5 $6 −$M + 5 $M – 6 $M −$M + 6

Cj − Zj for column $0 $0 $M − 5 − + $0 $2M − 6

$M 6
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Developing a Third Tableau (3 of
3)
TABLE M7.9 Third Simplex Tableau for the Muddy
River Chemical Corporation Problem
Cj $5 $6 $0 $0 $M $M

SOLUTION
MIX X1 X2 S1 S2 A1 A2 QUANTITY
550 Pi
$M A1 0 0 −1 1 1 −1 Pivotvot
row
$5 X1 1 0 1 0 0 0 300
numb er
$6 X2 0 1 0 −1 0 1 150
Zj $5 −$M + $M − $M −$M $550M +
$6 5 6 +6 2,400
Cj − Zj
$0 $M − −$M + $0 $2M
$0 5 6 −6
Pivot
column

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing a Fourth Tableau (1
of 3)

X1 Row X2 Row
1 = 1 − (0)(0) 0 = 0 − (−1)
(0)
0 = 0 − (0)(0) 1 = 1 − (−1)
(0)
1 = 1 − (0) −1 0 − (−1)(−1)
(−1) =
0=
300 0 −−(0)(1)
= 300 (0) 0= −1700− (−1)150 − (−1)
(550) (1)= (550)
0 = 0 − (0)(1) 1= 0 − (−1)
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
(1)
Developing a Fourth Tableau (2
of 3)
Zj (for X1) = $0(0) + $5(1) + $6(0) = $5
Zj (for X2) = $0(0) + $5(0) + $6(1) = $6
Zj (for S1) = $0(−1) + $5(1) + $6(−1) = −$1
Zj (for S2) = $0(1) + $5(0) + $6(0) = $0
Zj (for A1) = $0(1) + $5(0) + $6(1) = $6
Zj (for A2) = $0(−1) + $5(0) + $6(0) = $0
Zj (for total = + + $6(700) = $5,700
cost) $0(550) $5(300)
COLUMN

X1 X2 S1 S2 A1 A2

Cj for column $5 $6 $0 $0 $M $M

Zj for column $5 $6 −$1 $0 $6 $0

Cj − Zj for $0 $0 $1 $0 $M − 6 $M
column

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Developing a Fourth Tableau (3
of 3)
TABLE M7.10 Fourth and Optimal Solution to the
Muddy River Chemical Corporation Problem

Cj $5 $6 $0 $0 $M $M

SOLUTION
MIX X1 X2 S1 S2 A1 A2 QUANTITY
$0 S2 0 0 −1 1 1 −1 550

$5 X1 1 0 1 0 0 0 300

$6 X2 0 1 −1 0 1 0 700

Zj $5 $6 −$1 $0 $6 $0 $5,700

Cj − Zj $0 $0 $1 $0 $M − 6 $M

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

 Review of Procedures (1 of 3)

I. Formulate the LP problem’s objective

function and constraints.
II. Include slack variables in each less-than-or-
equal-to constraint, artificial variables in each
equality constraint, and both surplus and
artificial variables in each greater- than-or-equal-
to constraint. Then add all of these variables to
III the problem’s objective function.
. Develop an initial simplex tableau with artificial
and slack variables in the basis and the other
variables set equal to 0. Compute the Zj and Cj −
Zj values for this tableau.
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Review of Procedures (2 of 3)

IV. Follow these five steps until an optimal

solution has been reached:
1. Choose the variable with the negative Cj
− Zj indicating the greatest improvement
to enter the solution. This is the pivot
column.
2. Determine the row to be replaced by
selecting the one with the smallest
(nonnegative) quantity-to-pivot column
substitution rate ratio. This is the pivot row.
3. Calculate the new values for the pivot row.
4. Calculate theCopyright
new ©values for the other row(s).
2018 Pearson Education, Ltd. All Rights Reserved
Review of Procedures (3 of 3)

