UNIT 1

1.0 Introduction to Operation Research

1.1.What is operations research?
Operations Research (OR) is a science which deals with problem, formulation, solutions and
finally appropriate decision making. The objective of the operations research models is to
attempt and to locate best or optimal solution under the constraints.

“OR is concerned with scientifically deciding how to best design and operate man-machine
system usually requiring the allocation of scare resources.”

– Operations Research Society, America

“OR is a scientific knowledge through interdisciplinary team effort for the purpose of
determining the best utilization of limited resources.”
– H.A. Taha

“OR is a scientific approach to problem solving for executive management”.

– H.M. Wagner

“Operations research is the systematic application of quantitative methods, techniques and

tools to the analysis of problems involving the operation of systems.”
– Daellenbach and George, 1978

“Operations research may be described as a scientific approach to decision-making that

involves the operations of organizational system.”
– F S Hiller and G J Lieberman, 1980

1.2.History of Operations Research

It is believed that Charles Babbage is the father of the Operational Research due to his
research about the transportation's costs and sorting of mail realized for the Uniform Penny
Post in England in 1840 but it could not get noticed till World War II.
 The term Operations Research was first coined in 1940 by McClosky and Trefthen in
a small town, Bowdsey, of the United Kingdom. This new science came into existence in
military context. During World War II, military management called on scientists from various
disciplines and organized them into teams to assist in solving strategic and tactical problems
(ie) to discuss, evolve and suggest ways and means to improve the execution of various
military projects. By their joint efforts, experience and deliberations, they suggested certain
approaches that showed remarkable progress. This new approach to systematic and scientific
study of the operations of the system was called the Operations Research or Operational
Research (abbreviated as O.R). During the year 1950, O.R achieved recognition as a subject
worthy of academic study in the Universities. Since then, the subject has been gaining more
and more importance for students of Economics, Management, Public Administration,
Behavioral Sciences, Social Work, Mathematics, Commerce and Engineering. Operations
Research Society of America was formed in 1950 and in 1957 the International Federation of
O.R Societies was established.

1.3.Operational Research in India

In India, Operational Research came into existence in 1949 with the opening of an
Operational Research Unit at the Regional Research Laboratory at Hyderabad. In 1953, an
Operational Research Unit was established in the Indian Statistical Institute, Calcutta for the
application of Operational Research methods in national planning & survey. Operational
Research Society of India was formed in 1957. It became a member of the International
Federation of Operational Research Societies in 1959.

1.4.Features of Operations Research

The significant features of operations research include the followings:
a) Decision-making: Every industrial organisation faces multi facet problems to identify best
possible solution to their problems. OR aims to help the executives to obtain optimal
solution with the use of OR techniques. It also helps the decision maker to improve his
creative and judicious capabilities, analyse and understand the problem situation leading to
better control, better co-ordination, better systems and finally better decisions.
 b) Scientific Approach: OR applies scientific methods, techniques and tools for the purpose
of analysis and solution of the complex problems. In this approach there is no place for
guess work and the person bias of the decision maker.
c) Inter-disciplinary Team Approach. Basically, the industrial problems are of complex
nature and therefore require a team effort to handle it. This team comprises of scientist
/mathematician and technocrats who jointly use the OR tools to obtain a optimal solution of
the problem. They try to analyse the cause-and-effect relationship between various
parameters of the problem and evaluates the outcome of various alternative strategies.
d) System Approach. Systems approach is based on the generalization that everything is inter-
related and interdependent. The main aim of the system approach is to evaluate each action
in terms of effects on all sub systems and system as a whole.
e) Use of Computers. The models of OR need lot of computation and therefore, the use of
computers becomes necessary. With the use of computers, it is possible to handle complex
problems requiring large number of calculations.
The objective of the operations research models is to attempt and to locate best or
optimal solution under the specified conditions. For the above purpose, it is necessary that a
measure of effectiveness has to be defined which must be based on the goals of the
organization. These measures can be used to compare the alternative courses of action taken
during the analysis.

