UNIT 1: INTRODUCTION TO OPERATION RESEARCH

OPERATION RESEARCH
The OR approach has provided a new tool for managing conventional
management problems. In fact, operational research techniques do constitute a
scientific methodology of analysing the problems
of the business world. They provide an improved basis for taking management
decisions. The practice of OR helps in tackling intricate and complex problems,
such as that of resource allocation, product mix, inventory management,
sequencing
and scheduling, replacement and a host of similar problems of modern business
and industry.
Operations research is an interdisciplinary branch of applied mathematics
and formal science that uses mathematical methods, such as mathematical
modelling,
statistics and algorithms to arrive at optimal or near optimal solutions to complex
problems. Basically, it is concerned with optimizing the maxima (profit, assembly
line performance, bandwidth, etc.) or minima (loss, risk, etc.) of some objective
function. It also helps management achieve its goals using scientific methods.
Operations research provides top-level administrators a quantitative basis
for taking decisions which will help organizations to carry out their functions,
such
as planning, controlling and organizing, effectively. Decision-making is the key
responsibility of managers and OR provides a scientific approach to them for
solving problems. Decisions in an organization should be such that they can
compete
in the market.
The different phases of applications of OR include implementing and formulating
the problem, constructing a mathematical model, deriving the result from the
model,
testing and updating the model and controlling the final output or solution.
Requirements
of a good model which must be capable of working on a new formulation without
making any changes in its frame with minimum assumptions and with minimum
variables
and must not take extraordinary time to solve the problem.
The various models of OR work and the techniques adopted. These
techniques are: linear programming, waiting line or queuing theory, inventory
control/
planning, game theory, decision theory, network analysis, simulation, integrated
production models, non-linear programming, dynamic programming, heuristic
programming, integer programming, algorithmic programming, quadratic
programming, parametric programming, probabilistic programming, search
theory
and theory of replacement. All these techniques involve higher mathematics. In
real practice these techniques are used in combination to form more sophisticated
and advanced programming models.
OR is a systematic method-oriented study of the basic structures,
characteristics, functions, and relationships of an organization to provide the
executive with a sound, scientific, and quantitative basis for decision-making.
E.L. Arnoff and M.J Netzorg

Importance of OR
The problem may be complex for which normal guess does not work. Our
techniques help
in arriving at a feasible solution to the problem that too with full analysis and
research.
 The problem is very important and no lethargy on the part of the decision-
maker can be
entertained. In such a situation also, OR comes to the rescue. OR methodologies
are so detailed
and meticulous that even a little scope for leaving a point unattended is
unaffordable.
 The problem is new and no precedence exists to facilitate logical and
intelligent decision-making of the problem. In this situation, OR comes to
the rescue of analysts, and the reason
for this is that OR has a large pool of techniques that aid in solving even new and
unthoughtful of
problems.
 The problem is repetitive and a model may be developed to enhance faster
and better
decisions. Again OR helps like nothing else to aid the analysts in such a situation
by
offering either a readymade model or a readymade process to develop such a
model and
pacify the decision-making process.