5. Calculate the Zj and Cj − Zj values for this

tableau. If there are any Cj − Zj numbers less
than 0, return to step 1. If there are no Cj − Zj
numbers that are less than 0, an optimal
solution has been reached.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Special Cases (1 of 6)

• Infeasibility
– Infeasibility occurs when there is no solution
that satisfies all of the problem’s
constraints
TABLE M7.11 Illustration of Infeasibility
Cj $5 $8 $0 $0 $M $M
SOLUTION
MIX X1 X2 S1 S2 A1 A2 QUANTITY
$5 X1 1 0 −2 3 −1 −0 200
$8 X2 0 1 1 2 −2 0 100
$M A2 0 0 0 −1 −1 1 20
Zj $5 $8 −$2 $31 − M −$21 − M $M $1,800 + 20M
Cj − Zj $0 $0 $2 $M − 31 $2M + 21 $0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Special Cases (2 of 6)

• Unbounded Solutions
– Unboundedness describes linear programs
that do not have finite solutions
TABLE M7.12 Problem with an Unbounded Solution

Cj $6 $9 $0 $0
SOLUTION
MIX X1 X2 S1 S2 QUANTITY
$9 X1 −1 1 2 0 30
$0 S2 −2 0 −1 1 10
Zj −$9 $9 $18 $0 $270
Cj − Zj $15 $0 −$18 $0

Pivot
column
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Special Cases (3 of 6)

Negative
ratios
unacceptab
le
TABLE M7.12 Problem with an Unbounded
Solution
C
j $6 $9 $0 $0
SOLUTION
MIX X1 X2 S1 S2 QUANTITY
$9 X1 −1 1 2 0 30
$0 S2 −2 0 −1 1 10
Zj −$9 $9 $18 $0 $270
Cj − Zj $15 $0 −$18 $0

Pivot
column
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Special Cases (4 of 6)

• Degeneracy
– Degeneracy develops when three constraints
pass through a single point
TABLE M7.13 Problem Illustrating Degeneracy
Cj $5 $8 $2 $0 $0 $0
SOLUTION
MIX X1 X2 X3 S1 S2 S3 QUANTITY
$8 X2 0.25 1 1 −2 0 0 10
$0 S2 4 0 0.33 −1 1 0 20
$0 S1 2 0 2 0.4 0 1 10
Zj $2 $8 $8 $16 $0 $0 $80
Cj − Zj $3 $0 −$6 −$16 $0 $0
Pivot
column
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Special Cases (5 of 6)

Tie for the

smallest
ratio
indicates
degeneracy
Cj $5 $8 $2 $0 $0 $0
SOLUTION
MIX X1 X2 X3 S1 S2 S3 QUANTITY
$8 X2 0.25 1 1 −2 0 0 10
$0 S2 4 0 0.33 −1 1 0 20
$0 S1 2 0 2 0.4 0 1 10
Zj $2 $8 $8 $16 $0 $0 $80
Cj − Zj $3 $0 −$6 −$16 $0 $0
Pivot
column
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved
Special Cases (6 of 6)

• More Than One Optimal Solution

– If the Cj − Zj value is equal to 0 for a variable
that is not in the solution mix, more than one
optimal solution exists
TABLE M7.14 Problem with Alternate Optimal Solutions
Cj $3 $2 $0 $0
SOLUTION
MIX X1 X2 S1 S2 QUANTITY
$2 X2 1.5 1 1 0 6
$0 S2 1 0 0.5 1 3
Zj $3 $2 $2 $0 $12
Cj − Zj $0 $0 −$2 $0

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

Quantitative
Analysis for
TMh rateenntah Egdeitiomn,
Gelonbatl Edition

Module 8
Transportation,
Assignment, and
Network Algorithms

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

 Introduction
■ In this chapter we will explore two special
linear programming models
■ The transportation model
■ The assignment model
■ Because of their structure, they can be
solved more efficiently than the simplex
method
■ These problems are members of a
category of LP techniques called network
flow problems
 Introduction
■ Transportation model
■ The transportation problem deals with the
distribution of goods from several points
of supply (sources) to a number of points
of demand (destinations)
■ Usually we are given the capacity of goods at
each source and the requirements at each
destination
■ Typically the objective is to minimize total
transportation and production costs
 Introduction
■ Example of a transportation problem in a network
format
Factories Warehouses
(Sources) (Destinations)
100 Des Albuquerqu 300
Units Moines e Units

