Intro To or Class Notes For Session 1 2 3 and 4 14 Sep 18

Quantitative Methods for Management – 8102
(Part -II Operations Research)

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1.1 Introduction
A variety of names exists for the body of knowledge involving quantitative

approaches to decision making; in addition to operations research, two other
widely known and accepted names are management science and decision
science. Today, many use the terms management science, operations research,
and decision science interchangeably. Operation Research is a relatively new
discipline. The contents and the boundaries of the OR are very broad. OR starts
when mathematical and quantitative techniques are used to substantiate the
decision making process. The main activity of a manager is decision making. In
our daily life we take decisions even without noticing them. The decisions are
taken simply by common sense, judgment and expertise without using any
mathematical or any other model in simple situations. But the decision we are
concerned here are complex and has huge cost and time implications. Examples
are public transportation network planning in a city having its own layout of
factories, residential blocks or finding the appropriate product mix when there
exists a large number of products with different profit contributions and
production requirement etc.
Operations Research tools are not from any one discipline. Operations Research
takes tools from different discipline such as mathematics, statistics, economics,
psychology, engineering etc. and combines these tools to make a new set of
tool/technique for decision making. Today, O.R. has become a professional
discipline which deals with the application of scientific methods for making
decision, and especially to the allocation of scarce resources. The main purpose
of O.R. is to provide a rational basis for decisions making in the absence of
complete information, because the systems composed of human, machine, and
procedures may not have complete information. The emphasis on analysis of
operations as a whole distinguishes the O.R. from other research and
engineering. O.R. is an interdisciplinary discipline which provided solutions to
problems of military operations during World War II. Today business
applications are primarily concerned with O.R. analysis for evaluating various
possible alternative course of actions. The business and industry benefited from
O.R. in the areas of inventory, reorder policies, optimum location and size of
warehouses, advertising policies, etc.
Class notes, Session 8, 9, 10 and 11 – QMM, Only for internal class room purpose during the Jul-Nov 2018 Session Page 1
1.2 Evolution of OR
Evolution of OR can be traced to early attempts to use scientific approach in the

management of organizations. Some of the historical key events which
exemplifies use of science in business are:
1890 -Frederick Taylor-Scientific Management[Industrial
Engineering]
1900 - Henry Gannt [Project Scheduling],
1910 -F. W. Harris [Inventory Theory-Economic Order Quantity]
1920 - William Shewart [Father of QC, Plan Do Check Act,Control Charts,
Statistical Quality Control]
1930 - Jon Von Neuman – Oscar Morgenstern [Game Theory, Zero sum
game, science of logical descision making]
The scientific management revolution of the early 1900s, initiated by Frederic

W. Taylor, provided the foundation for the use of quantitative methods in
management. But modern management science research is generally
considered to have originated during the World War II period, when teams were
formed to deal with strategic and tactical problems faced by the military. These
teams, which often consisted of people with diverse specialties (e.g.,
mathematicians, engineers, and behavioral scientists), were joined together to
solve a common problem through the utilization of the scientific method. Some
of the problems which the British military asked scientists to analyze were:-
• Positioning of RADAR to maximize detection of enemy aircraft,
• Bunker location so as to cover max population,
• Bombing target for greater impact
After the war, many of these team members continued their research in the field
of management science and their knowledge of OR was utilized by the industry
to solve complex managerial problems faced by the industrial managers.
•1950: O.R. began to develop in industrial field in US
•1953: Operations Research Society of America was formed
•1957: International Federation of Operational Research Society
Operational Research has been studied in Health Care settings since 1952.
Norman Bailey published “Operational Research in Medicine” in the June issue
in Operational Research Quarterly.
(Bailey June 1952).
Two developments that occurred during the post-World War II period led to the
growth and use of management science in nonmilitary applications. First,
continued research resulted in numerous methodological developments.
Probably the most significant development was the discovery by George
Dantzig, in 1947, of the simplex method for solving linear programming
problems. At the same time these methodological developments were taking
place, digital computers prompted a virtual explosion in computing power.
Computers enabled practitioners to use the methodological advances to solve a
large variety of problems. The computer technology explosion continues, and
personal computers can now be used to solve problems larger than those solved
on mainframe computers in the 1900s.
1.3 Defining OR
The definitions stressed by various experts and Societies on the subject together
enable us to know what O.R. is, and what it does. Some of the commonly found
definitions are as follows:
1. According to the Operational Research Society of Great Britain (OPERATIONAL

RESEARCH QUARTERLY, l3(3):282, l962), Operational Research is the attack of
modern science on complex problems arising in the direction and management
of large systems of men, machines, materials and money in industry, business,
government and defense. Its distinctive approach is to develop a scientific model
of the system, incorporating measurements of factors such as change and risk,
with which to predict and compare the outcomes of alternative decisions,
strategies or controls. The purpose is to help management determine its policy
and actions scientifically.
2. Randy Robinson stresses that Operations Research is the application of

scientific methods to improve the effectiveness of operations, decisions and
management by means such as analyzing data, creating mathematical models
and proposing innovative approaches. Operations Research professionals
develop scientifically based information that gives insight and guides decision
making. They also develop related software, systems, services and products.
3. Morse and Kimball have stressed O.R. as a quantitative approach and

described it as “a scientific method of providing executive departments with a
quantitative basis for decisions regarding the operations under their control”.
4. Saaty considers O.R. as tool of improving quality of answers. He says, “O.R. is

the art of giving bad answers to problems which otherwise have worse
answers”.
5. Miller and Starr state, “O.R. is applied decision theory, which uses any
scientific, mathematical or logical means to attempt to cope with the problems
that confront the executive, when he tries to achieve a thorough-going
rationality in dealing with his decision problem”.
6. Pocock stresses that O.R. is an applied Science. He states “O.R. is scientific

methodology (analytical, mathematical, and quantitative) which by assessing
the overall implication of various alternative courses of action in a management
system provides an improved basis for management decisions”.
Summarizing we can define OR as:
It is the application of analytical methods designed to help the decision makers

choose between various courses of action available to accomplish specific
objectives.
Summing up the above discussion, OR can be defined as follows.
It is a scientific approach to decision making that seeks to determine how best

to operate a system under conditions of allocating scarce resources.
1.4 O.R. Tools and Techniques
Operations Research uses many suitable tools or techniques, the most

frequently used are mathematical procedures and electronic computation
(computers). However, operations researchers have given special importance to
the development and the use of techniques like linear programming, game
theory, decision theory, queuing theory, inventory models and simulation. In
addition to the above techniques, some other common tools are non-linear
programming, integer programming, dynamic programming, sequencing theory,
Markov process, network scheduling (PERT/CPM), symbolic Model, information
theory, and value theory. There are many other Operations Research
tools/techniques, some of them are briefly explained below.
Linear Programming: This is a constrained optimization technique, which

optimize some criterion within some constraints. In Linear programming the
objective function (profit, loss or return on investment) and constraints are
linear. There are different methods available to solve linear programming.
Game Theory: This is used for making decisions under conflicting situations
where there are one or more players/opponents. In this the motive of the
players are dichotomized. The success of one player tends to be at the cost of
other players and hence they are in conflict.
Queuing Theory: This is used in situations where a queue is formed (for example
customers waiting for service, aircrafts waiting for landing, jobs waiting for
processing in the computer system, etc). The objective here is minimizing the
cost of waiting without increasing the cost of servicing.
Inventory Models: Inventory model make decisions that minimize total

inventory cost. This model successfully reduces the total cost of purchasing,
carrying, and out of stock inventory.
Simulation: Simulation is a procedure that studies a problem by creating a

model of the process involved in the problem and then through a series of
organized trials and error solutions attempt to determine the best solution.
Sometimes this is a difficult/time consuming procedure. Simulation is used when
actual experimentation is not feasible or solution of model is not possible.
Non-linear Programming: This is used when the objective function and the
constraints are not linear in nature. Linear relationships may be applied to
approximate non-linear constraints but limited to some range, because
approximation becomes poorer as the range is extended. Thus, the non-linear
programming is used to determine the approximation in which a solution lies
and then the solution is obtained using linear methods.
Dynamic Programming: Dynamic programming is a method of analyzing

