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DBM
Quantitative Techniques in Management
Semester - 1
Session - 8
Generic Example
Consider the following problem with
three decision alternatives and three
states of nature with the following payoff
table representing costs: COST PAYOFF TABLE
States of Nature
s1
s2
s3
d1
4.5
Decisions d2
0.5
d3
Maximax
d1
decision
d2
Best
Decision
2
0.5
d3
Cost
Maximax
payof
d3
States of Nature
s1 s2
s3
d1
4.5
Decisions d2
0.5
d3
Example
Minimax Regret Approach (continued)
For each decision list the maximum regret. Choose
the decision with the minimum of these values.
States of Nature
s1
Max
s2
s3
Regret
d1
Decisions d2
0.5
d3
E
V
(d)(
P
s)V
N
ij1jij
$10,000
$ 8,000
$ 6,000
$15,000
$18,000
$16,000
$14,000
$12,000
$21,000
Payofs
Decision Tree
d1
1
d2
d3
s1
s2
s3
.4
.2
.4
s1
.4
s2
s3
.2
s1
s2
s3
.4
.4
.2
.4
10,000
15,000
14,000
8,000
18,000
12,000
6,000
16,000
21,000
Model A
d1
Model B d2
Model C
d3
Sensitivity Analysis
Some of the quantities in a decision analysis, particularly the
probabilities, are often intelligent guesses at best.
It is important to accompany any decision analysis with a
sensitivity analysis.
Sensitivity analysis can be used to determine how changes
to the following inputs affect the recommended decision
alternative:
probabilities for the states of nature
values of the payoffs
If a small change in the value of one of the inputs causes a
change in the recommended decision alternative, extra
effort and care should be taken in estimating the input value.
Sensitivity Analysis
One approach to sensitivity analysis is to arbitrarily
assign different values to the probabilities of the states of
nature and/or the payoffs and resolve the problem. If the
recommended decision changes, then you know that the
solution is sensitive to the changes.
For the special case of two states of nature, a graphical
technique can be used to determine how sensitive the
solution is to the probabilities associated with the states
of nature.
OPERATION RESEARCH
Introduction to
Operations Research
Introduction to Operations
Research
Introduction to Operations
Research
Provides rational basis for decision making
Solves the type of complex problems that turn up
in the modern business environment
Builds mathematical and computer models of
organizational systems composed of people,
machines, and procedures
Uses analytical and numerical techniques to make
predictions and decisions based on these models
Introduction to Operations
Research
Draws upon
engineering, management, mathematics
Feedback loops
at all levels!
Formulate a
Mathematical Model
Verify the Model
be collected?
How will data be
collected?
How do different
components of the
system interact with
each other?
objectives?
Inherently the most difficult
step.
This is where software tools
will help us!
Must communicate
results in laymans
terms.
Introduction
Our world is filled with limited resources.
Oil
Land
Human
Time
Business
Resource (Budget)
Manufacturing
m/c , number of worker
Restaurant
Space available for seating
Introduction
How best to used the limited resources
available ?
How to allocate the resource in such a
way as to maximize profits or minimize
costs ?
Introduction
Mathematical Programming(MP) is a field
of management science or operations
research that fines most efficient way of
using limited resources/ to achieve the
objectives of a business.
Optimization
Characteristics of Optimization
Problems
One or more decisions
Restrictions or constraints
e.g. Determining the number of products to
manufacture
a limited amount of raw materials
a limited amount of labor
Objective
The production manager will choose the mix of
products that maximizes profits
Minimizing the total transportation cost
Constraints
a less than or equal to constraint :
f(X1 , X2 , X3 , , Xn) < b
a greater than or equal to constraint :
f(X1 , X2 , X3 , , Xn) > b
an equal to constraint :
f(X1 , X2 , X3 , , Xn) = b
Objective
MAX(or MIN) : f(X1 , X2 , X3 , , Xn)
Mathematical formulation of an
optimization problem
MAX(or MIN) : f(X1 , X2 , X3 , , Xn)
Subject to:
f(X1 , X2 , X3 , , Xn) < b1
.
f(X1 , X2 , X3 , , Xn) > bk
.
f(X1 , X2 , X3 , , Xn) = bm
note : n variables , m constraints
-Linear
-Nonlinear
Decision variable
2 x1 x2 3 x3 50
2.
2 x1 x2 60
3. 4 x1 (1 / 3) x2 75
2
3
x
4.
1 7 x 2 45
3 x1 2 x2 3 x3
0.9
5.
x1 x2 x3
Problem
Blue Ridge Hot Tubs manufactures and sells two models of hot tubs :
Aqua Spa and the Hydro-Lux.
Howie Jones, the owner and manager of the company, needs to
decide how many of each type of hot tubs to produce
200 pumps available
Howie expects to have 1,566 production labor hours and
2,880 feet of tubing available.
Aqua-Spa requires 9 hours of labor and 12 feet of tubing
Hydro-Lux require s 6 hours of labor and 16 feet of tubing
Assuming that all hot tubs can be sold
To maximize profits, how many Aqua-Spas and Hydra-Luxs should be
produce?