300 Evansvill Bosto 200

Units e n Units

300 Fort Clevelan 200

Units Lauderdale d Units

Capacitie Shipping Requirement

s Routes s

Figure
10.1
 Introduction
■ Assignment model
■ The assignment problem refers to the class of
LP problems that involve determining the
most efficient assignment of resources to
tasks
■ The objective is most often to minimize total
costs or total time to perform the tasks at
hand
■ One important characteristic of assignment
problems is that only one job or worker can
be assigned to one machine or project
 Introduction
■ Special-purpose algorithms
■ Although standard LP methods can be used to
solve transportation and assignment problems,
special-purpose algorithms have been
developed that are more efficient
■ They still involve finding and initial
solution and developing improved
solutions until an optimal solution is
reached
■ They are fairly simple in terms of
computation
 Introduction
■ Streamlined versions of the simplex method are
important for two reasons
1. Their computation times are generally 100 times
faster
2. They require less computer memory (and hence can
permit larger problems to be solved)
■ Two common techniques for developing initial
solutions are the northwest corner method and
Vogel’s approximation
■ The initial solution is evaluated using either the
stepping-stone method or the modified
distribution (MODI) method
■ We also introduce a solution procedure called the
Hungarian method, Flood’s technique, or the
reduced matrix method
 Setting Up a Transportation Problem

■ The Executive Furniture Corporation

manufactures office desks at three locations:
Des Moines, Evansville, and Fort Lauderdale
■ The firm distributes the desks through regional
warehouses located in Boston, Albuquerque,
and Cleveland
■ Estimates of the monthly production capacity of
each factory and the desks needed at each
warehouse are shown in Figure 10.1
 Setting Up a Transportation Problem

■ Production costs are the same at the three

factories so the only relevant costs are shipping
from each source to each destination
■ Costs are constant no matter the quantity
shipped
■ The transportation problem can be described as
how to select the shipping routes to be used and
the number of desks to be shipped on each route
so as to minimize total transportation cost
■ Restrictions regarding factory capacities and
warehouse requirements must be observed
 Setting Up a Transportation Problem

■ The first step is setting up the transportation

table
■ Its purpose is to summarize all the relevant
data and keep track of algorithm computations

Transportation costs per desk for Executive Furniture

TO
FROM ALBUQUERQUE BOSTON CLEVELAND
DES MOINES $5 $4 $3
EVANSVILLE $8 $4 $3
FORT LAUDERDALE $9 $7 $5

Table 10.1
 Setting Up a Transportation Problem

■ Geographical locations of Executive Furniture’s

factories and warehouses

Bosto
n

Clevelan
d Factor
y
Des
Moines
Evansto Warehouse
n
Albuquerqu
e

Fort
Lauderdale
Figure
10.2
 Setting Up a Transportation Problem

■ Transportation table for Executive Furniture Des Moines

capacity
constraint

TO WAREHOUSE WAREHOUSE WAREHOUSE

AT AT AT FACTORY
FROM ALBUQUERQUE BOSTON CLEVELAND CAPACITY
$
$5 $4
DES MOINES 3 100
FACTORY

$
$8 $4
EVANSVILLE 3 300
FACTORY

FORT $
$9 $7
LAUDERDALE 5 300
FACTORY
Cell representing
TWabAlReE1H 300 200 Total a
source-t7o0-
CToSst of shipping 1 unit from Cleveland su2p0p0ly (Evansville to
0REQUIREMEN
O.2USE Fort Lauderdale factory to warehouse Cleveland) shipping
Boston warehouse and demand d 0estination
demand assignment that could
be made
 Setting Up a Transportation Problem