multistage decision processes. In this each elementary decision depends on
those preceding decisions and as well as external factors.
Integer Programming: If one or more variables of the problem take integral

values then integer programming method is used. For example number or motor
in an organization, number of passenger in an aircraft, number of generators in
a power generating plant, etc.
Markov Process:
Markov process permits to predict changes over time about the behavior of a
system. This is used in decision making in situations where the various states fo
a system can be defined. The probability of transition from one state to another
state is known and depends on the current state and is independent of how we
have arrived at a subsequent state.
Network Scheduling: This technique is used extensively to plan, schedule, and
monitor large projects (for example computer system installation, R & D design,
construction, maintenance, etc.). The aim of this technique is minimize trouble
spots (such as delays, interruption, production bottlenecks, etc.) by identifying
the critical factors. The different activities and their relationships of the entire
project are represented diagrammatically with the help of networks and arrows,
which is used for identifying critical activities and path. There are two main types
of technique in network scheduling, they are: Program Evaluation and Review
Technique (PERT), used when activities time is not known accurately/ only
probabilistic estimate of time is available. Critical Path Method (CPM), used
when activities time is known accurately.
1.5 Applications of Operations Research
Historically, OR has been applied to areas such as:

• Military: What is the optimal size of a convoy (during WWII)?
• Manufacturing: How to minimize cost of production while meeting
demand?
• Transportation: How to configure a supply chain to minimize
transportation costs?
• Finance: What is the best basket of stocks to hold to maximize return
while keeping risk at an acceptable level?
More recently, OR has been used in the realms of:
• Entertainment: Queue management at Disney World
• Pricing: Dynamic pricing of airline tickets and hotel rooms
• Sports: F1 (fuel load optimisation), tournaments (creation of roosters,
assignment of umpires), etc.
• Airline: Rescheduling aircraft in response to groundings and delays
• Amazon: Developing routes for prompt delivery
• Humanitarian aid: Optimisation of rescue operations, risk mitigation,
allocation of reconstruction resources, etc.
Today, almost all fields of business and government utilizing the benefits of
Operations Research. There are numerous applications of Operations Research.
Although it is not feasible to cover all applications of O.R., in brief, the following
are the abridged set of typical operations research applications which indicates
how widely these techniques are used today:
Accounting: Assigning audit teams effectively, Credit policy analysis, Cash flow
planning, developing standard costs, establishing costs for by products, Planning
of delinquent account strategy.
Construction: Project scheduling, monitoring and control, Determination of

proper work force, Deployment of work force, Allocation of resources to
projects.
Facilities Planning: Factory location and size decision, Estimation of number of

facilities required, Hospital planning international logistic system design,
Transportation loading and unloading, Warehouse location decision.
Finance: Building cash management models, Allocating capital among various

alternatives, Building financial planning models, Investment analysis, Portfolio
analysis, Dividend policy making.
Manufacturing: Inventory control, Marketing balance projection, Production

scheduling, Production smoothing.
Marketing: Advertising budget allocation, Product introduction timing,

Selection of Product mix, deciding most effective packaging alternative
Organizational Behaviour / Human Resources: Personnel planning,
Recruitment of employees, Skill balancing, Training program scheduling,
designing organizational structure more effectively.
Purchasing: Optimal buying, optimal reordering, Materials transfer.
Research and Development: R & D Projects control, R & D Budget allocation,

Planning of Product introduction.
Health Care - Three specific areas1 :

Policy “For the system” - Cost effectiveness and Guidelines in public health.
• Developed mathematical model to optimize locations of AEDs to cover as
many (historical) cardiac arrests as possible (one of states of US)
Micro “For the patient” - Medical decision making, Treatment design
• Optimization algorithms used to design radiation therapy treatments
(beam angles, intensity of each radiation beamlet, etc.) that Target
tumours, Spare healthy organs and compensate for uncertain breathing
motion
1 Operations Research in Health Care: Perspectives from an engineer, with examples from emergency medicine and cancer therapy Timothy Chan Steven
Brooks University of Toronto St. Michael’s Hospital, Clinical and Population Research Rounds St. Michael’s Hospital, October 20, 2011
• Adjusting nurse schedules in light of daily fluctuations in demand
• Operating theatres allocation, fitness plans optimisation
Macro “For the provider” - Resource allocation, Utilization, throughput
• Create clinic schedule that balances shared resource utilization like the
Upstream blood lab, Downstream chemo day care, Nursing, Rooms
1.6 OR at different levels in a business context
An example: Vehicle routing problem

• Strategic questions: Is our fleet over-/under-sized? Is it enough to expand to
new markets?
• Tactical questions: How many vehicles should we deploy at each depot? Should
we increase/decrease their capacity?
• Operational questions: Which customers will I visit today? In which order?
Taking which route?
1.7 OR Model classifications
• BASED ON STRUCTURE
o (1) Physical (Iconic or Analogue) (2) Symbolic(LP) (Verbal or
Mathematical)
• BASED ON PURPOSE AND NATURE
o (1)Descriptive (2)Predictive (3) Normative or Optimisation Models(LP)
• BASED ON CERTAINITY
o (1)Deterministic(LP) (2) Probabilistic or Stochastic Models
• BASED ON TIME REFERENCE
o Static(LP) (2) Dynamic Model
• BASED ON METHOD OF SOLUTION
o Analytical(LP) (2) Iterative or Heuristic (3) Simulation Models
1.8 Limitations of Operations Research
Operations Research has certain limitations which are mostly related to the
model building, money and time factors problems involved in its application.
Some of them are as given below:
i) Different perception between O.R. specialist and Manager: Operations

researchers is essentially a mathematician or statistician, who might not be
aware of the business problems. Similarly, a manager is unable to understand
the complex nature of Operations Research. Thus there is a big gap between the
two of them.
ii) Magnitude of Calculations (time and money): The aim of the O.R. is to find out
optimal solution taking into consideration all the factors. In this modern world
these factors are enormous and expressing them in quantitative model and
establishing relationships among these require voluminous calculations, which
can be handled only by machines(computers).
iii) Dynamic nature of a business environment: The basic data are subjected to
frequent changes, incorporating these changes into the operations research
models is very expensive. However, a fairly good solution at present may be
more desirable than a perfect operations research solution available in future or
after sometime.
iv) Non-quantifiable Factors: When all the factors related to a problem can be
quantifiable only then operations research provides solution otherwise not. The
non-quantifiable factors are not incorporated in O.R. models. Importantly O.R.
models do not take into account emotional factors or qualitative factors.
v) Implementation: Once the decision has been taken it should be implemented.

