OPERATION RESEARCH

&
DECISION MODELS

Prof. Srinivasan Kidambi

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 Table of Contents

No. of Page
Topic
Problems No.

Assignment 16 3–9

Transportation 17 10 – 18

Decision Trees 11 19 – 23

Statistical Decision Theory 15 24 – 28

Replacement 8 29 – 31

Game Theory 5 32 – 38

Inventory Management 19 39-42

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Assignment

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 Assignment Model
Algorithm

Step – 0 Verify whether the given problem is maximization or minimization, if it is

maximization convert in to minimization by selecting the largest element in
the matrix and subtracting other elements from the largest element
Step – 1 Verify whether No. of rows = no of columns, if not introduce a dummy row or
column with zero elements
Step – 2 Subtract row minimum
Step – 3 Subtract column minimum and assign zeros
Note – 1 – If number of assignments = number of rows, optimal assignment is made ,
if not proceed further
Note – 2 – Assignment of zeros refer procedure A
Step – 4 Draw minimum number of lines to cover all zeros (refer procedure B ) ,
Always the number of lines should be equal to number of assignments
Step – 5 i - Select the smallest uncovered elements
ii - Subtract the smallest uncovered element from the uncovered element
iii – add the smallest uncovered element , to the element at the intersection of two
lines
iv – If the element is covered by a single line write as it is
v – Assign the zeros as per procedure A , if optimal assignment is not made at this
stage also repeat the procedure from Step no – 4

Procedure A – Assigning Zeros –

Step – 1 (A)- if there is only one zero in a row assign that zero and delete the
corresponding zeros in that column
(B)- If you find more than one zero in a row , skip that row and go to
the next row
(C)- After completing row wise assignment , go through column wise
Step – 2 (A) – if there is only one zero in a column assign that zero and delete
the corresponding zeros in that row ,
(B) – if you find more than one zero in a column , skip that column and
go to next column for assignment
(C) – After completing column wise assignment , if any zeros are left
out , repeat the above procedure till all the zeros are assigned

Procedure – B for drawing min number of lines

Step – 1 Select the row or column having an assigned zero with max number of
deleted zeros , draw a line through assigned zero covering all the
elements , corresponding to that row or column
Step – 2 Select again the assigned zero with next maximum number of deleted
zeros, and draw the line covering all the elements , If only assigned
zero is left out with no deleted zeros then a line can be drawn through
assigned zero covering all the elements either horizontally or vertically

Step – 3 Repeat the above procedure till all zeros are covered by line

Note – verify whether number of lines = number of assignments

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 REPLACEMENT

The problem of replacement is to decide when an item should be replaced economically

by another of the same type or by a different one

The situation under which replacement of certain item is to be done are

• Old item has failed and does not work at all or the old item is
expected to fail shortly
• The old item has deteriorated and requires expensive maintenance.
• A better design of equipment has been developed

The failure of an item can be classified under two categories

• Gradual failure – all mechanical items will come under this

category
• Sudden failure – all electrical and electronic item will come under
this category

The items that fail may be broadly classified into

• Items that Deteriorate with time ( gradual failure )

1. Money value is not considered
2. Money value is considered
•Items that fail suddenly ( Sudden failure )

Procedure – Type – 1
Replacement of an item that deteriorate with time ,
Money value is not considered

Step – 0 Prepare the table as per the format given below and write down
the year , maintenance cost , resale value in the respective
column of the table
Year Maint . cost Cum.Maint cost Resale C-S Totalco Avg.C
value st ost
Where C is the cost of equipment and S is the resale value /Scrap value

Total cost = ( C- S ) + Cum. Maint. Cost

Average cost = Total Cost / No. of years

Step – 1 Find the cumulative maintenance cost , C-S ,total cost and average
cost

Step – 2 Select the minimum average cost and the corresponding period ,
replace the equipment at the end of this period

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Procedure – Type – 2
Replacement of an item that deteriorate with time ,
Money value is considered

Money Value

It is assumed that the maintenance cost increases with time and each
cost is to be paid just at the start of the period

Let the money carry a rate of interest r per year . Thus a rupee invested
now will be worth

