OPERATIONS RESEARCH

CHAPTER I

INTRODUCTION
Management Science/Operations Research/ Quantitative Techniques
When decision-making is too complex or the interests at stake are too important,
quite often we do not know or are not sure what to decide. In many instances, we
resort to informal decision support techniques such as tossing a coin, asking an
oracle, visiting an astrologer, etc. However formal decision support from an expert
has many advantages. Business Science focuses on the formal model-driven
decision support techniques such as mathematical programs for optimization, and
decision tree analysis for risky decisions. Such techniques are now part of our
everyday life. For example, when a bank must decide whether a given client will
obtain credit or not, a technique, called credit scoring, is often used.
In decision-making we may start the process of consideration. It is best to learn the
decision-making process for complex, important and critical decisions. Critical
decisions are those that cannot and must not be wrong.
The aim of this course is to make you a better decision maker by learning the
decision-making process. Decision-making is a complicated process that involves a
series of steps. This complication arises from the fact that your present goal
(including wants, resources, and abilities) dictates your choices; however, your
choices will change your goals. This influential-cycle keeps the decision-maker busy
all the time. Selecting your goals and your criteria for success is a dynamic process
and changes over time. The goal is the foundation for decision-making process. This
is true in almost all cases dealing with personal growth or organizational growth.
On a daily basis a manager has to make many decisions. Some of these decisions are
routine and inconsequential, while others have drastic impacts on the operations of
the firm for which he/she works. Some of these decisions could involve large sums of
money being gained or lost, or could involve whether or not the firm accomplishes its
mission and its goals.
In our increasingly complex world, the tasks of decision-makers are becoming more
challenging with each passing day. The decision-maker (i.e., the responsible
manager) must respond quickly to events that seem to take place at an ever-
increasing pace. In addition, a decision-maker must incorporate a sometimes-
bewildering array of choices and consequences into his or her decision. Routine
decisions are often made quickly, perhaps unconsciously without the need for a
detailed process of consideration. However, for complex, critical or important
managerial decisions it is necessary to take time to decide systematically.

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To make strategic decisions requires that one takes a structured approach following a
formal decision making process. Otherwise, it will be difficult to be sure that one has
considered all the key aspects of the decision.
The Industrial Revolution of the 19th century probably did more to shape life in the
modern industrialized world than any event in history. Large factories with mass
production created a need for managing them effectively and efficiently. The field of
Decision Science (DS) also known as Management Science (MS), Operations Research
(OR) in a more general sense, started with the publication of the Principles of
Scientific Management in 1911 by Frederick W. Taylor. His approach relied on the
measurement of industrial productivity and on time /motion studies in the factories.
The goal of his scientific management was to determine the best method for
performing tasks in the least amount of time, while unfortunately using the stopwatch
in an inhuman manner.
A basic education in OR/MS/DS for managers is essential. They are responsible for
leading the business system and the lives in that system. The business system is
dynamic in nature and will respond as such to disturbances internally and externally.
The OR/MS/DS approach to decision making includes the diagnosis of current
decision-making and the specification of changes in the decision process. Diagnosis is
the identification of problems (or opportunities for improvement) in current decision
behavior; it involves determining how decisions are currently made, specifying how
decisions should be made, and understanding why decisions are not made, as they
should be. Specification of changes in decision process involves choosing what
specific improvements in decision behavior are to be achieved and thus defining the
objectives.
Nowadays, the OR/MS/DS approach has been providing assistance to managers in
developing the expertise and decision tools necessary to understand the decision
problems, put them in analytical terms and then solve them. The OR/MS/DS analysts
are, e.g., "chiefs of staff for the president", "advisors", "and R&D modelers" "systems
analysts", etc. Applied Management Science is the science of solving business
problems. The major reason that MS/OR has evolved as quickly as it has is due to the
evolution in computing power.
Foundations of Good Decision-Making Process: When one talks of "foundations",
usually it includes historical, psychological, and logical aspects of the subject. The
foundation of OR/MS/DS/SS is built on the philosophy of knowledge, science, logic,
and above all creativity. Almost all decision problems have environments with similar
components as follows:

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 1. The decision-maker. The term decision-maker refers to an individual, not a
group.
2.The analyst who models the problem in order to help the decision maker,
3.Controllable factors (including your personal abilities and physical resources),
4.Uncontrollable factors,
5.The possible outcomes of the decision,
6.The environment/structural constraints
7. Dynamic interactions among these components.
Deterministic versus Probabilistic Models
All the decision models can be classified as either deterministic or probabilistic
models. In deterministic models your good decisions bring about good outcomes. You
get that which you expect, therefore the outcome is deterministic (i.e., risk-free).
However, in probabilistic decision models, the outcome is uncertain, therefore making
good decisions may not necessarily produce good outcomes. Unlike deterministic
models where good decisions are judged by the outcome alone, in probabilistic
models, the decision maker is concerned with both the outcome value and the
amount of risk each decision carries. When the outcome of your decision is rather
certain and all the important consequences occur within a single period, then your
decision problem is classified as a deterministic decision. However, in many
instances, these types of models are encumbered with the two most difficult factors -
uncertainty and delayed effects. Both difficulties can be overcome by probabilistic
modeling, which includes the time discounting factor.
After recognizing classification of decision-making components, the OR/MS/DS analyst
performs the following sequence with some possible feedback loops between its
steps:
1. Understanding the Problem: It is critical for a good decision maker to
clearly understand the problems, the objective, and the constraints involved.
2. Constructing an Analytical Model: This step involves the
"translation" of the problem into precise mathematical language in order to
make calculations and comparison of the outcomes under different possible
scenarios.
3. Finding a Good Solution: It is important here to choose the proper
solving technique, depending on the specific characteristics of the model.
After the model is developed, validation of the obtained results must be done
in order to avoid an unrealistic solution.

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 4. Communicating the Results with the Decision-Maker: The results
obtained by the OR/MS/DS analyst have to be properly communicated to the
decision-maker. If the decision-maker does not buy the OR/MS/DS analyst
recommendations, he/she will not implement any of them.

Successful OR/MS/DS modeling approach to decision-making demands a proper attitude

as well as an understanding of more technical matters.
Decision Science (DS) known also as Operations Research (OR), Management Science
(MS), and Success Science (SS) is the science of making decisions. To manage means
to utilize what is controllable, and to be able to predict what is uncontrollable in order
to achieve a specific objective. Science is a continuing search; it is a continuing
generation of theories, models, concepts, and categories. Management Science is the
science for managing and almost always involves decision-making.
In search of the genealogy of OR/MS, we might ask ourselves a more general
question "What is OR/MS/DS/SS?"

What Is OR/MS/DS/SS
Management Science (MS) often takes an analytical view of a decision before making
a decision. That is reflection before action, as a Chinese proverb says, "To chop a tree
quickly, spend twice the time sharpening the Ax." Carpenters say, "Measure twice,
cut once." It's no delay to stop to edge the tool.
This analytical approach is known by several different names: Operations Research
(OR), Operational Research (a UK-ism), Decision Sciences (DS), Systems Science,
Mathematical Modeling, Industrial Engineering, Critical Systems strategic thinking,
Success Science (SS), and Systems Analysis and Design. Analytical methods are
applied to planning and management problems in areas such as production and
operations, inventory management, scheduling, and capital budgeting. Techniques,
often using powerful computer programs, are available to solve problems ranging
from real-time control of specific business, industrial, agricultural, and administrative
operations to long-term planning models for corporations and public sector agencies.
It is ironic that the idea of utilizing knowledge from a variety of disciplines was a
central tenet of the early days in OR/MS. From the beginning, practical problems did
not fit into neat disciplinary boundaries. OR/MS/DS/SS became established in
organizations and interdisciplinary teams and positions included mathematicians,
statistician, psychologists, economists, sociologists, etc. However, over the years the
interdisciplinary teams were broken up and new recruits into OR/MS/DS/SS tended to
come from applied mathematical and statistical backgrounds.

