Introduction to Operations Research (OR)*

Bar Seluk s c

1.

What is OR?

Operations research (OR) is a scientic approach to analyzing problems and making decisions. OR professionals aim to provide rational bases for decision making by seeking to understand and structure complex situations and to use this understanding to predict system behavior and improve system performance. Much of this work is done using analytical and numerical techniques to develop and manipulate mathematical and computer models of organizational systems composed of people, machines, and procedures. The eld of Operations Research (called operational research in Great Britain) has its roots in the years just prior to World War II as the British prepared for the anticipated air war. In 1937 eld tests started on what was later to be called radar. In 1938 experiments began to explore how the information provided by radar should be used to direct deployment and use of ghter planes. Until this time, the word experiment conjured up the picture of a scientist carrying out a controlled experiment in a laboratory. In contrast, the multi-disciplinary team of scientists working on this radar-ghter plane project studied the actual operating conditions of these new devices and designed experiments in the eld of operations and the new term operations research was born. The teams goal was to derive an understanding of the operations of the complete system of equipment, people, and environmental conditions (e.g. weather, nighttime) and then improve upon it. Their work was an important factor in winning the Battle of Britain and operations research eventually spread to all of the military services. Several of the leaders of this eort were Nobel laureates in their original elds of study. Similar groups of interdisciplinary scientists were later established in the US at the various branches of the armed services. They worked to protect convoys, search for enemy convoys, enhance
* Content of this document is largely based on http://www.hsor.org
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IE3001: Introduction to Operations Research

anti-submarine warfare and improve the eectiveness of bombers. Common elements of their many studies were: data collection, direct observation of operations, a mathematical model, recommendations for improvements and feedback on the impact of the changes. It was this emphasis on seeing how things actually operated in the real-world and applying a scientic approach to improving performance that gave rise to the term operations research. Currently, every branch of the military has its own operations research group that includes both military and civilian personnel. They play a key role in both long-term strategy and weapons development, as well as directing the logistics of actions such as Operation Desert Storm. In addition, the National Security Agency has its own Center for Operations Research. In the 1950s operations research evolved into a profession with the formation of national societies, establishment of journals and academic departments in universities. The use of operations research expanded beyond the military to include both private companies and other governmental organizations. The petrochemical industry was one of the rst to broadly embrace operations research to improve the performance of plants, develop natural resources and plan strategy. Today, operations research plays important roles in a variety of industries such as:
airline - scheduling planes and crews, pricing tickets, taking reservations, and planning the

size of the eet,

logistics companies - routing and planning, nancial services - credit scoring, marketing, and internal operations, lumber and wood products - managing forests and cutting timber, local government - deployment of emergency services, and policy studies and regulation - environmental pollution, air trac safety, AIDS, and criminal

justice policy. As the eld evolved, the core moved away from interdisciplinary teams to a focus on the development of mathematical models that can be used to model, improve, and even optimize real-world systems. These mathematical models include both deterministic models such as mathematical programming, routing or network ows and probabilistic models such as queuing, simulation and decision trees. These mathematical modeling techniques form the core curriculum of masters degree and doctoral programs in operations research which can be found in either engineering or business schools. Most mathematics departments also oer one or more introductory operations research courses at the junior or senior undergraduate level.

IE3001: Introduction to Operations Research

2.

Role of Mathematical Models

At the center of operations research practice and theory is a diverse set of mathematical models that are used to capture and explore a wide-range of real-world settings. An operations research model is a mathematical abstraction or simplication of reality. The degree of simplication is a function of data availability, time and resources available to develop the model and the situational issues and decisions that the model is designed to address. With a mathematical model in hand, the operations researcher can work with managers and decision makers to evaluate decision alternatives or system redesign. These analyses are typically carried out in a computer implementation of the model that enables the decision makers and managers to explore changes in the mathematical representation without changing the actual system. A mathematical model in decision making is used to
Make objectives explicit Identify decisions that inuence objectives Clarify tradeos amongst decisions and objectives Require identication and denition of quantiable variables Explore the interaction between variables Help identify critical data elements and their role as model inputs Assist in recognizing and clarifying constraints on decisions and operations Facilitate communication

One drawback of mathematical modeling is by denition the emphasis on quantiable measures. As a result a decision maker may ignore critical organizational issues and concerns that may be dicult to quantify. In addition, the word optimization is an integral part of the vocabulary of the operations researcher. This term may lead the unsophisticated model user to expect more from the model than it is really able to deliver and to rely on the models results more than he should. Ideally, a model should be used as J. D. C. Little suggested, to update the intuition of a decision maker. Also the term optimal should be viewed as model-related rather than a real-world concept. One optimizes models, but rarely, if ever, real-world situations.