1.5.Use, Scope and Applications of Operations Research

Today, almost all fields of business and government utilizing the benefits of Operations
Research. There are voluminous of applications of Operations Research. Although it is not
feasible to cover all applications of O.R. in brief. The following are the abbreviated set of
typical operations research applications to show how widely these techniques are used today:
a) Construction:
 Project scheduling, monitoring and control
 Determination of proper work force
 Deployment of work force
 Allocation of resources to projects
b) Facilities Planning:
 Factory location and size decision
 Estimation of number of facilities required
 Hospital planning
 International logistic system design
 Transportation loading and unloading
 Warehouse location decision
c) Finance:
 Building cash management models
 Allocating capital among various alternatives
 Building financial planning models
 Investment analysis
 Portfolio analysis
 Dividend policy making
d) Manufacturing:
 Inventory control
 Marketing balance projection
 Production scheduling
 Production smoothing
e) Marketing:
 Advertising budget allocation
 Product introduction timing
 Selection of Product mix
 Deciding most effective packaging alternative
f) Organizational Behavior / Human Resources:
 Personnel planning
 Recruitment of employees
 Skill balancing
 Training program scheduling
 Designing organizational structure more effectively
 g) Purchasing:
 Optimal buying
 Optimal reordering
 Materials transfer
h) Research and Development:
 R & D Projects control
 R & D Budget allocation
 Planning of Product introduction

The main fields where OR is extensively used are given below, however, this list is not
exhaustive but only illustrative.
I. National Planning and Budgeting: OR is used for the preparation of Five-Year Plans,
annual budgets, forecasting of income and expenditure, scheduling of major projects of
national importance, estimation of GNP, GDP, population, employment and generation of
agriculture yields etc.
II. Defense Services: Basically, formulation of OR started from USA army, so it has wide
application in the areas such as: development of new technology, optimization of cost and
time, tender evaluation, setting and layouts of defense projects, assessment of “Threat
analysis”, strategy of battle, effective maintenance and replacement of equipment, inventory
control, transportation and supply depots etc.
III. Industrial Establishment and Private Sector Units: OR can be effectively used in plant
location and setting finance planning, product and process planning, facility planning and
construction, production planning and control, purchasing, maintenance management and
personnel management etc. to name a few.
IV. R & D and Engineering: Research and development being the heart of technological
growth, OR has wide scope for and can be applied in technology forecasting and evaluation,
technology and project management, preparation of tender and negotiation, value
engineering, work/method study and so on.
V. Business Management and Competition: OR can help in taking business decisions under
risk and uncertainty, capital investment and returns, business strategy formation, optimum
 advertisement outlay, optimum sales force and their distribution, market survey and analysis
and market research techniques etc.
VI. Agriculture and Irrigation: In the area of agriculture and irrigation also OR can be useful
for project management, construction of major dams at minimum cost, optimum allocation of
supply and collection points for fertilizer/seeds and agriculture outputs and optimum mix of
fertilizers for better yield.
VII. Education and Training: OR can be used for obtaining optimum number of schools with
their locations, optimum mix of students/teacher student ratio, optimum financial outlay and
other relevant information in training of graduates to meet out the national requirements.
VIII. Transportation: Transportation models of OR can be applied to real life problems to
forecast public transport requirements, optimum routing, forecasting of income and expenses,
project management for railways, railway network distribution, etc. In the same way it can be
useful in the field of communication.
IX. Home Management and Budgeting: OR can be effectively used for control of expenses to
maximize savings, time management, work study methods for all related works. Investment
of surplus budget, appropriate insurance of life and properties and estimate of depreciation
and optimum premium of insurance etc.

1.6.Phases of Operations Research: OR is a logical and systematic approach to provide a