The implementation of decisions is a delicate task. This task must take into
account the complexities of human relations and behavior and at times only the
psychological factors.
1.9 Linear Programming
While the credit for conceptualizing LP goes to George B Dantzig (1947),

Kantorovich (1939) was first to work in this field, however his work was
published only in 1959. In fact Dantzig’s first paper was titled “Programming in
Linear Structure” and the term “Linear Programming” was coined by Koopmans
in 1948. Simplex method, which forms the basic tool for solving LP problem was
proposed by Dantzig and published in 1949. We will now understand the process
of formulation LP problem through three examples.
Example 1: Consider FMS canteen makes two items S (Samosa) and B

(Bread pakoda). Two resources T (Time) and M (Masala) are required to
make these products. Each unit of product S requires 4 unit of T and 3
units of M. Each unit of product B requires 5 unit of T and 2 units of M.
The manufacturer has 300 units of T and 1200 units of M available. The
manufacturer makes a profit of Rs 6 per unit of product S sold and Rs 5
per unit of product B sold. How many S(samosas)/B(bread pakoda) should
he make to maximize profit
Example 2: M/s Keggfarms is considering buying two different brands of

poultry feed and blending them to provide good low cost diet. Each feed
contains varying proportion of nutrition essential for fattening poultry.
Brand 1, cost Rs 2 per pound and each pound contains 5 ounce of
ingredient A, 4 ounce of ingredient B and 0.5 ounce of ingredient C. Brand
2, cost Rs 3 per pound and each pound contains 10 ounce of ingredient A,
3 ounce of ingredient B. The minimum monthly requirement per poultry
is
– 90 ounce of ingredient A
– 48 ounce of ingredient B
– 1.5 Ounce of ingredient C
Find the lowest cost diet that meets the minimum monthly intake
requirement for each nutritional ingredient
Example 3: Let us consider a company making a single product. The

estimated demand for the product for the next four months are 1000,
800, 1200, 900 respectively. The company has a regular time capacity of
800 per month and an overtime capacity of 200 per month. The cost of
regular time production is Rs. 20 per unit and the cost of over time
production is Rs. 25 per unit. The company can carry inventory to the next
month and the holding cost is Rs 3/unit/month. The demand has to be
met every month. Formulate a linear programming problem for the above
situation.
1.10 Few terminologies of Linear Programming Model
• The problem variables X and Y are called decision variables and they
represent the solution or the output decision.
• The profit/cost function that the manufacture wishes to
increase/decrease, represents the objective of making the decisions and
is called the objective function.
• The conditions matching the resource availability and resources
requirement are called constraints. These usually limit (or restrict) the
values the decision variable can take.
• Explicitly stated all decision variable should take non negative values. This
is true for all Linear Programming problems and is called non negativity
restriction.
• The problem that has been written down in algebraic form represents the
mathematical model of the given system and is called the Problem
Formulation.
• This abstract representation of reality is called a mathematical model.
• Optimal Solution A solution to the model that optimizes (maximizes or
minimizes) some measure of merit over all feasible solutions.
1.11 Properties of Linear Programming Model
All LP models have the following properties in common:

1. All problems seek to maximize or minimize some quantity, usually profit
or cost. This property is referred to as the objective function of an LP problem.
For example, the objective of a typical manufacture is to maximize profits. In the
case of a trucking or railroad distribution system, the objective might be to
minimize shipping costs. An optimal solution to the problem is the solution that
achieves the best value (maximum or minimum, depending on the problem) for
the objective function.
2. LP models usually include restrictions, or constraints, that limit the degree

to which we can pursue our objective. For example, when we are trying to decide
how many units to produce of each product in a firm’s product line, we are
restricted by the available machinery time. Likewise, in selecting food items for
a hospital meal, a dietitian must ensure that minimum daily requirements of
vitamins, protein, and so on are satisfied. We want, therefore, to maximize or
minimize a quantity (the objective) subject to limited resources (the
constraints).
3. An LP model usually includes a set of constraints known as non-negativity
constraints. These constraints ensure that the variables in the model can take
only nonnegative values (i.e., > 0). This is logical because negative values of
physical quantities are impossible; one simply cannot produce a negative
number of chairs or computers.
4. There must be alternative courses of action from which we can choose.

For example, if a company produces three different products, management
could use LP to decide how to allocate its limited production resources (of
personnel, machinery, and so on) among these products. Should it devote all
manufacturing capacity to make only the first product, should it produce equal
numbers or amounts of each product, or should it allocate the resources in some
other ratio? If there were no alternative to select from, we would not need LP.
5. The objective and constraints in LP problems must be expressed in terms

of linear equations or inequalities. In linear mathematical relationships, all
terms used in the objective function and constraints are of the first degree (i.e.,
not squared, or to the third or higher power, or appearing more than once).
Hence, the equation 2A + 5B = 10 is a valid linear function, whereas the equation
2A2 + 5B3 + AB = 10 is not linear because the variable A is squared, the variable B
is cubed, and the two variables appear as a product in the third term.
6. You will see the term inequality quite often when we discuss LP problems.
By inequality we mean that not all LP constraints need be of the form A + B = C.
This particular relationship, called an equation, implies that the sum of the term
A and term B exactly equals term C. In most LP problems, we see inequalities of
the form A + B < C or A + B > C. This implies that A plus B is less than or equal to
C. This concept provides a lot of flexibility in defining problem limitations.
1.12 Basic Assumptions of a Linear Programming Model

Technically, there are four basic assumptions of an LP problem, which are:
1. We assume that conditions of certainty exist. That is, numbers used in the
objective function and constraints are known with certainty and do not change
during the period being studied.
2. We also assume that proportionality exists in the objective function and

constraints. This means that if production of 1 unit of a product uses 3 hours of
a particular resource, then making 10 units of that product uses 30 hours of the
resource.
3. Third assumption deals with additivity, meaning that the total of all
activities equals the sum of the individual activities. For example, if an objective
is to maximize profit which is equal to $8 per unit of the first product made plus
$3 per unit of the second product made, and if 1 unit of each product is actually
produced, the profit contributions of $8 and $3 must add up to produce a profit
sum of $11.
4. We make divisibility assumption that solutions need not necessarily be in

whole numbers (integers). That is, they may take any fractional value, and the
fraction can be considered as work in progress. However, this problem can be
obviated by considering an integer programming problem exists.
1.13 LP problem representation
The LP problem formulation with m inputs(constraints) and n outputs

(decision variables) can be written as :

Maximize/Minimize Z = ∑ cjxj
Subject to
∑ aijxj i where i = 1,2,!!m
xj 0 where j = 1,2,!!n
1.14 Guidelines to developing a correct LP model
How do I know my LP model is right? Unfortunately, there is no simple magical

answer for this question. The following guidelines can be used to judge whether
their model does what it is intended to do. Note that these guidelines do not
guarantee that the model is correct. Formulation is still an art that can be
mastered only through repeated application to several diverse problems. (We
will practice this over the next few sessions.) However, by following these
guidelines, you can hopefully avoid the common errors that many students
commit:
• Recognizing and defining the decision variables is perhaps the most critical
step in LP formulation.
• It is perfectly logical for different decision variables in a single LP model to
be measured in different units.
• All expressions in the model (the objective function and each constraint)
must use only the decision variables that have been defined for the model.
• At any stage of formulation, if you find yourself unable to write a specific
expression (the objective function or a constraint) using the defined decision
variables, it is a pretty good indication that you either need more decision
variables or you’ve defined your decision variables incorrectly.
• All terms within the same expression must refer to the same entity.
• All terms within the same expression must be measured in the same unit.
• Address each constraint separately.
1.15 Steps in LP/Decision Modeling
1. Formulation
Translating a problem scenario from words to a
mathematical model
2. Solution
Solving the model to obtain the optimal solution
3. Interpretation and Sensitivity Analysis

Analyzing results and implementing a solution
1.16 Method of solving LP problem, graphical method
There are many ways of solving a LP problem. They are:
Graphically methods
Algebraic method
Simplex method
Using Software:
Excel Solver
CoinMP (open source)
LINDO, LINGO
lpsolve, AMPL, MPL, CPLEX
1.17 Graphical Method of solving LP problem

This method can be used only to solve problems that involve two decision
variables using 2-D coordinates. Can be used for solving three decision variables
with difficulty using 3-D coordinates.
The graphical approach:
Plot each of the constraints.
Determine the region or area that contains all of the points that
satisfy the entire set of constraints (feasible region).
Determine the optimal solution using one of the following
Extreme/Corner point approach
Iso-profit line approach.
We will now solve a LP problem using graphical method.
Example 4: Flair company produces inexpensive tables and chairs. Each
table takes 3 hours of carpentry work and 2 hours of painting work. Each
chair requires 4 hours of carpentry and 1 hour of painting. During the
current month 2400 hours of carpentry and 1000 hours of painting time
are available. The marketing department wants Flair to make no more
than 450 new chairs this month because there is sizable existing inventory
of chairs. However because the inventory of tables is low, the marketing
department wants Flair to make at least 100 tables this month. Each table
sold results in a profit contribution of Rs. 7 and each chair sold yields a
profit contribution of Rs. 5. Flair Furniture’s problem is to determine the
best possible combination of tables and chairs to manufacture this month
in order to attain the maximum profit.
Iso-profit line approach.
1. Graph the
constraints.
2. Identify the
feasible solution space.
3. Set the objective
function equal to some
amount that is divisible by
each of the objective
function coefficients and
one that falls in the
feasible region.
4. After identifying the optimal point, determine which two
constraints intersect there.
5. Substitute the values obtained in the previous step into the
objective function to determine the value of the objective function at the
optimum.
Extreme/Corner point approach