( 1+r ) after a year

(1+r)^2 after two years and so on

In this way , a rupee invested today will be worth (1+r)^n n years hence

Or in other words if we have to make a payment of one rupee in n years

time , it is equivalent to make a payment of ( 1+r )^ -n rupee today

The quantity (1+r)^ -n is called the present worth factor (pwf)

Assumptions

a) The equipment has no salvage value

b) The maintenance cost has incurred at the beginning of the different
time periods

Procedure
Step – 0 Prepare the table as per the format given below and write down
the year, running cost ( maintenance cost) in the respective column of the
table

Year Maint . pwf Discounted Cum disc Total Cum. pwf Weight .
cost Maint.cost Main cost cost Avg cost /
yr
Step – 1 Find the pwf for the various years if money is worth r %
Note – 1 Always take first year pwf as 1
Note – 2 If money is worth 10 % then pwf is
1/1.1 = .9091 for the second year .
Use the calculator for finding out the
pwf s for the various years

Step – 2 Find the discounted maintenance cost

Discounted maintenance cost = pwf * corresponding running

cost

Step – 3 Find the cum.discounted maintenance cost , total cost for the
various periods

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 Total cost = cost of equipment + cum . disc . maint cost ,

Step – 4 Find the weighted avg cost per year

Weighted avg cost = total cost / cum pwf

Step – 5 when the weighted avg cost is less than the running cost of the
subsequent period ,replace the equipment at the end of that
period

Procedure – Type – 3
Replacement of an item that fail completely
sudden failure

Instead of gradual deterioration some item fail all of a sudden . All electrical and
electronic items will come under this category , the failure of the item may result in
complete break down of the system . The loss due to this break down is indirect . to
minimize this the indirect cost such as loss in production , idle labour etc, the time of such
failure is to be predicted . If the time of failure can be predicted , preventive replacement
will be appropriate course of action

There arises a need of replacement policy of sudden failure items to avoid the possibility
of complete breakdown . Two types of replacement policies are considered

- Individual replacement policy ( IRP)

Under this policy an item is replaced immediately after its
failure

- Group replacement policy (GRP)

Replace as and when the item fails during the optimal
period and also replace all the items including the good
ones at the end of the optimal period

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 Replacement- Problems

1. A truck owner from his past experience estimates that the maintenance cost per
year of a truck whose purchase price is Rs. 1,50,000 and the resolve valve of truck
will be as follows:

Year 1 2 3 4 5 6 7 8
Maintenance
(in Rs.) M(t): 10,000 15,000 20,000 25,000 30,000 40,000 45,000 50,000

Resale Value
(in Rs.) S(t): 1,30,000 1,20,000 1,15,000 1,05,000 90,000 75,000 60,000 50,000

Determine at which time it is profitable to replace the truck

Ans: Replace at the end of 4th year Rs. 37, 500/-

2. A Taxi owner estimates from his past records that the cost per year for operating a
taxi whose purchase price when new is Rs. 60,000 are as given below:

Age 1 2 3 4 5
Operating Cost 10,000 12,000 15,000 18,000 20,000

After 5 years, the operating cost = 6,000 K. where k = 6, 7, 8, 9, 10 (K denoting

age in years). If the resale value decreases by 10% of purchase price each year,
what is the best replacement policy? Cost of money is zero.

Ans: Taxi should be replaced at the end of each year Rs. 16,000.

3. A plant manager is considering replacement policy for a new machine. He

estimates the following cost (all costs in rupees),

Year 1 2 3 4 5 6
Replacement Cost at 100 110 125 140 160 190
Beginning of year:
Salvage valve at End 60 50 40 25 10 0
of year:
Operating Costs: 25 30 40 50 65 80

Find an optimum replacement policy and corresponding minimum cost.

Ans: Replace at the end of 2nd year Rs. 56.5

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 4. The initial cost of machine is Rs. 30,000 and running or operating expenditure
which increases with age of the machine is given below:

Year 1 2 3 4 5 6 7
Running cost 5,000 6,000 8,000 10,000 13,000 16,000 20,000
(Rs.):

What is the replacement policy when this machine should be replaced? It is given
that the rate of interest is 10% and scrap value is nil?