Scope / Application Of OR
Operations Research addresses a wide variety of issues in transportation,
inventory planning,
production planning, communication operations, computer operations, financial
assets, risk
management, revenue management, and many other fields where improving
business
productivity is paramount.
As OR has made (over the years) significant contributions in virtually all
industries, in almost
all managerial and decision-making functions, and at most organizational levels,
the list of OR
applications is prodigious. Successful OR applications can be found in a broad
array of industries
dealing with challenges such as planning, routing, scheduling, forecasting,
process analysis and
decision analysis.
1. Manufacturing: OR’s success in contemporary business pervades
manufacturing and service
operations, logistics, distribution, transportation, and telecommunication.
Operations research is used to for various activities which include scheduling,
routing,
workflow improvements, elimination of bottlenecks, inventory control, business
process
re-engineering, site selection, or facility and general operational planning.
OR helps in developing software for material flow analysis and design for flexible
manufacturing facilities, using pattern recognition and graph theory algorithms.
Further,
approaches for the design of reconfigurable manufacturing systems and
progressive
automation of discrete manufacturing systems are under development. Additional
OR
projects focus on the industrial deployment of computer-based methods for
assembly line
balancing, business process reengineering, capacity planning, pull scheduling,
and setup
reduction.
2. Revenue Management: The application of OR in revenue management
entails
first to accurately forecast the demand, and
secondly to adjust the price structure over time to more profitably allocate
fixed
capacity.
 3. Supply Chain Management: In the area of Supply Chain Management,
OR helps in taking
decisions that include the who, what, when, and where abstractions from
purchasing and
transporting raw materials and parts, through manufacturing actual products and
goods,
and finally distributing and delivering the items to the customers.
The primary objective here is to reduce overall costs while processing customer
orders
more efficiently than before. The power of utilizing OR methods allows for
examining a
rather complex and convoluted chain in a comprehensive manner, and to search
among a
a vast number of combinations for the resource optimization and allocation
strategy that
seem most effective, and hence beneficial to the operation.
4. Retailing: In supermarkets, data from store loyalty card schemes is
analyzed by OR groups
to advise on merchandising policies and profitability improvement.
OR methods are also used to decide when and where new store developments
should be
made.
5. Financial Services: In financial markets, OR practitioners address issues
such as portfolio
and risk management and planning and analysis of customer service. They are
widely
employed in Credit Risk Management—a vital area for lenders needing to ensure
that
they find the optimum balance of risk and revenue.
OR techniques are also applied in cash flow analysis and capital budgeting.
6. Marketing Management: OR helps the marketing manager in making the
apt selection of
product mix. It helps them in making optimum sales resource allocation and
assignments.
7. Human Resource Management: OR techniques are being applied widely in
the functional
area of Human Resource Management by helping the human resource managers
in activities
like manpower planning, resource allocation, staffing, and scheduling of training
programs.
8. General Management: OR helps in designing a Decision Support System and
management
of information systems, organizational design and control, software process
management, and Knowledge Management.
9. Production systems: The area of operations research that concentrates on real-
world
operational problems are known as production systems. Production systems
problems
may arise in settings that include but are not limited to, manufacturing,
telecommunications, healthcare delivery, facility location and layout, and
staffing.
The area of production systems presents special challenges for operations
researchers. Production
problems are operations research problems, hence solving them requires a solid
foundation in
operations research fundamentals. Additionally, the solution of production
systems problems
frequently draws on expertise in more than one of the primary areas of operations
research,
implying that the successful production researcher cannot be one-dimensional.
An important consequence of the application of OR to a wide variety of problems
is that a small
set of problem types has been identified which accounts for most problems.
Because of the
frequent recurrence of these problems, prototype techniques have been developed
for modelling
them and for deriving solutions from these models. Prototype applications
include:
Forecasting: Using time series analysis to answer typical questions such as, how
big will demand
for products be? What are the sales patterns? How will this affect profits?
Finance & Investment: How much capital do we need? Where can we get this?
How much will
it cost?
Manpower Planning & Assignment: How many employees do we need? What
skills should they
have? How long will they stay with us?
Sequencing & Scheduling: What job is most important? In what order should we
do jobs?
Location, Allocation, Distribution & Transportation: Where is the best location
for operation?
How big should facilities be? What resources are needed? Are there shortages?
How can we set
priorities?
Reliability & Replacement Policy: How well is equipment working? How
reliable is it? When
should we replace it?
Inventory Control and Stock Out: How much stock should we hold? When do
we order more?
How much should we order?
Project Planning and Control: How long will a project take? What activities are
most important?
How should resources be used?
Queuing and Congestion: How long are the queues? How many servers should
we use? What
service level are we giving?
This broad range of potential applications and a wide variety of OR techniques,
which can be
selected and combined for a multi-disciplinary approach, work together to make
this course a
dynamic and exciting one.

Some of the application areas of management where OR is applied is presented

below:
Finance, Budgeting and investments
Cash flow analysis,
Capital requirement,
Investment analysis,
Dividend policies,
Credit policies,
Portfolio analysis, etc.
Purchasing & procurement
Quantity and timing of purchase,
Bidding policies,
Replacement policies, etc.
Production Management
Production scheduling,
Physical distribution,
Inventory control,
Manufacturing and facilities planning,
Maintenance policies,
Product-mix planning, etc.
 Marketing Management
Product selection and competitive actions,
Advertising strategy,
Market research, etc.
Personnel Management
Recruitment policies,
Selection procedure,
Salary structure,
Bonus schemes,
Scheduling of training programs, etc.
Research and Development Notes
Control of R&D projects,
Reliability and evaluation of alternative designs,
Determination of time and cost, etc.