rational basis for decision-making. The phases of OR must be logical and systematic. The
various steps required for the analysis of a problem under OR are as follows:
Step. 1 Defining the problem: Problem definition involves the process of identifying,
understanding, and describing the problem being faced by an organization. It helps to
define the objective(s) to be achieved, and the alternative courses of action.
The procedure begins with gathering information (data) of the organizational
structure, communication and control system, objectives and expectations. Such
information will help in assessing the difficulty likely to be faced in terms of costs,
time, resources, probability of success of the study, etc.
Step. 2 Formulating a mathematical model: After the problem is clearly defined and
understood, the next step is to collect required data and then formulate a mathematical
model.
 Model formulation requires to define relationships among decision variables.
These models contain:
1. Objective function
2. Decision variables
3. Constraints
4. Functional relationship
Objective Function: It represents the criterion of evaluating alternative
courses of action in terms of value of decision variables so as to optimize (minimized
or maximized) the desired performance.
Decision Variables: These are certain factors (or variables) associated with
the problem whose values are to be determined by solving the model. The possible
values assigned to these variables are called decision alternatives. For example, in
queuing theory, the number of service facilities is the decision variable.
Constraints: There are certain constraints (limitations) on the use of
resources, and such constraints arise due to organizational policy, legal restraints or
limited resources such as space, money, manpower, material, etc. The constraints on
the use of resources are expressed either in the form of equations or inequalities.
Functional Relationships: In a decision problem, the decision variables in the
objective function and in the constraints are connected by a specific functional
relationship.
Step. 3 Solving the mathematical model: Once a mathematical model of the problem
has been formulated, the next step is to obtain numerical values of decision variables.
In this step the solution of the problems is obtained with the help of model and data
input.
Step. 4 Validating the solution: After solving the mathematical model, such solution
is not implemented immediately and it is important to review the solution to see
whether value of variables make sense and that the resulting decisions can be
implemented.
Some of the reasons for validating the solution are:
I. Mathematical model may not have considered all constraints present in
study because few constraints may either be omitted or incorrect.
 II. Certain aspects of the problem may have been overlooked, omitted or
simplified.
III. The data may have been incorrectly estimated or recorded.
The end result of this step is solution that is desirable and supports current
organizational objectives.
Step. 5 Implementing the solution: Before implementing the solution, the decision-
maker should ensure to select alternatives that are capable of being implemented.
Further, it is also important to ensure that any solution implemented is continuously
reviewed and updated in the light of a changing environment.
In any case, the decision-maker who is in the best position to implement
solution (or result), must be aware of the objective, assumption, omissions and
limitations of the model.
Step. 6 Modifying the model: For a mathematical model to be useful, the degree to
which it actually represents the system or problem being modelled must be
established. If during validation the solution cannot be implemented, then identify the
constraint(s) that were omitted during the mathematical model formulation or find out
whether some of the original constraints were incorrect. In all such cases, return to the
problem formulation step and carefully make the appropriate modifications to
represent the given problem more accurately.
A model must be applicable for a reasonable time period and should be
updated from time to time, taking into consideration the past, present and future
aspects of the problem.
Step. 7 Establishing controls over the solution: The changes within the environment
(society or business) influence the continuing validity of models and their solutions.
Thus, a control procedure needs to be developed for detecting significant changes in
decision variables of the problem, without having to build a model every time a
significant change occurs.
1.7.Limitations of Operations Research: OR has some limitations however, these are related to
the problem of model building and the time and money factors involved in application rather
than its practical utility. Some of them are as follows:
I. Magnitude of Computation. Operations research models try to find out optimal
solution taking into account all the factors. These factors are enormous and expressing
them in quantity and establishing relationships among these require voluminous
calculations which can be handled by computers.
II. Non-Quantifiable Factors. OR provides solution only when all elements related to a
problem can be quantified. All relevant variables do not lend themselves to
quantification. Factors which cannot be quantified, find no place in OR study. Models
in OR do not take into account qualitative factors or emotional factors which may be
quite important.
III. Distance between User and Analyst. OR being specialist’s job requires a
mathematician or statistician, who might not be aware of the business problems.
Similarly, a manager fails to understand the complex working of OR. Thus there is a
gap between the two. Management itself may offer a lot of resistance due to
conventional thinking.
IV. Time and Money Costs. When basic data are subjected to frequent changes,
incorporating them into the OR models is a costly proposition. Moreover, a fairly
good solution at present may be more desirable than a perfect OR solution available
after sometime. The computational time increases depending upon the size of the
problem and accuracy of results desired.
V. Implementation. Implementation of any decision is a delicate task. It must take into
account the complexities of human relations and behaviour. Sometimes, resistance is
offered due to psychological factors which may not have any bearing on the problem
as well as its solution.
 2.0 Decision Making Environment

Decision analysis is an analytical approach of comparing decision alternatives in terms of expected

outcomes.
The success or failure of an organization depends on the ability of making acceptable decisions on
time. To arrive at such a decision, a decision-maker:
1. Needs to enumerate feasible and viable courses of action (alternatives or strategies)
2. Needs to project the consequences associated with each course of action
3. Need to measure of effectiveness every course of action(alternative) to identify the best
course of action.
Decisions are taken by business manager under different types of environment and these
decision making environments are based on the degree of knowledge of decision maker :
complete knowledge (i.e. certainty), risk and uncertainty.