Ans: Replace at the end of 5th year, Rs. 15, 219.70/-

5. An engineering company is offered two types of material handling equipments A

and B. A is priced at Rs. 60,000 including cost of installation and the cost for
operation and maintenance are estimated to be Rs. 10,000 for each of the first five
years, increasing every year by Rs. 3000 per year in the sixth and subsequent
years. Equipment B with rated capacity same as A, requires an initial investment
of Rs. 30, 000 but in terms of operation and maintenance costs more than A. These
costs for B are estimated to be Rs.13,000 per year for the first six years, increasing
every year by Rs. 4000 per year from seventh year onwards. The company expects
a return of 10% on all its investments. Neglecting the scrap value of the equipment
at the end of its economic life, determine which equipments the company should
buy.

Ans: Replace machine A @ the end of 8th year, Rs. 19, 311
Replace machine B @ the end of 6th year, Rs. 16, 175

6. A Company has the option to buy one of the mini computers; MINICOMP and
CHIPCOMP, MINICOMP costs Rs. 5 lakhs, and running and maintenance costs
are Rs. 60,000 for each of the five years, increasing by Rs. 20, 000 per year in the
6th and subsequent years chip comp has the same capacity as MINICOMP, but
costs only Rs. 2,50,000. However, its running and maintenance costs are Rs. 1, 20,
000 per year in the first five years, and increase by Rs. 20,000 per year thereafter.
If the money is worth 10% per year, which computer should be purchased? What
are the optimum replacement periods for each one of the computers? Assume that
there is no salvage value for either computer. Explain your analysis.

Ans: Replace MINICOMP @ the end of 9th year, Rs. 1, 55,204. Replace the
CHIPCOMP @ the end of the 7th year, Rs. 1, 73,219. MINICOMP computer
to be purchased.

7. The following mortality rates have been observed for a special type of light bulbs.

Month 1 2 3 4 5
Percent failing at the end of month: 10 25 50 80 100

In an individual unit there are 1000 special type of bulbs in use, and it costs Rs.10
to replace an individual bulb which has burnt out. If all bulbs were replaced

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 simultaneously it would cost Rs. 2.50 per bulb. It is proposed to replace all bulbs
at fixed intervals whether or not they have burnt out, and to continue replacing
burnt out bulbs as they fail. At what intervals of time the manager should replace
all the bulbs?

Ans: IRP – Rs.2990, GRP – Rs.2550, GRP is recommended.

8. A computer contains 20,000 resistors. When any resistor fails, it is replaced. The
cost of replacing a resistor individually is Re. 1. If all the resistors are replaced at
the same time the cost per resistor to Rs. 0.40. The per cent surviving at the end of
month t, and the possibility of failure during the month t are given below:

0 1 2 3 4 5 6
Percent Surviving at the end
of t 100 96 90 65 35 20 0

Probability of failure during

the month: - 0.04 0.06 0.25 0.30 0.15 0.20

What is the optimum replacement plan?

Ans: IRP – Rs.4926, GRP – Rs.5043.10; IRP is recommended

9. A) Machine a cost Rs.9000 operation are Rs.200 for the first year and then
increase by Rs.2000 every year. Determine the best age at which to replace the
machine if the optimal replacement is policy is followed what will be the average
yearly cost of owning and operating the machine.

B) Machine B cost Rs. 10000 annual operating cost is Rs.400 for the first year
and then increases by Rs.800 every year you have a machine of type A which is
one year old. Should you replace it with machine B , if so when
ANS :- Machine A – Optimal period of replacement is in the end of 3rd year
Machine A – Avg. Cost of owning & Operating the machine Rs.5200/-
Machine B - Optimal period of replacement is in the end of 5th year
Machine B - Avg. Cost of owning & Operating the machine Rs.4000/-
Yes, Since the avg. yearly cost of machine B is less than avg. yearly cost of machine A
Replace machine A with machine B. Replace A at the end of 2nd year.

