Quantitative Analysis for

Management Decision

By:
Muhammed Yismaw
Contents…..
 Introduction to quantitative analysis
 Quantitative approaches
 Linear programming
 Transportation model
 Game theory
 Simulation
 Queuing
 UNIT ONE

Introduction to Quantitative analysis

Introduction to Quantitative Analysis

 Decision making is one of the most fundamental functions of

management professionals.

 Every manager has to take decisions pertaining to his field of work.

 Hence, it is an all-pervasive function of basic management.

 The process of decision making contains various methods.

 Quantitative techniques of decision making help make these methods

simpler and more efficient.
Introduction
 People have been using mathematical tools to solve problems
before thousands of years;
 However, the formal study and application of quantitative
techniques to practical decision making is largely a product of the
twentieth century.
 This field has highly organized by Taylor, who in the late 1800s
and early 1900s pioneered the application of the scientific
approach to management.
 Quantitative analysis, uses numerical figures to make a decision.
Introduction

 Emotions, Whim, and guesswork are not part of the quantitative

analysis approach.
 The approach starts with data. Like raw material for a factory,
these data are manipulated or processed into information that is
valuable to people making decisions.
 This processing and manipulating of raw data into meaningful
information is the heart of quantitative analysis.
 Computers have been instrumental in the increasing use of
quantitative analysis.
Introduction
 Nevertheless, in solving a problem, managers must consider both
qualitative and quantitative factors.
 For example, we might consider several different investment alternatives,
investments in the stock market, and an investment in real estate.
 We can use quantitative analysis to determine how much our investment
will be worth in the future when deposited at a bank.
 Quantitative analysis can also be used in computing financial ratios from
the balance sheets for several companies whose stock we are
considering.
 In addition to quantitative analysis, qualitative factors should be
considered. The weather, state and federal legislation, new technological
breakthroughs, the outcome of an election, and so on may all be factors
that are difficult to quantify.
Steps of Quantitative approach

 The quantitative analysis approach consists of defining a problem, developing

a model, acquiring input data, developing a solution, analyzing the results, and
implementing the results .

1. Defining the problem 6. Implementing the result

5. Analyzing the result

2. Developing a model

3. Acquiring data 4. Developing a solution

Quantitative approach
1. Defining the Problem
The first step in the quantitative approach is to develop a clear,
concise statement of the problem. This statement will give direction
and meaning to the following steps.
 In many cases, defining the problem is the most important and the
most difficult step.
 It is likely that an organization will have several problems.
 However, a quantitative analysis group usually cannot deal with all
of an organization’s problems at one time.
 Thus, it is usually necessary to concentrate on only a few problems.
Quantitative approach
 2. Developing a model
 Once we select the problem to be analyzed, the next step is to develop a model.
Simply stated, a model is a representation (usually mathematical) of a situation.
 There are many types of models. Architects sometimes make a physical model of
a building that they will construct.
 Chemical Engineers develop scale models of chemical plants.
 Automobiles, lawn mowers, gears, fans, smartphones, and numerous other
devices have schematic models (drawings and pictures) that reveal how these
devices work.
 What sets quantitative analysis apart from other techniques is that the models that
are used are mathematical. A mathematical model is a set of mathematical
relationships.
Quantitative approach

 3. Acquiring Input Data

 we must obtain the data that will be used in the model (input
data).
 Obtaining accurate data for the model is essential; even if the
model is a perfect representation of reality, improper data will
result in misleading results.
 This situation is called garbage in, garbage out. For a larger
problem, collecting accurate data can be one of the most difficult
steps in performing quantitative analysis.
Quantitative approach
 4. Developing a Solution
 Developing a solution involves manipulating the model to arrive at
the best (optimal) solution to the problem.
 In other cases, you can use a trial-and-error method, trying various
approaches and picking the one that results in the best decision or we
can use A series of steps.
 A series of steps or procedures that are repeated is called an
algorithm, named after Algorismus (derived from Musa al-
Khwarizmi), a Persian mathematician of the ninth century.
Quantitative approach

5. Analyzing the Results

Analyzing the results starts with determining the implications of the
solution.
 In most cases, a solution to a problem will result in some kind of
action or change in the way an organization is operating.

 The implications of these actions or changes must be determined

and analyzed before the results are implemented.
Quantitative approach
6. Implementing the Results
The final step is to implement the results.
 This is the process of incorporating the solution into the company’s
operations. This can be much more difficult than you would imagine.
 Even if the solution is optimal and will result in millions of dollars in
additional profits, if managers resist the new solution, all of the efforts of
the analysis are of no value.
 Experience has shown that a large number of quantitative analysis teams
have failed in their efforts because they have failed to implement a good,
workable solution properly.
 After the solution has been implemented, it should be closely monitored.
Top Quantitative approaches

 There are various quantitative techniques for decision making are:-

 Linear Programming
 Transportation Model
 Break-Even Analysis
 Cost-Benefit Analysis
 Decision Tree
 Game Theory
 Simulation
Cost Analysis (Break-Even Analysis)
 Managers want to make money. The objective of the break-even analysis is to decide the
optimum break-even point.

 In making decisions, managers must pay a great deal of attention to the profit
opportunities of alternative courses of action.

 A cost can be classified as being fixed or variable in relation to changes in the level of
activity within a given period. Fixed costs are those which remain fixed irrespective of
the volume of production or sales.

 For example, a managing director’s salary will not vary (change) with the volume of
goods produced during any year. Insurance premiums, rent charges, R&D costs are a
few other typical examples of fixed costs.
Cost Analysis (Break-Even Analysis)
Cost-Benefit Analysis

 Cost-benefit analysis is a mathematical technique for decision-

making. It is a quantitative technique used to evaluate the
economic costs and the social benefits associated with a
particular course of action.
 In this technique, an effort is made to identify all costs and
benefits, not only those that may be expressed in dollar.
 In general, this technique is advocated for use in decisions on
public projects.
 What counts as a benefit or loss to one part of the economy—to
one or more persons or groups- does not necessarily count as a
benefit or loss to the economy as a whole.
Linear Programming

 Linear Programming- is an optimization method, which shows how

to allocate scarce resources such as money, materials or time and
how to do such allocation in the best possible way subject to more
than one limiting condition expressed in the form of inequalities
and/or equations.