1. Graph the problem
and identify the feasible
solution space.
2. Determine the
values of the decision
variables at each corner
point of the feasible
solution space.
3. Substitute the values
of the decision variables at each corner point into the objective function
to obtain its value at each corner point.
4. After all corner points have been evaluated in a similar fashion,
select the one with the highest value of the objective function (for a
maximization problem) or lowest value (for a minimization problem) as
the optimal solution.
1.18 Algebraic Method of solving LP problem
Certain terminologies:
Slack and surplus
The term slack is used for the amount of resource that is not used.
For less-than-or-equal to constraint.
Slack = (Amount of resource available) - (Amount of resource used)
The term surplus is used with greater-than-equal-to constraints to indicate the
amount by which the right-hand side of a constraint is exceeded.
For a greater-than-or-equal-to constraint.
Surplus = (Actual amount) – (Minimum amount)
Basic and non-basic variable

Basic variables are selected arbitrarily with the restriction that there can be as
many basic variables as there are equations. The remaining variables are non-
basic variables.
x1 + 2 x2 + s1 = 32
3 x1 + 4 x2 + s2 = 84
This system has two equations, we can select any two of the four variables as
basic variables. The remaining two variables are then non-basic variables.
A solution found by setting the two non-basic variables equal to 0 and solving
for the two basic variables is a basic solution.
If a basic solution has no negative values, it is a basic feasible solution.
Example: Flair Furniture Problem

Maximize Z= 7T + 5C + 0S1 + 0S2
Convert inequality to equation & introduce slack variable.
3T + 4C + S1 = 2400
2T + 1C + S2 = 1000
Four variable & 2 equation.
But with two equation we can solve only for two variables.
So we fix two of the variables with some arbitrary value and solve for
the remaining two.
Two variable that we want to fix out of 4 variables can be done in 4C2
was.
In general if there are n decision variables & m equations (constraints),
fixing can be done in nCm (n!/m!(n-m)!) ways. (In this case we can fix in 6
different ways)
Since we can fix the two variables with any arbitrary value we can in
fact have infinite solutions to start with.
Fixing the variable to 0, is a good option to start with (But why), we will
see that.
Variable that are fix to 0 are called non-basic variables, variable that we
solve for are called basic variables.
Solution that are obtained by fixing non-basic variable to 0, are called
basic solution
We have, in this case six solutions
Of these some are feasible & some are not. This, can be ascertained by
non-negativity constraint.
In this specific case we have 4 Basic feasible and two basic infeasible
solution (infeasible)
The solution which return maximum value for Z in the optimum
solution.
Ser Solve For Fix to 0 Solution (Basic Z value

No. (basic (non- basic solution)
variable) variable)
1) S 1, S2 T C S1 = 2400, S2 = 1000 0 (not
optimal)
2) C, S2 T S1 C = 600, S2 = 200 3000
3) C, S1 T S2 C = 1000, S1 = -1000 5000
infeasible infeasible
4) T, S2 C S1 T = 800, S2 = -600 5600
infeasible infeasible
5) T, S1 C S2 T = 500, S1 = 900 3500
6) T, C S1 S2 T = 320, C = 360 4040
1.19 Simplex Method of solving LP problem
The graphical method is useful only for problems involving two decision variables
and relatively few problem constraints. The algebraic method is useful only for
problems involving fewer decision variables and relatively few problem
constraints as it involves testing all the case for arriving at an optimal solution.
The number of cases to be tested being given by nCm (n!/m!(n-m)!) combinations
where n represents decision variables & m represents equations (constraints).
Hence it can be seen that as the variable and constraints increases, number of
cases to be tested increases many folds making it very difficult to solve the
problem using the algebraic method. Accordingly, for such cases we use a
method called the simplex method, which was developed by George B. DANTZIG
(1914-2005) in 1947 while on assignment with the U.S. Department of the air
force.
The first step of the simplex method requires that each inequality be converted
into an equation. ”Less than or equal to” inequalities are converted to equations
by introducing slack variables.
Suppose S1 carpentry hours and S2 painting hours are the slack variable
introduced which primarily represents unused hours in a week. The constraints
become;
4T + 3C + S1 = 2400
2T + 1C + S2 = 1000
As unused hours result in no profit, the slack variables can thus be included in
the objective function with zero coefficients:
Z = 7T + 5C + 0s1 + 0s2
Z - 7T – 5C – 0s1 – 0s2 = 0
The problem can now be considered as solving a system of 3 linear equations
involving the 5 variables T,C,S1,S2,Z in such a way that Z has the maximum value;
Now, the system of linear equations can be written in matrix form or as a 3x6
augmented matrix.
The initial tableau is
The tableau represents the initial solution;T = 0, C = 0, S1 = 2400, S2 = 1000, Z = 0

The slack variables S1 and S2 form the initial solution mix. The initial solution
assumes that all avaliable hours are unused. i.e. The slack variables take the
largest possible values.
Next select the pivot column (determine which variable to enter into the solution
mix). Choose the column with the “most negative” element in the objective
function row.
Note that T should enter into the solution mix because each unit of T (a table)
contributes a profit of Rs 7 compared with only Rs 5 for each unit of C (a chair)
Select the pivot row (determine which variable to replace in the solution mix).
Divide the last element in each row by the corresponding element in the pivot
column. The pivot row is the row with the smallest non-negative result. Which
implies that S2 Should be replaced by T in the solution mix.
Now calculate the new values for the pivot row. Divide every number in the
row by the pivot number to obtain the new tableau, i.e divide the pivot row
with 2 to obtain the new tableau
Use row operations to make all numbers in the pivot column equal to 0 except
for the pivot number which remains as 1.
Making 500 tables results in the profit being increased by ₹3500; the value
changes from₹0 to ₹3500. Also T=500, C=0, S1=900 and S2=0. Now repeat the
steps until there are no negative numbers in the last row. Select the new pivot
column. C should enter into the solution mix. Select the new pivot row. S1 should
be replaced by C in the solution mix.
Now calculate new values for the pivot row. Divide every number in the row by
the pivot number 5/2 (in this case).
Next use row operations to make all numbers in the pivot column equal to 0
except for the pivot number.
As the last row contains no negative numbers, this solution gives the maximum
value of Z.
This simplex tableau represents the optimal solution to the LP problem. The
optimal solution (maximum profit to be made) is to make 320 tables and 360
chairs and profit of Z= $4040. Note that the solution matches with other two
processes.
1.20 Special cases of LP
Four special cases and difficulties arise at times when using the graphical
approach to solving LP problems:
Infeasibility
Unboundedness
Redundancy and
Alternate optimal solutions.
No feasible Solution: - lack of a feasible
solution region can occur if constraints
conflict with one another.
As a further graphic illustration of this, let
us consider the following three constraints:
X1 + 2X2 < 6
2X1 + X2 < 8
X1 > 7
Unboundedness :- when the profit in a

maximization problem can be infinitely large,
the problem is unbounded and is missing one
or more constraints.
Maximize profit = $3X1 + $5X2
Subject to X1 > 5
X2 < 10
X1 + 2X2 > 10
X1,X2 > 0
Redundancy:- A redundant constraint is one

that does not affect the feasible solution region.
Maximize profit = $1X1 + $2X2
Subject to
X1 + X2 < 20
2X1 + X2 < 30
X1 < 25
X1,X2 > 0
Alternate Optimal Solutions:- Multiple
optimal solutions are possible in LP problems.
Max Profit = $3X1 + $2X2
Subject to
6X1 + 4X2 < 24
X1 < 3
X1,X2 > 0
1.21 PROBLEMS ON APPLICATION OF LP
(a) Example 5: Fifth Avenue Industries, a nationally known manufacture of

menswear, produces four varieties of ties. One is an expensive, all-silk tie,
one is an all-polyester tie, and two are blends of polyester and cotton.
Table 1 illustrates the cost and availability (per monthly production
planning period) of the three materials used in the production process.
The firm has fixed contracts with several major department store chains
to supply ties each month. The contracts require that Fifth Avenue
Industries supply a minimum quantity of each tie but allow for a larger
demand if Fifth Avenue chooses to meet that demand. (Most of the ties
are not shipped with the name Fifth Avenue in their label, incidentally,
but with “private stock” labels supplied by the stores.) Table 2 summarizes
the contract demand for each variety. The production process for all ties
is almost fully automated, and Fifth Avenue uses a standard labor cost of
$0.75 per tie (for any variety). Fifth Avenue must decide on a policy for
product mix in order to maximize its monthly profit.
Table 1: Material Data For Fifth Avenue Industries