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 GAME THEORY

 Theory of games is concerned with decision-making in situations where two or

more rational players, each with a set of strategies, are involved in conditions of
competition and conflicting interests.

 With the pay-offs resulting from the play of various combinations of the strategies
by different players being given and known to all of them, the solution to a game
calls for determining the optimum strategies for the players.

 For a game involving two-persons and zero-sum (where the gain for one is equal
to the loss of the other) with a given set of a pay-offs expressed from the view
point of the ‘maximizing’ player, obtaining the solution calls for determining, in
the first place, whether the saddle point exists.

 For the ‘maximizing’ players, the maximin strategy is determined. For this, the
minimum pay-offs of all the strategies are obtained (as row minima) and then the
strategy with the maximum among those minimum values is determined.
Similarly, the maximum pay-offs of all the strategies open to the ‘minimizing’
player (column maxima) are obtained and the least value in them is considered.
The strategy is called ‘minimax’. If the pay-off of the maximin strategy matches
with the pay-off of the minimax strategy, then the saddle points exists. In such a
case, the strategies so determined are the respective optimal strategies for the
players and the pay-off involved is the value of the game. The strategies involved
are termed pure.

 If the saddle point does not exist, then the players have to employ mixed strategies.
For each player, the optimal mix is obtained in such a manner that the pay-off is
the same no matter what strategy the opponent chooses to play.

 For a 2 x 2 game, involving two strategies for each of the players, the optimal mix
can be obtained by using analytical method.

 Game of the order 2 x n or m x 2 may be reduced to 2 x 2 games by using

graphical method and then solved as such.

 The games involving more than two strategies available to each of the players may
be attempted to be reduced to the order of 2 x 2, by using the rule of dominance. If
a game can be so reduced, it is solved by using the analytical method.

 If a strategy is found to be better than, or at least as good as another strategy in

terms of the comparable pay-offs, then the former is said to “dominate” the latter.
Also, a weighted average of two (or more) strategies may be seen to dominate a
given strategy. In any event, a dominated strategy can be deleted.

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 If a game cannot be reduced to a 2 x 2 game, it can be formulated as a linear
programming problem and solved accordingly. In general, any game can be
formulated and solved as an LPP.

TEST YOUR UNDERSTANDING

Mark the following statements as T {True} or F {False}

1. In a two-person game, both the players must have an equal number of

strategies.

2. The zero – sum game implies that any gain of one player is exactly
matched by a loss to the other so that their sum is equal to zero.

3. The solution to a game implies determining optimal strategies for both the
players and value of the game.

4. The solution to a two-person game is based on the assumption that player

A will always play his strategy first and the other player, B, would play his
strategy thereafter.

5. In the two-person games, both the players are assumed to be in full

knowledge of the strategies available to each one and the pay-offs resulting
from each combination of strategies.

6. For a two-person game with, respectively, 6 and 5 strategies available to

the two players, a total of 30 conditional pay-offs would be involved.

7. Player A’s strategy is determined on the basis of maximin criterion

whereas player b’s is on minimax criterion.

8. Saddle point is the point of equilibrium.

9. It is possible that multiple minimax/maximin strategies might exist in a

two player game.

10. If the largest element in the pay-off matrix is negative, the game should
favour player B irrespective of what the optimal strategies of the players
are.

11. If the value of the game is a negative value, it implies that the game is
favouring player B.

12. A game is said to be fair when both the players know about the optimal
strategy of each other and the losing player pays off the amount involved
to the gaining player.

13. Mixed strategy for a player can involve no more than two strategies.

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14. Mixed strategies for each of the players are determined such that same
pay-off would be expected irrespective of the strategy adopted by the
opponent..

15. Mixed strategies are adopted by the players when they are doubtful about
the optimal strategies for them.

16. Strategies involved in mixed strategies of the player are played in a

random manner in the ratio determined in the optimal mix.

17. An optimal strategy (0, 2/9, 7/9) implies that in every nine plays, the first
strategy should never be played, the second strategy twice and the third
strategy be adopted in the remaining seven times.