■ In this table, total factory supply exactly

equals total warehouse demand
■ When equal demand and supply occur,
a
balanced problem is said to exist
■ This is uncommon in the real world and
we have techniques to deal with
unbalanced problems
 Developing an Initial Solution:
Northwest Corner Rule
■ Once we have arranged the data in a table,
we must establish an initial feasible solution
■ One systematic approach is known as the
northwest corner rule
■ Start in the upper left-hand cell and allocate
units to shipping routes as follows
1. Exhaust the supply (factory capacity) of each
row before moving down to the next row
2. Exhaust the demand (warehouse) requirements of
each column before moving to the right to the next
column
3. Check that all supply and demand requirements are
met.
■ In this problem it takes five steps to make
the initial shipping assignments
 Developing an Initial Solution:
Northwest Corner Rule
1. Beginning in the upper left hand corner, we
assign 100 units from Des Moines to
Albuquerque. This exhaust the supply from Des
Moines but leaves Albuquerque 200 desks short.
We move to the second row in the same column.
TO ALBUQUERQUE BOSTON CLEVELAND FACTORY
FROM (A) (B) (C) CAPACITY
100 $5 $4 $3
DES MOINES 100
(D)

$8 $4 $3
EVANSVILLE 300
(E)

$9 $7 $5
FORT 300
LAUDERDALE (F)

WAREHOUSE 300 200 200 700

REQUIREMENTS
 Developing an Initial Solution:
Northwest Corner Rule
2. Assign 200 units from Evansville to Albuquerque.
This meets Albuquerque’s demand. Evansville
has 100 units remaining so we move to the right
to the next column of the second row.

TO ALBUQUERQUE BOSTON CLEVELAND FACTORY

FROM (A) (B) (C) CAPACITY
100 $5 $4 $3
DES MOINES 100
(D)

200 $8 $4 $3
EVANSVILLE 300
(E)

$9 $7 $5
FORT 300
LAUDERDALE (F)

WAREHOUSE 300 200 200 700

REQUIREMENTS
 Developing an Initial Solution:
Northwest Corner Rule
3. Assign 100 units from Evansville to Boston. The
Evansville supply has now been exhausted but
Boston is still 100 units short. We move down
vertically to the next row in the Boston column.

TO ALBUQUERQUE BOSTON CLEVELAND FACTORY

FROM (A) (B) (C) CAPACITY
100 $5 $4 $3
DES MOINES 100
(D)

200 $8 100 $4 $3
EVANSVILLE 300
(E)

$9 $7 $5
FORT 300
LAUDERDALE (F)

WAREHOUSE 300 200 200 700

REQUIREMENTS
 Developing an Initial Solution:
Northwest Corner Rule
4. Assign 100 units from Fort Lauderdale to Boston.
This fulfills Boston’s demand and Fort
Lauderdale still has 200 units available.

TO ALBUQUERQUE BOSTON CLEVELAND FACTORY

FROM (A) (B) (C) CAPACITY
100 $5 $4 $3
DES MOINES 100
(D)

200 $8 100 $4 $3
EVANSVILLE 300
(E)

$9 100 $7 $5
FORT 300
LAUDERDALE (F)

WAREHOUSE 300 200 200 700

REQUIREMENTS
 Developing an Initial Solution:
Northwest Corner Rule
5. Assign 200 units from Fort Lauderdale to
Cleveland. This exhausts Fort Lauderdale’s
supply and Cleveland’s demand. The initial
shipment schedule is now complete.
Table 10.3
TO ALBUQUERQUE BOSTON CLEVELAND FACTORY
FROM (A) (B) (C) CAPACITY
100 $5 $4 $3
DES MOINES 100
(D)

200 $8 100 $4 $3
EVANSVILLE 300
(E)

$9 100 $7 200 $5
FORT 300
LAUDERDALE (F)