3.

Model Building

The operations researcher when faced with real-world decision or opportunity for process improvement can draw a whole range of analogous modeling situations discussed in both the applied and theoretical operations research literature. Typically, four steps of the model building process are

IE3001: Introduction to Operations Research

1. Model formulation and model building; the process of taking real-world managerial situations, abstracting them into formulation, and then developing the mathematical terms of a symbolic model. 2. Analysis of the model to generate results. 3. Interpretation and validation of model results; making sure that the available information obtained from the analysis is understood in the context of the original real-world situation. 4. Implementation; putting the validated knowledge gained from the interpretation of model results to work in real-world decision-making.

4.

Model Types

The mathematical models of the eld of operations research can be dichotomized as deterministic and probabilistic. Often the deterministic models reect complex systems involving large numbers of decision variables and constraints and are broadly labeled mathematical programming models. Some of the most complex constrained optimization models involve tens of thousands of constraints and hundreds of thousands of decision variables. Operation researchers not only model these complex systems but also have developed algorithms that can eciently search for optimal or near optimal solutions. Another class of deterministic models involves networks: routing through the network or optimal location on a network. Decisions involving multiple objectives can be addressed with a general class of models called Multi-Criteria Decision Analysis (MCDA). Decision trees are a basic tool for structuring decisions in the presence of uncertainty. A tree is used to lay out the sequence of decisions and random events. The optimal solution maximizes an expected value function. Generally, models of complex probabilistic systems tend to be descriptive. Optimal or near optimal solutions are found by manipulating important parameters or a limited number of decision variables. The most exible of all probabilistic system modeling techniques is computer simulation. Queueing theory is amongst the oldest and most widely known probabilistic modeling tools of operations research. Its beginning actually pre-dates the start of WWII operations research. OR models can be used to model and optimize routine decisions and operations. Typically, this class of models will have nicely designed user interfaces and computerized data collection procedures. Often these models become automated and require limited or no managerial insight to tweak the results. Examples of these types of models are routinely used in gasoline blending, airline crew scheduling, or routing calls through telecommunications networks. Strategic models are designed to address a unique situation that may or may not ever occur again. Data is often

IE3001: Introduction to Operations Research

subjective and based on expert opinion. Senior executives and their sta use strategic models to gain insight. They rarely simply implement the models solution without an in-depth analysis and understanding of the ramications of the recommended solution. As the array of OR techniques and application areas developed, numerous sub-specialties evolved. Some of the specializations focused on specic modeling techniques as mentioned above. Others spawned broad application areas under the titles of: transportation science, marketing science, inventory and production management, and operations management. Recent additions to this array of application areas include: supply chain management, knowledge management, and customer relationship management. Operations research has overlapping interests with a variety of other disciplines. Research into algorithms often parallels the work of computer scientists. Those operations researchers working in the area of quality and reliability interact with a number of engineering disciplines. Forecasting models, an area of interest to statisticians and economists, are often an important element of operations research-based decision support systems. Lastly, OR specialists in applied mathematical programming or game theory may work with colleagues in economics. Not surprisingly, several Nobel Prize winners in economics had strong links with the operations research community.

5.

Linear Programming

The father of linear programming is George Dantzig, who developed between 1947 and 1949 the foundation concepts for framing and solving linear programming problems. During WWII, he worked on developing various plans or proposed schedules of training, logistics supply and deployment which the military calls programs. After the war he was challenged to nd an ecient way to develop these programs. He came to recognize that the planning problem could be formulated as a system of linear inequalities. His next challenge involved the concept of a goal. At that time, when managers thought of goals, they generally meant rules of thumb for carrying out a goal. A navy man might have said our goal is to win the war and we can do that by building more battleships. Dantzig was the rst to express the criterion for selecting a good or best plan as an explicit mathematical function that we now call the objective function. All of this work would have been of limited practical value without an ecient method, or algorithm, for nding the optimal solution to a set of linear inequalities that maximizes (prot) or minimizes (cost) of an objective function. He therefore proceeded to develop the simplex algorithm which eciently solves this problem. Economists were excited by these developments. Several attendees at a rst conference entitled Activity Analysis of Production and Allocation went on to win Nobel prizes in economics with their work drawing on linear programming to model fundamental economic principles.