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Academically, OR/MS/DS/SS became increasingly focused on mathematical models
and strategic solution algorithms. OR/MS/DS/SS was locked into a hard, technical
shell. In recent years, however, this situation is changing with the arrival of "soft"
methodologies and critical systems strategic thinking.
Systems modeling process depict a complex problem, with its many, interconnected
variables, in a way that amplifies and clarifies our understanding of the decision
problem. A good model does not solve the problem in itself, but allows us to
experiment with different systems variables to come up with new ideas about how to
tackle the decision problem.
The typical OR/MS/DS/SS approach is to build a model for the problem being studied.
Such a model is often (but not always) mathematical. Practical problems are often
unstructured and the definition and clarification of problems, as well as the building
of models, is an important part of the OR/MS/DS/SS methodology. Most people
discover that the understanding created by building a model is a very valuable part of
an OR/MS/DS/SS project. Once a model is built, algorithms often have to be used to
solve it. An algorithm is a series of steps that will accomplish a certain task. The
study, understanding, and invention of such algorithms is also an important part of
OR/MS/DS/SS modeling for decision-making. The decision maker might incorporate
some other perspectives of the problem such as cultural, psychological, etc., into the
management scientist's recommendations. Finally, communicative and political skills
are needed in implementing the results of an OR/MS/DS/SS model in a real-life
situation. OR/MS/DS/SS models are aimed at assisting the decision-maker in his/her
decision-making process and making sound decision.
You may ask, "Why must we learn the decision-making process?" Here are a few
motivating reasons:

· Organizations are becoming more complex.

·Environments are changing so rapidly that past practices are no longer adequate.
·The costs of making bad decisions have increased.
The field of OR/MS/DS/SS is always changing. Its changes are driven by the
technology it uses and that it extends, and the applications that it affects.
Progressive Approach to Modeling: Modeling for decision-making involves two
distinct parties, one is the decision-maker and the other is the model-builder known
as the analyst. The analyst is to assist the decision-maker in his/her decision-making
process. Therefore, the analyst must be equipped with more than a set of analytical
methods.

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Specialists in model building are often tempted to study a problem, and then go off in
isolation to develop an elaborate mathematical model for use by the manager (i.e.,
the decision-maker). Unfortunately the manager may not understand this model and
may either use it blindly or reject it entirely. The specialist may feel that the manager
is too ignorant and unsophisticated to appreciate the model, while the manager may
feel that the specialist lives in a dream world of unrealistic assumptions and
irrelevant mathematical language.
Such miscommunication can be avoided if the manager works with the specialist to
develop first a simple model that provides a crude but understandable analysis. After
the manager has built up confidence in this model, additional detail and
sophistication can be added, perhaps progressively only a bit at a time. This process
requires an investment a great deal of time on the part of the manager and sincere
interest on the part of the specialist in solving the manager's real problem, rather
than in creating and trying to explain sophisticated models. This progressive model
building is often referred to as the bootstrapping approach and is the most
important factor in determining successful implementation of a decision model.
Moreover the bootstrapping approach simplifies otherwise the difficult task of model
validating and verification processes.
The OR/MS/DS/SS modeling process is more than a set of analytical methods.
OR/MS/DS/SS models are aimed at assisting the decision-maker in his/her decision-
making process. A fundamental part of OR/MS/DS/SS modeling is the "systems
approach" to problem solving. This approach indicates that the context of
organizational problems is as important as the stated problem. Defining a problem,
collecting data, consulting with people involved in the solution, incorporating change
and implementing are all aspects of the OR/MS/DS/SS education and training. As it is
easier to make plans than to carry them out, models that are not to be implemented
are ones that were not drawn up correctly and taken seriously from the start.
The OR/MS/DS/SS modeling process helps to improve operations in business and
government through the use of scientific methods and the development of
specialized techniques. Operations Research is not "research"; it is the process cycle
of re-searching for an optimal (or desirable) strategic solution to the existing decision
problem/situation.
OR/MS/DS/SS modeling process provides systematic and general approaches to
problem solving for decision-making, regardless of the nature of the system, product,
or service. The approaches and tools used in OR/MS/DS/SS models are based on one
or more of the following analytical methods, simulation, and qualitative or logical

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reasoning. Many of these tools and approaches depend on computer-based
methodologies for implementation.
[

Cycle of Decision-Making
In summary, the OR/MS/DS/SS modeling process is the application of scientific
methods to complex organizational decision problems/opportunities. The
OR/MS/DS/SS models are aimed at assisting the decision-maker in his/her decision-
making process. This modeling process is now widely used in the manufacturing
industry, least cost distribution of goods, and finance functions as well as in service
industries, and the health and education sectors. Improvement of an existing system
and good designs for new systems are the aims of OR/MS.