Formulating LP Models
1. Understand the problem
2. Indentify the decision variable
3. State the objective as a linear combination of decision variables
Max : 350x1 + 300x2
4. State the constraints as linear combinations of the decision variable
4.1 Pumps available
4.2 labor available
4.3 Tubing available
5. Identify any upper or lower bounds on the decision variable
x1 > 0
x2 > 0
x1 + x2
9x1 + 6x2
>0
>0
Subject to:
a11X1+ a12X2+ , , a1nXn
< b1
> bk
Notations
n
< b1
a
i 1
x b1
1i i
X1+ X2+ , ,+ Xn
= b1
x
i 1
b1
x
i 1
= b1
= b2
ij
b j , j
Graphical Method:
Solving LP Problems
Graphical Method
x1+x2 200
(1)
Graphical Method
x1+x2 200
(1)
Note :
X1 = 0 , x2 = 1566/6 = 261
X2 = 0 , x1 = 1566/9 =174
Graphical Method
x1+x2 200
(1)
Note :
X1 = 0 , x2 = 2880/16 = 180
X2 = 0 , x1 = 2880/12 = 240
Graphical Method
MAX
350x1 + 300x2
350x1 + 300x2
Graphical Method
MAX
350x1 + 300x2
x1+x2 200
(1)
= 200
(1)
(2)
1,566
1,566
366
122
= 78
MAX
x1+x2
450x1 + 300x2
200 (1)
9x1+ 6x2
1,566 (2)
12x1+ 16x2 2,880 (3)
(1)
9x1+ 6x2
1,566 (2)
12x1+ 16x2 2,880 (3)
MAX x1 + x2
x1+ x2
400 (1)
-x1+ 2x2
x1
x2
0
0
400
(2)
MAX
x1 + x2
x1+ x2
x1+ x2
x1
x2
0
0
150
200
(1)
(2)
Modeling LP Problems
1. Make vs. Buy Decisions
- The Electro-Poly corporation received a $750,000 order
for various quantities of 3 types of slip rings.
- Each slip ring requires a certain amount of time to wire
and hardness.
Model1 Model2 Model3
Number ordered
3,000
2,000
900
1.5
Model1
Model2
Model3
Cost to make
50
83
130
Cost to buy
61
97
145
1m1 + 2m2
< 5,000
+ m3
, harness constraint
m1 + b1 = 3,000
m2 + b2 = 2,000
m3 + b3 = 900
Decision Variable
Objective
Total Cost
Constraint
wiring constraint
harness constraint
Required order of each model
A transportation problem
Supply
R/M Area
Capacity
Processing Plant
i1
j1
275,000
200,000
i2
j2
400,000
600,000
i3
300,000
j3
225,000
Distance : (mile)
j1
j2
j3
i1
21
50
40
i2
35
30
22
I3
55
20
25
A transportation problem
How many product should be shipped from r/m area to the processing
plant, the trucking company charges a flat rate for every mile.
Min the total distance ~ Min total cost of transportation
Defining the decision variable
xij = number of R/M to ship from node i to node j
Defining the objective function
Min : 21x11+50x12 +40x13+35 x21 +30x22 +22x23 +55x31 +20x32 +25x33
Defining the constraints
x11 + x21 + x31 < 200,000
capacity restriction for j1
x12 + x22 + x32 < 600,000
capacity restriction for j2
x13 + x23 + x33 < 225,000
capacity restriction for j3
x11 + x12 + x13 = 275,000
supply restriction for i1
x21 + x22 + x23 = 400,000
supply restriction for i2
x31 + x32 + x33 = 300,000
supply restriction for i3
xij > 0 , for all i and j
A transportation problem
Parameters
Decision Variable
Objective
Constraint
capacity restriction
supply restriction
A transportation problem
A Blending problem
Agri-Pro stocks bulks amounts of four
types of feeds that can mix to meet a
given customers specifications.
Nutrient(%)
feed1
feed2
feed3
feed4
Corn (i=1)
30%
5%
20%
10%
Grain(i=2)
10%
30%
15%
10%
Minerals(i=3)
20%
20%
20%
30%
0.25
0.30
0.32
0.15
A Blending problem
Agri-Pro has just received an order from a local chicken farmer for
8,000 pounds of feed.
The farmers wants this feed to contain at least 20% corn, 15% grain ,
and 15% minerals.
What should Agri-Pro do to fill this order at minimum cost?
Defining the decision variable
xi = pounds of feed (j) to use in the mix
Defining the objective function
Min : 0.25x1 +0.30x2 +0.35x3+0.15 x4 , total cost
Defining the constraints
x1 + x2 + x3 + x4 = 8,000
0.3x1 +0.05 x2 + 0.20x3 + 0.10x4 > 0.20 8,000
--- Corn
0.1x1 +0.30 x2 + 0.15x3 + 0.10x4 > 0.15 8,000
--- Grain
0.2x1 +0.20 x2 + 0.20x3 + 0.30x4 > 0.15 8,000
--- Mineral
x1 , x2 , x3 , x4 > 0
A Blending problem
Parameters
Decision Variable
Objective
Minimize Cost
Constraint
A Blending problem
m1
m2
m3
m4
m5
m6
240
250
265
280
280
260
Unit Demanded(Dm)
1000
4500
6000
5500
3500
4000
Maximum Production(Maxp
m)
4000
3500
4000
4500
4000
3500
m 1
Subject to
pm Maxpm
, m
pm (1 / 2) Maxpm
, m
bm pm Dm 6,000
, m
bm pm Dm 1,500
, m
bm1 bm pm Dm
, m
Maximum Production(Maxp),
Unit production cost(Cm) ,
Unit Demanded(Dm)
Decision Variable
Objective
Minimize Cost
Constraint