Models of OR
When a problem or process under investigation is simplified and represented with
its typical
features or characteristics, it is called a model. The word ‘model’ has several
meanings. All of
which are relevant to Operations Research. For example, a model can act as a
substitute for
representing reality, such as a small-scale model locomotive or may act as some
sort of idealization,
like a model plan for recruitment procedure, etc. Constructing a model helps in
bringing the
complexities and possible uncertainties into a logical framework required for
comprehensive
analysis. In fact, the model acts as a vehicle in arriving at a well-structured view
of reality. An
array of models can be seen in various business areas or industrial activities. The
most relevant
for our study purpose are portrayed below:
1. Physical Models:
(a) Iconic Models
(b) Analogue Models
2. Symbolic Models:
(a) Verbal Models
(b) Mathematical Models:
(i) Deterministic Models
(ii) Probabilistic Models
3. Combined Analogue and Mathematical Models
4. Function Models
5. Heuristic Models
1. Physical Models: To deal with specific types of problems, models like
diagrams, charts,
graphs, and drawings are used, which are known as “Physical Models’. The
schematic way
of representing significant factors and interrelationships may be in a pictorial
form to help in useful analysis. Moreover, they help in easy observation,
description, and prediction.
However, they overrule any manipulation.
There are two types of Physical Models:
(i) Iconic Models: An image or likeness of an object or process is an Icon. These
models
represent the system as it is by scaling it up or down. Even though the use of these
models in the area of management appears to be narrow, their usefulness is seen
in
the field of engineering and science. For example,
(a) In the field of R&D, a prototype of the product is developed and tested to
know
the workability of the new product development.
(b) Photographs, portraits, and drawings are good examples of iconic types. These
models help in testifying the samples thus avoiding full-scale designing and
probable loss.
(ii) Analogue Models: These models are closely associated with iconic models.
However,
they are not replicas of systems or processes. The analog, in constructing these
models, helps in analyzing the issues and forces which are in the system or
process.
Because these models use ‘one set of properties’ which is ‘analogous to another
set
of properties.’ For example, kids, toys, rail-road models, etc.

(2) Symbolic Models: Symbolic Models use letters, numbers, and figures to
represent decision
variables of the system. There are two types of Symbolic Models—Verbal
Models and
Mathematical Models.
(a) Verbal Models: These models describe a situation in written or spoken
language.
Written sentences, books, etc., are examples of a verbal model.
(b) Mathematical Models: Mathematical symbols are used to represent a problem
or a
system under these types of models. Rules of mathematics enable the builder to
make the models more abstract and precise. There are two types of Mathematical
Models—Deterministic Models and Probabilistic Models.
(i) Deterministic Models: The exact statement of variables and their
relationships
are made under these models. The coefficients used for the mathematical
the formulation is known and is constant with certainty. So, to say, with a
given set of data the answer will always be the same. For instance,
determination of the break-even sales volume (BEP), the volume where the
total cost equals the total sales revenue earned pertaining to a product.
The sales revenue line is determined by using an equation.
TSR = (SV) (PU)
where, TSR = Total Sales revenue
SV = Sales Volume
PU = Price per Unit
The total cost line is represented as:
TC = TFC + SV (VC)
TC = Total Cost
TFC = Total Fixed Cost
SV = Sales Volume Notes
VC = Variable Cost.
The break-even point occurs when
TSR = TC or (SV) (PU) = TFC + SV (VC)
Hence, the volume (BEP) is determined by
BEP =
FC
SP - VC – VC represents the contribution to fixed cost.
(ii) Probabilistic Models: The risk involved and the state of uncertainty are
covered
by these models. The decision variables take the form of a probability
distribution and can assume more than single values. In the presence of risk
and uncertainty, these models tend to yield different answers every time
they attempt to. For example, uncertainty over the acquisition of raw materials
to execute customer orders during a certain period. The purchaser has to
consider both the sale and the delivery timing of the orders as they are
variables. A probability distribution can be developed for the instant period
for both sales delivery timings. However, the optimum selection is adhered
to by the demand of the situation.