 It enables users to find optimal solution to certain problems in which

the solution must satisfy a given set of requirements or constraints.
Linear Programming

 Optimization in linear programming implies either maximization (such as

profit, revenue, sales, and market share) or minimization (such as cost, time,
and distance) a certain objective function.
 But, in LP we cannot max/min two quantities in one model. It involves
linearly related multi-variety functions, i.e., functions with more than one
independent variable.
 The goal in linear programming is to find the best solution given the
constraints imposed by the problem; hence the term constrained optimization.
Decision Tree

 Another increasingly useful tool for management decision-makers is the so called

decision tree. This is basically a conceptual map of possible decisions and
outcomes in a particular situation. It is useful in cases where a manager is required
to make a number of sequential decisions i.e.,
Decision Tree

 The above diagram focuses attention on outcomes or

consequences as well as decisions.
 These outcomes can be further elaborated in terms of their
probability and their anticipated pay off.
 It is also possible to add a time dimension to the whole diagram,
so that, for example in Fig. 18.3 the period from decision point 1
to decision point 2 could be one year.
 These additional features help to make the use of decision trees a
salutary exercise for managers.
Game Theory

 Game theory is a technique of operations research. This provides

a basis for determining, under specified conditions, the particular
strategy that will result in maximum gain or minimum loss, no
matter what opponents do or do not do. (An opponent would be
the enemy general in military application, or a competitor in a
business situation etc.)
 The simplest application of the game theory is the two-person,
zero-sum game, in which there are only two players and one
player can gain only at the expense of the other.
 These two conditions are generally fulfilled when two armies are
opposing each other. In business they are fulfilled only in special
cases.
Game Theory

 Assume, a company has only one competitor and the size of the
market is fixed; thus every gain in sales by one company means
an equal loss in sales for the other.

 In an expanding market, both the companies could gain, in a

declining market, one could gain at the expense of the other.

 Game theory has the greatest practical usefulness in planning

sales promotion strategies.

Simulation

 Simulation techniques are especially applicable to what if problems, in

which a manager or technician wants to know, If we do this, what will
happen.

 For example, one might have a physical model of a machine and actually
keep on increasing its speed to determine at what point it would begin to
jam, fly apart or walk across the floor.

 With no loss one can use a mathematical model in which each of the terms
represents one of the variables, and observe the effect on the others when
different values are given to one or more of the terms.
Simulation

 Simulation is the process of building and operating models of

real-world phenomena through the use of mathematical
relationships that exist among critical factors.
 This technique is useful for solving complex problems that
cannot be readily solved by other techniques.
 However, simulation is essentially probabilistic, since the
manager typically must estimate the future values of these
factors.
 Simulation is very helpful in engineering and design problems,
where the medium may be either the mathematical model or a
diagram on a screen connected to the computer.
 Unit Two

Introduction to Linear Programming

Concept and Importance of Linear Programming

 Linear Programming- is an optimization method, which shows how

to allocate scarce resources such as money, materials or time and
how to do such allocation in the best possible way subject to more
than one limiting condition expressed in the form of inequalities
and/or equations.

 It enables users to find optimal solution to certain problems in which

the solution must satisfy a given set of requirements or constraints.
Assumption of LP Models

1. Linearity. The linearity requirement is that each decision variable has a linear
impact on the objective function and in each constraint in which it appears.

2. Divisibility. The divisibility requirement pertains to the potential values of

decision variables. It is assumed that non-integer values are acceptable.

3. Certainty. The certainty requirement assumed that these values are known and
constant.

4. Non-negativity. The non-negativity constraint is that negative values of

variables are unrealistic (Not-acceptable) and, only positive values and zero
will be allowed.
 Formulating LP Models
 Formulating linear programming models involves the following steps:

1. Define the problem/problem definition

 To determine the # of type 1 and type 2 products to be produced per mother

so as to maximize the monthly profit given the restrictions.

 Problem identification is the first step in LP. Once a problem has been defined,
the attention of the analyst shifts to formulating a model.

 If the LP model is ill formulated, ill-structured, it can easily lead to poor

decisions.
Formulating LP Models

2. Identify the decision variables

* Let X1 and X2 be the monthly quantities of Type 1 and type 2 products

3. Determine the objective function

Once the variables have been identified, the objective function can be specified. It is necessary
to decide if the problem is maximization or a minimization problem.

4. Identifying the constraints

- System constraints - more than one variable

 - Individual constraints - one variable

 - Non-negative constraints
 Illustrations-1

1. A firm that assembles computer equipment is, about to start

production of two new microcomputers. Each type of micro-computer
will require assembly time, inspection time and storage space.

The amount of each of these resources that can be devoted to the

production of microcomputers is limited.

The manager of the firm would like to determine the quantity of each
microcomputer to produce in order to maximize the profit generated by
sales of these microcomputers.
Illustrations-1

 Additional information

 In order to develop a suitable model of the problem, the manager has met with design
and manufacturing personnel. As a result of these meetings, the manager has obtained
the following information:

 Type 1
Type 2

 Profit per unit Birr 60 Birr 50

 Assembly time per unit 4hrs 10hrs

 Inspection time per unit 2hrs 1hr

 Storage space per unit 3cubic ft. 3cubic ft

Illustrations-1

 The manager also has acquired information on the availability of company resources.
These weekly amounts are:

 Resource Resource available

 Assembly time 100hrs

 Inspection time 22hrs

 Storage space 39 cubic feet

 The manger also meet with the firm’s marketing manager and learned that demand for the
microcomputers was such that whatever combination of these two types of microcomputer
is produced, all of the output can be sold.