The OR/MS/DS/SS modeling process is one of the greatest innovative decision-making tools of
the twentieth century.

Historical Needs for OR/MS

Until the middle of the 19th century, most industrial enterprises only employed a few
workers. However, as companies expanded, it became less and less feasible for one
person to manage all of the new managerial functions of the business effectively.
New scientific methodologies were developed to provide assistance to each new type
of managerial function as it appeared. As more specialized forms of management
emerged, more specialized sub-functions, such as statistical quality control,
equipment maintenance, marketing research, and inventory control emerged.
Whenever a managerial function is broken down into a set of different sub-functions,
a new task, called the executive function of management, is created to integrate
the diverse sub-functions so that they efficiently serve the interests of the business
as a whole. The executive function evolved gradually with organizations themselves.
However, increasing demands were made on the manager who, in turn, sought aid
outside the organization. This gave rise to management consultants. What we call
OR/MS/DS/SS today is, in fact, the use of scientific tools to aid the executive.
OR originated in Great Britain during World War II to bring mathematical or
quantitative approaches to bear on military operations. Since then OR/MS/DS/SS has
evolved to be applicable to the management of all aspects of a system, product, or
service, and hence is often referred to as Systems Science or Management Science. It
has now become recognized as an important input to decision-making in a wide
variety of applications in business, industry, and government .
The term OR arose in the 1940's when research was carried out on the design and
analysis of mathematical models for military operations. Since that time the scope of
OR has expanded to include economics (known as econometrics), psychology

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(psychometrics), sociology (socio-metrics), marketing (marketing research and
marketing science), astrology (astronomy), and corporate planning problems. The
growing complexity of management has necessitated the development of
sophisticated mathematical techniques for planning and decision-making, and the
OR/MS/DS/SS features prominently in this structured decision-making process cycle
by providing a quantitative evaluation of alternative policies, plans, and decisions.
The mathematical disciplines most widely used in OR/MS/DS/SS modeling process
include mathematical programming, probability and statistics, and computer science.
Some areas of OR, such as inventory control, production control, and scheduling
theory, have grown into sub-disciplines of their own right and have become largely
indispensable in the modern world.
Military organizations had gone through the same type of evolution as other
businesses and industries. This organizational evolution took place in the twenty-year
gap between the end of World War I and the beginning of World War II when the
military leadership had to turn to teams of scientists for aid. These teams of scientists
were usually assigned to the executive in charge of operations; hence their work
came to be known as Operational Research in the United Kingdom and by a variety of
names in the United States: Operation Research, Decision Science, Operational
Analysis, System analysis, Success Science, and Management Science. The name
Operations Research is the most widely used.
The potential of computer and information systems as new tools for management
forced the non-technically trained executives to begin to look for help in the
utilization of the computer. The emerging search for assistance was accelerated by
the outbreak of the Korean War. This vigorous growth of OR in the military continued
to provide rapid applicability to other industries and sectors.

The Nature and Meaning of OR/MS/DS/SS

Many definitions of OR/MS/DS/SS have been offered, as well as many arguments as to
why it cannot be defined. The following definitions provide a useful basis for an initial
understanding of the nature of OR/MS:
A scientific method of providing executive management with a quantitative base for
decisions regarding operations under their control (Mores-Kimball 1943). ..
The application of the scientific method by inter-disciplinary teams to problems
involving the control of organized (man-machine) systems so as to provide solutions
which best serve the purpose of the organization as a whole (Ackoff- Sasieni 1968).
Scientific approach to problem solving for executive management (Wagner 1969).