(3) Combined Analogue and Mathematical Models: When analog models are
interpreted
with the use of mathematical symbols, they can be termed as physical-symbolic
models.
For instance, decision-makers tend to use mathematical symbols to represent their
sales
or profit figures.

(4) Function Models: Models which are used to represent a group of functions
performed, are
called function models.
Example: A monthly plan of processes to be carried on, a list of layouts, a
calendar of
events are the common examples of a functional model.

(5) Heuristic Models: When intuition guides a problem-solver to find solutions,

heuristic
models are developed. Even though he would not be able to find an optimum
solution to
the problem, with his past experience he arrives at the most advantageous
solution.
However, it depends on how intuitive and creative the decision-maker is.

Methodology of OR
OR study generally involves three phases viz., the judgment phase, the research
phase, and the action phase. Of these three, the research phase is the longest and
the largest, but the remaining two phases are very important since they provide
the basis for and implementation of the research phase respectively.

The judgment phase includes (i) The determination of the problem;

(ii) The establishment of the objectives and values related to the operation; and
(iii) The determination of suitable measures of effectiveness.

The research phase utilizes (i) Observations and data collection for better
Understanding of the problem; (ii) Formulation of hypothesis and models;
(iii) Observation and experimentation to test the hypothesis based on
additional data; and (iv) Predictions of various results from the hypothesis,
generalization of the result and consideration of alternative methods.

The action phase in the OR consists of making recommendations for

the decision process. As such this phase deals with the implementation of the
tested results of the model. This phase is executed primarily through the
cooperation of the OR experts on the one hand and those who are responsible for
operating the system on the other.

The methodology of OR generally involves the following steps:

1. Formulating the Problem: The first step in an OR study is to formulate

the problem in an appropriate form. Formulating a problem consists in
identifying, defining, and specifying the measures of the components of the
decision model. This means that all quantifiable factors that are pertinent to the
functioning of the system under consideration are defined in mathematical
language as variables (factors that are not controllable), parameters, or
coefficients along with the constraints on the variables and the determination of
suitable measures of effectiveness.
2. Constructing the Model: The second step consists in constructing the
model by which we mean that appropriate mathematical expressions are
formulated which describes the interrelations of all variables and parameters.
In addition, one or more equations or inequalities are required to express
the fact that some or all of the controlled variables can only be manipulated
within limits. Such equations or inequalities are termed constraints or
restrictions. The model must also include an objective function that
defines the measure of effectiveness of the system. The objective function
and the constraints, together constitute a model of the problem that we
want to solve. This model describes the technology and the economics of
the system under consideration through a set of simultaneous equations
and inequalities.

3. Deriving the Solution: Once the model is constructed the next step in an
OR study is that of obtaining the solution to the model, i.e., finding the
optimal values of the controlled variables—values that produce the best
performance of the system for specified values of the uncontrolled variables.
In other words, an optimum solution is determined on the basis of the various
equations of the model satisfying the given constraints and inter-relations of
the system and at the same time maximizing profit minimizing cost, or
coming as close as possible to some other goal or criterion. How the solution
can be derived depends on the nature of the model. In general, there are
three methods available for the purpose viz., the analytical methods, the
numerical methods, and the simulation methods. Analytical methods involve
expressions of the model by mathematical computations and the kind of
mathematics required depends upon the nature of the model under
consideration. This sort of mathematical analysis can be conducted only in
some cases without any knowledge of the values of the variables but in
others, the values of the variables must be known concretely or numerically.
In the latter cases, we use the numerical methods which are concerned with
iterative procedures through the use of numerical computations at each step.
The algorithm (or the set of computational rules) starts with a trial or
initial solution and continues with a set of rules for improving it towards
optimality. The initial solution is then replaced by the improved one and the
process is repeated until no further improvement is possible. But in those
cases where the analytical as well as the numerical methods cannot be used
for deriving the solution then we use simulation methods, i.e., we conduct
experiments on the model in which we select values of the uncontrolled
variables with the relative frequencies dictated by their probability
distributions. The simulation methods involve the use of probability and
sampling concepts and are generally used with the help of computers.
Whichever method is used, our objective is to find an optimal or near-optimal
solution, i.e., a solution that optimizes the measure of effectiveness
in a model.