MATERIAL COST PER YARD MATERIAL AVAILABLE PER
MONTH (Yards)
Silk $20 1,000
Polyester $6 2,000
Cotton $9 1,250
Table 2: Product Data For Fifth Avenue Industries

Variety of Selling Monthly Monthly Total Material
Tie Price Contract Demand Material Requirements
Per Tie Minimum Required
Per Tie
(Yards)
All Silk $6.70 6,000 7,000 0.125 100% Silk
All $3.55 10,000 14,000 0.08 100%
Polyester Polyester
Poly- $4.31 13,000 16,000 0.10 50%
cotton Polyester/50%
Blend 1 Cotton
Poly- $4.81 6,000 8,500 0.10 30%
Cotton Polyester/70%
Blend 2 Cotton
(b) Example 6: Win Big Gambling Club promotes gambling junkets from a
large mid western city to Casinos in The Bahamas. The club has budgeted
up to $8,000 per week for local advertising. The money is to be allocated
among four promotional media: TV spots, newspaper ads, and two types
of radio advertisements. Win Big’s goal is to reach the largest possible
high potential audience through the various media. Table 3 presents the
number of potential gamblers reached by making use of an advertisement
in each of the four media. It also provides the cost per advertisement
placed and the maximum number of ads that can be purchased per week.
Win Big’s contractual arrangements require that at least five radio spots
be placed each week. To ensure a broad-scoped promotional campaign,
management also insists that no more than $1,800 be spent on radio
advertising every week.
Table 3: Data For Win Big Gambling Club

MEDIUM AUDIENCE COST MAXIMUM ADS
REACHED PER PER AD PER WEEK
AD
TV spot (1 minute) 5,000 $800 12
Daily newspaper 8,500 $925 5
(full-page ad)
Radio spot (30 2,400 $290 25
seconds, prime time)
Radio spot (1 minute, 2,800 $380 20
afternoon)
(c) Example 7: Hong Kong Bank of Commerce and Industry is a busy bank that
has requirements for between 10 and 18 tellers, depending on the time
of day. The afternoon time, from noon to 3 P.M. is usually heaviest. Table
4 indicates the workers needed at various hours that the bank is open.
The bank now employs 12 full-time tellers but also has several people
available on its roster of part-time employees. A part-time employee must
put in exactly 4 hours per day but can start anytime between 9 A.M. and
1 P.M. Part-timers are a fairly inexpensive labor pool because no
retirement or lunch benefits are provided for them. Full-timers, on the
other hand, work from 9 A.M. to 5 P.M. but are allowed 1 hour for lunch.
(Half of the full-timers eat at 11 A.M. and the other half at noon.) Each
full-timer thus provides 35 hours per week of productive labor time.
The bank’s corporate policy limits part-time hours to a maximum of 50%
of the day’s total requirement. Part-timers earn $7 per hour (or $28 per
day) on average, and full timers earn $90 per day in salary and benefits,
on average. The bank would like to set a schedule that would minimize its
total personnel costs. It is willing to release one or more of its full-time
tellers if it is cost-effective to do so.
Table 4: TELLERS REQUIRED FOR HONG KONG BANK

TIME PERIOD NUMBER REQUIRED
9 A.M. – 10 A.M. 10
10 A.M. – 11 A.M. 12
11 A.M. – NOON 14
NOON – 1 P.M. 16
1 P.M. – 2 P.M. 18
2 P.M. – 3 P.M. 17
3 P.M. – 4 P.M. 15
4 P.M. – 5 P.M. 10
(d) Example 8: The Whole Food Nutrition Center uses three different types
of bulk grains to blend a natural breakfast cereal that it sells by the
pound. The store advertises that each 2-ounce serving of the cereal,
when taken with ½ cup of whole milk, meets an average adult’s
minimum daily requirement for protein, riboflavin, phosphorus, and
magnesium. The cost of each bulk grain and the protein, riboflavin,
phosphorus, and magnesium units per pound of each are shown in Table
5.
The minimum adult daily requirement (called the U.S. Recommended
Daily Allowance [USRDA]) for protein is 3 units, for riboflavin is 2 units,
for phosphorus is 1 unit, and for magnesium is 0.425 units. Whole Food
wants to select the blend of grains that will meet the USRDA at a
minimum cost.
Table 5: Requirements for Whole Food’s Natural Cereal

GRAIN COST PER PROTEIN RIBOFLAVIN PHOSPHORUS MAGNESIUM
POUND (UNITS/LB) (UNITS/LB) (UNITS/LB) (UNITS/LB)
(CENTS)
A 33 22 16 8 5
B 47 28 14 7 0
C 38 21 25 9 6
(e) Example 9: Goodman shipping, an Orlando firm owned by Steven

Goodman. One of his trucks, with a weight capacity of 15,000 pounds and
a volume capacity of 1,300 cubic feet, is about to be loaded. Awaiting
shipment are the items shown in table below. Each of these six items, we
see, has an associated total dollar value, available weight, and volume per
pound that the item occupies. The objective is to maximize the total value
of the items loaded onto the truck without exceeding the truck’s weight
and volume capacities.
Shipments for Goodman Shipping

ITEM VALUE WEIGHT (POUNDS) VOLUME (CU.FT. PER
POUND)
1. $15,500 5,000 0.125
2. $14,400 4,500 0.064
3. $10,350 3,000 0.144
4. $14,525 3,500 0.448
5. $13,000 4,000 0.048
6. $9,625 3,500 0.018
(f) Example 10: The international City Trust (ICT) invests in short-term trade
credits, corporate bonds, gold stocks, and construction loans. To
encourage a diversified portfolio, the board of directors has placed limits
on the amount that can be committed to any one type of investment. ICT
has $5 million available for immediate investment and wishes to do two
things: (1) maximize the return on the investments made over the next six
months and (2) satisfy the diversification requirements as set by the board
of directors.
The specific of investment possibilities are as follows:
INVESTMENT INTEREST RETURN MAXIMUM INVESTMENT
($ MILLIONS)
Trade credit 7% 1.0
Corporate bonds 11% 2.5
Gold stocks 19% 1.5
Construction loans 15% 1.8
In addition, the board specifies that at least 55% of the funds invested
must be in gold stocks and construction loans, and that no less than 15%
be invested on trade credit.
1.22 References
1.(B) Balakrishnan, N., Render, B. and Stair Jr., R.M.: Managerial decision
modelling with spreadsheets, Pearson education.
2.Anderson, Sweeney, Williams and Martin: An Introduction to Management
Science – Quantitative Approach to Decision Making, 13th Edition.
3.Barry R., Stair R.M. Jr., Hanna M.E., Hale T.S., Badri T.N., Quantitative Analysis
for Management, 12th Edition.
4. Youtube video on LP by Prof G Srinivasan, Dept of management studies, IIT
Madras (open courseware)- https://nptel.ac.in/courses/112106134/1
5. Case study available online - Hillier-Lieberman Textbook, Introduction to Operations
Research, INFORMS, Interfaces.
6. Class notes, assignments, homework and handouts. (Note PPT would not be
shared)
7. http://www.orsi.in/index.php - Operations research society of India
http://ifors.org/ - International Federation of Operational Research Societies
http://www.apors.asia/ - Asia Pacific Operational Research Societies
1.23 Journals
Management Science International Journal of Production Research
Operations Research Omega
European Journal of Operational Research Journal of the American Statistical Association
Interfaces International Journal of Production Economics
Naval Research Logistics INFORMS Journal on Computing
Manufacturing and Service Operations SIAM Review
Management (INFORMS journal)
Mathematics of Operations Research Computers and Operations Research
Decision Sciences Decision Support Systems
Operations Research Letters Networks
Production and Operations Management Computers and Industrial Engineering
IIE Transactions Mathematical and Computer Modelling
Journal of Operations Management Journal of the Operational Research Society
Annals of Operations Research Mathematical Programming
Journal of the Operational Research Society Transportation Science
1.24 Sensitivity analysis
We have solved LP models under deterministic assumptions. In most real-world