18. The graphic approach to the solution of games can be applied when one of
the player has two strategies available.

19. Every game is solvable irrespective of whether the players adopt pure or
mixed strategy.

20. In case of m by 2 games, the value of the game is given by the highest
point in the lower envelope.

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 SHEMATIC PRESENTATION OF THE METHOD
OFSOLUTION OF TWO-PERSON ZERO-SUM GAME

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 GAME THEORY - PROBLEMS
1. Two leading firms, Nirmala Textiles Ltd and Swati Rayons Ltd., for years
have been selling shirting, which is but a small part of both firms total sales.
The Marketing Director of Nirmala Textiles raised the question, “What should
the firms strategies be in terms of advertising for the product in question?” The
system group of Nirmala Textiles developed the following data for varying
degrees of advertising:

a) No advertising, medium advertising and heavy advertising for both

firms will result in equal market share.

b) Nirmala Textiles with no advertising : 40 percent of the market with

medium advertising by Swati Rayons and 28 per cent of the market
with heavy advertising by Swati Rayons.

c) Nirmala Textiles using medium advertising : 70 per cent of the market

with no advertising by Swati Rayons and 45 per cent of the market
with heavy advertising by Swati Rayons.

d) Nirmala Textiles using heavy advertising: 75 per cent of the market

with no advertising by Swati Rayons and 52.5 per cent of the market
with medium advertising by Swati Rayons.

2. Shruti Ltd has developed a sales forecasting function for its products and the
products of its competitors, Purnima Ltd. There were four strategies S1, S2,
S3, and S4 available to Shruti Ltd and the strategies P1, P2, P3 to Purnima
Ltd. The pay-offs corresponding to all the above combinations of the strategies
are given below. From the table we can see that, for example, if strategy, S1 is
employed by Shruti Ltd and strategy P1 by Purnima Ltd, then there shall be a
gain of Rs. 30,000 in quarterly sales to the former. Other entries can be
similarly interpreted.

Considering this information, state what would be the optimal strategy for Shruti
Ltd? Purnima Ltd? What is the value of the game? Is the game fair?

Purnima Ltd’s Strategy

P1 P2 P3
S1 30 16 25
S2 48 40 60
Shruti’s Strategy
S3 19 20 18
S4 60 59 55

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3. In a small town, there are only two stores that handles sundry goods – ABC
and XYZ. The total number of customers is equally divided between the two,
because price and quality of goods sold are equal. Both stores have good
reputation in the community, and they render equally good customer service.
Assume that a gain of customer of ABC is a loss to XYZ and vice-versa. Both
stores plan to run annual pre Diwali sales during the first week of November.
Sales are advertised through a local newspaper, radio and television media.
With the aid of an advertising firm, store ABC constructed the game matrix
given below.

(Figures in the matrix represent a gain or loss of customers)

Strategy Of XYZ
Strategy Of ABC
Newspaper Radio Television
Newspaper 30 40 -80
Radio 0 15 -20
Television 90 20 50

Determine optimal strategies and worth of such strategies for both ABC and XYZ.

4. Reduce the following two-person zero sum game to 2 x 2 order, and obtain the
optimal strategies for each player and the value of the games:

Process B
B1 B2 B3 B4
A1 3 2 4 0
A2 3 4 2 4
Players A
A3 4 2 4 0
A4 0 4 0 8

5. A Company is currently involved in negotiation with its union on the

upcoming wage contract. With the aid of an outside mediator, the table below
was constructed by the management group. The pluses are to be interpreted as
proposed wage increases while a minus figure indicates that a wage reduction
is proposed. The mediator informs the management group that he has been in
touch with the union and that they have constructed a table that is comparable
to the table developed by the management. Both the company and the union
must decide on an overall strategy before negotiation begin. The management
group understands the relationship of company strategies to union strategies in
the following table but lacks specific knowledge of game theory to select the
best strategy (or Strategies) for the firm. Assist the management on this
problem. What game value and strategies are available to the opposing
groups?