4. Testing the Validity: The solution values of the model, obtained as stated
in step three above, are then tested against actual observations. In other
words, effort is made to test the validity of the model used. A model is
supposed to be valid if it can give a reliable prediction of the performance
of the system represented through the model. If necessary, the model may
be modified in the light of actual observations and the whole process is
repeated till a satisfactory model is attained. The operational researcher
quite often realizes that his model must be a good representation of the
system and must correspond to reality which in turn requires this step of
testing the validity of the model in an OR study. In effect, performance of
the model must be compared with the policy or procedure that it is meant to
replace.

5. Controlling the Solution: This step of an OR study establishes control

over the solution by proper feedback of information on variables which
might have deviated significantly. As such the significant changes in the
system and its environment must be detected and the solution must
accordingly be adjusted.

6. Implementing the Results: Implementing the results constitutes the last

step of an OR study. The objective of OR is not merely to produce reports
but to improve the performance of systems. The results of the research
must be implemented if they are accepted by the decision-makers. It is
through this step that the ultimate test and evaluation of the research is
made and it is in this phase of the study the researcher has the greatest
learning opportunity.
Thus, the procedure for an OR study generally involves some major steps viz.,
formulating the problem, constructing the mathematical model to represent the
system under study, deriving a solution from the model, testing the model and the
solution so derived, establishing controls over the solution and lastly putting the
solution to work-implementation. Although the said phases and the steps are
usually
initiated in the order listed in an OR study but it should always be kept in mind
that
they are likely to overlap in time and to interact each phase usually continues until
the study is completed.

Operations Research As A Tool In Decision-Making

Mathematical models have been constructed for OR problems and methods for
solving the models are available in many cases. Such methods are usually termed
as OR techniques. Some of the important OR techniques often used by decision-
makers in modern times in business and industry are as under:

1. Linear Programming: This technique is used in finding a solution for

optimizing a given objective, such as profit maximization or cost minimization
under certain constraints. This technique is primarily concerned with the
optimal allocation of limited resources for optimizing a given function. The
name linear programming is given because the model in such
cases consists of linear equations indicating linear relationships between the
different variables of the system. Linear programming technique solves
product-mix and distribution problems of business and industry. It is a
technique used to allocate scarce resources in an optimum manner in
problems of scheduling, product mix, and so on. Key factors under this
technique include an objective function, choice among several alternatives,
limits or constraints stated in symbols, and variables assumed to be linear.

2. Waiting Line or Queuing Theory: Waiting line or queuing theory deals

with the mathematical study of queues. The queues are formed whenever the
current demand for service exceeds the current capacity to provide that
service. The waiting line technique concerns itself with the random arrival of
customers at a service station where the facility is limited. Providing too
much capacity will mean idle time for servers and will lead to a waste of
‘money’. On the other hand, if the queue becomes long there will be a cost
due to the waiting of units in the queue. Waiting line theory, therefore, aims at
minimizing the costs of both servicing and waiting. In other words, this
technique is used to analyse the feasibility of adding facilities and to assess
the amount and cost of waiting time. With its help, we can find the optimal
capacity to be installed which will lead to a sort of economic balance
between the cost of service and the cost of waiting.

3. Inventory Control/Planning: Inventory planning aims at optimizing

inventory levels. Inventory may be defined as a useful idle resource that
has economic value, e.g., raw materials, spare parts, finished products, etc.
Inventory planning answers the two questions, viz., how much to
buy and when to buy. Under this technique, the main emphasis is on minimizing
costs associated with holding inventories, procurement of inventories, and the
shortage of inventories.

4. Game Theory: Game theory is used to determine the optimum strategy in

a competitive situation. The simplest possible competitive situation is that of
two persons playing a zero-sum game, i.e., a situation in which two persons
are involved and one person wins exactly what the other loses. More
complex competitive situations in real life can be imagined where game
theory can be used to determine the optimum strategy.