 Required: Formulate the Linear programming model.

Solution

 Step 1: Problem Definition

- To determine the number of two types of microcomputers to be produced

(and sold) per week so as to maximize the weekly profit given the
restriction.

 Step 2: Variable Representation

- Let X1 and X2 be quantities of type 1 and type 2 microcomputers,

respectively.

 Step 3: Develop the Objective Function

 Maximize or Zmax = 60X1 + 50X2

Solution

 Step 4: Constraint Identification

 System constraints:

 4X1 + 10X2 100hrs Assembly time

 2X1 + X2 22hrs

Inspector time

 3X1 + 3X2 39 cubic feet Storage

space

 No Individual constraint

 X1, X2 0 Non-negativity constraint

Solution

 In summary, the mathematical model for the microcomputer

problem is:

Zmax = 60X1 + 50X2

 Subject to: 4X1 + 10X2 100

 2X1 + X2 22

 3X1 + 3X2 39

 X1, X2 0
Illustration-2
 An electronics firm produces three types of switching devices. Each type
involves a two-step assembly section. The assembly times are shown in the
following table:

 Assembly time per Unit (in minutes)

 Model A Model B Model C

 Section #1 2.5 1.8 2.0

 Section #2 3.0 1.6 2.2

Illustration-2

 Each workstation has a daily working time of 7.5 hrs. The manager wants
to obtain the greatest possible profit during the next five working days.
 Model A yields a profit of Birr 8.25 per unit, Model B a profit of Birr
7.50 per unit and Model C a profit of Birr 7.80 per unit. Assume that the
firm can sell all it produces during this time, but it must fill outstanding
orders for 20 units of each model type.
 Required: Formulate the linear programming model of this problem.
Illustration-2

 Step 1. Problem definition

 To determine the number of three types of switching devices to be produced

and sold for the next 5 working days so as to maximize the 5 days profit.

 Step 2. Variable representation

 Let X1, X2 and X3 be the number of Model A, B and C switching

devices respectively, to be produced and sold.

 Step 3. Develop objective function

 Zmax: 8.25X1 + 7.50X2 + 7.80X3

 Illustration-2

Step 4. Constraint identification

2.5X1 + 1.8X2 + 2.0X3 2250 minutes Ass. time station 1 System
3.0X1 + 1.6X2 + 2.2X3 2250 minutes Ass. time station 2
X1  20 Model A
X2 20 Model B Individual constraint
X3 20 Model C
X1, X2, X30 Non negativity
Illustration-2

 In summary:

 Zmax: 8.25X1 + 7.50X2 + 7.80X3

 : 2.5X1 + 1.8X2 + 2.0X3 2250 minutes

 3.0X1 + 1.6X2 + 2.2X3 2250 minutes

 X1  20 model A

 X2 20 model B

 X3 20 model C

 X1, X2, X3 0 non negativity

Illustration-3

 A diet is to include at least 140 mgs of vitamin A and at least 145 Mgs of
vitamin B. These requirements are to be obtained from two types of foods:
Type 1 and Type 2.
 Type 1 food contains 10Mgs of vitamin A and 20mgs of vitamin B per pound.
Type 2 food contains 30mgs of vitamin A and 15 mgs of vitamin B per pound.
If type 1 and 2 foods cost Birr 5 and Birr 8 per pound respectively, how many
pounds of each type should be purchased to satisfy the requirements at a
minimum cost?

Vitamins

 Foods A B

 Type 1 10 20

 Type 2 30 15
Illustration-3

 Step 1. Problem definition

 To determine the pounds of the two types of foods to be purchased to make the diet at
a minimum possible cost within the requirements.

 Step 2. Variable representation

 Let X1 and X2 be the number of pounds of type 1 and type 2 foods to be purchased,
respectively.

 Step 3. Objective function

 Zmin: 5X1 + 8X2

Illustration-3

Constraints
10X1 + 30X2 140 System constraints
20X1 + 15X2 145
X1, X2 0 non-negativity constraints.
Illustration-3

 In summary:

 Zmin: 5X1 + 8X2:

 10X1 + 30X2 140 System constraints

 20X1 + 15X2 145

 X1, X2 0 non-negativity constraints.

Illustration-4

A farm consists of 600 hectares of land of which 500 hectares will be planted
with corn, barley and wheat, according to these conditions.

(1) At least half of the planted hectare should be in corn.

(2) No more than 200 hectares should be barley.

(3) The ratio of corn to wheat planted should be 2:1

 It costs Birr 20 per hectare to plant corn, Birr 15 per hectare to plant barley
and Birr 12 per hectare to plant wheat.

a. Formulate this problem as an LP model that will minimize planting cost

while achieving the specified conditions.
Illustration-4

 Solution:
 Step 1. Problem definition

 To determine the number of hectares of land to be planted with corn, barley

and wheat at a minimum possible cost meeting the requirements.

 Step 2. Decision variable representation

 Let X1 be the number of hectares of land to be planted with corn, X 2 be the

number of hectares of land to be planted with barley, and X 3 be the number

of hectares of land to be planted with wheat.
Illustration-4

 Step 3. Objective function

Cmin = 20X1 + 15X2 + 12X3

Step 4. Constraints

X1 + X2 + X3 = 500

X1  250
X2  200
X3 = 125
Illustration-4

 In summary

 Cmin = 20X1 + 15X2 + 12X3

X1 + X2 + X3 = 500

X1  250
X2  200
X3 = 125
 Unit Three

Solution Approaches for Linear Programming

Graphic Method
 There are two approaches to solve linear programming problems:

 3.4.1. The Graphic solution method

 3.4.2. The Algebraicsolution/ simplex algorithm method

 3.4.1. The Graphic Solution Method

 It is a relatively straightforward method for determining the optimal solution to

certain linear programming problems.