WAREHOUSE 300 200 200 700

REQUIREMENTS
 Developing an Initial Solution:
Northwest Corner Rule
■ We can easily compute the cost of this shipping
assignment
ROUTE
UNITS PER UNIT TOTAL
FROM TO

D A 100
SHIPPED x 5 ($)
COST = 500
COST ($)
E A 200 8 1,600
E B 100 4 400
F B 100 7 700
F C 200 5 1,000
4,200

■ This solution is feasible but we need to check

to see if it is optimal
 Vogel’s Approximation Method:
Another Way To Find An Initial Solution
■ Vogel’s Approximation Method (VAM) is not as
simple as the northwest corner method, but it
provides a very good initial solution, often
one that is the optimal solution
■ VAM tackles the problem of finding a good initial
solution by taking into account the costs
associated with each route alternative
■ This is something that the northwest corner rule
does not do
■ To apply VAM, we first compute for each row and
column the penalty faced if we should ship over
the second-best route instead of the least-cost
route
 Vogel’s Approximation Method
■ The six steps involved in determining an initial
VAM solution are illustrated below beginning
with the same layout originally shown in Table
10.2
VAM Step 1. For each row and column of the
transportation table, find the difference between
the distribution cost on the best route in the row
or column and the second best route in the row
or column
■ This is the opportunity cost of not using
the best route
■ Step 1 has been done in Table 10.11
 Vogel’s Approximation Method
■ Transportation table with VAM row and column
differences shown
OPPORTUNITY
3 0 0 COSTS
TO TOTAL
FROM
A B C
AVAILABLE
$5 $4 $3
D 100 100 1

$8 $4 $3
E 200 100 300 1

$9 $7 $5
F 100 200 300 2

TOTAL REQUIRED 300 200 200 700

Table 10.11
 Vogel’s Approximation Method

VAM Step 2. identify the row or column with the

greatest opportunity cost, or difference (column A
in this example)
VAM Step 3.Assign as many units as possible to the
lowest-cost square in the row or column selected
VAM Step 4. Eliminate any row or column that has
been completely satisfied by the assignment just
made by placing Xs in each appropriate square
VAM Step 5. Recompute the cost differences for the
transportation table, omitting rows or columns
eliminated in the previous step
 Vogel’s Approximation Method
■ VAM assignment with D’s requirements satisfied

OPPORTUNITY
31 03 02 COSTS
TO TOTAL
FROM
A B C
AVAILABLE

$5 $4 $3
D 100 X X 100 1

$8 $4 $3
E 300 1

$9 $7 $5
F 300 2

TOTAL REQUIRED 300 200 200 700

Table 10.12
 Vogel’s Approximation Method

VAM Step 6. Return to step 2 for the rows and

columns remaining and repeat the steps until
an initial feasible solution has been obtained
■ In this case column B now has the greatest
difference, 3
■ We assign 200 units to the lowest-cost square in
the column, EB
■ We recompute the differences and find the
greatest difference is now in row E
■ We assign 100 units to the lowest-cost square in
the column, EC
 Vogel’s Approximation Method
■ Second VAM assignment with B’s requirements
satisfied
OPPORTUNITY
31 03 02 COSTS
TO TOTAL
FROM
A B C
AVAILABLE

$5 $4 $3
D 100 X X 100 1

$8 $4 $3
E 200 300 1

$9 $7 $5
F X 300 2

TOTAL REQUIRED 300 200 200 700

Table 10.13
 Vogel’s Approximation Method
■ Third VAM assignment with E’s requirements
satisfied

TO TOTAL
FROM
A B C
AVAILABLE
$5 $4 $3
D 100 X X 100

$8 $4 $3
E X 200 100 300

$9 $7 $5
F X 300

TOTAL REQUIRED 300 200 200 700

Table 10.14
 Vogel’s Approximation Method
■ Final assignments to balance column and row
requirements