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 Conditional costs to company

(In Lac Rs)

Company Union Strategies

Strategies U1 U2 U3 U4
C1 + 0.25 + 0.27 + 0.35 - 0.02
C2 + 0.20 + 0.16 + 0.08 + 0.08
C3 + 0.14 + 0.12 + 0.15 + 0.13
C4 + 0.30 + 0.14 + 0.19 0.00

6. Use the graphical method for solving the following game and find the value of the game

Player B
Player A B1 B2 B3 B4

A1 2 2 3 -2

A2 4 3 2 6

7. Solve the following game graphically

Player B

Player A B1 B2

A1 1 2

A2 4 5

A3 9 -7

A4 -3 -4

A5 2 1

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 INVENTORY MODELS

Problems

1. Alpha industry estimates that it will sell 12,000 units of its product for the
forthcoming year. The ordering cost is Rs. 100 per order and the carry cost /
unit / year is 20% of the purchase price. The purchase price / unit is Rs. 50/-.
Find

a) EOQ (490 units)

b) No. of order/year (24)
c) Time bet-orders (0.04 yrs)
d) Optimal total cost (Rs. 6, 04,899).

2. A company for one of the A class items placed 6 orders each of size 200 in a
year. Given ordering cost Rs. 400, Holding cost 40%, cost/unit Rs.40/-. Find
out the loss to the company in not operating scientific inventory policy. What
are your recommendations for the future.

Ans: 80/-
3. For the data given below find EOQ & Total variable cost.

a) Annual Demand = 5000 units, Unit price = 20/-, Ordering cost/order =

Rs.16/- Storage rate2% p.a, Interest rate – 12% p.a, Obsolescence rate 6%
p.a.
Ans: (200,800).
b) Det. Total variable cost that would result for the item if an incorrect price
of Rs. 12.80 is used.
Ans: (250, 820)

4. The purchase manager has decided to place an order for a minimum qty of 500
nos. of a particular item in order to get a discount of 10%. From the records, it
was found out that in the last year, 8 orders each of size 200 nos. were placed.

Given: Ordering cost = Rs. 500/order

Inventory carrying cost = 40%
Cost/unit = Rs.400/-

Is the purchase manager justified in his decision? What is the effect of his decision
on the company?

Ans: Yes, Saving over EOQ policy of ordering Rs. 42, 400, saving over
present policy of ordering Rs. 46, 400/-

5. A company uses annually 50,000 units of an item. Each costing Rs.1.20. Each
order costs Rs.45/- and Inventory carrying cost is 15% of the average
Inventory value.

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Find:
a) EOQ
Ans.5000.
b) If the company operates 250 days a year, the procurement time being 10
days and safety stock is 500 units. Find Reorder Level, Max Level, Min
Level and Avg. inventory.
Ans: 2500, 5500, 3000 units.

6. The average monthly consumption of an item is 200 units and the normal lead
time is 1 month. If the max consumption has been upto 250 units per month
and the max. Lead time is 1½ months. What would be the buffer stock for the
item if the item is controlled by Fixed order quantity system (FOQ) system.

Ans: 175 units.

7. A firm has a demand distribution during a constant lead time with a std.
deviation of 250 units. The firm wants to provide 98% service level.

a) How much safety stock should be carried?

b) If the demand during lead time is 1200 units. What is the appropriate
Reorder level (Z value for 98% is 2.05)?

Ans: 512, 1712 units.

8. An airline has determined that 10 spare brake cylinders will give them a stock
out risk of 30%, whereas 14 will reduce the risk to 15% and 16 to 10%. It
takes 4 months to receive the cylinder from the supplier and the airline uses on
average of 4 cylinders/ months. At what stock level should they reorder
assuming they wish to maintain an 85% service level?

Ans: 30 cylinders.
9. The average demand for an item is 120 units / year. The lead time is one
months and the demand during lead time follows normal distribution with
average of 10 units and S.D. of 2 units. If the item is ordered once in 4 months
and the policy of the company is that there should not be more than 1 stock out
every 2 years. Det. Reorder level?

10. A scrutiny of past records gives the following distribution for lead time and
daily demand during lead time.

Lead time distribution: LT (days) 3 4 5 6 7 8 9 10

Freq 2 3 4 4 2 2 2 1

Demand distribution: Demand/day 0 1 2 3 4 5 6 7

Freq 2 4 5 5 4 2 1 2

What should be the safety stock?