2.1.Key terms
2.1.1. States of nature: A state of nature is an event or scenario that is not under the
control of decision makers. For instance, it may be the state of economy (e.g.
inflation), a weather condition, a political development, etc. The states of nature
(Events) are mutually exclusive and collectively exhaustive with respect to any
decision problem.
2.1.2. Act / Decision alternatives/Alternative course of action: There is a finite
number of decision alternatives available to the decision-maker at each point of time
when a decision is made. The number and type of such alternatives may depend on the
previous decisions made and their outcomes.
2.1.3. Outcome: Outcome is a result of combination of decision alternative (course
of action) and States of nature (Event). For example, if we decide to carry
umbrella(alternative) and there is a rain (Event), we will get safety from rain
(outcome).
2.1.4. Payoff: It is a calculated value of an outcome.
2.2.Types of Decision-Making Environments
To arrive at an optimal decision, it is essential to have an exhaustive list of decision-
alternatives, knowledge of decision environment, and use of appropriate quantitative
approach for decision-making.
In this section three types of decision-making environments: certainty, uncertainty,
and risk, have been discussed. The knowledge of these environments helps in choosing the
quantitative approach for decision-making.
Type 1: Decision-Making under Certainty: In this decision-making environment,
decision-maker has complete knowledge (perfect information) of outcome due to each
decision-alternative (course of action). In such a case he would select a decision
alternative that yields the maximum return (payoff) under known state of nature.
For example, the decision to invest in National Saving Certificate, Indira
Vikas Patra, Public Provident Fund, etc., is where complete information about the
future return due and the principal at maturity is known.
Type 2: Decision-Making under Risk: In this decision-environment, decision-maker
does not have perfect knowledge about possible outcome of every decision
alternative. It may be due to more than one states of nature.
In a such a case he makes an assumption of the probability for occurrence of
particular state of nature.
Type 3: Decision-Making under Uncertainty: In this decision environment, decision-
maker is unable to specify the probability for occurrence of particular state of nature.
Thus, decisions under uncertainty are taken even with less information than
decisions under risk. For example, the probability that Mr X will be the prime minister
of the country 15 years from now is not known.

2.3.Decision-Making Under Certainty

The conditions of certainty are very rare particularly when significant decisions are involved.
Under conditions of certainty, the decision-maker knows which particular state of nature will
occur or equivalently, he is aware of the consequences of each course of action with
certainty.
2.4.Decision-Making Under Risk
 In this decision-making environment, decision-maker has sufficient information to assign
probability to the likely occurrence of each outcome (state of nature). Knowing the
probability distribution of outcomes (states of nature), the decision-maker needs to select a
course of action resulting a largest expected (average) payoff value. The expected payoff is
the sum of all possible weighted payoffs resulting from choosing a decision alternative.
Decision maker uses broadly two types of criteria for decision making under risk:
1. Expected monetary value criteria (EMV)
2. Expected opportunity loss criteria (EOL)
Note: EMV criteria and EOL criteria both are based of probability and these
probabilities are based on past experience of decision maker, intuition of decision
maker and past data available with decision maker. However, practically these
probabilities may not be perfect indicator of future possibilities therefore decision
maker collects more perfect and reliable information with the help of marketing
survey, test marketing etc. Decision maker needs to spend some amount for collecting
this information and this amount may be calculated through EVPI method. EVPI
stands for expected value of perfect information.

2.5.Decision-Making Under Uncertainty

When Decision maker does not know probability of different events, then he takes decision
under uncertainty. In such a case, decisions are generally taken on the basis of circumstances,
approach of decision maker, policy of company etc. Decision maker may use any of these
following criteria for decision making under uncertainty.
I. Optimism (Maximax or Minimin) criterion
II. Pessimism (Maximin or Minimax) criterion
III. Equal probabilities (Laplace) criterion
IV. Coefficient of optimism (Hurwiez)
V. Regret (salvage) criterion
 3.0 Decision Tree
A decision tree analysis involves the construction of a diagram that shows, when decisions are
expected to be made – in what sequence, their possible outcomes, and the corresponding payoffs.
Decision tree is a graphical model of decision process.
A decision tree consists of nodes, branches, probability estimates, and payoffs. There are two
types of nodes:
I. Decision node: A decision node is represented by a square and represents a point of time
where a decision-maker must select one alternative course of action among the available. The
courses of action are shown as branches or arcs emerging out of decision node.
II. Chance node: Each course of action may result in a chance node. The chance node is
represented by a circle and indicates a point of time where the decision-maker will discover
the response to his decision.
Branches emerge from and connect various nodes and represent either decisions or states of nature.
There are two types of branches:
I. Decision branch: It is the branch leading away from a decision node and represents a course
of action that can be chosen at a decision point.
II. Chance branch: It is the branch leading away from a chance node and represents the state of
nature of a set of chance events. The assumed probabilities of the states of nature are written
alongside their respective chance branch.
III. Terminal branch: Any branch that makes the end of the decision tree (not followed by either
a decision or chance node), is called a terminal branch. A terminal branch can represent
either a course of action. The terminal points of a decision tree are supposed to be mutually
exclusive points so that exactly one course of action will be chosen.

The payoff can be positive (i.e., revenue or sales) or negative (i.e., expenditure or cost) and it can be
associated either with decision or chance branches

A decision tree is analyzed using roll back technique. In this technique, we start from last decision
node and reach to first decision node.