situations, conditions are dynamic and changing. In practice, such changes to
input data values typically occur for two reasons. First the value may have been
estimated incorrectly. Second, management is often interested in getting quick
answers to a series of what if questions. Sensitivity analysis, also known as post-
optimality analysis, is a procedure that allows us to answer questions such as
those posed above, using the current optimal solution itself, without having to
resolve the LP model each time. Sensitivity analysis involves examining how
sensitive the optimal solution is to changes in profits, resources, or other input
parameters. That is, for each input data value, we attempt to determine a range
of values within which the current optimal solution will remain optimal.
1.25 Types of sensitivity analysis
Consider the Flair furniture problem. The model summary is as under.

Maximize profit = 7T + 5C
Subject to constraints:
3T + 4C ≤ 2,400 (carpentry time)
2T + 1C ≤ 1,000 (painting time)
C ≤ 450 (maximum chairs allowed)
T ≥ 100 (minimum tables required)
T, C ≥ 0 (non negativity)
Objective function coefficient (OFC). The OFCs are the coefficients of the
decision variables in the objective function (such as the $7 and $5 for T and C,
respectively, in Flair’s model as shown above). In many business-oriented LP
models, OFCs typically represent unit profits or costs, and they are measured in
monetary units such as dollars, Euros, and rupees. Are OFCs likely to have any
uncertainty in their values? Clearly the answer is yes, because in many real-
world situations, selling and cost prices are seldom likely to be static or fixed.
For this reason, we will study how the optimal solution may be affected by
changes in OFC values.
Right-hand-side (RHS) value of a constraint. The RHS values are constraints,

such as the 2,400 and 1,000 in the Flair’s model, that typically appear on the RHS
of a constraint (i.e., to the right of the equality or inequality sign). For <
constraints, they typically represent the amount of resource available and for >
constraints they typically represent the minimum level of resources/input
needed. Are these types of input data subject to uncertainty in practice? Here
again, the answer is a clear yes. In many practical situations, companies may find
that their resource availability has changed due to, for example, miscounted
inventory, broken-down machines, absent labor, etc. For this reason, we will
study how the optimal solution may be affected by changes in RHS values.
Constraint coefficient: The constraint coefficients are the coefficients for the
decision variables in a model’s constraints (such as the 3 and 4 in the carpentry
constraint in Flair’s model). In many problems, these represent design
parameter with regard to the decision variable. For example, needing 3 hrs of
carpentry per table is a product design issue that has probably been specified by
design engineers. Although we could think of specific situation where these
types of input parameters could also be subject to uncertainty in their values,
such changes are less likely as compared to OFC and RHS values. For this reason,
we do not usually study the impact of changes in constraint coefficient values
on the optimal solution and we will study only the impact of changes in an
objective function coefficient and that due to changes in a constraint’s Right-
hand-side value.
1.26 Impact of changes in an objective function coefficient.
When the value of an

OFC changes, the
feasible solution region
remains the same
(because it depends
only on the constraint).
That is, we have the
same set of corner
points, and their
locations do not
change. All that
changes is the slope of
the level profit (or cost)
line. If the OFC changes too much, a new corner point could become optimal.
There is a range of possible values for this OFC for which the current optimal
corner point solution remains optimal. Any change in the OFC value beyond this
range, either on the higher end or the lower end, causes a new corner point to
become optimal solution.
To summarize, only two things can occur due to a change in an OFC: (1) if the
current optimal corner point continues to remain optimal, the decision variable
values do not change, even though the objective function value may change;
and (2) if the current corner point is no
longer optimal, the values of the
decision variables change, as does the
objective function value.
1.27 Impact of changes in a

constraint’s Right-hand-side value.
Unlike changes in OFC values, a change in the RHS value of a non-redundant

constraint results in a change in the size of the feasible region. Hence, one or
more corner points may physically shift to new locations. Optimal solution,
constraints can either be binding or nonbinding. Binding constraints intersect at
the optimal corner point and are, hence, exactly satisfied at the optimal solution.
Nonbinding constraints have a nonzero slack (for < constraints) or surplus (for >
constraints) value at the optimal solution. We now analyse impact of changes in
RHS values for binding and non-binding constraints separately.
1.28 Impact of change in RHS value of a binding constraint
We know that the two

binding constraints in
Flair’s problem are the
carpentry and painting
hours. Let us analyze, for
example, potential
changes in the painting
hours available. Flair
currently projects an
availability of 1,000
hours, all of which will be
needed by the current
production plan. Let us first analyze the impact if this value is increased. What
happens if, for example, the painting time availability can be increased 300
hours (to 1,300 hours) by adding an extra painter? Figure shows the revised
graph for Flair’s problem under this scenario.
The first point to note is that because the painting constraint is a binding <
constraint, any increase in its RHS value causes the feasible region to become
larger, as shown by the region marked R1 in figure. As a consequence of this
increase in the size of the feasible region, the locations of corner points 4 and 5
has shifted to new locations 4A and 5A respectively. However, the level profit
line approach indicates that the intersection of the carpentry and painting
constraints is still the optimal solution. That is, the “same” corner point (in the
sense that the same two constraints intersect at this point) is still optimal. But it
now has a new location and hence, there are new values for T, C and profit. The
values at corner point 4A can be computed to be T = 560 and C = 180, for a profit
of $4,820. This implies that if Flair is able to obtain an additional 300 hours of
painting time, it can increase profit by $780 for 300 additional hours of painting
time translates to a profit increase of $2.60 per additional hour of painting time.
Next, let us analyze