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 Ans: 52/-.

11. Data on the distribution of lead time for a pump component were collected as
shown below. The management would like to set safety stock that would limit
the stock out risk to 10%.

Lead Time Frequency

0–1 10
1–2 20
2–3 70
3–4 40
4–5 30
5–6 10
6–7 10
7–8 10

How many weeks of safety stock are required to protect the desired service level.

Ans: 2.6 weeks.

12. Find the optimal order qty for a product for which the price break is as
follows.

Qty Unit Price

0 <= Q1 < 50 Rs. 10
50 <= Q2 < 100 Rs. 9
100 <= Q3 Rs. 8

The monthly demand for the product is 200 units. The storage cost is 25% of the
unit cost and the ordering cost is Rs. 20/- order.

13. Find the optimum order qty for a product for which the price breaks are as
follows

Qty Unit Price

0 <= Q1 < 100 Rs. 20 per unit
100 <= Q2 < 200 Rs. 18 per unit
200 <= Q3 Rs. 20 per unit

The monthly demand for the product is 400 units. The storage cost is 20% of the
unit cost of the product and the cost of ordering is Rs. 25 per order.

Ans: EOQ Q3* = 79 TC = 6770

Q2* = 75 TC = 7480
Q1* = 70 TC = 8283

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14. A company purchase one of its items for Rs. 2 per unit without qty discount.
The ordering cost is Rs. 20/- per order and the carrying cost is 20% of its
purchase price per unit per year. The annual demand is 2500 units. A new
vendor offers quantity discount for the same item on per the following quantity
discount scheme. Find the best order quantity.

Qty Unit Price

0 <= Q1 < 1500 C
1500 <= Q2 < 200 97% of C
2500 <= Q3 95% of C

15. An automobile factory manufactures a particular type of gear within the

factory. This gear is used in the final assembly. The particulars of this gear are

D = Demand rate - 14,000 units / year

P = Production rate - 35,000 units / year
S = Setup cost - Rs. 500 / setup
H = Carrying cost - Rs. 15 / unit / year

Find Economic Batch quantity & Cycle time?

Ans: 1248, t1 – 13 days, t2 – 20 days, t = 33 days.

16. A Company manufactures a low cost bearing which is used in main product
line. The demand of the bearing is 10,000 units / months and the production
rate of the bearing is 25,000 units per months. The carrying cost is Re. 0.02 per
unit per year and the setup cost is Rs. 18 per set up. Find EBQ & cycle time.

17. Find the most economic batch qty of a product on a machine if the product
rate of that item on the machine is 200 pieces / day and the demand is uniform
at the rate of 100 pieces / day. The setup cost is Rs. 200 per batch and the cost
of holding one item in inventory is Rs. 0.81 per day.

b) How will the batch quantity vary if the rate production rate is infinite?

18. The annual demand for a component is 7200 units. The carrying cost is Rs.
500 / unit / year. The ordering cost is Rs. 1500/- order and the shortage cost is
Rs. 2000 / unit / year. Find EOQ, max inventory max shortage qty, inventory
period & shortage period.

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19. The demand of an item in a store is 18,000 units per year. The purchase price
of the item is Rs. 5/- per unit and its carrying cost is Rs. 1.2 per unit per year
and the ordering cost is Rs. 400/- per order. The shortage cost is Rs. 5/- per
unit per year. Find EOQ, no of orders / year, the max inv, max, shortage qty
and the total cost.

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 Dynamic Programming INTRODUCTION
The decision-making process often involves several decisions to be taken at different
times. The mathematical technique of optimizing a sequence of interrelated decisions over
a period of time is called dynamic programming.
Dynamic programming (DP) differs from linear programming in two ways:
(i) In DP, there is no set procedure (algorithm) as in LP to solve any decision-
problem. The DP technique allows to break the given problem into a sequence
of easier and smaller subproblems, which are then solved in a sequential order
(stage).

(ii) LP approach provides one-time period (single stage) solution to a problem

whereas DP approach is useful for decision-making over time and solves each
subproblem optimally.