IE3001: Introduction to Operations Research

The rst problem Dantzig solved, much to the chagrin of his wife, was a minimum cost diet problem that involved the solution of nine equations (nutrition requirements) with seventy-seven decision variables. The National Bureau of Standards supervised the solution which took 120 man days using hand-operated desk calculators. (His wife rejected the minimum cost diet as boring.) Nowadays, a standard personal computer could handle this problem in under a second. EXCEL spreadsheet software includes as a standard addition a module called solver, which includes a linear programming solver. As mainframe computers became available in the 50s and grew more and more powerful, the rst major users of the simplex algorithm to solve practical problems were the petroleum and chemical industries. One use was to minimize the cost of blending gasoline to meet certain performance and content criterion. The eld of linear programming grew exponentially and led to the development of non-linear programming in which inequalities and/or the objective function are non-linear functions. Another extension is called integer programming (combinatorics) in which the variables must take on only integer values. These disciplines are collectively called mathematical programming.

6.

Network Routing

Graphs and networks are collections of nodes and arcs. The nodes are used to represent cities, major intersections, or individual customer locations. The arcs are used to represent the linkages between nodes. The linkages could be telecommunication lines or roads. The links can be oneway or bi-directional. Numeric values on the links can represent the actual length of the link, the distance as the crow ies, or the time to traverse the link. In routing applications, it is important to use travel times and not just distances. Two miles on the open road are traversed much faster than two miles through city streets. In addition, these data will often need to be adjusted by time of day. The eld of graph theory dates back more than two hundreds years with mathematicians such as Euler actively involved in its theoretical analysis. Graph theorists were primarily interested in understanding the properties of dierent graph structures without numeric values attached to the arcs. With the growth of computers, the study of networks moved into a new phase in the 1950s and 60s that focused on the development of ecient algorithms to solve optimization problems in routing. Networks were no longer just a collection of nodes and arcs; arcs now included numeric values which could represent either distance or time. One of the rst class of problems that was solved related to nding the shortest path between two points (nodes) on a network. A computer scientist named Dijkstra developed one of the rst ecient algorithms for solving this problem.

IE3001: Introduction to Operations Research

Dijkstras algorithm is the basis for widely available software that responds to requests for nding the shortest or fastest route to a specic location. In addition, this algorithm is an important element of the management of information traveling through a telecommunications network. In the 1970s operations researchers began to study two classes of vehicle routing problems, the traveling salesman problem and the Chinese postman problem. One class of problems involves an individual or vehicle traveling along the shortest route from node to node, visiting every node in the network and then returning home to its base. (The 19th century mathematician William Hamilton rst posed the question of the existence of a circuit that visited each node once and only once.) This problem is called the traveling salesman problem (TSP), as it represents the challenge facing a salesman who must travel from city to city and return home. It is part of a broad class of problems for which we know it is NOT possible to develop algorithms that are guaranteed to nd the absolute optimal solution in a reasonable period of time. Instead, operations researchers work on developing heuristic algorithms that search for good or near optimal solutions. These algorithms generally have two phases. The rst phase attempts to nd a good initial solution. The second phase involves minor modications to the best solution found so far in order to create better and better routes. In practical applications, the transportation manager rarely deals with routing just one vehicle. Instead, he has a whole eet of vehicles. In this case the algorithms must divide the set of nodes (pick-up or delivery points) into separate routes, with each route assigned to a vehicle. Companies such as Federal Express have large internal operations research groups working on a wide range of issues related to the routing of vehicles and the overall management of the truck eet. In contrast, a bank such as Wells Fargo or Bank of America might commission a consulting rm to design the routes for a eet of trucks. These trucks pick up cancelled checks several times a day at the bank branch oces and then deliver them to a check clearing house for posting with the Federal Reserve for collection of funds. School bus routing also involves applying algorithms used to solve TSP. In the not so good old days, routing software ran in batch mode on a mainframe computer. The solution was printed out as a sequential list of stops. To see the route, an individual would take a piece of see-through vellum, lay it over a big map and trace the route by hand. If a mistake had been made in the input data or new stops had to be added, the process would have to start all over again and the original piece of vellum tossed out. In the 1980s, the personal computer revolutionized this process. Not only could the algorithms be run almost instantaneously on the managers desk, more importantly the solutions could be linked to widely available geographic information systems (GIS). As a result the routes could be shown on the computer screen overlaid