TO TOTAL
FROM
A B C
AVAILABLE
$5 $4 $3
D 100 X X 100

$8 $4 $3
E X 200 100 300

$9 $7 $5
F 200 X 100 300

TOTAL REQUIRED 300 200 200 700

Table 10.15
 Unbalanced Transportation Problems

■ In real-life problems, total demand is

frequently not equal to total supply
■ These unbalanced problems can be handled
easily by introducing dummy sources or dummy
destinations
■ If total supply is greater than total demand, a
dummy destination (warehouse), with demand
exactly equal to the surplus, is created
■ If total demand is greater than total supply, we
introduce a dummy source (factory) with a
supply equal to the excess of demand over
supply
 Unbalanced Transportation Problems

■ In either case, shipping cost coefficients of zero

are assigned to each dummy location or route as
no goods will actually be shipped
■ Any units assigned to a dummy destination
represent excess capacity
■ Any units assigned to a dummy source represent
unmet demand
 Demand Less Than Supply
■ Suppose that the Des Moines factory increases its
rate of production from 100 to 250 desks
■ The firm is now able to supply a total of 850
desks each period
■ Warehouse requirements remain the same (700)
so the row and column totals do not balance
■ We add a dummy column that will represent a fake
warehouse requiring 150 desks
■ This is somewhat analogous to adding a slack
variable
■ We use the northwest corner rule and either
stepping-stone or MODI to find the optimal
solution
 Demand Less Than Supply
■ Initial solution to an unbalanced problem
where demand is less than supply
TO DUMMY TOTAL
FROM
A B C WAREHOUSE AVAILABLE

$5 $4 $3 0
D 250 250

$8 $4 $3 0
E 50 200 50 300

$9 $7 $5 0
F 150 150 300

300 200 200

+ 150(0)150 850
WAREHOUSE
ToRtEaQl
50($5) + 50($8) + 200($4) + 50($3) + 150($5)
$3,350
=
UcIoRsEtM=E2N New Des
Table
TS 10.16
Moines capacity
 Demand Greater than Supply
■ The second type of unbalanced condition
occurs when total demand is greater than total
supply
■ In this case we need to add a dummy
row representing a fake factory
■ The new factory will have a supply exactly
equal to the difference between total demand
and total real supply
■ The shipping costs from the dummy
factory to each destination will be zero
 Demand Greater than Supply
■ Unbalanced transportation table for Happy
Sound Stereo Company
TO WAREHOUSE WAREHOUSE WAREHOUSE PLANT
FROM A B C SUPPLY
$6 $4 $9
PLANT W 200

$10 $5 $8
PLANT X 175

$12 $7 $6
PLANT Y 75
Totals
do not
WAREHOUSE 250 100 150
450 balance
DEMAND 500
Table
10.17
 Demand Greater than Supply
■ Initial solution to an unbalanced problem
in which demand is greater than supply
TO WAREHOUSE WAREHOUSE WAREHOUSE PLANT
FROM A B C SUPPLY
$6 $4 $9
PLANT W 200 200

$10 $5 $8
PLANT X 50 100 25 175

$12 $7 $6
PLANT Y 75 75

0 0 0
PLANT Y 50 50

W A R
ToE Ht O
a l l solut2i5o0n = 200($61)0+0
c o s tUoSfEiniti 0) + 101500($5) 25($8)
a + 50($1 +5 070 5($6)
$ +
DEMAND 50(0) = $2,850
Table 10.18
 Assignment Model Approach
■ The second special-purpose LP algorithm is
the assignment method
■ Each assignment problem has associated with it
a table, or matrix
■ Generally, the rows contain the objects or people
we wish to assign, and the columns comprise
the tasks or things we want them assigned to
■ The numbers in the table are the costs
associated with each particular assignment
■ An assignment problem can be viewed as a
transportation problem in which the capacity
from each source is 1 and the demand at each
destination is 1
 Assignment Model Approach
■ The Fix-It Shop has three rush projects to repair
■ They have three repair persons with different
talents and abilities
■ The owner has estimates of wage costs for each
worker for each project
■ The owner’s objective is to assign the three
project to the workers in a way that will result
in the lowest cost to the shop
■ Each project will be assigned exclusively to one
worker
 Assignment Model Approach
■ Estimated project repair costs for the Fix-It shop
assignment problem