the impact if the
painting time
availability is
decreased. What
happens if, for
example, this value
is only 900 hours
instead of 1,000
hours? The revised
graph, shown in
figure, indicates
that this decrease in
the RHS value of a binding < constraint shrinks the size of the feasible region (as
shown by the region marked R2 in figure). Here again; the locations of corner
points 4 and 5 have shifted to new locations, 4B and 5B, respectively. However,
as before, the level profit lines approach indicates that the “same” corner point
(i.e. intersection of the carpentry and painting constraints, point 4B) is still
optimal. The values of the decision variables and the resulting profit at corner
point 4B can be compared to be T = 240 and C = 420, for a profit of $3,780. That
is, the loss of 100 hours of painting time causes Flair to lose $260 in profit (from
$4,040 to $3,780). This translates to a decrease in profit of $2.60 per hour of
painting time lost.
1.29 Shadow price
Observe that the profit increases by $2.60 per each additional hour of painting
time gained and it decreases by the same $2.60 per each hour of painting time
lost from the current level. This value, known as the shadow price, is an
important concept in LP models. The shadow price of a constraint can be
defined as the change in the optimal objective function value for a one unit
increase in the RHS value of that constraint. In the case of painting time, the
shadow price is $2.60; this implies that each hour of painting time (with respect
to the current availability) affects Flair’s profit by $2.60. Because painting time
is a binding < constraint, each additional hour obtained increases profit by $2.60,
while each hour lost decreases profit by $2.60.
Is this shadow price of $2.60 valid for any level of change in the painting time
availability? That is, for example, can Flair keep obtaining additional painting
time and expect its profits to keep increasing endlessly by $2.60 for each hour
obtained? Clearly, this cannot be true and we illustrate the reason for this in the
following section.
1.30 Validity range for shadow price
Consider, for
example, what
happens if Flair can
increase the painting
time availability even
further, to 1,700
hours. Under this
scenario as shown in
figure, the feasible
region increases by
the region marked
R3. However, due to
the presence of the
non-negativity constraint > 0, the corner point defined by the intersection of the
carpentry and painting constraints is no longer feasible. In fact, the painting
constraint has now become a redundant constraint. Obviously, in such a case,
the optimal solution has shifted to a new corner point. The level profit lines
approach indicates that the optimal solution is now at corner point 5C (T=800,
C=0, profit=$5,600). Note that this translates to a profit increase of $1,560
(=$5,600-$4,040) for 700 additional hours, or $2.23 per hour, which is different
from the shadow price of $2.60. That is, the shadow price of $2.60 is not valid
for an increase of 700 hours in the painting time availability.
What happens if the painting time availability is decreased all the way down to
700 hours? Here again, as shown in figure, the intersection point of the
carpentry and painting constraint is no longer even feasible. The carpentry
constraint is now
redundant, and the
optimal solution has
switched to a new
corner point given by
corner point 3A
(T=125, C=450,
profit=$3,125). This
translates to a profit
decrease of $915
(=$4,040 - $3,125) for
a decrease of 300
hours or $3.05 per hour, which is again different from the shadow price of $2.60.
That is, the shadow price of $2.60 is not valid for a decrease of 300 hours in the
painting time availability.
The preceding discussion based on figures shows that a certain range of change
in the RHS value of a binding constraint, the “same” corner point will continue
to remain optimal.
That is, the constraints that are currently binding at the optimal solution will
continue to remain the binding constraints. The location of this optimal corner
point will, however, change, depending on the change in the RHS value. In fact,
it turns out that as long as this corner point exists in the feasible region, it will
continue to remain optimal. In Flair’s case, this means that the corner point
where the carpentry and painting constraints intersect will remain the optimal
solution as long as it exists in the feasible region. Also, the shadow price of $2.60
measures the impact on profit for a unit change in painting time availability as
long as this corner points continues to exist in the feasible region. Once this RHS
value changes to such an extent that the current binding constraints no longer
intersect in the feasible region, the shadow price of $2.60 is no longer valid and
changes to a different value. It is algebraically possible to use the graphical
solution to determine the RHS range within which the current optimal corner
point continues to exist, albeit at a new location. We will, however, use the
information provided in the solver sensitivity report to further discuss this issue
in a subsequent section.
A similar analysis can be conducted with the RHS value for the other binding
constraint in Flair’s example – the carpentry constraint.
1.31 Impact of changes in RHS value of a nonbinding constraint

Let us now
consider a
nonbinding
constraint such as
the production
limit on chairs (C <
450). As shown in
figure the gap
between corner
point 4 and the
chairs constraint
represents the
amount of slack in
this nonbinding
constraint. At the present solution, the slack is 90 (=450-360). What happens
now if the marketing department allows more chairs to be produced (i.e. the
450 limit is increased)? As we can see in figure such a change only serves to
increase the slack in this constraint and does not affect the optimality of corner
point 4 in any way. How far can we raise the 450 limit? Clearly, the answer is
infinity.
Now consider the case where the marketing department wants to make this
production limit even more restrictive (i.e. the 450 limit is decreased). As long
as we are permitted to make at least 360 chairs, figure indicates that a corner
point 4 is feasible and still optimal. That is, as long as the change in the RHS value
for the chairs constraint is within the slack of 90 units, the current optimal corner
point continues to exist and remains optimal. However, if the chairs production
limit is reduced below 360, corner point 4 is no longer feasible, and a new corner
point becomes optimal. A similar analysis can be conducted with the other
nonbinding constraint in the model (i.e. T > 100).
The preceding discussion illustrates that for nonbinding constraints, the
allowable change limit on one side is infinity. On the opposite side the allowable
change limit equals the slack (or surplus).
1.32 Reduced Cost
The Reduced Cost values (in an Excel solver sensitivity analysis) show the
difference between the marginal contribution of a decision variable to the
objective function value (profit, in Flair’s example) and the marginal worth of
the resources it would consume if produced. A property of LP models is that if a
variable has a nonzero value at optimality, its marginal contribution to the
objective function value will equal the marginal worth of the resources it
consumes. For instance, in the Flair furniture problem each table produced uses
3 hours of carpentry time, uses 2 hours of painting time. Counts 1 unit towards
the 100-unit minimum tables’ requirement, and counts 0 units toward the 450-
maximum chairs limit.
Based on the preceding discussion of the shadow price, the marginal worth of
these resources can be calculated as
= 3 X shadow price of carpentry constraint +
2 X shadow price of painting constraint +
1 X shadow price of minimum tables required constraint +
0 X shadow price of maximum chairs allowed constraint
= 3 X $0.6 + 2 X $2.6 + 1 X $0 + 0 X $0
= $7
Note that this is equal to the profit contribution per table. The same
calculation will hold for chairs also. The profit contribution per chair is $5, and
the marginal worth of the resources it consumes is calculated as
= 4 X shadow price of carpentry constraint +
1 X shadow price of painting constraint +
0 X shadow price of minimum tables required constraint +
1 X shadow price of maximum chairs allowed constraint
= 4 X $0.6 + 1 X $2.6 + 0 X $0 + 1 X $0
= $5
Therefore the reduced cost of table and chair are zero.
1.33 Sensitivity analysis using excel solver
Large number of
software are
available to carry
out sensitivity
analysis. For
discussion, we
will use the excel
solver, which is
widely available. Let us take the example of Flair furniture. The screen shot show
how the problem is set up in a excel sheet.
Thereafter, the problem is solved and the sensitivity report is obtained as
indicated in the snapshot below.
The sensitivity report snap shot of the Flair furniture problem is shown below.
The limits to which the objective function coefficient(profit) can be changed

without affecting the optimality of the current solution is revealed by the values
in the Allowable Increase and Allowable Decrease columns of the Excel
Sensitivity Report. In the Flair furniture problem, for tables, their profit
contribution per table can range anywhere from a low of $3.75 (=$7 - $3.25) to
a high of $10 (= $7 + $3), and the current production plan (T = 320, C = 360) will
continue to remain optimal. The total profit will, of course, change, depending
on the actual profit contribution per table. For example, if the profit contribution
is $6 per table, the total profit is $3,720 (= $6 X 320 + $5 X 360). However, for
any profit contribution below $3.75 or over $10 per table, a different corner
point solution will become optimal.
For chairs, the profit contribution per chair can range anywhere from a low of
$3.50 (=$5 - $1.50) to a high of $9.33 (=$5 + $4.33), and the current production
plan will continue to remain optimal. Here again, the total profit contribution is
$8 per chair, the total profit is $5,120(=$7 X 320 + $8 X 360). Any profit
contribution below $3.50 or over $9.33 per chair will result in a different corner
point solution being optimal.
The answer report, snapshot shown below, provides details about the method
used for the solution, no of iteration, time taken and optimal value of objective
function, resources used, available slack(surplus) and the maximized
profit/minimize cost
Problem on sensitivity analysis
Burn-off, a manufacture of diet drinks, is planning to introduce a miracle drink
that will magically burn away fat. The drink is a bit expensive, but Burn-Off
guarantees that a person using this diet plan will lose up to 50 pounds in just
three weeks. The drink is made up of four “mystery” ingredients (which we will
call ingredients A, B, C and D). The plan calls for a person to consume at least
three 12-ounce doses per day (i.e. at least 36 ounces per day) but no more than
40 ounces per day. Each of the four ingredients contains different levels of three
chemical compounds (which we will call chemicals X, Y, and Z). Health
regulations mandate that the dosage consumed per day should contain
minimum prescribed levels of chemical X and Y and should not exceed maximum
prescribed levels for the third chemical, Z. The composition of the four
ingredients in terms of the chemical compounds (units per ounce) is shown in
table along with the unit cost prices of the ingredients. Burn-Off wants to find
the optimal way to mix the ingredients to create the drink, at minimum cost per
daily dose.
Data for Burn-Off Diet Drink
INGREDIENT INGREDIENT INGREDIENT INGREDIENT REQUIREMENT