IE3001: Introduction to Operations Research

on the actual street network. This new capability motivated a change in the design of routing packages to enable the experienced manager to contribute to the design and modication of the nal routes. No mathematical model can capture all aspects of a complex problem. Thus, the need to tweak a solution to account for something not explicitly included in the model is not uncommon. PC based systems have enabled managers to easily adjust the nal routes. The Chinese Postman Problem (CPP) is a close cousin to TSP. In this routing problem the traveler must traverse every arc (i.e. road link) in the network. The name comes from the fact that a Chinese mathematician, Mei-Ko Kwan (1962), developed the rst algorithm to solve this problem for a rural postman. It is an extension to one of the earliest graph theory questions, the Knigsberg Bridge Problem, which was studied by Euler (1736). The Pregel River runs through the o city of Knigsberg in Germany. In a city park seven bridges cross branches of the river and connect o two islands with each other and with opposite banks of the river. For many years the citizens of Knigsberg tried to take walks that took them over each bridge once without retracing any part o of their path. Euler was able to prove that such a walk is impossible. In general, graph theorists are interested in understanding whether or not a circuit exists that does not require traversing the same arc twice. Operations researchers are interested in nding the shortest route in any type of network. The Chinese Postman class of problems is relevant to a number of other services. Garbage collection, street sweeping, salting or gritting of icy roads, and snow plowing are some of the other services for which vehicle routing algorithms have been applied. Meter readers also must travel up and down every street. Checking roads for potholes or serious deterioration or checking pipelines for weak spots also fall into this class of problems. In the ever complex real-world additional constraints can arise that complicate the search for ecient routes. Labor contracts may require that the routes of dierent drivers must be approximately of equal length. There may be signicant time restrictions or time windows on when a vehicle must visit a specic location to make a delivery or pick-up. The vehicle making pick-ups may also have capacity limitations such as a garbage truck which would restrict the maximum length of a route. Uncertainty can also complicate route planning. Trucks that deliver gasoline or oil, cant be sure when they set out as to how much they will have to pump into each of the tanks on their route.

7.

Queueing Theory

All of us have experienced the annoyance of having to wait in line. Unfortunately, this phenomenon continues to be common in congested, urbanized and high-tech societies. We wait in line in our

IE3001: Introduction to Operations Research

cars in trac jams or at toll booths, we wait on hold for an operator to pick up our telephone calls, we wait in line at supermarkets to check out, we wait in line at fast-food restaurants, and we wait in line at banks and post oces. As customers, we do not generally like these waits, and the managers of the establishments at which we wait also do not like us to wait, since it may cost them business. Why then is there waiting? The answer is relatively simple: There is more demand for service than there is facility for service available. Why is this so? There may be many reasons; for example, there may be a shortage of available servers; it may be infeasible economically for a business to provide the level of service necessary to prevent waiting; or there may be a limit to the amount of service that can be provided. Generally, this limitation can be removed with the expenditure of capital. To know how much service should be made available, one would need to know answers to such questions as, How long will a customer wait? and How many people will form in the line? Queueing theory attempts to answer these questions through detailed mathematical analysis, and in many cases it succeeds. The word queue is in more common usage in Great Britain and other countries than in the United States, but it is rapidly gaining acceptance in this country. However, it must be admitted that it is just as unpleasant to spend time in a queue as in a waiting line. A queueing system can be simply described as customers arriving for service, waiting for service if it is not immediate, and if having waited for service, leaving the system after being served. The term customer is used in a general sense and does not imply necessarily a human customer. For example, a customer could be a ball bearing waiting to be polished, an airplane waiting in line to take o, a computer program waiting to be run, or a telephone call waiting to be answered. Queueing theory, as such, was developed to provide mathematical models to predict behavior of systems that attempt to provide service for randomly arising demands and can trace its origins back to a pioneer investigator, Danish mathematician named A. K. Erlang, who, in 1909, published The Theory of Probabilities and Telephone Conversations based on work he did for the Danish Telephone Company in Copenhagen, Denmark. Work continued in the area of telephone applications, and although the early work in queueing theory picked up momentum rather slowly, the trend began to change in the 1950s when the pace quickened and the application areas broadened well beyond telephone systems. There are many valuable applications of the theory, including trac ow (vehicles, aircraft, people, communications), scheduling (patients in hospitals, jobs on machines, programs on a computer), and facility design (banks, post oces, amusement parks, fast-food restaurants). Today, we encounter a myriad of queues every day of our lives, and queueing theory, when it can, helps us to navigate around these.