PROJECT

PERSON 1 2 3

Adams $11 $14 $6

Brown 8 10 11

Cooper 9 12 7

Table 10.26
 Assignment Model Approach
■ Summary of Fix-It Shop assignment alternatives
and costs
PRODUCT ASSIGNMENT

1 2 3 LABOR TOTAL
COSTS ($) COSTS
($)
Adams Brown Cooper 11 + 10 + 7 28
Adams Cooper Brown 11 + 12 + 11 34
Brown Adams Cooper 8 + 14 + 7 29
Brown Cooper Adams 8 + 12 + 6 26
Cooper Adams Brown 9 + 14 + 11 34
Cooper Brown Adams 9 + 10 + 6 25

Table 10.27
 The Hungarian Method
(Flood’s Technique)
■ The Hungarian method is an efficient method
of finding the optimal solution to an
assignment problem without having to make
direct comparisons of every option
■ It operates on the principle of matrix reduction
■ By subtracting and adding appropriate numbers
in the cost table or matrix, we can reduce the
problem to a matrix of opportunity costs
■ Opportunity costs show the relative penalty
associated with assigning any person to a
project as opposed to making the best
assignment
■ We want to make assignment so that the
opportunity cost for each assignment is
zero
Three Steps of the Assignment Method

1. Find the opportunity cost table by:

(a) Subtracting the smallest number in each row
of the original cost table or matrix
from every number in that row
(b) Then subtracting the smallest number in
each column of the table obtained in part (a)
from every number in that column
2. Test the table resulting from step 1 to see
whether an optimal assignment can be made by
drawing the minimum number of vertical and
horizontal straight lines necessary to cover all
the zeros in the table. If the number of lines is
less than the number of rows or columns,
proceed to step 3.
Three Steps of the Assignment Method

3. Revise the present opportunity cost table by

subtracting the smallest number not covered by
a line from every other uncovered number. This
same number is also added to any number(s)
lying at the intersection of horizontal and
vertical lines. Return to step 2 and continue the
cycle until an optimal assignment is possible.
 Steps in the Assignment Method

Not
Set up cost table for optimal Revise opportunity cost table
problem in two steps:
Step (a)Subtract the smallest
number not covered by a line
1
from itself and every other
Find opportunity cost uncovered number
(a) Subtract smallest (b)add this number at
number in each row from every intersection of any
every number in that row, two lines
then
(b) subtract smallest
number in each column Optimal solution at zero
from every number in that locations. Systematically
column make final assignments.
Step
(a)Check each row and
2
column for a unique zero and
Test opportunity cost table to make the first assignment in
see if optimal assignments are that row or column
possible by drawing the
(b)Eliminate that row and
minimum possible lines on
column and search for
columns and/or rows such that Optima
another unique zero. Make
all zeros are covered l that assignment and proceed
in a like manner.
Figure
10.3
 The Hungarian Method
(Flood’s Technique)
■ Step 1: Find the opportunity cost table
■ We can compute row opportunity costs and
column opportunity costs
■ What we need is the total opportunity cost
■ We derive this by taking the row opportunity
costs and subtract the smallest number in
that column from each number in that column
 The Hungarian Method
(Flood’s Technique)
■ Cost of each person- ■ Row opportunity
project assignment cost table
PROJECT PROJECT
PERSON 1 2 3 PERSON 1 2 3

Adams $11 $14 $6 Adams $5 $8 $0

Brown 8 10 11 Brown 0 2 3

Cooper 9 12 7 Cooper 2 5 0

Table 10.28 Table 10.29

■ The opportunity cost of assigning Cooper

to project 2 is $12 – $7 = $5
 The Hungarian Method
(Flood’s Technique)
■ We derive the total opportunity costs by taking
the costs in Table 29 and subtract the smallest
number in each column from each number in
that column
■ Row opportunity ■ Total opportunity
cost table cost table
PROJECT PROJECT
PERSON 1 2 3 PERSON 1 2 3