A B C D
CHEMICAL X 3 4 8 10 At least 280 units
CHEMICAL Y 5 3 6 6 At least 200 units
CHEMICAL Z 10 25 20 40 At most 1,050
units
Cost per ounce $0.40 $0.20 $0.60 $0.30
The sensitivity analysis report of the LP problem and the answer report are
given below.
Based on these reports, answer the questions given below.
Q1 What is the impact on cost if Burn-off insists on using 1 ounce of ingredient
B to make the drinks?
A1. The reduced cost indicates that each ounce of ingredient B used to make the
drink will cause the total cost per daily dosage to increase by $0.069 (-$0.07).
The new cost will be $13.06 + $0.07 = $13.13.
Q2 There is some uncertainty in the cost of ingredient C. How sensitive is the
current optional solution to this cost?
A2. The current cost of ingredient C is $0.60 per ounce. The range for the cost
coefficient of this ingredient shows an allowable increase of $1.50 and an
allowable decrease of $0.073 in order for the current corner point solution to
remain optimal. The cost per ounce of ingredient C could therefore fluctuate
between $0.527 (=$0.60 - $0.073) and $2.10 (=$0.60 + $1.50) without affecting
the current optimal mix.
The total cost will, however, change depending on the actual unit cost of
ingredient C. For example, if the cost of ingredient C increases to $1.00 per
ounce, the new total cost will be
= $13.06 + ($0.40 extra per ounce X 4.125 ounces of C)
= $13.06 + $1.65
= $14.71
Q3. What do the shadow prices for chemical X and chemical Z imply in this
problem?
A3. The shadow price for chemical X is $0.088. Because the constraint for
chemical X is a > constraint, an increase by 1 unit in the RHS (from 280 to 281)
makes the problem solution even more restrictive. That is, the feasible region
becomes smaller. The optimal objective function value could, therefore, worsen.
The shadow price indicates that for each additional unit of chemical X required
to be present in the drink, the overall cost will increase by $0.088. This value is
valid for an increase for an increase of up to 41 units and a decrease by 11 units
in the requirement for chemical X.
In contrast, the constraint for chemical Z is a < constraint. An increase in the RHS
of the constraint (from 1,050 to 1,051) will cause the feasible region to become
bigger. Hence, the optimal objective function value could possibly improve. The
negative value of the shadow price for this constraint indicates that each unit
increase in the maximum limit allowed for chemical Z will cause the total cost to
decrease by $0.024. This value is valid for an increase of up to 47.143 units.
Likewise, the total cost will increase by $0.024 for each unit decrease within the
maximum limit allowed for chemical Z. This is valid for a decrease of up to 346
units in the maximum limit for chemical Z.
Q4. Burn-off can decrease the minimum requirements for chemical X by 5 units
(from 280 to 275), provided that the maximum limit allowed for chemical Z is
reduced to 1,000 units (i.e, reduced by 50 units), Is this trade-off cost-effective
for Burn-off to implement?
A4. Because we are dealing with simultaneous changes in RHS values, we first
verify whether the 100% rule is satisfied. To do so, we take the ratio of each
proposed change to its maximum allowable change. The calculation is
Sum of ratios = (5/11) + (50/346) = 0.599 < 1
Because the sum does not exceed 1, we can use the shadow price information
in the sensitive report above. The reduction of 5 units in the requirement for
chemical X will cause the feasible region to increase in size. The total cost will
therefore improve (i.e. go down) by $0.44 (= 5 units, at a shadow price of $0.088
per unit).
In contrast, the reduction of 50 units in the maximum allowable limit for
chemical Z makes the feasible region shrink in size. The total cost will therefore
be adversely affected (i.e. go up) by $1.20 (= 50 units at a shadow price of $0.024
per unit).
The net impact of this trade-off is therefore an increase in total cost $0.76 (=
$1.20 - $0.44). The new cost will be $13.82. Clearly, this trade-off not cost-
effective from Burn-offs perspective and should be rejected.

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Quantitative Methods for Management – 8102

(Part -II Operations Research)

A variety of names exists for the body of knowledge involving quantitative

Evolution of OR can be traced to early attempts to use scientific approach in the

The scientific management revolution of the early 1900s, initiated by Frederic

1. According to the Operational Research Society of Great Britain (OPERATIONAL

2. Randy Robinson stresses that Operations Research is the application of

3. Morse and Kimball have stressed O.R. as a quantitative approach and

4. Saaty considers O.R. as tool of improving quality of answers. He says, “O.R. is

6. Pocock stresses that O.R. is an applied Science. He states “O.R. is scientific

Summarizing we can define OR as:

It is the application of analytical methods designed to help the decision makers

Summing up the above discussion, OR can be defined as follows.

It is a scientific approach to decision making that seeks to determine how best

1.4 O.R. Tools and Techniques

Operations Research uses many suitable tools or techniques, the most

Linear Programming: This is a constrained optimization technique, which

Inventory Models: Inventory model make decisions that minimize total

Simulation: Simulation is a procedure that studies a problem by creating a

Dynamic Programming: Dynamic programming is a method of analyzing

Integer Programming: If one or more variables of the problem take integral

1.5 Applications of Operations Research

Historically, OR has been applied to areas such as:

Construction: Project scheduling, monitoring and control, Determination of

Facilities Planning: Factory location and size decision, Estimation of number of

Finance: Building cash management models, Allocating capital among various

Manufacturing: Inventory control, Marketing balance projection, Production

Marketing: Advertising budget allocation, Product introduction timing,

Purchasing: Optimal buying, optimal reordering, Materials transfer.

Research and Development: R & D Projects control, R & D Budget allocation,

Health Care - Three specific areas1 :

1.6 OR at different levels in a business context

An example: Vehicle routing problem

1.7 OR Model classifications

1.8 Limitations of Operations Research

i) Different perception between O.R. specialist and Manager: Operations

v) Implementation: Once the decision has been taken it should be implemented.

While the credit for conceptualizing LP goes to George B Dantzig (1947),

Example 1: Consider FMS canteen makes two items S (Samosa) and B

Example 2: M/s Keggfarms is considering buying two different brands of

Example 3: Let us consider a company making a single product. The

1.11 Properties of Linear Programming Model

All LP models have the following properties in common:

2. LP models usually include restrictions, or constraints, that limit the degree

4. There must be alternative courses of action from which we can choose.

5. The objective and constraints in LP problems must be expressed in terms

1.12 Basic Assumptions of a Linear Programming Model

2. We also assume that proportionality exists in the objective function and

4. We make divisibility assumption that solutions need not necessarily be in

1.13 LP problem representation

The LP problem formulation with m inputs(constraints) and n outputs

xj 0 where j = 1,2,!!n

How do I know my LP model is right? Unfortunately, there is no simple magical

1.15 Steps in LP/Decision Modeling

3. Interpretation and Sensitivity Analysis

1.17 Graphical Method of solving LP problem

Extreme/Corner point approach

Basic and non-basic variable

Example: Flair Furniture Problem

Ser Solve For Fix to 0 Solution (Basic Z value

The initial tableau is

The tableau represents the initial solution;T = 0, C = 0, S1 = 2400, S2 = 1000, Z = 0

Unboundedness :- when the profit in a

xj 0 where j = 1,2,!!n