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8.

Pyschology of Queueing

The mathematics of queueing theory enables a decision-maker to model the behavior of a queueing system. Mathematical equations are used to calculate the time spent waiting and the number of customers waiting. In some situations, if the lines are too long, customers may go elsewhere to be served. In this case the queueing manager is interested in the number of customers lost due to long waits. Generally, if the waiting time seems excessive and customers are dissatised, a manager will explore cost-eective strategies for increasing the service capacity by adding more servers or increasing the speed of service. However, raw numbers fail to tell the whole story. The experience of waiting in line is inuenced by the waiting area environment and our expectations as to the length of the wait. Imagine having to wait standing up in a dentists oce for twenty minutes, while a patient is screaming in an adjacent examination room. Now imagine an alternative wait in comfortable chairs with access to the latest magazines for a variety of customer tastes. For your ten-year old child there is a video game machine, and the area is sound proof. Many companies (Disney is one example) have become expert in understanding the psychology of waiting. Waiting in a line that is moving seems less boring than standing still in the same spot. TV monitors with engaging pictures help keep visitors? minds o the clock. In addition, if they can see and hear some of the excitement of those who have completed their wait, anticipation increases and waiting seems worthwhile. Lastly, expectations are a major factor in determining customer satisfaction. If customers approach a line and are told the wait will be fteen minutes, at least they have the information to make an informed judgement as to join the line or not. If it turns out to be less than the quoted fteen minutes then they are pleasantly surprised. Another dimension to the psychology of waiting relates to fairness. It can be very upsetting to see someone arrive after you in line and end up being served before you. This can happen if there are two separate lines. You might get stuck behind a customer who has a complicated request that takes a long time to service. As a result, people who have joined the other line even after you might ending up waiting less time. Many organizations have addressed this potential inequity by creating one line which all arriving customers enter. Thus, anyone who arrives after you must be further back in line and cannot begin service before you do.

9.

Simulation

Simulation is the most exible of all operations research modeling techniques. It is almost always implemented on a computer that is used to generate random numbers and keep track of various statistics. The essence of a computer simulation is the representation of the elements of a situation

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or system on a computer. The system being modeled can either be one in existence or on the drawing board. The analysis of the simulated data enables the manager to make inferences about the real world system by manipulating the computer representation. Computer simulations play two broad roles.
Build skills to manage similar systems by oering a broader range of experiences and challenges

than the individual could accumulate purely through actual work experience.
Evaluate dierent policies for the design and/or operation of the system.

The military is one of the leading users of simulations as a training tool. Flight simulators are used by civilian airlines as well as the military to train and retest pilots. War game simulations enable senior military commanders to learn from handling a wide variety of complex battle situations. Business schools also use simulations to teach their students by providing them with simulated experiences of a wide range of business problems and opportunities. In each case, the strength of simulation as a training tool lies in the ability to simulate a greater variety of potential situations than the individual would ever likely face in actual experience. Computer simulation is also the basis for many popular games such as Sim-City as well as the entire array of sports simulation games. Simulations are widely used to design a facility or develop operational policies. A computer simulation of a manufacturing plant or fast-food restaurant is designed primarily to evaluate different layouts and management policies. The goal is to reduce waiting time and increase the rate of production. In general, these simulations are discrete event stochastic simulations. That is, the computer simulation includes probability functions that are used to reect randomness in the customer arrival pattern or the time to complete a task. The simulation model can be used to identify and avoid possible bottlenecks in a proposed system or to develop solutions for bottlenecks in an existing system. The growth and renement in the use of simulation has paralleled the growth of the computer. The rst computer simulations were written in general purpose programming languages. Later, special simulation languages were developed. More recently, dramatic improvements were made in the dynamic visual representations of the system on the computer screen. The computer can represent a complex manufacturing line and the manager can watch as parts move from work station to work station and see where bottlenecks grow. The restaurant manager can watch customer lines grow and decline in a fast food restaurant. There are also simple simulation programs that are add-ons to spreadsheet software such as @Risk, an add-on to Excel.