 It gives as a clear picture. This method can be used only to solve problems that
involve two decision variables.

 However, most linear programming applications involve situations that have more
than two decision variables, so the graphic approach s not used to solve them.
Graphic Method

 E.g.: 1. solving the micro-computer problem with graphic approach

 Zmax = 60X1 + 50X2

 : 4X1 + 10X2 100

 2X1 + X2 22

 3X1 + 3X2 39

 X1 , X 2  0
Graphic Method
 Steps:

1. Plot each of the constraints and identify its region – make linear inequalities
linear equations.

2. Identify the common region, which is an area that contains all of the points
that satisfy the entire set of constraints.

3. Determine the Optimal solution- identify the point which leads to maximum
benefit or minimum cost.
Graphic Method

24
22 2X1 + X2 = 22

20

16

3X1 + 3X2 = 39
12
(0, 13) E
8
(5, 8) D 4X1 + 10X2 = 100
4 (9, 4) C
Graphic Method

 To identify the maximum (minimum) value we use the corner

point approach or the extreme point approach respectively.

 The corner point/extreme point approach has one theorem: It

states that;
 For problems that have optimal solutions, a solution will occur at
an extreme, or corner point. Thus, if a problem has a single
optimal solution, it will occur at a corner point.
Graphic Method

Points Coordinates How Determined Value of Objective function

X1 X2 Z = 60X1 + 50X2

A 0 0 Observation Birr 0

B 11 0 Observation Birr 660

C 9 4 Simultaneous equations Birr 740

D 5 8 Simultaneous equations Birr 700

E 0 10 Observation Birr 500

Graphic Method (Illustration 1)
 Basic solution

 X1 = 9, X2 = 4, Z = Birr 740

 After we have got the optimal solution, we have to substitute the value of the decision
variables into the constraints and check whether all the resources available were used
or not. If there is an unused resource we can use it for any other purpose. The amount
of unused resources is known as SLACK-the amount of the scarce resource that is
unused by a given solution.

 The slack can range from zero, for a case in which all of a particular resource is used,
to the original amount of the resource that was available (i.e., none of it is used).
 Graphic Method
Computing the amount of slack

Constraint Amount used with X1 = 9 and Originally available Amount of slack (available –
X2 = 4 Used)

Assembly time 4(9) + 10(4) = 76 100 hrs 100 – 76 = 24 hrs

Inspection time 2(9) +1 (4) = 22 22 hrs 22 – 22 = 0 hr

Storage space 3(9) + 3(4) = 39 39 cubic ft 39 – 39 = 0 cubic ft

 Graphic Method (Illustration 2)

Solving the diet problem with graphic approach

 Cmin: 5X1 + 8X2

 10X1 + 30X2 140

 20X1 + 15X2 145

 X1, X2 0
Graphic Method (Illustration 2)

16

12
20X1 + 15X2 = 145
(0, 9.67) A
8

10X1 + 30X2 = 140

4 B (5, 3)

C (14,0)
4 8 12 16 20
Graphic Method (Illustration 2)

Points Coordinates How Determined Value of the objective function

X1 X2 Z = 5X1 + 8X2

A 0 9.67 Observation Birr 77.30

B 5 3 Simultaneous equations Birr 49

C 14 0 Observation Birr 70
 Graphic Method (Illustration 2)

 Basic solution: X1= 5 pounds

 X2 = 3 pounds

 C = Birr 49

 Interpretation: To make the diet at the minimum cost of Birr 49 we have to

purchase 5 pounds of Type1 food and 3 pounds Type 2 food.

 If there is a difference between the minimum required amount and the optimal solution, we
call the difference surplus: That is, Surplus is the amount by which the optimal solution
causes a  constraint to exceed the required minimum amount.

 Calculate the Surplus amount for the above solution.

Unit Three

Simplex Algorithm/Algebraic Solution Method

Introduction

 The simplex method is an iterative technique that begins with a

feasible solution that is not optimal but serves as a starting point.
 Through algebraic manipulation, the solution is improved until no
further improvement is possible (i.e., until the optimal solution
has been identified).
 Each iteration moves one step closer to the optimal solution.
 In each iteration, one variable that is not in the solution is added
to the solution and one variable that is in the solution is removed.
 Procedures of simplex method
 The simplex procedure for a maximization problem with all 
constraints consists of the following steps.
1. Write the LPM in a standard form: when all of the constraints are
written as equalities, the linear program is said to be in standard
form. We convert the LPM in to a standard form by applying the
slack variables, S, which carries a subscript that denotes which
constraint it applies to. For example, S1 refers to the amount of slack
in the first constraint, S2 to the amount of slack in the second
constraint, and so on.
When slack variables are introduced to the constraints, they are no
longer inequalities because the slack variable accounts for any
difference between the left and right-hand sides of an expression.
Procedures of simplex method
 Hence, once slack variables are added to the constraints, they
become equalities. Furthermore, every variable in a model must
be represented in the objective function.

 However, since slack does not provide any real contribution to

the objective, each slack variable is assigned a coefficient of zero
in the objective function.
 Slack = available – Production,
 Surplus = Production – Requirement
Basic Rules
 Note:
The optimality condition for :
Maximization is: Cj-Zj  0
Minimization is: Cj-Zj  0
Entering variable for:
Maximization: when bottom row is highest positive value
Minimization: when bottom row is highest negative value
Leaving Variable for:
Maximization is: The smallest number in the ratio column
Minimization: The highest number in the ratio column
Illustration 3
 Maximization problem examples

 Taking the microcomputer problem its standard form is as follows:

 Zmax = 60X1 + 50X2 Zmax = 60X1 + 50X2 + 0S1 +0 S2 + 0S3

: 4X1 + 10X2 100 : 4X1 + 10X2 + S1 = 100

2X1 + X2 22 2X1 + X2 + S2 = 22

3X1 + 3X2 39 3X1 + 3X2 + S3 = 39

X1, X2 0 X1, X2, S1, S2, S3 0

Illustration 3
1. Develop the initial tableau: the initial tableau always represents the “Do Nothing” strategy,
so that the decision variables are initially non-basic.

a) List the variables across the top of the table and write the objective function
coefficient of each variable jut above it.

b) There should be one row in the body of the table for each constraint. List the slack
variables in the basis column, one per raw.

c) In the Cj column, enter the objective function coefficient of zero for each slack
variable. (Cj - coefficient of variable j in the objective function)

d) Compute values for row Zj

e) Computer values for Cj – Zj.