DYNAMIC PROGRAMMING TERMINOLOGY

Regardless of the type or size of a dynamic programming problem, there are

certain terms and concepts that are common in every problem.

1. STAGE: The dynamic programming can be decomposed or divided into a

sequence of smaller subproblems called stages. At each stage there are a
number of decision alternatives (courses of action) and a decision is made
by selecting the most suitable alternative. Stages very often represent
different time periods in the planning period of the problem, places, people
or other entities. For example, in the replacement problem each year is a
stage, in the salesman allocation problem each territory represent a stage.

2. STATE: Each stage in the dynamic programming problem has a certain

number of states associated with it. These states represent various
conditions of the decision process at a stage. The variables that specify the
condition of the decision process or describe the status of the system at a
particular stage are called state variables. These variables provide
information for analyzing the possible effects that the current decision
could have upon future courses of action. At any stage of the decision-
making process there could be a finite or infinite number of states. For
example, a specific city is referred to as state variable, in any stage of the
shortest route problem.

3. RETURN FUNCTION: At each stage, a decision that can affect the state
of the system at the next stage and help in arriving at the optimal solution
at the current stage is made. Every decision that is made has its own merit
in terms of worth or benefit associated with it and can be described in an

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algebraic equation form. This equation is generally called a return
function, in general, depends upon the state variable as well as the decision
made at a particular stage. An optimal policy or decision at a stage yields
optimal (maximum or minimum) return for the given value of the state
variable.

DEVELOPING OPTIMAL DECISION POLICY

Dynamic programming is an approach in which the problem is broken

down into a number of smaller subproblems called stages. These
subproblems are then solved sequentially until the original problem is
finally solved. A particular sequence of alternatives (course of action)
adopted by the decision-maker in a multistage decision problem is called a
policy. The optimal policy, therefore, is the sequence of alternatives that
achieves the decision-maker’s objective. The solution of a dynamic
programming problem is based upon Bellman’s principle of optimality
(recursive optimalization technique), which states:

The optimal policy must be one such that, regardless of how a particular
state is reached, all later decisions (choices) proceeding from that state
must be optimal.

Based on this principle of optimality, we find the best policy by solving

one stage at a time, and then sequentially adding a series of one-stage-
problems that are solved until the overall optimum of the initial problem is
obtained. The solution procedure is based on a backward induction
process and forward induction process. In the first process, the problem is
solved by solving the problem in the last stage and working backwards
towards the first stage, making optimal decisions at each stage of the
problem. In certain cases, the second process is used to solve a problem by
first solving the initial stage of the problem and working towards the last
stage, making an optimal decision at every stage of the problem.

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 Dynamic Programminng Problems

SHORTEST ROUTE PROBLEM

1. A salesman located in a city A decided to travel to city B. He knew the

distances of alternative routes from city A to city B. He then drew a
highway network map as shown in the Fig. The city of origin A, is city
1. The destination city B, is city 10. Other cities through which the
salesman will have to pass through are numbered 2 to 9. The arrow
representing routes between cities and distances in kilometres are
indicated on each route. The salesman’s problem is to find the shortest
route that covers all the selected cities from A to B.

2 5

3 6 10
1

4 7

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2. A company has decided to introduce a product in three phases. Phase 1
will feature making a special offer at a greatly reduced rate to attract
the first-time buyers. Phase 2 will involve intensive advertising to
persuade the buyers to continue purchasing at a regular price. Phase 3
will involve a follow up advertising and promotional campaign.

A total of Rs 5 million has been budgeted for this marketing campaign.

If m is the market share captured in Phase 1, fraction f2 of m is retained
in Phase 2, and fraction f3 of market share in Phase 2 in retained in
Phase 3. The expected values of m, f2 and f3 at different levels of
money expanded are given below. How should the money be allocated
to the three phases in order to maximize the final share?

Money Effect On Market

Spent Share
(Rs millions) m per cent f2 f3
0 0 0.03 0.05
1 10 0.05 0.07
2 15 0.70 0.85
3 22 0.80 0.90
4 27 0.85 0.93
5 30 0.90 0.95

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