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The role of computer simulations in society as a planning and educational tool will continue to grow. Computers will become ever more powerful and ubiquitous and their graphics more realistic. We live in an uncertain world in which changes are happening faster and faster. Stochastic simulation is the best tool for carrying out low cost experiments while capturing more of the real-world situation than traditional analytic models are capable of doing. In addition, computer software and graphics will continue to improve, making it easier and easier to build simulations. However, an intuitive understanding of probability constructs is critical for interpreting the output of a stochastic simulation. Developing this understanding in anyone who might one day be a user or a builder of stochastic simulations is the largest remaining challenge. 9.1. Areas of Application

Probabilistic simulations have been used to characterize complex systems such as production lines, inventory systems, a police patrol force, a criminal court system, armies in battle, an emergency room, hospital populations, and so forth. Civil engineers who design transportation systems routinely build simulation models to study highway and street trac ows. One of the earliest simulations was used to study tollbooths and trac through tunnels leading into New York City. New airport runways with entrances and exits are designed using simulations to also identify and address safety concerns. Communications trac owing through a telecommunications network has also been simulated, as has the spread of pollution as it ows through groundwater. Simulation models are also used in public policy studies. Models have been developed to study the impact of prison sentencing guidelines on prison populations or to explore dierent strategies for controlling the spread of AIDS in Africa. Dierent policies regarding the collection and distribution of transplanted organs have also been studied using computer simulations. The simplest class of simulations involves basic single and multiple server queueing systems. Analytic queueing models can be used to determine long-term averages, but they require restrictive modeling assumptions in order to obtain closed form solutions for these averages. In contrast, a stochastic simulation can calculate a variety of system performance statistics over a much broader range of assumptions. In addition, a computer simulation can describe the ebbs and ows in the system and not just long-run averages. These queueing simulations have been used to study banks, fast food restaurants, airport ticket counters or ships lined up waiting to enter the Suez Canal. 9.2. Multi-Attribute Utility Theory

We all face decisions in our jobs, our communities and in our personal lives.
Where should a new airport, manufacturing plant, power plant, or health care clinic be located?

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Which college should I attend, or which job should I accept? Which car, house, computer, stereo or even health plan should I buy? Which supplier or building contractor should be hired?

Decisions such as these involve comparing alternatives that have strengths or weaknesses with regard to multiple objectives of interest to the decision maker. Multi-Attribute Utility Theory (MAUT) is a structured methodology designed to handle the tradeos among multiple objectives. One of the rst applications of MAUT involved a study of alternative locations for a new airport in Mexico City in the early 1970s. The factors that were considered included cost, capacity, access time to the airport, safety, social disruption and noise pollution. Utility theory is a systematic approach for quantifying an individuals preferences. It is used to rescale a numerical value on some measure of interest onto a 0-1 scale with 0 representing the worst preference and 1 the best. This allows the direct comparison of many diverse measures. That is, with the right tool, it really is possible to compare apples to oranges! The end result is a rank ordered evaluation of alternatives that reects the decision makers preferences. An analogous situation arises when individuals, college sports teams, MBA degree programs, or even hospitals are ranked in terms of their performance on multiple disparate measures. Another example is the Bowl Coalition Series (BCS) in college football that attempts to identify the two best college football teams in the United States to play in a national championship bowl game. This process has reduced but not eliminated the annual end of the year arguments as to which college should be crowned national champion. Early applications of MAUT focus on public sector decisions and public policy issues. These decisions not only have multiple objectives, they also often involve multiple constituencies that will be aected in dierent ways by the decision. Under the guidance of Ralph Keeney, a leading researcher in the eld, many power plant-related decisions were made using MAUT. The military is also a leading user of this technique. The design of major new weapons systems always involves tradeos of cost, weight, durability, lethality and survivability. The federal government requires its defense contractors to use a structured method to make these design trade-o decisions. MAUT is one methodology in the broader eld of Multi-Criteria Decision Making (MCDM). The Analytic Hierarchy Process (AHP) is a direct competitor to MAUT as an ecient technique for rank ordering alternatives. MCDM also encompasses Multiobjective Mathematical Programming. This technique is used to tackle complex problems involving a large number of decision variables that are subject to constraints. Logical Decisions is a leading software product designed to facilitate MAUT and AHP studies. Its website contains a comprehensive bibliography of books and applications.

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10.