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Optimal decision-making in, and modeling of, deterministic and probabilistic systems
that originate from real life. These applications, which occur in government, business,
engineering, economics, and the natural and social sciences, are largely
characterized by the need to allocate limited resources. In these situations,
considerable insight can be obtained from scientific analysis, such as that provided by
OR/MS/DS/SS (Hiller-Lieberman 1974).
A branch of applied mathematics wherein the application is to the decision-making
process (Gross 1979).
Comparing definitions given by More-Kimball and Gross, the divergence is notable
after almost 40 years: in one case, OR/MS/DS/SS is defined as scientific method, while
in the other it is seen as a branch of mathematics.
In examining these definitions, it should be noted that neither the old and well-
established scientific discipline nor science itself has ever been defined in a way that
is acceptable to most practitioners.

The Methodology of OR/MS

OR/MS/DS/SS is the scientific method of decision-making. In most discussions of the
general scientific method you would find certain stages and essential processes:
Although these phases of an OR/MS/DS/SS project are normally initiated in the order
listed, they usually do not terminate in this order. In fact, each stage usually
continues until the project is completed and continuously interacts with the others.

Reference: http://home.ubalt.edu/ntsbarsh/Business-stat/home.html

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1.1. DEFINITION
Operations Research: is defined by many authors in different ways.
However, the following definition is proposed here.

“Operations Research is a systematic analysis of a problem through

scientific methods, carried out by appropriate specialists, working together as
a team, constituted at the instance of management for the purpose of finding
an optimum and the most appropriate solution, to meet the given objective
under a given set of constraints.”

Meaning of Operations Research

From the concept and definition given above, Operations Research is:
1. The application of scientific methods, techniques and tools to the problem
to find an answer
2. A management tool in the hands of a manager to take a decision
3. A scientific approach to decision-making process
4. An “applied research” aims at finding a solution for an immediate
problem facing a society, industry or a business enterprise. This is not
“fundamental research”
5. A decision-oriented research, using scientific methods, for providing
management a quantitative basis for taking decision regarding operations
under its control
6. Applied decision theory. It uses scientific, mathematical and logical means
to take decisions.

1.2. DECISION MAKING

Making appropriate decision is the most VITAL aspect in management. Every
one of us takes number decisions every day. Some are important; some are
trivial. Some decisions initiate a set of activities; some put an end to a certain
activities. In business environment right decisions at the right times ensure
success. This shows the importance of decision-making.

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A Problem is any variation between what was planned and what is actually
have/produced.

Problem solving can be defined as the process of identifying a difference

between some actual and some desired states of affairs and then taking
action to resolve the difference.

Decision-making requires for all human being because each of us make

decision every day in our life. Thus, decision-making is universal. Decision-
making is a rational selection among alternatives at hand.

Definition
Decision making is the process of selecting or choosing based on some
criteria, the best among the alternatives.

The decision making process: Steps in the process of rational

decision-making are:
1. Identify and define the problem
Problem is a necessary condition for a decision, i.e. here would be no need
for decisions if problems did not exist.
2. Determine the set of alternative solutions.
3. Determine the criteria to evaluate alternatives.
=>Identifying those characteristics that are important in making the
decision.
4. Analyze the alternatives.
==>Based on the advantages and disadvantages of each alternative.
5. Select the best alternative
==> Select the best alternative that suits to solve our decision problem. In
selecting the best alternative, factors such as risk, timing and limiting
factors should be considered adequately
6. Implementing the solution
==> Putting the decision into action
7. Establishing a control, follow up and evaluation system
==>On going actions need to be monitored
==>Following the decision
==>Evaluate the results and determine if a satisfactory solution has been
obtained.