Illustration
3. Develop subsequent tableaus

 3.1. Identify the entering variable - a variable that has a largest positive value is the Cj
– Zj raw.

 3.2. Identify the leaving variable - Using the constraint coefficients or substitution rates
in the entering variable column divide each one into the corresponding quantity value.
However do not divide by a zero or negative value. The smallest non-negative ratio that
results indicate which variable will leave the solution.

4. Find unique vectors for the new basic variable using row operations on the pivot
element.
Illustration 3

Sol/n Cj 60 50 0 0 0 Ratio
basis X1 X2 S1 S2 S3 RHSV
S1 0 4 10 1 0 0 100 100/4 = 25
S2 0 2* 1 0 1 0 22 22/2 = 11 leaving variable
S3 0 3 3 0 0 1 39 39/3 = 13 Pivot row
Zj 0 0 0 0 0 0
Cj-Zj 60 50 0 0 0 0

Entering variable Pivot column

 Illustration 3
1. Find unique vectors for the new basic variable using row operations on the pivot element.

Sol/n Cj 60 50 0 0 0
basis X1 X2 S1 S2 S3 RHSV Øj = bj/xj (aij)
S1 0 0 8 1 -2 0 56 56/8 = 7
X1 60 1 1/2 0 ½ 0 11 11/. 5 = 22
S3 0 0 3/2 0 -3/2 1 6 6/1.5 = 4 Leaving
Zj 60 30 0 30 0 660 variable
Cj-Zj 0 20 0 -30 0 0

Entering Variable
Illustration 3
Sol/n Cj 60 50 0 0 0
basis X1 X2 S1 S2 S3 RHSV Øj = bj/xj (aij)
S1 0 0 0 1 6 -16/3 24
X1 60 1 0 0 1 -1/3 9
X2 50 0 1 0 -1 2/3 4
Zj 60 50 0 10 40/3 740
Cj-Zj 0 0 0 -10 -40/3

Optimal solution: X1 = 9
X2 = 4
S1 = 24 hrs
Z = Birr 740
Illustration 3
5. Compute the Cj – Zj raw

6. If all Cj – Zj values are zeros and negatives you have reached optimality.

7. If this is not the case (step 6), rehear step 2to5 until you get optimal solution.

 “A simplex solution is a maximization problem is optimal if the Cj – Zj row consists

entirely of zeros and negative numbers (i.e., there are no positive values in the bottom
row).”

 Note: The variables in solution all have unit vectors in their respective columns for the
constraint equations. Further, note that a zero appears is raw c - z in every column whose
variable is in solution, indicating that its maximum contribution to the objective function
has been realized.
Illustration 4

 Solve the following problem using simplex method.

 Zmax = 45X1 + 70X2

 : 9X1 + 12X2 720

 2X1 + 6X2 300

 X1 + X2 75

 X1, X2 0
Illustration 4

 Write the LPM in a standard form

 Zmax = 45X1 + 70X2 + OS1 + OS2 + OS3

 : 9X1 + 12X2 + S1 = 720

 2X1 + 6X2 + S2 = 300

 X1 + X2 + S3 = 75

 X1, X2, S1, S2, S3 o

Illustration 4
a. Develop the initial tableau – in LP matrices are commonly called tableaus

Sol/n Cj 45 70 0 0 0
basis X1 X2 S1 S2 S3 RHSV Øj = bj/xj (aij)
S1 0 9 12 1 0 0 720 720/12 =60
S2 0 2 6 0 1 0 300 300/6 =50 Leaving
S3 0 1 1 0 0 1 75 75/1 = 75 variable
Zj 0 0 0 0 0 0
Cj-Zj 45 70 0 0 0

Entering variable
b.
Illustration 4
a.
Develop the subsequent tableaus
- Identify the entering variable
- Identify the leaving variable

Sol/n Cj 45 70 0 0 0
basis X1 X2 S1 S2 S3 RHSV Øj = bj/xj (aij)
S1 0 5 0 1 -2 0 120 120/5 = 24 Leaving variable
X2 70 1/3 1 0 1/6 0 50 50/. 333 =150
S3 0 2/3 1 0 -1/6 1 25 25/.666 = 75
Zj 70/3 70 0 70/6 0 3500
Cj-Zj 65/3 0 0 -70/6 0
Entering variable
Illustration 4

Sol/n Cj 45 70 0 0 0 rato
basis X1 X2 S1 S2 S3 RHSV
X1 45 1 0 1/5 -2/5 0 24
X2 70 0 1 -1/15 3/10 0 42
S3 0 0 0 -2/15 1/10 1 9
Zj 45 70 13/3 3 0 4020
Cj-Zj 0 0 -13/3 -3 0
Illustration 4

 Optimal solutions: X1 = 24 units

 X2 = 42 units

 S3 = 9 engines

 Z = Birr 4020

Interpretation: The Company is advised to produce 24 units of push type mowers

and 42 units of self-propelled mowers so as to realize a profit of Birr 4020. In
doing so the company would be left with unused resource of 9 engines which can
be used for other purposes.
B. Solving Minimization Problems
.
solution for Minimization problems

 It is similar to maximization problem except

 The selection of variable to enter the solution (pivot Colum) is based on

the most/largest negative value in the Cj-Zj row (net evaluation row).