Adams $5 $8 $0 Adams $5 $6 $0

Brown 0 2 3 Brown 0 0 3

Cooper 2 5 0 Cooper 2 3 0

Table 10.29 Table 10.30

 The Hungarian Method
(Flood’s Technique)
■ Step 2: Test for the optimal assignment
■ We want to assign workers to projects in such
a way that the total labor costs are at a
minimum
■ We would like to have a total
assigned opportunity cost of zero
■ The test to determine if we have reached an
optimal solution is simple
■ We find the minimum number of straight
lines necessary to cover all the zeros in the
table
■ If the number of lines equals the number
of rows or columns, an optimal solution
has been reached
 The Hungarian Method
(Flood’s Technique)
■ Test for optimal solution

PROJECT
PERSON 1 2 3

Adams $5 $6 $0

Brown 0 0 3 Covering line

1
Cooper 2 3 0

Table 10.31 Covering line

2

■ This requires only two lines to cover the zeros

so the solution is not optimal
 The Hungarian Method
(Flood’s Technique)
■ Step 3: Revise the opportunity-cost table
■ We subtract the smallest number not covered
by a line from all numbers not covered by a
straight line
■ The same number is added to every number
lying at the intersection of any two lines
■ We then return to step 2 to test this new
table
 The Hungarian Method
(Flood’s Technique)
■ Revised opportunity cost table (derived by
subtracting 2 from each cell not covered by a
line and adding 2 to the cell at the intersection
of the lines)
PROJECT
PERSON 1 2 3

Adams $3 $4 $0

Brown 0 0 5

Cooper 0 1 0

Table 10.32
 The Hungarian Method
(Flood’s Technique)
■ Optimality test on the revised opportunity cost
table
PROJECT
PERSON 1 2 3

Adams $3 $4 $0

Brown 0 0 5 Covering line

2
Cooper 0 1 0

Table 10.33 Covering line Covering line

1 3
■ This requires three lines to cover the zeros so
the solution is optimal
 Making the Final Assignment
■ The optimal assignment is Adams to project
3, Brown to project 2, and Cooper to project 1
■ But this is a simple problem
■ For larger problems one approach to making the
final assignment is to select a row or column
that contains only one zero
■ Make the assignment to that cell and rule out its
row and column
■ Follow this same approach for all the
remaining cells
 Making the Final Assignment
■ Total labor costs of this assignment are

ASSIGNMENT COST ($)

Adams to project 3 6

Brown to project 2 10

Cooper to project 1 9

Total cost 25
 Making the Final Assignment
■ Making the final assignments

(A) FIRST (B) SECOND (C)

THIRD ASSIGNMENT ASSIGNMENT ASSIGNMENT

1 2 3 1 2 3 1 2 3

Adams 3 4 0 Adams 3 4 0 Adams 3 4 0

Brown 0 0 5 Brown 0 0 5 Brown 0 0 5

Cooper 0 1 0 Cooper 0 1 0 Cooper 0 1 0

Table 10.34
Unbalanced Assignment Problems

■ Often the number of people or objects to be

assigned does not equal the number of tasks
or clients or machines listed in the columns,
and the problem is unbalanced
■ When this occurs, and there are more rows
than columns, simply add a dummy column or
task
■ If the number of tasks exceeds the number
of people available, we add a dummy row
■ Since the dummy task or person is nonexistent,
we enter zeros in its row or column as the cost
or time estimate
Unbalanced Assignment Problems
■ The Fix-It Shop has another worker available
■ The shop owner still has the same basic problem
of assigning workers to projects
■ But the problem now needs a dummy column to
balance the four workers and three projects
PROJECT
PERSON 1 2 3
DUMMY
Adams $11 $14 $6 $0
Brown 8 10 11 0
Cooper 9 12 7 0
Davis 10 13 8 0

Table 10.35