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The Decision-Making Environment
Decisions are made under three basic conditions as:
 Decision under certainty
 Decision under risk
 Decision under uncertainty

i. Decision making under conditions of certainty

The decision maker has perfect knowledge about the outcome.
In this situation, we are reasonably sure what will happen when we make a decision. The
information is available & is considered to be reliable & we know the cause & effect relationships.
Example: If you decide to invest your money in saving account in the Commercial
Bank of Ethiopia, You are certain that you will earn three percent interest.

ii. Decision making under condition of risk

Usually, decision makers cannot have a precise knowledge about the outcome of a decision.
Decision makers may only be able to attach a probability to the expected outcomes of each
alternative.

Under this situation, one may have factual information, but it may be incomplete.
Example: If we gamble by tossing a fair coin, the probability that a tail will turn up is 50%.

iii. Decision making under conditions of uncertainty

It is a case where neither there is complete data nor probabilities can be assigned to the
surrounding condition. It is the most difficult for a manager.

Some conditions that are uncontrollable by management include competition, government

regulations, technological advances, the overall economy, & the social & cultural tendencies of
society.

Example: A corporation that decides to expand its operation, launching a new product, or
developing of a new technology in a strong country may know little about its culture, laws,
economic environment, or politics. The political situation may be so volatile that even experts
cannot predict a possible change in government.

1.3. QUNATITIATIVE ANALYSIS PROCESS

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*Qualitative skill can be developed through experience. It is inherent.
The three basic quantitative analysis processes are:
1. Model development
2. Data preparation
3. Model solution

1.Model development
Model is a representation of real objects/situations

Following are types of models:

a. Physical (icon) model
This is the representation of the situation, problem or object.
It is also called Static Model. It is given in two or three dimensions. It is a representation of the real
object.
Example:
 The structure of an atom
 Model of an airplane
 Photograph of a machine
 Layout drawing of a factory
 Glob
b . Analogue Models:
These are abstract models mostly showing inter and intra relationships
between two or more parameters.
For example:
It may show the relationship between an independent variable (input) with
that of a dependent variable (output). For instance; histogram, frequency
table, cause-effect diagram, flow charts, Gantt charts, price-demand graph,
world map and others.
:Is two dimensional.

c. Symbolic or Mathematical models

This is also an abstract model. Here a set of relations is represented in the
form of mathematical equations, using symbols to represent various
parameters.
Example:
1. (x + y)2=x2+2xy+y2

2. Max.Z=3000x1 +2500x2
Subject to:

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 2x1+x2 < 40
x1+3x2 < 45
x1 < 12
x1 , x2 > 0

x1 and x2 are decision variables

Objective Function:
A mathematical statement of the goal of an organization, stated as intent to
maximize or to minimize some important quantity such as profits or costs.

Max.Z=3000x1 +2500x2 is the objective function

Constraint:
A restriction on the resources available to a firm (stated in the form of an
inequality or an equation.)
2x1+x2 < 40
x1+3x2 < 45 Are constraints
x1 < 12
x1, x2 > 0 x1, x2 > 0 is non-negativity constraint

2. Data presentation
Data represent the values of inputs to the model.

Max.Z=3000x1 +2500x2
Subject to:
2 x1+x2 < 40
x1+3x2 < 45
x1 < 12
x1, x2 > 0

3. Model solution: Is optimal solution

From the above equation, x1=12, x2=11 and Max.Z= $63500

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Trial and error method
In this method a certain algorithm is developed. One starting point is an initial
solution, which is the first approximation .The method of solution, is repeated
with a certain set of rules so that initial solution is gradually modified at each
subsequent solution till optimal solution is reached. There are certain criteria
laid down to check whether the solution has become an optimal solution.
These trial solutions are called Iterations and the method is called iterative
process. The classical example of trial and error method is Linear
Programming
Then the next step after iteration is model testing and validation.

1.4. MANAGEMENT SCIENCE IN PRACTICE

There are various techniques used in O.R. Some of these are listed here:
o Probability theory
o Linear Programming
o Transportation algorithm
o Assignment problems
o Queuing Theory
o PERT/CPM Method etc
OR techniques are ’application specific’. Maximum benefit can be derived
from selecting most appropriate techniques for each specific area or problem.
Appropriate selection of OR is an equally important task. Each technique has
its own advantages and limitations .In all such cases, the ability of the
Manager is tested in appropriate selection of OR technique.

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