 Addition of the coefficient +M to standardize the problem in the OF.

 Have at least one artificial variable for the OF and each constraint

 Subtraction of the surplus

solution for Minimization problems

 Why the big +M method is used? Since it is easy to visualize that

an initial solution doesn’t exist if we let X1 and X2 each equal to
zero, we get S1 and S2 with negative constraints which are not
feasible as it violates the non negativity constraints
restriction.

 To provide an initial feasible solution, we add an artificial

variable in to the model in which has not tangible relationship
with the decision with the decision program.
solution for Minimization problems

 Example 1: - Z min = 3X1 + 4X2

 Subject to:

 2X1 + 3X2 ≥ 90

 4X1 + 3X2 ≥ 120

 X1, X2 ≥ 0
solution for Minimization problems

 Solution:

 Standardization: Zmin = 3X1 + 4X2 +0s1+0S2 + MA1

+MA2

 Subject to

 2X1 + 3X2 – S1 -0S2 +A1 +0A2 = 90

 4X1 + 3X2 – 0S1-0S2 +0A1 +A2 = 120

 X1, X2, S1, S2, A1, A2 ≥ 0

 solution for Minimization problems
First tableau
Basis Cj 3 4 0 0 M M Solu- ratio
tion
Cb X1 X2 S1 S2 A1 A2
A1 M 2 3 -1 0 1 0 90 45
A2 M 4 3 0 -1 0 1 120 30
Zj 6m 6m -m -m m m 210m
Cj- 3-6m 4-6m m m 0 0
Zj
Entering
 solution for Minimization problems
Second tableau
Basis Cj 3 4 0 0 M M Solu- ratio
tion
Cb X1 X2 S1 S2 A1 A2
A1 M 0 3/2 -1 ½ 1 __ 30 20
X1 3 1 3/4 0 -1/4 0 __ 30 40
Zj 3 3/2m+ -m 1/2m m --- 30m+
9/4 -3/4 90
Cj- 0 -3/2m m -1/2m 0 ---
Zj +7/4 +3/4

Entering
solution for Minimization problems
Basis Cj 3 4 0 0 M M Solu- ratio
tion
Cb X1 X2 S1 S2 A1 A2
X2 4 0 1 -2/3 1/3 --- __ 20
X1 3 1 0 1/2 -1/2 --- __ 15
Zj 3 4 -7/6 -1/6 -- --- 125
Cj-Zj 0 0 7/6 1/6 --- ---
solution for Minimization problems

 Since all the numbers in the index row (Cj – Zj

row) are either zero or positive, the optimal solution
has been arrived or realized and the solution is given as;
X1 = 15 and X2= 20 and its minimum cost is = $125.
solution for Minimization problems
 Example 2: A chemical company produced two types of
compounds, C and D. The following table gives the units of
ingredients X1 and X2 per kg of compounds C and D as well as
minimum requirements of X1 and X2 and cost per Kg of C and
D. Using the simplex method, find the quantities of C and D
which would give a supply of X1 and X2 at a minimum cost?
Compounds Ingredients Minimum requirement

X1 X2

C 1 2 80

D 3 1 75

Cost per kg $4 $6
solution for Minimization problems
 Solution: The OF is to minimize cost. Thus;
 Z min = 4X1 + 6X2
 S.t: X1 + 2X2≥ 80
 3X1 + X2≥75
 X1, X2 ≥ 0


 Standardization: 4X1 + 6X2 +0S1 +0S2 +MA1+MA2

 S.t: X1 + 2X2 –S1-0S2 + A1 +0A2 =80
 3X1 + X2 – 0S1 –S2 +0A1 +A2 =75
 X1, X2, S1, S2, A1, A2 ≥ 0
solution for Minimization problems
First Table

Basis Cj 4 6 0 0 M M Solu- ratio

tion
Cb X1 X2 S1 S2 A1 A2
A1 M 1 2 -1 0 1 0 80 80
A2 M 3 1 0 -1 0 1 75 25
Zj 4m 3m -m -m m m 155m
Cj- -4m -3m+ M m 0 0
Zj +4 6
solution for Minimization problems
Second tableau
Basis Cj 4 6 0 0 M M Solu- ratio
tion
Cb X1 X2 S1 S2 A1 A2
A1 M 0 5/3 -1 1/3 1 --- 55 33
X2 4 1 1/3 0 -1/3 0 --- 25 75
Zj 4 5/3m+ -m 1/3m- m --- 55m+
4/3 4/3 100
Cj- 0 -5/3m+ m -1/3m 0 ----
Zj 14/3 +4/3
 solution for Minimization problems
Last table
Basis Cj 4 6 0 0 M M Solu- ratio
tion
Cb X1 X2 S1 S2 A1 A2
X1 4 0 1 -3/5 1/5 -- --- 33
X2 4 1 0 1/5 -2/5 --- --- 14
Zj 4 6 -14/5 -2/5 -- --- 254
Cj-Zj 0 0 14/5 2/5 -- ----
solution for Minimization problems

 Sinceall the numbers in the index row (Cj

– Zj row) are either zero or positive, the
optimal solution has been arrived or realized.
Therefore, optimality is found at X1 = 14, X2 =
33 and the minimum cost is = 254
 Chapter Four

Transportation Models
Introduction
 Many practical problems in operations research can be broadly
formulated as linear programming problem, for which the simplex
method is a powerful technique for solution of these problems.
 But this is a general method and cannot be used for specific types of
problems like, Transportation model.
 Transportation model is an important class of linear programs. For a
given supply at each source and a given demand at each destination,
the model studies the minimization of the cost of transporting a
commodity from a number of sources to several destinations.
 1. Transportation Algorithm (MODI Method)

 The transportation algorithm is the Simplex method

specialized to the format of table. It involves:
• Finding an initial basic feasible solution.
• Testing the solution for optimality.
• Improving the solution, when it is not optimal.
 Repeating steps 2 and 3 until the optimal solution is
obtained.
1. Transportation Algorithm (MODI Method)

• The solution to T.P is obtained in two stages:

 In the first stage, find the basic feasible solution
using any of the following methods:-
• North-west corner rule
• Matrix minimum method or least cost method
• Vogel’s approximation method (VAM)
 In the second stage, test the basic feasible solution for its
optimality by following method:-
• Modi method
• Stepping stone method.
North west corner rule.