Integer Programming

Linear programming (LP) involves nding the optimal values for a set of decision variables that are constrained by a system of linear inequalities. The objective can be to minimize cost or maximize prot. Linear programming has a broad range of applications that includes planning production rates for a mix of products, blending gasoline and reducing trim loss when cutting large sheets of paper or steel. In these contexts the decision variables are continuous and the optimal solution must lie at a corner point of the feasible region formed by the system of linear inequalities. There are situations, however, in which the decision variables must assume only integer values. A regional manager deciding how many cars to have at each of her car rental locations knows that the solution must be integer. Planning the number of police ocers to have on duty each hour of the day requires that the solution take on integer values. Problems of these types in which the decision domain is restricted to integer values are called integer programming (IP) problems. Problem contexts that involve both integer and continuous decision variables are termed mixed-integer programming. Another equivalent term often used is combinatorial optimization. Optimal scheduling and sequencing decisions are often formulated as IP problems. General purpose IP problems are orders of magnitude more complex to solve than LP problems because the optimal solution need no longer be at a corner point. However, there are IP problems that have structures that facilitate the development of special purpose solution algorithms that are even faster to solve than comparably sized LP problems. Interestingly, there are classes of LP problems in which the matrix structure of the system of linear inequalities guarantees that the optimal solution to the LP problem will have all integer values. The Transportation Problem is in that class. The Transportation Problem involves minimizing the total cost of transporting supplies of a single product type from various locations (e.g., plants or warehouses) to a set of demand points (e.g., retail facilities). The decision variables are how much to ship from point A to point B and the constraints are the location-specic available supplies and demand. An especially powerful IP modeling concept is the use of integer decision variables that take on only the values of 0 or 1. These 0-1 decision variables, also called indicator variables, are used to describe yes-no decisions. Should a facility be built at this location or not? Should the corporation invest in this project or not? The Assignment Problem is a specic example of using only 0-1 variables. The Assignment Problem involves assigning, for example, people (or machines) to a set of mutually exclusive set of jobs (or tasks) so as to minimize the total cost (or time) of completing these jobs. The decision variable takes on the value 1 if person a is assigned to do job 1 and equals 0 if he is not assigned to that job.

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11.

Decision Analysis - Decision Trees

We all make decisions in our jobs, our communities and in our personal lives that involve signicant uncertainty.
How much should a company bid on an oil lease and how much should it invest in developing

an oil eld? On a personal level, how much should I invest in a particular stock or mutual fund?
How much capacity should be added to the manufacturing plant? Should millions be invested in new drug that has proven eective in animal tests? Which type of eye surgery should I have? Should the next baseball player at bat bunt?

There is uncertainty as to the oil reserves of the oil eld and the market demand for a new product. The link between animal drug trials and human eectiveness is far from perfect. What are the risks with the various types of surgery? Decision analysis is an operations research modeling tool used to select the best decision in the presence of uncertainty. The oil industry was one of the earliest users of the tool and continues to lead in its application. Pharmaceutical companies apply decision trees, which are an application of probability trees to make Research and Development decisions. Industrial giants such as DuPont, Kodak and GM use it to plan new products and capacity. The methodology involves creating a probabilistic tree for every alternative. The nodes of a tree represent either decisions or random events. The branches emanating from a node correspond to alternative decisions or alternative outcomes. The best alternative either maximizes the expected prot or minimizes the expected cost. Modern software such as Precision Tree, an Excel add-on, facilitates the analysis and oers graphical representations of the results. These enable a decision maker to explore the strengths and weaknesses of the alternatives. As decision analysis developed, the leaders in the eld recognized two critical psychological and practical issues that needed to be addressed in order to make the tool of greater practical value. The models required estimates of probabilities that were often not readily obtainable through detailed analysis of data. Subject matter experts, therefore, were interviewed in order to estimate the probabilities. Decision analysts, along with mathematical psychologists, became leaders in the eort to understand biases and misconceptions that individuals display when asked to make a forecast. They developed interview protocols to elicit expert opinion in a manner that reduced the likely bias. For example, project managers are often overly optimistic when they forecast how quickly a project will be completed. The interviewer encourages the manager to recall his experiences when

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projects did not go as planned and to use that relevant experience to make a more realistic forecast for the current project. The expected value, however, does not capture the fact that people are often fearful of taking risks, especially large ones. This risk aversion is the foundation for all of the insurance industry and the huge market in extended warranties. Decision analysts became leaders in researching attitudes towards risk and designing a methodology called utility theory, that captures this behavior. Utility theory is used to capture the decision makers risk attitude and incorporate his value system into the decision tree structure.