5. Decision Theory: Decision theory is concerned with making sound decisions

under conditions of certainty, risk, and uncertainty. There
are three different kinds of states under which decisions are made, viz.,
deterministic, stochastic, and uncertainty, and the decision theory explains
how to select a suitable strategy to achieve some object or goal under each
of these three states.

6. Network Analysis: Network analysis involves the determination of an

optimum sequence of performing certain operations concerning some jobs
to minimize overall time and/or cost. Program Evaluation and
Review Technique (PERT), Critical Path Method (CPM), and other network
techniques such as the Gantt Chart come under network analysis. Key concepts
under this technique are a network of events and activities, resource allocation,
time and cost considerations, network paths, and critical paths.

7. Simulation: Simulation is a technique of testing a model, which resembles

a real-life situation. This technique is used to imitate an operation before
actual performance. Two methods of simulation are used—the Monte Carlo
method and the System simulation method. The former uses random numbers
to solve problems that involve conditions of uncertainty and the
mathematical formulation is impossible. In the case of System simulation, there
is a reproduction of the operating environment and the system allows for
analyzing the response from the environment to alternative management
actions. This method draws samples from a real population instead of from
a table of random numbers.
8. Integrated Production Models: This technique aims at minimizing cost
to workforce, production, and inventory. This technique is
highly complex and is used only by big business and industrial units. This
technique can be used only when sales and cost statistics for a considerable
long period are available.

9. Some Other OR Techniques: In addition, there are several other techniques

such as non-linear programming, dynamic programming, search theory, the
theory of replacement, etc. A brief mention of some of these is as follows:
(i) Non-Linear Programming: A form of programming in which some
or all of the variables are curvilinear. In other words, this means that
either the objective function or constraints or both are not in linear
form. In most of the practical situations, we encounter non-linear
programming problems but for computation purposes, we approximate
them as linear programming problems. Even then there may remain
some non-linear programming problems that may not be fully solved
by presently known methods.
(ii) Dynamic Programming: It refers to a systematic search for optimal
solutions to problems that involve many highly complex interrelations
that are, moreover, sensitive to multistage effects such as successive
time phases.
(iii) Heuristic Programming: It is also known as discovery method and
refers to a step-by-step search toward an optimum when a problem
cannot be expressed in mathematical programming form. The search
procedure examines successively a series of combinations that lead to
stepwise improvements in the solution and the search stops when a
near optimum has been found.
(iv) Integer Programming: It is a special form of linear programming in
which the solution is required in terms of integral numbers (i.e., whole
numbers) only.
(v) Algorithmic Programming: It is just the opposite of Heuristic
programming. It may also be termed as similar to mathematical
programming. This programming refers to an exhaustive
mathematical approach to investigate all aspects of the given variables
to obtain optimal solutions.
(vi) Quadratic Programming: It refers to a modification of linear
programming in which the objective equations appear in quadratic
form, i.e., they contain squared terms.
(vii) Parametric Programming: It is the name given to linear programming
when it is modified for the inclusion of several objective
equations with varying degrees of priority. The sensitivity of the solution
to these variations is then studied.
(viii) Probabilistic Programming: It is also known as stochastic
programming and refers to linear programming that includes an
evaluation of relative risks and uncertainties in various alternatives of
choice for management decisions.
(ix) Search Theory: It concerns itself with search problems. A search
problem is characterized by the need to design a procedure to
collect information based on which one or more decisions are
made. This theory is useful in places in which some events are known
to occur but the exact location is not known. The first search model
was developed during World War II to solve decision problems
connected with air patrols and their search for submarines. Advertising
agencies search for customers, personnel departments search for good
executives are some examples of search theory’s application in
business.
(x) The Theory of Replacement: It is concerned with the prediction of
replacement costs and determination of the most economic
replacement policy. There are two types of replacement models. First
type of models deal in replacing types of equipment that deteriorate with time
and the other types of models help in establishing replacement policy
for those equipment that fail completely and instantaneously.
All these techniques are not simple but involve higher mathematics. The
the tendency today is to combine several of these techniques and form more
sophisticated and advanced programming models.

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