• Step 1. Make first assignment in cell (1,1), the

upper left hand (north west corner) of table. The
amount allotted is
 X11 = min ( a1, b1 )
Either the capacity of origin O1 is used up or the
requirement at destination D1 is satisfied or both.
This value of X11 is entered in the upper left hand
corner of cell (1, 1) in the transportation table.
North west corner rule.

Step 2. If b1 > a1, the capacity of origin O1 is exhausted and the

requirement at destination D1 is still not satisfied. Then at least one
variable in the first column will have to take on a positive value.
Move down vertically to the second row and make the second
allocation of magnitude:
 X21 = min ( a2, b1 – X21) in the cell (2, 1).
This either exhausts the capacity of origin O2 or satisfies the remaining
demand at destination D1.
 If a1 > b1, the requirement at destination D1 is satisfied, but capacity of
origin O1 is not completely exhausted. Move to right in a horizontal
position to the second column to make the second allocation of the
magnitude.
 X12 = min (a1 – X11, b2) in the cell (1, 2).
North west corner rule.

 This either exhausts the remaining capacity of origin O1 or

satisfies the demand at destination D2.
 If b1 = a1, the capacity of origin O1 is completely exhausted
as well as the requirement at destination is completely
satisfied, then there is a tie at the second allocation. An
arbitrary tie breaking choice is made. Make the second
allocation of the magnitude

 X12 = min (a1 – a2, b2) = 0 in the cell

(1, 2). X21 = min ( a2, b1 – X21) = 0 in

the cell (2, 1).

 North west corner rule.

 Step 3. Start from the new North West

corner of the transportation table satisfying
the destination requirements and exhausting
the origin capacities one at a time, moving
down towards the lower right corner of the
transportation table until all the rim
requirements are satisfied.
 Solved problem 1

 Determine initial basic feasible solution to the following transportation problem

using the North West corner rule.

D1 D2 D3 D4 Available

O1 6 4 1 5 14

O2 8 9 2 7 16

O3 4 3 6 2 5

required 6 10 15 4 35
Solution
 Solution:
• Start with the top most left corner.
• Allocate the maximum possible amount here.
• Move to the right hand cell if there is still any available quantity, otherwise move to
down cell. Again perform step 2 and continue until all the available quantity is
exhausted.
 In this method we start from the North West corner cell i.e., (1, 1) cell and allocate there
maximum possible. Thus 6 which is min (a1 = 14, b1 = 6), can be allocated in this. After
this allocation 8 units are available at O1, so we move to the next cell of the first row and
allocate 8 units balance at cell (1, 2).
 But still second column demand is not satisfied so we allocate more in the second column.
We move to the cell (2, 2) and allocate 2 units where sum of 2 nd column is 10. Still there
are 14 units balance available at O2. We send these 14 units to the next destination that is
cell (2, 3).
 But still there one unit balance at destination D3 thus we move to cell (3, 3) and allocate
this one unit there. Now there are 4 units balance at O 3. We move to cell (3, 4) and allocate
these 4 units there. The resulting feasible solution is as shown in the following table.
Solution

D1 D2 D3 D4 Available
O1 6 4 1 5 14
(6) (8)
O2 8 9 2 7 16
(2) (14)
O3 4 3 6 2 5
(1) (4)
required 6 10 15 4 35

The total transportation cost = 6x6 + 4x8 + 9x2 + 2x14 + 6x1 + 2x4 = 128
Solved problem 2

Determine initial basic feasible solution to the following transportation problem using the
North West corner rule.
D1 D2 D3 D4 Available
O1 1 2 1 4 30
O2 3 3 2 1 50
O3 4 2 5 9 20
required 20 40 30 10 100
Solved problem 2

Based on the solution for solved problem 1, we start allocating from cell (1, 1) and move
right and down sequentially. Till the entire rim requirements are met. The resulting feasible
solution is as shown in the following table.

D1 D2 D3 D4 Available
O1 1 2 1 4 30
(20) (10)
O2 3 3 2 1 50
(30) (20)
O3 4 2 5 9 20
(10) (10)
required 20 40 30 10 100

The total transportation cost = 20x1 + 2x10 + 3x30 + 2x20 + 5x10 + 9x10 = 310
Solved problem 3 ( Self-assessment)

Solved problem 3
Solve the following transportation problem using north west corner rule.
Destination
origin P Q R supply
A 5 7 8 70
B 5 4 6 30
C 6 7 7 50
demands 65 42 43 150

The total cost of transportation by this method will be

Total cost = 65 x 5 + 5 x 7 + 30 x 4 + 7 x 7 + 43 x 7 = 830
Maximum-minimum Method
Step 1. Allocate up to the full capacity/ requirement of the
cell having lowest cost.
XiJ = min ( ai, bJ ).
• Step 2. If XiJ = ai , cross off the ith row and decrease bi by ai , go
to step 3.
 If XiJ = bJ, cross off the jth column of the table and decrease ai by
bj. Go to step 3.
 Repeat step 1 and 2 for the resulting reduced table until all the rim
requirements are satisfied. Whenever the minimum is not unique, make
an arbitrary choice among the minimum.
Maximum-minimum Method

Solved problem 4
Obtain an initial basic feasible solution to the following transportation problem using matrix
minimum method.
D1 D2 D3 D4 CAPACITY
O1 1 2 3 4 6
O2 4 3 2 0 8
O3 0 2 2 1 10
DEMAN 4 6 8 6 24
D
Maximum-minimum Method
Solution:
The transportation table of given TP has 12 cells. Following the matrix minimum
method.
D1 D2 D3 D4 CAPACITY
O1 1 2 3 4 6
(6) 0
O2 4 3 2 0 8
(2) (6) 0
O3 0 2 2 1 10
(4) (6) 0
DEMAN 4 6 8 6 24
D 0 0 0 0

Thus, The total transportation cost = 0 x 6 + 0 x 4 + 2 x 6 + 2 x 2 + 2 x 6 = 28

Vogel’s approximation method.

 The Vogel’s approximation method (VAM) takes into account not

only the least cost Cij, but also the cost that just exceeds Cij. This
method is based on the ‘difference’ associated with each row and
column in the matrix giving unit cost of transportation Cij.
 This ‘difference’ is defined as the arithmetic difference between the
smallest and next to the smallest cost in that row or column.
 This difference in a row or column indicates the minimum unit
penalty incurred in failing to make an allocation to the smallest cost
cell. It is a measure of proper priorities for making allocations to the
respective rows and columns.
 In other words, if we take a row, we have to allocate to the cell
having the least cost and if we fail to do so, extra cost will be
incurred for wrong choice, which is called penalty. The minimum
penalty is given by this procedure.
Vogel’s approximation method.

➢ Step 1. For each row of the transportation table, identify the least cost
and next smallest cost cells. Determine the difference between them
and for each row and column. Display them alongside the
transportation table by enclosing them in parenthesis against the
respective rows and the respective columns.
➢ Step 2. Identify the row or column with the largest difference among
all the rows and the columns. If a tie occurs, use any arbitrary tie
breaking choice. Let the greatest difference correspond to the ith row
and let Cij be the smallest cost in the ith row. Allocate the maximum
feasible amount XiJ = min (ai , bj) in (I, j) cell and cross off the ith row
or jth column in the usual manner.
➢ Step 3. Recompute the column and row differences for the reduced
transportation table and go to step 2. Repeat till all the rim
requirements are satisfied.
Vogel’s approximation method.

 Remarks
• A row or column “difference” indicates the minimum unit penalty
incurred by failing to make an allocation to the least cost cell in that
row or column.
• It is clear that VAM determines an initial basic feasible solution,
which is very close to the optimum solution, but the number of
iterations required to reach the optimum solution are small.
 Area of Application
• It is used to compute transportation routes in such a way as to
minimize transportation cost for finding out location of
warehouses.
 It is used to find out locations of transportation corporations depots where insignificant
total cost difference may not matter.
Vogel’s approximation method.

Solved problem 5
A company has three production facilities S1, S2 and S3 with production capacity of 7, 9 and
18 units (in 100s) per week of a product respectively. These units are to be shipped to four ware
houses D1, D2, D3 and D4 with requirement of 5, 8, 7 and 14 units (in 100s) per week. The
transportation costs (in Rupees) per unit between factories to ware houses are given below.
Determine the initial basic feasible solution using Vogel’s approximation method.
D1 D2 D3 D4 Capacity
S1 19 30 50 10 7
S2 70 30 40 60 9
S3 40 8 70 20 18
Demand 5 8 7 14 34
Vogel’s approximation method.

 Solution:
 The difference (penalty costs) for each row and
column has been calculated as depicted in table
given below. The maximum penalty, 22 occurs in
column D2.
 Thus, and cell (S3, D2) is having the least cost in
that column. Thus it is selected for allocation. The
maximum possible allocation in this cell can be 8
Vogel’s approximation method.

D1 D2 D3 D4 Capacity Row difference

S1 19 30 50 10 7 9
S2 70 30 40 60 9 10
S3 40 8 70 20 18 10 12
(8)
Demand 5 80 7 14 34
Column 21 22 10 10
defference
Vogel’s approximation method.

The new row and column penalties are calculated except column D 2 because its demand
has been satisfied. The second round allocation is made in column D1 with targetpenalty
21 in the same way as in the first round as depicted in the cell (S 1, D1) in the table given
below.

D1 D2 D3 D4 Capacity Row difference

S1 19 30 50 10 72 9
(5)
S2 70 30 40 60 9 20
S3 40 8 (8) 70 20 18 10 20
Demand 5 (0) 80 7 14 34
Column 21 X 10 10
defferenc
e
Vogel’s approximation method.

In the third round, the maximum penalty 50 occurs at row S3. The maximum possible
allocation of 10 units is made in cell (S3, D4) having least transportation cost 20 as depicted
in table given below.

D1 D2 D3 D4 Capacity Row difference

S1 19 30 50 10 72 40
(5)
S2 70 30 40 60 9 20
S3 40 8 (8) 70 20 (10) 18 10 0 50
Demand 5 (0) 80 7 14 4 34

Column X X 10 10
difference
Vogel’s approximation method.

 In the fourth round, the maximum penalty occurs in column D4. The maximum
possible allocation of 2 units is made in cell (S1, D4). The process is continued with
new allocations till all rim requirements are fulfilled. The initial solution using
vogel’s approximation method is depicted in table given below.
D1 D2 D3 D4 Capacity Row difference
S1 19 30 50 10 (2) 720 40
(5)
S2 70 30 40 (7) 60 (2) 90 20
S3 40 8 (8) 70 20 (10) 18 10 0 X

Demand 5 (0) 80 70 14 4 2 34
0
Column X X 10 50
defferenc e

 The total transportation cost associated with this method is calculated as follows;
Total cost = 5 x 19 + 2 x 10 + 7 x 40 + 2 x 60 + 8 x 8 + 10 x 20 = Rs. 779
Thank You, For Your
Attention